Vietnam freight transport report q4 2009

... of any information hereto contained Vietnam Freight Transport Report Q4 2009 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2009 CONTENTS Executive Summary ... average 5.0% per annum in 2009- 2013 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2009 Under BMI’s freight transport rating system, Vietnam achieves a composite... Ltd Page 29 Vietnam Freight Transport Report Q4 2009 Vietnam Air freight also faces a difficult two years On the other hand, WTO membership has been as supportive of greater freight transport turnover

Including 5-year industry forecasts

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Vietnam Freight Transport

Business Monitor International

© 2009 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor

Report Q4 2009

Including 5-year industry forecasts by BMI

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Publication date: August 2009

CONTENTS

Executive Summary 5

SWOT Analysis 7

Vietnam Road Haulage SWOT 7

Vietnam Political SWOT 7

Vietnam Economics SWOT 8

Vietnam Business Environment SWOT 8

Business Environment Ratings 9

Table: Asia Pacific Freight Business Environment Ratings 9

Freight Industry Ranking 10

Transport Intensity Index 11

Vietnam Logistics Performance Index (LPI) 11

Economic Risk Summary 11

Political Risk Summary 12

Business Environment Risk Summary 13

Legal Code/Corruption 13

Red Tape 13

Labour Force 14

Industry Trends And Developments 15

Road 16

Rail 16

Air 17

Sea 17

Industry Forecast Scenario 20

Global Oil Products Market Review 20

Table Global Oil Prices, 2003-2013 (US$ per barrel) 24

Macroeconomic Outlook 25

Table: Vietnam – Economic Activity, 2006-2013 28

Transport Outlook 29

Table: Transport And Communications Data And Forecasts, 2006-2013 29

Table: Freight Carried, Domestic, 2006-2013 31

Trade Environment 32

Trade Agreements 32

Tariffs/Non-Tariff Barriers 32

Table: Value Of Imports By Category, 2006-2013 (US$mn) 33

Table: Value Of Exports By Category, 2005-2013 (US$mn) 34

Table: Top Export Destinations, 2002-2006 (US$mn) 35

Table: Export Trade, 2003-2006 (% Growth y-o-y) 36

Table: Import Trade, 2003-2005 (% growth y-o-y) 36

Table: Top Import Sources, 2002-2006 (US$mn) 37

Market Overview 38

Multi-Modal 38

Competitive Landscape: Multi-Modal 38

Road 41

Infrastructure 41

Competitive Landscape: Road 41

Rail 45

Infrastructure 45

Competitive Landscape: Rail 45

Air 47

Infrastructure 47

Competitive Landscape: Aviation 47

Company Profile: Vietnam Airlines 51

Water 53

Infrastructure 53

Competitive Landscape: Maritime 54

Company Profile: Vietnam Petroleum Transport Jsc (VIPCO) 59

Table: Vietnam Petroleum Transport’s Key Financial Data 60

Company Profile: Doan Xa Port 61

Table: Doan Xa Port’s Financial Performance 62

Pipelines 63

Competitive Landscape 63

Country Snapshot: Vietnam Demographic Data 64

Section 1: Population 64

Table: Demographic Indicators, 2005-2030 64

Table: Rural/Urban Breakdown, 2005-2030 65

Section 2: Education And Healthcare 65

Table: Education, 2002-2005 65

Table: Vital Statistics, 2005-2030 65

Section 3: Labour Market And Spending Power 66

Table: Employment Indicators, 1999-2004 66

Table: Consumer Expenditure, 2000-2012 (US$) 66

BMI Forecast Modelling 67

How We Generate Our Industry Forecasts 67

Transport Industry 67

Sources 68

supporting infrastructure for ports was also a key issue that hindered operations and raised costs,

IntellAsia reported One example of the latter point is the delay in the development of roads around ports

in Ba Ria-Vung Tau province in South Vietnam This has in turn caused delays in the construction and commencement of operations of the country's new ports Vietnam still has a cost advantage against China when it comes to manufacturing wages, but much FDI flow is still diverted to southern China because it is much easier to get input goods to factories and finished goods out owing to China's superior

infrastructure

Taking this and other developments such as the downturn in the global economy into consideration,

BMI’s newly released Vietnam Freight Transport Report concludes that shipping traffic will increase by

an annual average of 4.2% in 2009-2013, measured in tonnes per km A number of factors underpin this forecast One is sharpness of the contraction in international trade this year: Vietnam’s trade will fall by 13.9% Pulling in the opposite direction however is the still-realistic prospect of a long, export-led boom

in Vietnam Annual GDP growth is likely to average 6.5% in 2009-2013, only a little slower than the 7.8% rate achieved in the preceding five-year period

Our overall outlook for the nascent freight transport industry across the different modes is bullish despite the recession Although the next two years will be tough, air freight will grow by an annual average of 7.9% over the next five years In road haulage, we have trimmed our forecast to take account of the economic slowdown, but we still see turnover running ahead of the general rate of economic expansion in Vietnam We see road freight growing by an annual average of 7.9% over the next five years, followed closely by pipeline throughput (7.5%), rail (7.0%), and maritime freight (4.2%, as already mentioned) Full World Trade Organization (WTO) membership, achieved in early 2007, can be seen as supportive of greater freight transport turnover relative to GDP across all modes, particularly so for shipping We now expect total freight carried growth across all modes, measured in million tonne-km (mntkm), to average 5.0% per annum in 2009-2013

Under BMI’s freight transport rating system, Vietnam achieves a composite score of 54.3 out of a

potential maximum of 100 Vietnam’s stronger points are freight growth, transport infrastructure growth

and the transport intensity index, which measures the dynamism of the country’s foreign trade BMI

views Vietnam as being weaker in the other four categories: economic and political long-term risks, and the country’s regulatory and competitive environment (corruption is a particular problem)

According to our latest estimates, the total value of transport and communications GDP will rise to US$6.7bn in nominal terms by 2013, representing 4.5% of Vietnam’s GDP

SWOT Analysis

Vietnam Road Haulage SWOT

Strengths ƒ Vietnam’s strong domestic growth rate coupled with its geography; a long country

stretching for thousands of kilometres on a north-south axis creates a need for distance freight haulage

long-Weaknesses ƒ The generally poor state of the road network Despite new highway construction, only

13.5% of the road network is considered to be in good condition, only 26% has two or more lanes and only 29% is tarred Construction of the second north-south highway may be a waste of resources given the pressing need for improvement of secondary roads

Opportunities ƒ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

Threats ƒ The attractiveness of other modes of freight transport, particularly inland waterways

and coastal shipping If progress towards a better-integrated national road network is too slow, freight growth will divert away from the trucking industry

Vietnam Political SWOT

Strengths ƒ The Communist Party government appears committed to the market-oriented reforms

necessary to double 2000’s GDP per capita by 2010, as targeted The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight control over political dissent

Opportunities ƒ The government recognises the threat that corruption poses to its legitimacy and has

acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ Vietnamese dissidents are seeking external help, especially from the US This could

complicate Vietnam-US relations, with Washington having criticised Hanoi over its restrictions on religious freedom

ƒ Although strong domestic control will ensure little change to Vietnam’s political scene

in the next few years, over the longer term, the one-party state will probably be unsustainable

Vietnam Economics SWOT

Strengths ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years,

averaging growth of 8.0% a year

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses ƒ Vietnam suffers from substantial trade, current account and fiscal deficits, leaving the

economy vulnerable to external shocks The fiscal picture is clouded by considerable

‘off-the-books’ spending

ƒ The heavily managed and weak dong currency reduces incentives to improve the quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

ƒ The government will continue to move forward with market reforms, including privatisation of the state-owned enterprises sector and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government fails to curb inflation, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce that has made the country

attractive to foreign investors

ƒ Vietnam’s location – its proximity to China and South East Asia, and its good sea links – makes it a good base for foreign companies to export to the rest of Asia and beyond

Weaknesses ƒ Vietnam’s infrastructure is still weak Roads, railways and ports are inadequate to cope

with the country’s economic growth and links with the outside world

ƒ Vietnam remains one of the world’s most corrupt countries Its score in Transparency

International’s 2008 Corruption Perceptions Index was 2.7, lower than the regional

average of 4.6

Opportunities ƒ Vietnam is attracting investment from key Asian economies, such as Japan, South

Korea and Taiwan This offers possibility of transfer of high-tech skills and know-how

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US and the general threat of American protectionism,

which will remain a concern

ƒ Labour unrest remains a lingering threat A failure by the authorities to boost skill levels could leave Vietnam a second-rate economy for an indefinite period

Business Environment Ratings

The freight transport sector in the Asia Pacific region offers one of the most attractive business

environments for the industry worldwide There are various reasons for this First, the region offers a powerful combination of future growth and economies of scale It contains arguably the two most

significant of the four BRIC (Brazil, Russia, India and China) economies, which, it is argued, are the powerhouses of future global growth China and India combine vast geographical size, large populations, globally competitive labour costs and as yet untapped infrastructure potential To this must be added the

‘third BRIC’, Russia, which, although outside the region, has critically important trade and transport links

to Asia (such as crude oil exports to China) Second, at a ‘big picture’ level, most of the regional power centres are committed to reasonably pragmatic and relatively stable, market-based policies Countries that

in the past were either fervently communist (China, Vietnam) or capitalist (Malaysia, Taiwan) share a much wider non-ideological common ground focused on how to achieve a sustainable rise in living standards This is not to say, of course, that the area is free of tensions and flash points (North Korea, China-Japan, India-Pakistan to name just a few)

Table: Asia Pacific Freight Business Environment Ratings

Limits of potential returns Risks to realisation of returns

Freight transport

market

Country structure Limits

Market risks

Country risk Risks

Overall rating

Regional ranking

Hong Kong 60.0 81.0 70.5 70.0 74.7 72.8 71.2 1 Australia 42.5 90.1 66.3 75.0 82.2 79.3 70.2 2 India 67.5 61.0 64.2 60.0 55.8 57.5 62.2 3 China 80.0 38.3 59.1 60.0 66.5 63.9 60.6 4 Singapore 50.0 74.3 62.1 80.0 39.4 55.6 60.2 5 Indonesia 40.0 71.3 55.7 50.0 65.4 59.2 56.7 6 Japan 47.5 54.4 51.0 75.0 63.5 68.1 56.1 7

Thailand 40.0 59.2 49.6 55.0 58.1 56.8 51.8 9 South Korea 45.0 46.4 45.3 60.0 62.5 61.5 50.2 10 Taiwan 47.5 35.6 41.6 65.0 74.2 70.5 50.2 11 Philippines 40.0 41.1 40.5 50.0 72.6 63.6 47.4 12 Pakistan 50.0 47.6 48.8 55.0 35.0 43.0 47.1 13 Malaysia 40.0 31.6 35.8 60.0 68.8 65.3 44.6 14

Scores out of 100, with 100 highest Source: BMI

Strong freight transport growth rates are combined with a very encouraging infrastructure investment picture across most of the region

By mode, road haulage will grow as road infrastructure and vehicle density is extended and as the shift to smaller/higher value loads continues Rail freight will benefit from long-distance economies of scale, whether from the opening up of the Australian hinterland or big projects such as the new Silk Road route Shipping is being lifted by the surge in trans-Pacific commodity and manufacturers’ trade routes, while air freight is growing on the back of liberalisation and the budget airline boom While the freight transport industry in the region suffers from patchy regulation and in some areas there are ongoing issues with corruption and cronyism, it is on the whole much more open and competitive than in the past A strong positive factor is the dynamic and outward facing role played by foreign trade

Freight Industry Ranking

Our overall freight transport rating for Vietnam stands at 54.3 (out of a theoretical maximum score of 100) This is composed of a score of 54.6 for potential returns (reflecting factors such as market size, growth and the competitive environment), which gets a 70% weighting, and a lower score of 53.5 for risks to those returns (reflecting factors such as market orientation, regulatory environment and other country-risk issues), which gets a 30% weighting

Vietnam’s freight transport traffic, measured in mntkm, rose by an annual average of 13.8% in 2004-2008 and, according to our projections, will decelerate to an annual average of 5.0% in 2009-2013

According to official information, there is a wide range of transport sector investment projects in the pipeline, across road, rail, air and sea Work is under way to develop the Mekong basin area, and new seaports are planned While there is no doubt that Vietnam’s transport infrastructure is expanding, our rating for this category is constrained by poor planning and limited project management experience

Vietnam is moving towards a full market economy, but is doing so at a relatively slow pace, given that the reform process started nearly two decades ago The country gained access to the WTO in 2007 In the transport sector, state-owned enterprises (SOEs) continue to be dominant in many areas There is not yet a clear legal framework for the protection of passenger and freight customer rights

Freight transport competition remains limited, with SOEs dominating key transport modes There are few foreign entrants, although we expect more to arrive during the forecast period To be able to operate in the country, significant negotiations and procedures are required Although the government favours attracting more foreign direct investment (FDI), the local environment is not yet fully supportive of competitive markets

Transport Intensity Index

This index is derived by calculating the average annual growth rate for total trade (imports plus exports) over a 10-year period running from 2004 through to 2013 As such, it is a mix of actual performance (the five-year 2004-2008 period) and projected performance (2009-2013) In Vietnam’s case, actual average annual trade growth in 2004-2008 was a very strong 27.6%, which in our projections will ease

substantially to 5.8% per annum in 2009-2013 The annual average across the 10 years as a whole is 16.7%

Vietnam Logistics Performance Index (LPI)

In 2007, the World Bank launched its Logistics Performance Index (LPI), intended as ‘the first in-depth cross-country assessment of the logistics gap among countries.’ The LPI was calculated on a five-point scale and based on survey responses from over 800 logistics professionals Countries were given an aggregate LPI score, which was in turn made up of seven sub-categories, covering criteria such as the quality of customs, infrastructure and international shipments, logistics competence, tracking and tracing, domestic logistics costs, and timeliness

In the 2007 survey, Vietnam was ranked 53rd in the world with an LPI score of 2.9 For comparison with the major OECD economies, the Netherlands was ranked second in the world with an LPI of 4.2;

followed by Germany (third with an LPI of 4.1), the UK (ninth, LPI of 4.0) and the US (14th, LPI of 3.8)

In comparison with other Asian economies, Singapore was the world number one with an LPI score of 4.2, followed by Australia (17th, LPI of 3.8) and Taiwan (21st, LPI of 3.6) Then came South Korea (25th, LPI of 3.5), Malaysia (27th, LPI of 3.5), China (30th, LPI of 3.3), Thailand (31st, LPI of 3.3) and Indonesia (43rd, LPI of 3.0) Vietnam was therefore close to the bottom end of the regional LPI ranking, ahead of Papua New Guinea (95th, LPI of 2.4) and Laos (117th, LPI of 2.3) In terms of the different components of the index, Vietnam’s best performing areas, ranked in order, were domestic logistics costs, timeliness, international shipments, and tracking and tracing Weaker areas in descending order were customs, logistics competence, and infrastructure

Economic Risk Summary

Bad Debt Ratio Rising

The State Bank of Vietnam (SBV) stated on July 20 that the banking sector had registered an increase in bad debt to 2.52% of total loans at the end of June, compared with 2.17% at the end of 2008 However,

we believe the true rate of non-performing loans, using international standards could be considerably higher Moreover, we believe the bad debt ratio is also disguised by the rapid increase in credit growth since the government extended its interest-rate subsidy programme in April The SBV has reported a

cumulative loan growth of 17% in H109, putting the government's 25% credit growth target for 2009 as a whole in danger

Long-Term Risk

The 3.1% y-o-y expansion in Q109 was the lowest on record, but more recent macroeconomic data suggest that the government and central bank's stimulus measures are now gaining traction We thus acknowledge upside risks to our 2.9% growth forecast for 2009, but refrain from an upward revision due

to the still precarious state of the global economy On the political front, the economic downturn has not yet seen any material repercussions, but we have nevertheless decided to lower our short-term political risk ratings on the back of high inflation and rising unemployment undermining public acceptance of one-party rule Meanwhile, regional tensions have risen due to China's more assertive claims for sovereignty

in the South China Sea

We maintain our below-consensus 2.9% GDP growth forecast for 2009, but are now acknowledging upside risks to this forecast This is due to strong fiscal and monetary stimulus bolstering domestic

demand, and a weaker dong softening the contraction in external demand With global economic

conditions expected to improve slightly in 2010, we maintain our 5.0% growth forecast for next year We also maintain our expectation that the government will stepwise depreciate the dong towards

VND19,000/US$ by the end of the year However, this carries risks to macroeconomic stability as public confidence in the dong has been impaired by expectation of higher inflation and speculation about a devaluation

Political Risk Summary

Religious Rights an Obstacle

We believe that Hanoi's stern position on limiting religious freedom will continue to weigh on

US-Vietnamese relations after 14 people were detained following a clash with police preventing them from rebuilding a church in the city of Dong Hoi in central Vietnam on July 22 The incident follows an appeal

by 37 US senators for Hanoi to free Nguyen Van Ly, a catholic priest and political dissident, given an eight-year prison sentence in March 2007 for spreading propaganda against one-party rule While not creating any serious dissonance, we believe the government's repression of Catholics may prevent closer cooperation to check China's growing naval influence in the South China Sea

Long-Term Risk

The crackdown on trade union activists, bloggers and other political dissidents has left little doubt that the Communist Party of Vietnam has no intention of moving towards increasing political freedom

Nonetheless, the widening cracks in the government's monopoly on information remain a long-term threat

to one-party rule This has been particularly evident in Hanoi's efforts to silence domestic criticism of China, which has risen due to a controversial Chinese investment in bauxite mining in the central

highlands However, while Chinese investment into the extractive sector is likely to remain a contentious issue in the short term, we believe that economic integration carries the key to improved Sino-Vietnamese relations over the longer term

Business Environment Risk Summary

The sharp deterioration in economic conditions both domestically and globally has prompted the

Vietnamese government to shift its attention from economic reforms to devising measures to support growth in the short term in the face of slumping global demand Only 73 out of a planned 262 state-owned enterprises (SOEs) were equitised, i.e transformed into shareholder-owned companies, in 2008, and initial public offerings of SOEs like Bao Viet have been unsuccessful, largely due to the high pricing

of shares While continued delays in the equitisation process are expected, we are not expecting any shift

in the government's economic reform agenda, which will continue to support economic activity

Airport Upgrade Approved

Prime Minister Nguyen Tan Dung has approved a plan to upgrade Cam Ranh domestic airport, near Nha Trang in central Vietnam, to an international airport with an investment of US$600mn The airport's capacity will be enhanced to handle 5.5mn passengers and 100,000 tonnes of cargo annually The

government also plans to further increase annual capacity to 8mn passengers and 200,000 tonnes of cargo

by 2030 The upgraded airport will include an area of more than 650 hectares and will be used for both civil and military purposes

Legal Code/Corruption

Legal Code

Vietnam’s judicial system is based on communist legal theory and the French civil law system

Corruption

Vietnam has a bad record on transparency The state was ranked 121st (out of 180) in Transparency

International’s Corruption Perceptions Index in 2008, with a score of 2.7

Red Tape

Vietnam compares favourably with its regional peers in terms of bureaucracy, and about the same as developed states According to World Bank data, 28 separate procedures are required to enforce a

contract, which takes an average of 120 days The East Asia and Pacific average is 24 and 193,

respectively, while the process involves 18 procedures and 213 days in high-income OECD states

Conversely, World Bank data state that it takes 11 procedures and 56 days to start a business in Vietnam, compared with an average of nine and 61 in East Asia and Pacific and six and 25 in high-income OECD states

Labour Force

Size

Reliable data on the labour force in Vietnam are difficult to find However, it is estimated that the

working age population in the country is 42.1mn, approximately 61% of the total An estimated 10.2mn live in urban areas, with the remaining 31.9mn in rural areas ‘Technically skilled workers’ form an estimated force of 8.84mn, accounting for 20.99% of the total The south-east region has the highest rate

of skilled workers (30.13%), followed by the Red River delta (27.99%) and Coastal South Central

(20.85%) The lowest rate was reported in the north-west region

Education

The adult male illiteracy rate was estimated at 4% for males and 9% for females in 2000, with the youth illiteracy rate 3% for both genders

Regulation

The Vietnam labour force is comparatively heavily regulated, according to World Bank’s Employment

Laws Index Its score of 56 indicates that regulations are tighter than the East Asia and Pacific average,

and a bit tighter than OECD high-income states Disaggregating the data, the regulations for hiring workers are looser than those for firing workers, with scores of 43 and 48, respectively, the combination

of which suggests a more regulated workforce than regional peers

Issues

Fears of growing unemployment and rising social unrest in the cities is slowing down the reform of SOEs The SOEs are an inefficient and loss-making legacy of a different era, and would have gone bankrupt a long time ago if the market had had its way However, the fear of creating mass

unemployment in the cities by laying off surplus labour has prevented meaningful reform As a result, the SOEs continue to crowd out the more productive private sector, while adding to the government’s fiscal woes by forcing the state to absorb their losses

Industry Trends And Developments

According to reports in early June, foreign investors have once again raised concerns about Vietnam's infrastructure Rapid economic growth is placing a heavy burden on existing infrastructure, and

investments, tangled in red tape and regulatory obstacles, have not been able to keep pace The latest concerns were raised during a conference in Ho Chi Minh City, organised by the International Finance Corporation and the Vietnamese Planning and Investment Agency The country's port infrastructure was once again in the spotlight, with foreign investors urging the government to invest not just in creating maritime hubs, but also in creating a better intermodal transport system to move cargo to and from the ports The chairman of the American Chamber of Commerce said that delays in construction of

supporting infrastructure for ports was also a key issue that hindered operations and raised costs,

IntellAsia reported One example of the latter point is the delay in the development of roads around ports

in Ba Ria-Vung Tau province in South Vietnam This has in turn caused delays in the construction and commencement of operations of the country's new ports Vietnam still has a cost advantage against China when it comes to manufacturing wages, but much FDI flow is still diverted to southern China because it is much easier to get input goods to factories and finished goods out due to China's superior infrastructure

In another conference organised by the Asian Development Bank in February 2009 called 'Strengthening Public Private Partnerships For Infrastructure Investments In Vietnam', a core theme among the

participants was the absence of an enabling institutional and regulatory/legal environment, which hinders

the proliferation of PPPs Law firm Duane Morris identified four main reasons behind the limited

participation of the private sector in infrastructure in Vietnam First, the weak governance structures of the state-owned companies that dominate the construction and utilities sectors; second, difficulty in accessing domestic capital; third, projects can experience delays due to the weak regulatory environment,

which can prove to be costly; and finally the support of the government is often uncertain In BMI's

global Business Environment Ratings, Vietnam's score in terms of Infrastructure is 37.2 out of 100, below the regional average of 41.6

Vietnam added to its growing status as a major international trading power after announcing it would cut import tariffs on a variety of goods in order to meet World Trade Organisation (WTO) regulations According to the Journal of Commerce (JOC), the East Asian country will reduce tariffs on a number of imported items until the end of 2009 The Vietnamese government is reported to already have agreed to reduce import duties on more than 10,000 goods by approximately 4% from 2009-2013 as part of the

conditions of the country becoming a WTO member in 2007 BMI views the agreement as a further sign

of Vietnam's growing status as a major trading power Furthermore, the decision to relax import

restrictions may be based on the government's acknowledgement of the country's growing exports sector,

which BMI predicts will outpace the growth in imports in real terms from 2010 Since joining the WTO,

BMI notes that Vietnam has made significant strides in improving its trade links, particularly its links

with Western import markets The most significant single development has been the construction of the

country's first deepwater container port at the Cai Mep terminal complex at Ho Chi Minh City's Saigon New Port which was officially inaugurated in May 2009 The facility has opened up direct container

shipping links with the United States with major container lines APL and Mitsui O.S.K Lines Ltd

(MOL) becoming the first carriers to offer direct services between Vietnam and the US APL President Eng Aik Meng said the new service represented 'a new era for trade with Vietnam and marks its increased

importance as a manufacturing and export centre' BMI notes that while Vietnam's port infrastructure is

still relatively underdeveloped when compared with other major Asian export nations, continuing

developments within the nation's port sector are expected to ease congestion in coming years following the implementation of a US$4.5bn government port investment programme We believe that, following APL's endorsement, other major liners will look to increase direct services between Vietnam and western consumer markets This is expected to offer a considerable boost to the country's export sector, providing

an outlet for the Vietnam's growing manufacturing industry

Road

Vietnam's Ministry of Transport began work on a 121km-long expressway connecting Ninh Binh

province to Nghi Son, in Thanh Hoa province, on June 16, reported VNBusinessNews The construction

of the expressway is part of a programme to upgrade the North-South national road Total investment in the project is forecast to be VND32trn (US$1.9bn) Vietnam has a total road network of 222,000km – the 20th largest globally – although only 19% of it is paved, indicating the poor condition of road

infrastructure in the country It should be noted that in the past 10 years, large-scale projects have been implemented and more are under way or in the pipeline; therefore, the ratio of paved to unpaved is

arguably looking better Vietnam's Ministry of Transport and Communications disclosed estimates that it will require close to US$60bn to 2020 to fund road infrastructure projects

The Hanoi city People's Committee is to invest VND881.6bn (US$50.9mn) in a project to upgrade the 1A National Highway, from Ngoc Hoi to Cau Gie, in Thuong Tin dist and Phu Xuyen district, according to a

report in IntellAsia in June Hanoi Department of Transportation has been given the responsibility to carry

out the project as part of its mandate to develop the transportation network, and upgrade the route

capacity The roads and ports sectors are seeing the greatest level of activity in transport infrastructure, with the government funnelling public funds and loans from multilateral institutions for their

development The increased traffic levels in Vietnam's urban areas and the country's general fast-paced economic development have increased the volume of exports and imports to and from the country, thus creating a pressing need for better infrastructure between ports and inland

Rail

The Railroad Management Board Region 2 in Vietnam announced in June that the project for upgrading

the railroad between Vinh-Nha Trang would be officially launched in Q309, according to IntellAsia The

upgrade on the railroad, with a total length of 700kms, is expected to cost VND4trn (US$231.8mn) The increased traffic levels in Vietnam's urban areas and the country's general fast-paced economic

development have increased the volume of exports and imports to and from the country, thus creating a pressing need for better infrastructure between ports and inland

Vietnam is expecting financial assistance from China as well as other international sources to develop a 128.5km long railway line from Ho Chi Minh City to the Cambodian border A China-based consulting group was scheduled to submit a feasibility study to the Vietnam Railway Department by the end of June

2009 Construction was set to begin in 2010 Linking the railways of the South East Asia is part of the ASEAN rail link and the Trans-Asian rail projects An efficient transport network is vital to any emerging economy, and will assist countries such as Cambodia and Vietnam in continuing the impressive economic growth rates that they have posted in recent years

A memorandum of understanding (MoU) has been signed between the Vietnam Railway Department and

an associated company of China National Machinery Import & Export Corp (CMC) and China

Railway Construction Corp Limited (CRCC) to survey and assess the urban railway line No 1 from

Nam Thang Long to Lang Hoa Lac in Hanoi, Vietnam Under the terms of the MoU, the CMC-CRCC associated company will provide a report on the viability of the project and China's commitment to the Vietnam Railway Department Vietnam's poor infrastructure has always been a hindrance for investors, and the government is making efforts to overhaul its roads, railways, airports and ports to address the problem Vietnam's transport infrastructure has received attention and investments throughout the

country Major cross-country and domestic projects have been announced and they are either in planning stages or under construction, but most are expected to come on stream before 2015

Air

The prime minister of Vietnam, Nguyễn Tấn Dũng, has given the go-ahead for the planned VND10.52trn

(US$0.59bn) upgrade for Cam Ranh International Airport, reports IntellAsia The upgrade will enable the

airport to handle 27 aircraft during peak hours, and to receive 5.5mn passengers and nearly 100,000 tonnes of commodities per year by 2020 Vietnam's airports have been one of the focuses of the country's upgrade plans for its transport infrastructure In May, the Vietnamese Government gave approval to a master zoning plan, drawn up by the Ministry of Transport, which proposes the development of 10 international airports across the nation, reports Asia Pulse The plan proposes both the expansion of the current airports and construction of new airports

Sea

According to Thanh Nien Daily in the second half of July, state-owned Vietnam National Shipping

Lines (Vinalines) is to build the first two wharves of the deep-water port at Van Phong Bay in the central

province of Khanh Hoa The company will begin building in October 2009 as a part of a project to

develop the international transshipment port, primarily to serve Asian trade The two berths will have the capacity to handle vessels of up to 9,000 twenty-foot equivalent units (TEUs) Vinalines will further

develop the other berths with the capacity to handle ships between 12,000 and 15,000 TEUs Cargonews

Asia reports that the new International Transshipment Port of Van Phong will have between 36 and 42

berths The Ministry of Transport's Vinamarine International Co-operation Department stressed the country's port sector requires significant investment if it is to keep pace with wider economic

development

Dubai-based port operator Dubai Ports World (DP World) was to launch the Saigon Premier Container Terminal (SPCT) on October 1 2009 The terminal is a joint venture between DP World and Tan Thuan

Industrial Promotion Company (IPC) and is on the Soai Rap River near Ho Chi Minh City, Vietnam

SPCT will provide services to Ho Chi Minh City and the surrounding industrial zone area SPCT will have a capacity of 800,000TEUs annually, increasing to 1.5mn TEUs after the completion of the second phase DP World has become one of the world's largest port operating companies Focusing on the

container business, the company owns 45 terminals and 13 new developments in 29 countries Its capacity stands at 54mn TEUs and is expected to increase to around 90mn TEUs by 2017, when the new terminals are ready

Building for the second phase of the Cai Cui seaport project in Vietnam's Can Tho city began after an inaugural ceremony by Prime Minister Nguyen Tan Dung on July 11 2009 The prime minister said that once fully operational, the port would cut transportation costs in the Mekong delta and would help reduce congestion at the Saigon port The second phase, worth VND600bn (US$34mn), includes 500m of

wharves, modern handling facilities and a logistic area BMI notes that while Vietnam's port

infrastructure is still relatively underdeveloped compared with other major Asian export nations,

continuing developments within the nation's port sector are expected to ease congestion in years to come

PricewaterhouseCoopers (PWC) executive director for south east Asian infrastructure is quoted in the

Saigon Times saying, 'Vietnam will need to increase the levels of infrastructure investment at twice the

growth rate of GDP to increase its overall national competitiveness'

The CKYH Alliance said it would begin a direct service between Vietnam and the US East Coast from mid-August 2009 The alliance will start by adding Ho Chi Minh City to its current AWE-4 (All Waters

East Coast-4) service, managed by Kawasaki Kisen Kaisha (K-Line) It is considered to be the first direct service from Ho Chi Minh City to Norfolk and New York Alliance members include Coscon, K- Line, Yang Ming and Hanjin Shipping Company Industry observers believe the service will reduce

transit time and provide easier access to and from Vietnam This will possibly result in improving profit levels We predict Vietnam's export sector will become one of the strongest in the region, despite a projected decline in 2009

South Korea's Hanjin Shipping Company has announced in June the launch of a new service, the SJX (Southeast and Japan Express), from June 21 2009 The new service would connect South East Asia and Japan with the US west coast, and included a direct call at the new deepwater port in Ho Chi Minh City, Vietnam The service will use six vessels, each with a capacity of 4,000TEUs Industry observers believe the new service will prove a more economical option for customers, as it will reduce the cargo transit time Moreover, the service will also increase the company's coverage of key ports in Asia and the US

We forecast that Vietnam's export sector will become one of the strongest in the region, despite a

projected decline in 2009

Vietnam commenced operations of its first deep-water port, SP-PSA Port, on May 29 2009, with the arrival of the container ship APL Alexandrite The port is a joint venture between Saigon Port and PSA Singapore, with a capacity of 2.2mn twenty-foot equivalent units (TEUs) The ship, with a 3,821TEU capacity, is a part of the first direct service between Vietnam and the US We predict Vietnam's export sector to become one of the strongest in the region, despite a projected decline in 2009 As Western consumer demand recovers from 2010, we forecast Vietnam's exports to grow by an average of 7.1%

year-on-year (y-o-y) over our 2010-2013 forecast period BMI predicts that Vietnam's exports and

imports will reach US$79.3bn and US$86.5bn respectively by 2013, with an average annual trade growth

of 3.8% over our 2009-2013 forecast period

Industry Forecast Scenario

Global Oil Products Market Review

Spinning The Wheels

As a barometer for current and future products demand, the world’s autos industry continues to be a cause

of great concern, in spite of government initiatives that have stabilised the situation The industry is now just spinning its wheels while waiting for the recession to end and consumer activity to recover

European car sales rose in June for the first time in 14 months as government-backed incentives boosted

demand at Volkswagen (VW) and Fiat in particular New-car registrations increased by 2.4% to 1.46mn

vehicles, the first monthly gain since April 2008, according to the Brussels-based European Automobile Manufacturers’ Association (EAMA) Sales for the first six months of 2009 fell by 11% to 7.43mn cars State scrappage incentives, topped by Germany's EUR2,500 bonus for car buyers who trade in old

vehicles, have favoured sales of smaller models So-called ‘premium’ carmakers are not benefiting on the same scale

European deliveries by VW rose by 9.5% to 312,302 cars Meanwhile, Turin-based Fiat recorded a 12% gain, selling 125,640 vehicles in the region Germany led the June expansion, with a 41% sales surge, reflecting the generous terms of its incentives The French market grew by 7%, while Italy advanced by 12% Central and Eastern European demand continued to contract, declining by 25% in June and 27% for the first half of the year as a whole

Registrations for Mercedes-Benz slipped by 1.4% to 61,530 vehicles BMW’s European sales fell 13%

to 60,454 cars VW’s Audi unit bucked the trend among premium brands, achieving a 5.8% gain to 62,639 cars and sports utility vehicles (SUVs)

However, a July 2009 report in the Wall Street Journal suggested that European car sales may slump in

2010 after scrappage programmes come to an end Analysts quoted suggest that EU car plants will have

an excess capacity of 7.2mn vehicles in 2010

The French government plans a gradual phase-out of its EUR1,000 car sales incentive, which had been

due to expire at the end of 2009, a report in Les Echos stated, citing industry minister Christian Estrosi

While the scrappage bonus cannot be ‘maintained indefinitely’, the government is working on a phased

withdrawal, Estrosi was quoted as saying Renault’s CEO Carlos Ghosn said in July that the expiry of

state-backed incentives in France and elsewhere threatened to offset any improvement in demand and prevent a European sales recovery in 2010

In the US, it has been predicted that autos sales probably will rise to an annual rate of more than 10mn in H209 as fleet operators finally replace their ageing vehicles Purchases in the first half of the year were abnormally low by historical standards Fleet purchases, along with the federal government’s scrappage programme, may push the annual rate to more than 9.9mn, the highest in any month so far this year Sales

of cars and light trucks in 2008 totalled 13.2mn

General Motors and Chrysler, which have both left bankruptcy, need a 10mn annual sales rate to break

even, according to the US government Fleet sales can account for as many as 3mn vehicles annually

However, rental-car companies such as Hertz have been keeping vehicles longer

Dean Maki, chief US economist at Barclays Capital, is among those predicting that automakers will

crank up production to meet demand spurred by the scrappage programme A rebound in the industry’s output would help pull the economy out of the recession, he said

Nissan expects Japanese sales to improve in July, helped by government incentives Under a government

programme beginning on June 19, consumers can apply for a JPY250,000 subsidy if they scrap a car that

is more than 13 years old to buy a new one and for JPY100,000 for a new car purchase without scrapping

an old one

Chinese car sales have begun to pick up, after the earlier slump VW, which is the biggest overseas carmaker in the country, boosted first-half sales in China by 23% after a government stimulus package helped spur demand Sales to consumers jumped to 652,222 units The overall passenger car market (excluding minivans), grew 22% from a year earlier China is on course to pass the US as the world’s largest auto market in 2009, after the government halved retail taxes on small cars and gave out subsidies

in rural areas to help revive flagging demand

Demand In The Doldrums

The downturn continued through the second quarter In May, OECD oil products consumption fell by an estimated 7.4% year-on-year (y-o-y) Europe, Asian OECD states and North America registered losses for the 13th consecutive month The Pacific region suffered particularly badly, with a decline in demand of more than 11%, in spite of greater gasoline usage North America's 8.1% fall was spread across all

product groups Europe fared better by comparison, with a 4.3% reduction in May demand

According to the International Energy Agency (IEA)’s July 2009 report, preliminary weekly data for the

US showed an 8.1% y-o-y fall in June demand All product categories bar residual fuel oil saw losses, scaring the bulls and undermining belief in the country's economic recovery The weakness in diesel demand (-13.4% y-o-y) is particularly worrying, as it is a barometer of underlying economic activity

According to the American Petroleum Institute (API), US demand for crude oil and petroleum products declined by 5.4% y-o-y during June Total petroleum product deliveries, excluding exports, averaged 18.61mn barrels per day (b/d), down 1.07mn b/d from a year ago, the API said in its monthly oil report Demand fell by 6% to 18.75mn b/d in the first half of 2009, the lowest level for the six-month period in more than 10 years

The downturn is having the greatest impact on distillate demand, with industrial and transportation use of diesel hit particularly hard The situation for jet is no better, and gasoil consumption is sufficiently weak

to see inventories in OECD Europe above the five-year average In fact, Europe is storing up trouble with

a glut of middle distillates Much of an estimated 50mn bbl of products in floating storage is reportedly sitting offshore Europe This bodes ill for prices over the next few months

False Dawn For Gasoline

Bullish market observers will have been alarmed by the apparent absence of the seasonal upturn in US gasoline demand Given that gasoline prices soared in June thanks to hopes of a good driving season, the market must now be very concerned about the likely trend for the rest of the summer For a second year in

a row, the US driving season either petered out early, or never got going at all Gasoline demand actually fell by an estimated 1.5% y-o-y in June, early July data are not encouraging and the US-based American Automobile Association (AAA) expects a drop in vehicle miles travelled (VMT)

Gasoline prices took off in June, stirring hopes that it would be a strong US driving season By 22 June, the average US regular gasoline price had reached US$2.69 per gallon At the beginning of the quarter the average price was US$2.04/gallon, so there had been an increase of almost one-third to the June peak In mid-July, the price had fallen for the third week in a row, dropping to US$2.53/gallon A year earlier it was US$4.12, but drivers did not respond by tackling long journeys Prices decreased throughout the country, with the biggest drop seen in the Midwest

During Q209 BMI estimates that the global wholesale price for premium unleaded gasoline was

US$69.89/bbl Gasoline prices in Q209 were down from US$127.92 in the equivalent period of 2008 45.4%) Fore the third quarter of the year we forecast an average global gasoline price of US$63.70/bbl

(-For the whole of 2009, the BMI assumption is an average US$62.12/bbl The overall y-o-y fall in 2009

travel numbers in May fell 9.2% during the month All airlines surveyed were suffering through pricing declines, with half saying they expect yields to fall further this year

The cutting of fuel surcharges, the impact of swine flu and the downgrading to economy class have all contributed to airline misery, but the primary concern has been a glut of excess capacity Capacity cuts have come at about half the rate of the declining traffic trend, putting pressure on prices, IATA said The number of passengers flying on premium tickets fell by 23.6% y-o-y in May 2009, according to the IATA That follows a 22% decline in April Meanwhile, the number of passengers flying economy fell 7.6%, after growing 0.3% in April

Premium traffic in the North Atlantic was down by 16.5% in May y-o-y Travel across the North and mid-Pacific was down by 30.7%, and travel in Europe was down 30.6% Q2 losses at the eight biggest US

airlines may be US$1.2bn, said Michael Linenberg, a Bank of America analyst in New York Jet fuel

prices climbed by 32% in the quarter, although the US$1.59/gallon average was down 58% y-o-y

According to the API, US jet fuel demand in June plunged by 19.4% y-o-y to 1.31mn b/d

Jet prices averaged US$66.87/bbl in Q209, using the composite for New York, Singapore and Rotterdam The annual decrease was 57.3%, and the monthly low during the first half was US$53.75 in February

2009, with the price reaching US$77.19/bbl in June 2009 For Q309 we are assuming an average global jet price of US$67.65 For 2009, the annual level is forecast to be US$65.17/bbl This compares with US$124.95/bbl in 2008

Diesel Drifts

In the US, mid-July diesel prices were almost 47% below the all-time high seen a year earlier, averaging US$2.54/gallon against US$4.76 in July 2008 Prices had fallen for the third successive week, with declines seen in every region but the biggest drop taking place on the West Coast US diesel’s low point was in mid-March 2009, at US$2.02/gallon The year’s high of US$2.62 was reached during the week of June 22, a rise of almost 30% from the low point June US deliveries of distillates, which include heating oil and diesel, declined by 279,000b/d (-7.4%) to 3.48mn b/d, according to API data

Overall oil product demand in Europe during May fell by 4.3% y-o-y, with diesel down 3.6%, according

to IEA data In France, diesel demand contracted sharply and registered a 4.7% fall in May The European gasoil market was expected to come under increased pressure in July on the back of huge export flows from the US and Russia

Gasoil in Q209 averaged US$65.37/bbl, based on a composite global price Our revised Q309 forecast is

for global gasoil at an average US$ 68.45/bbl, a 51.2% y-o-y decline For 2009 as a whole, the BMI

forecast is for an average price of US$68.62/bbl, assuming a monthly high of US$92.49/bbl in December

Table Global Oil Prices, 2003-2013 (US$ per barrel)

2003 2004 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f

OPEC basket 28.10 36.05 50.64 61.08 69.08 94.08 55.00 60.00 65.00 70.00 70.00 WTI 31.06 41.49 56.59 66.02 72.26 99.56 57.51 62.74 67.97 73.20 73.20 Brent 28.83 38.27 54.52 65.14 72.52 96.99 56.29 61.42 66.53 71.65 71.65 Urals 27.04 34.50 50.87 61.35 69.51 94.49 55.55 60.61 65.66 70.71 70.71 Dubai 26.76 33.69 49.54 61.52 68.37 93.56 55.60 60.66 65.72 70.77 70.77

f = forecast Source: BMI

Macroeconomic Outlook

Economic Outlook

Growth Bottoming Out, But Risks To Recovery Remain

We maintain our below-consensus 2.9% GDP growth forecast for 2009, but are now acknowledging upside risks to this forecast This is due to strong fiscal and monetary stimulus bolstering domestic

demand, and a weaker dong softening the contraction in external demand With global conditions

expected to improve in 2010, we maintain our 5.0% growth forecast for next year

We revised down our 2009 growth forecast for Vietnam from 5.0% to 2.9% in January as regional and global macroeconomic data hit home the severity of global demand destruction, which will undoubtedly have an effect on the export-dependent Vietnamese economy We now note that both the Vietnamese government and the IMF have followed our lead The Vietnamese government lowered its 2009 growth target from the 6.5% set in December to 5.0% in May, while the IMF reduced its 2009 growth forecast for Vietnam from 4.75% to 3.3% in early May, to reflect a deterioration in the global macroeconomic

environment

However, we are now acknowledging upside risks to our 2009 forecast as domestic and global economic data indicate that the 3.1% y-o-y growth posted by Vietnam in Q109 may have been the bottom of the ongoing downturn However, there are a number of potential obstacles for a sustained economic recovery, and we thus remain averse to claiming that Vietnam is out of the woods quite yet

The 3.1% y-o-y outturn in Q109 was the slowest on record, with manufacturing growth dropping to 0.45% y-o-y from 6.3% in the preceding quarter, a sharp contrast from the double-digit growth rates registered between Q106 and Q308 The state-run National Centre for Socio-Economic Information and Forecast stated in a report released in early May that growth would pick up to 3.5-3.8% in Q209, and we find this estimate reasonable given the solid performance of exports and the boost given to economic activity from the expansion of the government's loan subsidisation programme Indeed, the government's decision to include medium-and-long-term loans in the programme saw overall lending jump by 4.86% m-o-m in April from growth rates of 0.52%, 0.23% and 1.92% in January, February and March,

respectively

In addition, industrial production grew by 4.2% m-o-m in April after having contracted by 8.6% in February This pushed cumulative industrial production output for January-April up by 3.3% compared to the equivalent year-ago period We expect industrial production growth to rise to 8.0% by the end of

2009, bringing the average for the year to 6.0% Moreover, retail sales increased by an impressive 21.5% y-o-y in January-April as Vietnamese consumers remained considerably more optimistic than their

counterparts in other Asian economies The semi-annual Nielsen global consumer confidence index for H109, published in April, showed that Vietnamese consumers were the most optimistic in the world when

it came to believing that the domestic economy would exit the current downturn by the end of 2009

Private consumption should also be boosted by a planned US$1.6bn of tax breaks for companies and individuals in a US$8-9bn stimulus package being debated in the National Assembly as we went to print While the National Assembly has increased its scope to criticise suggested government policies, effective political power still lies with the Politburo Hence, we see no risk that the government's stimulus package will fail to gain parliamentary approval

Further Dong Devaluation Likely

The Vietnamese export sector has done relatively well so far this year, with exports declining by 0.1% o-y in January-April, which can be compared to double-digit declines in other regional economies Having said this, subtracting the US$2.5bn export rush in gold bullion in Q109 the y-o-y export growth figure for the period drops to -13.7%, which we believe is a more representative figure We are currently expecting exports to drop by 19.5% to US$50.9 for 2009 as a whole

y-While this is considerably better than our forecasts for other Asian economies, Vietnam's high reliance on external demand – exports amounted to 74.8% of GDP in 2008 – means that the country's export

contraction will be harder felt Further dong devaluation may thus prove to be an easy way for the

authorities to soften the blow of contracting external demand Indeed, we adjusted our end-09 dong target from VND18,000/US$ to VND19,000/US$ in January and were partly vindicated in doing so when the State Bank of Vietnam (SBV) widened the trading band around the dong from 3% to 5% on March 24, which was effectively a devaluation of 2%

After a brief period of stabilisation, downside pressure on the dong has quickly re-emerged This was mainly due to the SBV's expansive monetary policy and declining dollar inflows from exports, foreign direct investment and remittances With the US dollar trading at a premium of VND200-500 to the ceiling price of the SBV's trading band on the black market in mid-May, we expect it to be only a matter of time until conditions on the ground will yet again force the central bank's hand The extent of the devaluation

is to a large extent a guessing game We find an adjustment of 2-3% to VND18,200-300/US$ most likely

at the initial stage to bring the official exchange rate in line with supply and demand conditions, but do not preclude a larger adjustment to quell expectations of a further devaluation

A dong devaluation would naturally add to the inflationary pressures already evident in the economy from the interest rate subsidy programme Nonetheless, the present trend is still one of disinflation with consumer price inflation dropping to 9.2% y-o-y in April 2009, the first single-digit figure since October

2007 We expect inflation to bottom out in the low single digits in Q309 and start rising again towards the

inflation expectations are rising, with fears of a new inflationary bubble weakening public confidence in the dong, which could bring a further dollarisation of the economy This would in turn decrease the traction of monetary policy and most likely result in further macroeconomic instability

An orderly depreciation of the dong towards VND19,000/US$ would, on the other hand, aid the export sector and an economic recovery, especially as the pressure is now on other Asian currencies to

appreciate against the dollar as risk appetite has returned, further improving Vietnam's price

competitiveness Also adding to a more positive external demand picture is the effect on domestic

demand expected from the strong fiscal stimulus package currently being implemented by the government

to counter the slowdown However, while the government's efforts to counter the slowdown through increasing public infrastructure projects are commendable, we believe that the slow disbursement of the funds will to a great extent spill over into 2010 With this in mind, we are forecasting a fiscal deficit of 8.2% of GDP in 2009 to be followed by a 7.8% shortfall in 2010

This has raised the need to increase government borrowing to finance the burgeoning fiscal deficit However, the state treasury has held a number of unsuccessful bond auction in H109 as it has been averse

to pay the higher yields demanded by the market As a consequence, the treasury had in mid-May only been able to raise US$236mn out of the government's fund-raising target of US$3.11bn Yet, with

government revenue falling by 20% y-o-y in Q109, the treasury will inevitably have to accept higher yields in future bond auctions However, we do not see this as a greater threat to public finances as total public debt is still less than 50% of GDP, according to IMF estimates Indeed, we raised our sovereign risk rating for Vietnam from D- to D in May, but this was solely due to an improvement in the ability-to-pay component from 22 to 26 (out of 45) on the back of greater macroeconomic stability, with the

willingness-to-pay component actually falling from 30 to 28 (out of 55)

Risks To Outlook

We have decided to maintain our below consensus GDP forecast of 2.9% in spite of the emergence of tentative green shoots of economic revival in recent macroeconomic data There are a few factors that keep us from revising up our growth forecast Firstly, we suspect that part of the increased lending

through the loan subsidisation programme has been invested in the stock and real estate markets, and may thus not actually bolster real economic activity Secondly, the sharp credit growth rate in April has made the SBV apprehensive of a possible resurgence in inflation with the 0.35% m-o-m increase in April being the highest monthly inflation rate recorded since August last year (with the exception of the 1.17% Tet-induced price increase in January)

We see a risk that stimulative fiscal and monetary policy will lead to inflationary conditions down the road, and possibly a repeat of the severe macroeconomic imbalances of 2008, when inflation rocketed to 28.4% y-o-y in August and the ballooning trade deficit threatened a balance-of-payments crisis Also

government may thus opt to scale down their stimulus efforts for the benefit of macroeconomic stability and longer-term growth

Thirdly, external demand will be key for an economic recovery With this in mind we highlight that our growth forecasts of -3.1%,-3.6% and -6.1% for key export destinations such as the US, Europe and Japan, respectively, are still considerably below consensus Indeed, we do not expect these economies to post a marked recovery until well into 2010 With global growth forecast to improve to 1.7% in 2010, after a 2.3% contraction in 2009, we maintain our 5.0% GDP growth forecast for Vietnam next year, with GDP forecast to expand by 7.0% in 2011

Table: Vietnam – Economic Activity, 2006-2013

Nominal GDP, VNDbn 1 974,266 1,144,016 1,478,695 1,711,360 1,899,304 2,111,893 2,362,410 2,652,283

Nominal GDP, US$bn 1 61.00 70.94 84.59 90.07 94.97 111.15 131.25 147.35 Real GDP growth, %

change y-o-y 1 8.2 8.5 6.2 2.9 5.0 7.0 7.7 7.9 GDP per capita, US$ 1 723 829 975 1,024 1,065 1,229 1,432 1587 Population, mn 2 84.4 85.6 86.8 88.0 89.2 90.4 91.6 92.8 Industrial production

index, % y-o-y, average 3 17.7 16.3 14.6 6.0 10.0 12.0 14.0 14.0 Unemployment, % of

labour force, end of

period 3 4.8 4.6 5.0 5.5 5.5 5.0 4.5 4.0

f = BMI forecast Source: 1 IMF (General Statistics Office); 2 IMF; 3 General Statistics Office

Transport Outlook

Table: Transport And Communications Data And Forecasts, 2006-2013

2005 2006e 2007e 2008e 2009f 2010f 2011f 2012f 2013f

Annual GDP growth, % 8.2% 8.5% 6.2% 4.5% 5.5% 6.8% 7.7% 8.0% 8.2% GDP index, 1995=100 217.5 236.0 250.6 261.9 276.3 295.1 317.8 343.3 217.5 5-year average annual

GDP growth, % 7.8% 8.0% 7.8% 7.2% 6.6% 6.3% 6.1% 6.5% 7.8% Annual transport and

communications sector

growth, % 9.5% 9.8% 7.5% 5.7% 6.7% 8.0% 8.9% 9.2% 9.5% Transport sector GDP

index, 1995=100 224.9 246.9 265.4 280.6 299.4 323.5 352.3 384.8 224.9 5-year average annual

transport GDP growth, % 9.0% 9.6% 9.1% 8.5% 7.8% 7.6% 7.4% 7.7% 9.0% Transport and

communications sector,

% of GDP 4.2% 4.2% 4.3% 4.3% 4.4% 4.4% 4.5% 4.5% 4.2% Annual import growth, % 22.1% 38.3% 37.5% -20.6% 11.0% 11.0% 10.0% 10.0% 22.1% Imports index, 1995=100 565.0 781.4 1074.3 852.8 946.6 1,050.7 1,155.8 1,271.4 1,565.0 5-year average annual

import growth, % 24.9% 22.7% 29.3% 18.5% 17.7% 15.4% 9.8% 4.3% 24.9% Annual exports growth, % 22.7% 21.9% 30.3% -5.3% 10.0% 10.0% 12.0% 12.0% 22.7% Exports index, 1995=100 766.0 933.8 1216.3 1151.9 1267.1 1393.8 1561.2 1748.5 766.0 5-year average annual

export growth, % 21.7% 23.8% 25.8% 18.4% 15.9% 13.4% 11.4% 7.7% 21.7% Transport and

communications sector

value, US$bn nominal 2.5 3.0 3.6 3.9 4.4 5.0 5.9 6.7 2.5 Total transport sector

employment, ‘000 1,074 1,099 1,123 1,148 1,173 1,198 1,224 1,250 1,074

e/f = estimate/forecast Source: BMI

Since our last report we have adjusted our macroeconomic forecasts for Vietnam After GDP growth in

2008 of 6.2% we raised the outlook for 2009 to 4.5% growth, up from 2.9% earlier (These numbers are

our latest projections and may update those in the preceding section) Our forecast for 2009-2013 is for an

annual average GDP growth rate of 6.5% per annum, a weakening on the 7.8% average rate achieved in the preceding five-year period We maintain some adjustments to mode-specific freight carried forecasts

In road haulage, we have trimmed our forecast to take account of the global downturn and lower freight demand We still see road-freight turnover running ahead of the general rate of economic expansion in

Vietnam Air freight also faces a difficult two years On the other hand, WTO membership has been as supportive of greater freight transport turnover relative to GDP across all modes, but particularly so for shipping On the downside, this year’s contraction in trade has had a particularly strong impact on

shipping and Vietnam is expected to export less coal by sea as its domestic power needs rise The net result of this is that we expect freight carried growth across all modes, measured in mntkm, to average 5.0% a year in 2009-2013

According to our latest estimates, transport and communications GDP rose by 7.5% in 2008, 1.2

percentage points (pps) faster than overall GDP, which we estimate to have increased by 6.2% For the 2009-2013 forecast period, we expect the transport and communications sector to continue outpacing the economy as a whole It will achieve average annual growth of 7.7%, versus 6.5% for overall GDP The total value of transport and communications GDP will rise to US$6.7bn in nominal terms by 2013, representing 4.5% of Vietnam’s GDP

By modes, we project that air freight and road haulage will be the fastest growing, each rising by 7.9% per annum, followed by pipelines (7.5%), rail (7.0%), and shipping (4.2%)

Table: Freight Carried, Domestic, 2006-2013

% change y-o-y 16.9% 9.3% 6.8% 4.1% 6.1% 7.5% 8.5% 8.8%

% change, 5-year average 11.1% 9.7% 8.2% 8.9% 8.6% 6.8% 6.6% 7.0%

% share total 2.8% 2.9% 2.8% 2.5% 2.8% 2.8% 2.8% 2.8% Inland waterways (mn tonnes-

km) 4,081 4,463 4,767 4,982 5,283 5,678 6,159 6,701

% change y-o-y 8.8% 9.3% 6.8% 4.5% 6.1% 7.5% 8.5% 8.8%

% change, 5-year average 7.5% 8.5% 8.4% 7.7% 7.1% 6.8% 6.7% 7.1%

% share total 3.6% 3.5% 3.3% 3.0% 3.3% 3.3% 3.3% 3.3% Maritime (mn tonnes-km) 89,297 105,579 125,445 116,727 124,091 132,577 142,024 153,232

% change y-o-y 11.8% 18.2% 18.8% -6.9% 6.3% 6.8% 7.1% 7.9%

% change, 5-year average 11.5% 13.5% 14.2% 10.4% 9.6% 8.6% 6.4% 4.2%

% share total 75.8% 77.2% 79.0% 77.1% 77.0% 76.8% 76.4% 76.1% Air (mn tonnes-km) 269 304 324 336 353 384 425 473

% change y-o-y 12.6% 12.8% 6.8% 3.6% 5.0% 8.8% 10.8% 11.2%

% change, 5-year average 11.4% 12.3% 9.1% 7.4% 8.1% 7.4% 7.0% 7.9%

% share total 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Pipeline (mn tonnes-km) 211 231 248 261 277 299 325 355

% change y-o-y 9.0% 9.8% 7.1% 5.2% 6.3% 7.8% 8.9% 9.2%

% change, 5-year average 8.2% 8.7% 8.6% 8.0% 7.5% 7.2% 7.1% 7.5%

% share total 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Total (mn tonnes-km) 117,842 136,803 158,799 151,455 161,054 172,582 185,872 201,458

Trade Environment

Although high tariffs, customs bureaucracy and legal inadequacies have provided significant trade

barriers, the opening up of Vietnam’s economy has been accompanied by concrete measures to meet the requirements of the WTO and other international trade organisations This means tariffs are falling in many sectors and the customs regime is being overhauled

Trade Agreements

Vietnam became a member of the WTO in 2007 It is also a member of the Association of South East Asian Nations (ASEAN) – with Brunei, Philippines, Indonesia, Laos, Myanmar, Malaysia, Singapore, Thailand and Cambodia – as well as the linked ASEAN Free Trade Area (AFTA)

A bilateral trade agreement with the US came into effect in December 2001 Vietnam is also in, or

preparing for, talks over free trade agreements (FTAs) with Japan, South Korea, Australia and New Zealand The country is also party to FTA negotiations being conducted by ASEAN, such as talks with the EU and China

Tariffs/Non-Tariff Barriers

Import tariffs are high, averaging around 18% in 2004 However, Vietnam is reducing tariffs to meet ASEAN and WTO goals, although some key sectors remain protected Vietnam has agreed to comply with ASEAN’s Common Effective Preferential Tariff (CEPT) scheme on manufactured goods within the ASEAN region, which calls for rates to be brought down to the 0-5% range

The legislation providing the framework for the trade regime is 1998’s Law to Amend the Import and Export Tariffs Law However, given the ASEAN and WTO requirements, the tariff structure is in a constant state of flux at present After a May 2005 meeting with Vietnamese officials, the WTO praised the country for speeding up the passage of legislation

At the WTO meeting, Vietnam unveiled its latest round of commitments and changes These are: a proposed revision of excise duties to end discrimination against imported motor vehicles; a similar proposal for excise duty on beer; the elimination of export subsidies that depend on export performance; a commitment to require supported products made in free zones to be subject to normal customs formalities when entering the rest of Vietnam; enquiry points on technical barriers and sanitary/phytosanitary

measures to trade to be set up; and the reduction of restrictions on trading rights to some sensitive

products such as oil, pharmaceuticals, sugar, tobacco, salt, fertilisers, rice and cultural products

Table: Value Of Imports By Category, 2006-2013 (US$mn)

Total imports 42,600 58,920 81,000 64,300 71,370 79,220 87,150 95,860 % change 22.1% 38.3% 37.5% -20.6% 11.0% 11.0% 10.0% 10.0% % share 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Food and live animals 1,235 1,709 2,349 1,865 2,070 2,297 2,527 2,780 % share 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% Beverages and tobacco 43 59 81 64 71 79 87 96 % share 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Crude materials, excl

fuels 767 1,061 1,458 1,157 1,285 1,426 1,569 1,725 % share 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% Mineral fuels, lubricants

and related materials 5,708 7,895 7,895 7,895 7,895 7,895 7,895 7,895 % share 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% Animal and vegetable

oils, fats and wax 128 177 177 177 177 177 177 177 % share 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% Chemicals and related

products 5,666 7,836 7,836 7,836 7,836 7,836 7,836 7,836 % share 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% Basic manufactures 9,329 12,903 12,903 12,903 12,903 12,903 12,903 12,903 % share 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% Machines, transport

equipment 11,417 15,791 15,791 15,791 15,791 15,791 15,791 15,791 % share 26.8% 26.8% 26.8% 26.8% 26.8% 26.8% 26.8% 26.8% Miscellaneous products 2,769 3,830 3,830 3,830 3,830 3,830 3,830 3,830 % share 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% Unclassified goods 5,581 7,719 10,611 8,423 9,349 10,378 11,417 12,558 % share 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1% 13.1%

f = forecast Source: BMI

Table: Value Of Exports By Category, 2005-2013 (US$mn)

Total exports 39,830 48,560 63,250 59,900 65,890 72,480 81,180 90,920 % change 22.7% 21.9% 30.3% -5.3% 10.0% 10.0% 12.0% 12.0% % share 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Food and live animals 9,480 11,557 11,557 11,557 11,557 11,557 11,557 11,557 % share 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% Beverages and tobacco 40 49 63 60 66 72 81 91 % share 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Crude materials, excl

fuels 916 1,117 1,117 1,117 1,117 1,117 1,117 1,117 % share 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% Mineral fuels, lubricants

and related materials 10,515 12,820 16,698 15,814 17,395 19,135 21,432 24,003 % share 26.4% 26.4% 26.4% 26.4% 26.4% 26.4% 26.4% 26.4% Animal and vegetable

oils, fats and wax 159 194 253 240 264 290 325 364 % share 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Chemicals and related

products 279 340 443 419 461 507 568 636 % share 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% Basic manufactures 2,191 2,671 3,479 3,295 3,624 3,986 4,465 5,001 % share 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Machines, transport

equipment 1,952 2,379 3,099 2,935 3,229 3,552 3,978 4,455 % share 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% 4.9% Miscellaneous products 10,794 13,160 17,141 16,233 17,856 19,642 22,000 24,639 % share 27.1% 27.1% 27.1% 27.1% 27.1% 27.1% 27.1% 27.1% Unclassified goods 3,545 4,322 5,629 5,331 5,864 6,451 7,225 8,092 % share 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%

f = forecast Source: BMI