Vietnam freight transport report q4 2013

... Office of Vietnam © Business Monitor International Page 22 Vietnam Freight Transport Report Q4 2013 Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam' s air freight sector... 35 Vietnam Freight Transport Report Q4 2013 Road Dominates Freight Mix Vietnam Freight Transport Mode Breakdown (% of Total 2013f) Source: General Statistics Office of Vietnam Vietnam's dense river... affect Vietnam' s freight transport sector © Business Monitor International Page 11 Vietnam Freight Transport Report Q4 2013 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam

Q4 2013 www.businessmonitor.com

VIETNAM

FREIGHT TRANSPORT REPORT

INCLUDES 5-YEAR FORECASTS TO 2017

Q4 2013

INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2013

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BMI Industry View 7

SWOT 10

Freight Transport 10

Political 12

Economic 13

Business Environment 14

Industry Forecast 15

Road Freight 18

Table: Rail Freight 19

Inland Waterways 19

Table: Inland Waterway Freight 21

Rail Freight 21

Table: Vietnam Transport Network Length (km) 22

Table: Rail Freight 22

Air Freight 23

Table: Air Freight 25

Maritime Freight 25

Table: Maritime Freight 27

Trade 27

Table: Trade Overview 27

Table: Key Trade Indicators 28

Table: Top Import Destinations, 2004-2011, US$mn 29

Table: Top Export Destinations, 2004-2011, US$mn 29

Market Overview 31

Industry Trends And Developments 39

Maritime 39

Multimodal 40

Rail 41

Road 42

Company Profile 43

Vietnam Airlines Cargo 43

Vietnam Petroleum Transport Company (VIPCO) 45

Vietnam National Shipping Lines (Vinalines) 47

Political Outlook 51

Domestic Politics 51

Table: Vietnam Political Overview 52

Long-Term Political Outlook 53

Oil Price Outlook 57

Global Oil Products Price Outlook 57

Methodology 57

Crude Price Forecasts 57

Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) 58

Product Prices Move Back Up But No Spikes Expected 58

Narrower US Market Crude-Product Spreads 59

Weak Demand Persists 60

Table: BMI's Refined Products Forecasts, US$/bbl 63

Supply: Supported By Global Refining Capacity 64

Naphtha: Gas Renaissance Hits Demand 67

Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement 69

Jet Fuel: Slump Restricts Upward Movement 71

Table: Total Air Freight And Passenger Volumes 73

Bunker Fuels: No Rest To Downward Movement In Sight 73

Macroeconomic Forecasts 76

Economic Analysis 76

PMI Data Suggests Economic Recovery Remains On Track 76

Downward Revision To Reflect Weak Q113, But Growth Trajectory Intact 78

Table: Vietnam - Economic Activity 80

Demographic Forecast 81

Table: Vietnam's Population By Age Group, 1990-2020 ('000) 82

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 83

Table: Vietnam's Key Population Ratios, 1990-2020 84

Table: Vietnam's Rural And Urban Population, 1990-2020 84

Methodology 85

Transport Industry 85

Sources 86

BMI Industry View

Vietnam recorded a relatively weak real GDP growth figure of 5.0% year-on-year (y-o-y) in Q2 2013, uponly slightly from 4.9% in Q1 2013 The latest GDP print also suggests to us that further efforts by theVietnamese government to speed up the restructuring of debt-laden banks and restart lending to small andmedium-sized enterprises (SMEs) may be necessary to support economic growth over the coming quarters.Moreover, given that we have recently begun to see signs of a slowdown in economic activity across theregion, 2013 looks increasingly precarious for the Vietnamese economy With this in mind, certain elements

of the freight mix have seen their y-o-y growth forecasts downgraded slightly this quarter

Foreign direct investment (FDI) will continue to play a crucial role in driving Vietnam's economic growthover the coming quarters, and we view the recent uptick in FDI inflows into the country as a positive signthat the economic rebound is gathering pace The shipping sector will be no different in this regard

Total foreign direct investment in industrial parks (IPs) and economic zones (EZs) in Vietnam reached anestimated US$110bn by the end of June 2013, according to the country's Ministry of Planning and

Investment IPs alone attracted around 4,665 FDI projects totalling US$70bn, while coastal and border EZshave attracted US$40bn and US$700mn in foreign investment, respectively Vietnam remains one of thefavourite investment destinations for multinational companies despite the country's turbulent economicenvironment and uncertainties over the country's short-term growth outlook This continues to provideencouragement for Vietnam's freight mix going forward

Exports from Asian steelmakers have begun to be cut due to cross-border trade disputes, Reuters reported inJuly 2013 In developments that could dent the Vietnamese freight industry, a group of US steel pipemakers asked the US International Trade Commission in a bid to halt alleged unfairly traded steel productsfrom outside of the US, including Vietnam, India and South Korea Speaking to Reuters, Dinh Huy Tam,

Headline Industry Data

■ 2013 rail freight tonnage is set to increase by 4.12% to 7.29mn tonnes

■ 2013 air freight tonnage is forecast to rise by 13.13% to 202,170 tonnes

■ Tonnage handled at the Port of Ho Chi Minh City in 2013 is forecast to grow 6.72%, whereas tonnagehandled at the Port of Da Nang is forecast to increase 3.85%

■ 2013 road freight tonnage is forecast to grow by 11.70% to 820.5mn tonnes

■ 2013 total trade is forecast to rise by 5.05%

Key Industry Trends

DHL Intends To Invest EUR10mn - Germany's DHL Supply Chain is set to make an investment of

EUR10mn (US$13mn) for expansion work in Vietnam over the next few years The logistics specialist aims

to construct new facilities, including a second build-to-suit distribution centre in Bac Ninh, which is due to

be completed in Q3 2013 The company will also make investments in additional information technology,including a warehouse management system and a transportation management system

Vietnam Invites Applications For Expressway - A request was issued in July 2013 by the Vietnamese

Ministry of Transport inviting applications for qualification for a second investor for the US$757mn DauGiay-Phan Thiet Expressway Project The successful bidders would design, finance, construct, operate andmaintain a four-lane expressway and allied structures from Dau Giay in the Dong Nai province to PhanThiet in the Binh Thuan province through a Special Purpose Vehicle

Australian Firms Eyes Megaport Project - A proposal has been submitted by Australian company N&M

Commodities relating to the construction of an AUD3.5bn megaport on Hon Khoai Island If given the go

ahead, the deepwater port project will stretch over 320 hectares and the 12 berths will be capable of

handling vessels up to 250,000dwts

Key Risks To Outlook

Vietnamese Ministry of Transport issued a request inviting applications for qualification for a secondinvestor for the US$757mn Dau Giay-Phan Thiet Expressway Project in July 2013, which could provide awelcome boon to the country's road freight sector in the future Under the project, the successful bidderswould design, finance, construct, operate and maintain a four-lane expressway and allied structures fromDau Giay in the Dong Nai province to Phan Thiet in the Binh Thuan province through a Special Purpose

Vehicle The Special Purpose Vehicle would be formed between Bitexco, which has been appointed as the

first investor for the project, and the second investor The first investor will have a share of 60% in theproject and the other investor 40% However, the first investor may dilute its share in favour of the secondinvestor during the construction

In terms of the rail freight sector, it has been announced that the Laos government is to build a new railwayline between the country and its Asian neighbours, Vietnam and Thailand, reported the Asia Times in June

2013 The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate inVietnam Construction will commence in August 2013 with an expected completion date of the second half

of 2017

Further positivity is provided by the news that Vietnam was scheduled to start the construction of thedeepwater Lach Huyen terminal in Haiphong in April 2013 The statement was made by Vietnam's PrimeMinister Nguyen Tam Dung in the week ended April 27 2013 Vinalines, Mitusi OSK Lines, Nippon YusenKaisha and Itochu jointly own the project, which is the first public-private project in Vietnam The 900,000twenty-foot equivalent units (TEUs) project will entail a total investment of US$1.2bn and is likely tobecome operational in 2015 The terminal, likely to ease port congestion in Haiphong, will be able toaccommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs

Freight Transport

Vietnam Freight Transport Industry SWOT

Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis, creates a need for long-distancefreight haulage

the mid-term to 2017

inter-Asian shipping routes, as well as access to the developing land transport links withASEAN countries, allowing the country scope to develop its trade logistics

Weaknesses ■ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the networkhas two or more lanes and only 29% is tarred

being underutilised

that is poor by international standards Overcapacity is a growing problem

access to infrastructure financing means that we remain very conservative on thegrowth potential of Vietnam's freight sector

being the Asian country's largest export partner

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

stock of lorries used by road haulage companies

Vietnam Freight Transport Industry SWOT - Continued

sector

International Airport in order to develop infrastructure facilities Under a plansubmitted to the government, 21,000 hectares in three communes in Cam My Districtand seven communes in Long Thanh are to be cleared for establishing new residentialand urban areas, industrial zones, research institutes and international service

centres

Vietnam trade lane across a range of industries, including IT hardware and garments,

in 2012, reported JOC at the end of February 2013

in the construction of a new rail line in southern Vietnam will come in at more than US

$2bn Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about itnow, because there is no project', but as it stands, an agreement of intent was signed

on March 11 2013 between RZD, Vietnamese Railways and the mineral depositcompany An Vien, also from Vietnam

venture between Vietnam's Vinalines and Japan's Mitusi OSK Lines, Nippon YusenKaisha and Itochu) became the first public-private project in Vietnam in April 2013

Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

the sensitive South China Sea, subject to competing sovereignty claims

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

Hanoi as a potential geopolitical ally in South East Asia

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

ruling Communist Party

control over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

policies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the

one-party system, and street demonstrations to protest economic conditions coulddevelop into a full-on challenge of undemocractic rule

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

assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

SWOT Analysis

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

GDP growth averaging 7.1% annually between 2000 and 2012

poverty rate in the country falling from 58% in 1993 to 14.0% in 2010

Weaknesses ■ Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit isdominated by substantial spending on social subsidies that could be difficult towithdraw

exports, and also keeps import costs high, contributing to inflationary pressures

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

while making Vietnamese enterprises stronger through increased competition

forward with market reforms, including privatisation of state-owned enterprises, andliberalising the banking sector

urban population rising from 29% of the population to more than 50% by the early2040s

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

Business Environment

SWOT Analysis

Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors

- makes it a good base for foreign companies to export to the rest of Asia, andbeyond

Weaknesses ■ 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

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123out of 176 countries

Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan This offers the possibility of the transfer of high-techskills and know-how

liberalisation of the banking sector This should offer foreign investors new entrypoints

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

protectionism, which will remain a concern

levels could leave Vietnam a second-rate economy for an indefinite period

Industry Forecast

Vietnam's freight transport sector will benefit from the uptick in domestic growth and the growth outlook ofits two main trade partners, the USA and China, which will drive export growth Vietnam's logistics sectorhas been developing to keep up with the country's increasing role as Asia's factory, especially in the

manufacturing of clothing and shoes Vietnam's connections to its key export partners has been improvingover the past three years, with the country now boasting direct container line services to the US and Europe

Vietnam's economic growth is picking up While the country's economy continued to expand at a reasonablerate of 5.3% forecast for 2013, following a year of slowing growth in 2012, when Vietnam's GDP expanded

by just 5%

Economic Growth Getting Back On Course

Vietnam Real GDP growth, % change y-o-y

To keep pace with this growth Vietnam will continue to need to invest in its logistics sector, but BMI

expects a lot of this investment to come from outside logistic and freight transport companies which will bekeen to enter and expand into this high growth market We have already witnessed this to some extent inVietnam's port sector, with considerable investment being made by container shipping lines and global portoperators in the development of modern box terminals at Vietnam's ports

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can beachieved with greater links between the country and its main export partner the US Direct containershipping links between Vietnam and the US have been in operation since 2009, which have cut both timeand cost, as previously Vietnamese shipments had to be transhipped via Singapore

Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam'sexports set to benefit from the slow, but steady recovery in the US economy We project US economicgrowth to expand by 1.9% in 2013 Over the medium term (2013-2017) we forecast the US economy toexpand by an average 2.4% per annum

China And The US To Drive Export Growth

LHC: Vietnam's Main Export Partners By % 2011 RHC: China and US Real GDP growth, % change

y-o-y

*2012 data is a BMI estimate f = BMI forecast Source: CIA World Factbook, National Bureau of Statistics and

BEA

Vietnam's export outlook will also continue to be bolstered by China's growth outlook Although we projectChina's economic growth to slow over the medium term, the country's real GDP growth outlook remainsrobust, estimated at 7.5% in 2013 and 6.4% over the medium term.

Vietnam plays a key role in China's coal supply chain Vietnam is China's fifth-largest coal supplier

providing the country with the thermal coal it requires for its power stations Vietnam's role in this supply

chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors'

reliance on coal While we believe that the percentage supplied by coal fired power plants within China'soverall energy mix will slip over the medium term, it will nevertheless remain above 70%

Playing A Major Role In China's Coal Supply Chain

China Coal Imports By Partner 2012 (tonnes)

Road Freight

Road Dominates And Offers Best Links Into China

Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at

123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logisticsneeds are primarily met by road

In 2013, we predict that road freight volumes in Vietnam will account for 81.9% freight carried in thecountry

Over the medium term, we forecast road freight volume growth will average 11.7% per annum reaching aprojected 1.3bn tonnes in 2017.

There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road

freight expertise expand in Vietnam Recently, both FedEx and DHL have been expanding their role in

Vietnam While some companies are breaking into Vietnam by developing their own operations in thecountry, others are getting a head start by acquiring and joining up with domestic freight operators This is

the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group.

Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's exportsupply chain Road is the main form of transport linking Vietnam's factories to the country's ports and alsoplays a key role in linking Vietnam with its second-largest export partner China

Vietnam's northern border links the country's with the south of China Road links continue to be developed

between the two and with them trucking services Kerry Asia Road Transport (Kart), for example, offers

a twice-weekly trucking link connecting Shenzhen and Hanoi

Table: Rail Freight

Rail freight, '000 tonnes 7,861.50 7,234.10 7,003.50 7,292.04 7,519.58 7,759.34 8,010.37 8,269.75

- % change y-o-y -4.68 -7.98 -3.19 4.12 3.12 3.19 3.24 3.24 Rail freight, mn tonnes/km 3,960.90 4,098.50 4,024.60 4,217.78 4,457.13 4,709.35 4,973.43 5,246.28

- % change y-o-y 2.49 3.47 -1.80 4.80 5.67 5.66 5.61 5.49

f = BMI forecast Source: General Statistics Office of Vietnam

will be carried by the nation's waterways, a year-on-year (y-o-y) growth of 5.3% In terms of total freighttransport projections for Vietnam in 2013, we calculate that inland waterways will account for 16.3%.

Mekong Offers Trade Connections

Map of the Mekong River

Source: BMI

The country's inland waterways stretch for 17,702km, of which 5,000km is navigable for vessels with adraught of up to 1.8m Vietnam's dense network of waterways ranks its seventh in the world in terms oflength

The country's inland waterways include the Mekong River, which enables freight connections with

Vietnam's neighbours Although we highlight that the River's full potential has not been reached and sodevelopment in the River is an area for potential investment

Table: Inland Waterway Freight

Network Lacking And No Impetus To Develop It

Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in thecountry's freight transport sector remains small In 2013, we forecast Vietnam's rail freight volumes toaccount for just 1.8% of the total with the country's rail network transporting just 7.3mn tonnes of freight

Although like the other freight modes, we expect volumes to increase in line with Vietnam's economicgrowth outlook, rail freight volumes (while forecast to grow by 18% over the next five years) will only behandling 8.3mn tonnes in 2017; this is still way below that which we forecast for the nation's other mainfreight modes, road and inland waterways

There are two key factors that we believe have held back Vietnam's rail freight development and willcontinue to do so

Table: Vietnam Transport Network Length (km)

Source: CIA World Factbook

The first is the quality of Vietnam's railway infrastructure The Global Economic Formula gives Vietnam'srail infrastructure a low ranking, placing it 71st globally out of 123 countries measured This ranking places

it 12th out of its 13 Asian peers A major problem for Vietnam's rail freight development is the relativeshortness of the country's rail network Vietnam's railway lines extend for just 2,632km; this compares withthe country's 180,549km network of roads and 17,702km network of inland waterways

The second drawback for freight rail development in Vietnam is its gauge incompatibility with China.Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total While the countryhas some standard gauge track, this system only accounts for 20% of the total

This means that rail freight trade between Vietnam and China is slowed by gauge changes, making roadfreight a more cost- and time-effective alternative; this stymies potential rail-freight projects between thetwo nations

BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused

on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam andLaos)

Table: Rail Freight

Rail freight, '000 tonnes 7,861.50 7,234.10 7,003.50 7,292.04 7,519.58 7,759.34 8,010.37 8,269.75

- % change y-o-y -4.68 -7.98 -3.19 4.12 3.12 3.19 3.24 3.24 Rail freight, mn tonnes/km 3,960.90 4,098.50 4,024.60 4,217.78 4,457.13 4,709.35 4,973.43 5,246.28

- % change y-o-y 2.49 3.47 -1.80 4.80 5.67 5.66 5.61 5.49

f = BMI forecast Source: General Statistics Office of Vietnam

Air Freight

On Growth Trajectory As Vietnam Gets Better Connected

Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector;although this is not expected to change there is a lot of growth potential in this sector As intra-Asia airfreight routes develop, Vietnam is becoming better connected with air freight routes internationally Thekey sectors that are demanding air freight as a transport option, include consumer electronics and

pharmaceuticals

In line with Vietnam's economic growth and the projected pick up in international air freight, BMI forecasts

the country's air freight volume growth to strengthen in 2013 We forecast Vietnam's air freight volumes toincrease by 5.8% to reach 189,030 tonnes in 2013 a start of a recovery following the the 10.3% declinerecorded in 2012 Over the medium term (2013-2017), we forecast Vietnam's air freight levels to grow onaverage per annum by 6.4% and by 36% over the full period to reach 243,200 tonnes

There are upside risks to these forecasts stemming from the continued interest of international air freightoperators in Vietnam Throughout 2012, Vietnam's Ho Chi Minh City airport became better connected with

more air freight routes and BMI expects this trend to continue in 2013 and beyond.

Taking Off

Vietnam Air Freight, '000 tonnes

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam

BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi

Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot Vietnam'strade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term.The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with

the sector offering savings in transport time, along with environment controlled options, which are vital forthe transport of some medicines and vaccinations.

Table: Air Freight

Air freight, '000 tonnes 190.10 199.20 178.70 189.03 199.81 212.50 227.00 243.20

- % change y-o-y 36.17 4.79 -10.29 5.78 5.71 6.35 6.82 7.14 Air freight, mn tonnes/km 426.80 449.00 480.90 499.51 527.98 557.98 589.38 621.84

- % change y-o-y 34.81 5.20 7.10 3.87 5.70 5.68 5.63 5.51

f = BMI forecast Source: General Statistics Office of Vietnam

Maritime Freight

Box Role To Continue Expanding

Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector As

highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulkcommodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao Vietnam is anoil-producing nation, but its consumption needs have come to outweigh its supply and so the country ismaking use of the liquid bulk shipping sector to import oil

It is in the container shipping sector that Vietnam has seen the most development, a trend which is expected

to continue As Vietnam has become the factory of Asia, with an emphasis on the development of clothingand shoe exports, the country's ports and shipping links have had to keep up As mentioned, considerableinvestment was ploughed into Vietnam's container terminal sector over the past five years, with

international players participating This investment is now starting to yield results, with Vietnam nowdirectly connected to the key demand market of the US (in 2009) and Europe (in 2010)

Getting Better Connected

UNCTADstat Liner Connectivity Index For Asia 2004 and 2013

Source: UNCTADstat

The development of Vietnam's liner connections has been highlighted by data from UNCTAD's linerconnectivity index In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container lineconnectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours

Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho ChiMinh's box throughput In 2013, we expect container volumes to increase by 7.2% and over the mediumterm by an annual average of 8% For more information on data and analysis of Vietnam's shipping sector,

please see BMI's Vietnam Shipping Report.

Table: Maritime Freight

Nominal

Imports, US$bn 90.90 111.98 128.58 142.98 160.96 180.46 203.14 228.30

- % change y-o-y 24.06 23.18 14.83 11.20 12.58 12.11 12.57 12.38 Exports, US$bn 80.27 106.80 121.43 136.19 155.07 175.67 199.06 224.55

- % change y-o-y 26.14 33.06 13.69 12.15 13.87 13.28 13.32 12.81 Total trade, US$bn 171.17 218.78 250.01 279.17 316.04 356.12 402.21 452.86

- % change y-o-y 25.03 27.81 14.27 11.66 13.21 12.68 12.94 12.59

e/f = BMI estimate/forecast Source: BMI, General Statistics Office of Vietnam

Table: Key Trade Indicators

Agricultural raw

Imports, US$mn 2,666.48 3,758.86 4,284.36 4,814.68 5,493.28 6,233.29 7,086.65 7,994.26

- % change y-o-y 28.31 40.97 13.98 12.38 14.09 13.47 13.69 12.81 Exports, US$mn 3,436.62 3,385.63 3,927.56 4,397.46 4,984.36 5,620.50 6,460.05 7,213.80

- % change y-o-y 116.99 -1.48 16.01 11.96 13.35 12.76 14.94 11.67

Ores and metals

Exports, US$mn 594.33 800.03 918.52 1,038.10 1,191.11 1,357.96 1,546.57 1,753.71

- % change y-o-y 44.06 34.61 14.81 13.02 14.74 14.01 13.89 13.39 Imports, US$mn 3,300.36 4,357.33 5,058.18 5,665.89 6,424.90 7,247.60 8,157.98 9,251.74

- % change y-o-y 19.18 32.03 16.08 12.01 13.40 12.80 12.56 13.41

Iron and steel

Exports, US$mn 1,622.95 2,018.59 2,347.20 2,678.82 3,103.17 3,565.92 4,143.02 4,682.03

- % change y-o-y 202.25 24.38 16.28 14.13 15.84 14.91 16.18 13.01 Imports, US$mn 60,547.73 74,629.91 85,727.38 95,349.88 107,368.20 120,394.90 135,293.06 152,285.94

- % change y-o-y 17.80 23.26 14.87 11.22 12.60 12.13 12.37 12.56

Manufactured goods

Exports, US$mn 40,806.05 54,678.39 62,513.08 70,419.59 80,536.95 91,569.78 103,959.06 117,709.67

- % change y-o-y 21.60 34.00 14.33 12.65 14.37 13.70 13.53 13.23 Imports, US$mn 59,491.63 73,261.81 84,112.15 93,520.36 105,271.02 118,007.63 132,736.16 149,241.20

- % change y-o-y 24.01 23.15 14.81 11.19 12.56 12.10 12.48 12.43

Fuel

Exports, US$mn 11,085.59 17,200.25 19,466.13 21,752.78 24,678.83 27,869.65 31,596.54 35,478.99

- % change y-o-y 30.31 55.16 13.17 11.75 13.45 12.93 13.37 12.29 Imports, US$mn 9,659.44 14,041.36 16,191.21 18,055.32 20,383.55 22,907.14 25,862.47 29,107.71

- % change y-o-y 28.84 45.36 15.31 11.51 12.90 12.38 12.90 12.55

e/f = BMI estimate/forecast Source: BMI, UNCTAD

Table: Top Import Destinations, 2004-2011, US$mn

China, Mainland, US$mn 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 China, Mainland, US$mn, % of

total 14.37 16.05 16.46 20.25 19.79 23.50 24.01 23.53 Korea, Republic Of, US$mn 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 Korea, Republic Of, US$mn, % of

total 10.51 9.78 8.71 8.51 8.99 9.97 11.71 12.61 Japan, US$mn 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 Japan, US$mn, % of total 11.11 11.08 10.47 9.86 10.21 10.68 10.82 9.95 Singapore, US$mn 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 Singapore, US$mn, % of total 11.32 12.19 13.98 12.13 11.62 6.07 4.92 6.11 Thailand, US$mn 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 Thailand, US$mn, % of total 5.81 6.46 6.76 5.97 6.08 6.45 6.72 6.11 TOTAL 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510

% from top 5 trade partners 53.28 55.69 56.49 56.80 56.75 56.75 58.24 58.36

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Table: Top Export Destinations, 2004-2011, US$mn

United States, US$mn 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 United States, US$mn, % of total 18.97 18.26 19.70 20.81 18.96 19.85 20.39 18.23 China, Mainland, US$mn 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 China, Mainland, US$mn, % of

total 10.95 9.95 8.14 7.51 7.74 8.58 10.47 11.98

Top Export Destinations, 2004-2011, US$mn - Continued

% from top 5 trade partners 49.78 47.11 46.85 47.33 46.45 46.42 49.82 50.56

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Market Overview

Exports Provide Downside Risk

Net exports remain the biggest downside risk to our outlook for the Vietnamese economy, although weexpect external demand to pick up as we head into H1 2013, providing a glimmer of hope for the country'sfreight industry Vietnam has been recording an average monthly trade surplus of US$172mn since June

2012 (resulting in a year-to-date surplus of US$77mn) and we see the case for a substantial pickup inexternal demand on the back of a rebound in regional growth over the coming month However, we believethat China's structural imbalances will return in H2 2013, becoming a drag on regional growth

Accordingly, we still expect exports to expand at a moderate pace of 6.5% in 2013

Furthermore, the SBV's aggressive monetary easing cycle in 2012 has yet to achieve the desired effect of accelerating credit growth, as investor confidence remains depressed by uncertainties over the outlook forexports and the build up of bad debt in the banking sector As the accompanying chart shows, credit growthhas slowed from 9.4% year-on-year (y-o-y) in November to 8.9% as of December Despite our view thatcredit conditions should continue to improve over the coming months, we expect credit growth to remainhistorically subdued at 11.0% for the full year, underpinning our benign outlook for inflation

re-Economic Recover Begins To Falter

As mentioned in this report's Executive Summary, Vietnam's economic recovery is beginning to lose itsmomentum The country recorded a relatively weak real GDP growth figure of 5.0% y-o-y in the secondquarter of 2013, which was up only slightly from 4.9% in the quarter before that Given that we haverecently begun to see signs of a slowdown in economic activity across the Asian region, 2013 looks

increasingly precarious for the Vietnamese economy

In mid-May 2013, we reported that we expect there to be further deterioration in external

attractive entry points have opened up across ASEAN's benchmark bourses While there is a case to be made for tactical opportunities in Singapore and Indonesia, our technical, valuation and fundamental assessment of the region suggests that further downside is likely in store over a multi-month horizon.

That said, it is worth reminding readers that our bearishness towards South East Asian equities in 2013 hasbeen predicated largely upon the lack of value in the market, rather than a more fundamental dislike of theregion's macroeconomic credentials The ASEAN economy, as a whole, is on course to be a global growthoutperformer both this year and over the medium term

The Vietnamese government took a more aggressive stance with regards to speeding up economic reforms

in 2012, and we expect this trend to remain in play in 2013 and beyond Prime Minister Nguyen Tan Dungapproved a master plan in February to further restructure the economy, strengthen oversight of the bankingsystem and establish a roadmap to clean up state-owned enterprises (SOEs) The plan is expected to beimplemented by June We are optimistic that reforms to strengthen regulatory oversight of the bankingsystem will help to improve the quality of credit and reinstall confidence in the banking sector

Investors have been staying on the sidelines and are keeping a close eye on the government's plan toestablish a new debt management agency that is expected to consolidate non-performing loans from ailingbanks Progress on this front is encouraging, with the government unveiling plans to launch the debtmanagement agency within a matter of weeks Such reforms will play a crucial role in attracting greaterforeign direct investment (FDI) into Vietnam over the coming quarters, and should complement renewedefforts by the government to speed up privatisation of state-owned enterprises (SOEs) to allow the privatesector to assume a greater role in driving economic growth going forward It is widely expected that at leastseven SOEs will launch initial public offerings (IPOs) in 2013 and another 20 more SOEs could be listed bythe end of the year if the response is favourable

Healthy Medium Term Beckons

Vietnam GDP Year-On-Year Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 4

5 6 7 8 9

Source: Asian Development Bank, General Statistics Office

The economic headwinds that hit the US and the eurozone in 2012 should continue to act as a dampener onexternal demand throughout 2013 to some extent, especially in the case of the US, which is by somedistance Vietnam's top export partner In addition, another of Vietnam's largest export partners, China, is set

to see a GDP growth cool in 2013, as is Japan This suggests that production activity in the manufacturingsector and other export-based industries could face difficulties, with a negative effect on the freight

transport industry expected as a result

The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2.4% as

estimates for 2013 by BMI, 60% of which is under 35 We forecast that the population will be 94.1mn by

2017, with 57% under 35, and will rise to 97.7mn by 2022

Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in

terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a marketshare of around 75% of domestic cargo Few foreign companies are present in the market and there aremany small, family owned road freight companies operating informally

Investment Needed Across The Board

Vietnam Transport Infrastructure Rankings

* Rail infrastructure is measured out of 123 Source: Global Economic Forums Competitiveness Index

Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's

World Factbook BMI believes the sector requires substantial investment as the quality of Vietnam's road

infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142countries surveyed in its Global Competitiveness Report 2011-2012

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),

established in April 2003 as a state corporation operating railway transport and related services Vietnam's

rail network totals 2,632km The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and527km of 1.435m gauge.

Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract

investment in the country's aviation sector The ministry believes that it is a difficult task to attract

investment in the sector as it requires huge investment capital and high techniques and a longer time frame

to take back the investment capital The country recorded an increase in capacity of its domestic airportsfrom 6mn passengers in 2000 to 52mn in 2012

Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule,according to the Civil Aviation Authorities of Vietnam Vietnam is currently operating a state-owned airline

Vietnam Airlines as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific Additionally, the government has also granted approval to the development of 25

airports

Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved Thistotal puts the country in a poor 97th place in comparison with other countries

Road Dominates Freight Mix

Vietnam Freight Transport Mode Breakdown (% of Total 2013f)

Source: General Statistics Office of Vietnam

Vietnam's dense river and canal network provides the country with a highly developed inland waterwaysystem of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accountingfor 25-30% of total transport volumes

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limiteddepth at the entrance Some ports are located in big cities, thus making it difficult to connect with othermodes of transport for cargo transfer due to traffic congestion

BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep

International Terminal (CMIT) since it opened in March 2011 as an important driver of growth In addition

to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011.

Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks

111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality

of Port Infrastructure As such, APMT's commitment to improving CMIT's facilities is an important stepboth for the terminal and the country's shipping sector as a whole

The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger

vessels to access the facility BMI notes that these works are badly needed, as we are seeing a growing

trend for shipping lines to order larger container vessels

The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping

sector State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened to

bring down the entire Vietnamese economy Widespread investment in the country's infrastructure isnecessary if Vietnam is to compete with regional peers

Investment And Development Outlook The Vietnamese transport sector requires vast levels of

investment The majority of infrastructure investment in Vietnam over the next 10 years will be in thetransport sphere, accounting for 65% by the end of 2021 Vietnam still suffers from a significant deficit intransportation infrastructure, and we believe the Vietnamese government will continue to develop thissector over the medium term This is reflected in our forecast for transport infrastructure industry value,which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016

According to our key infrastructure projects database, there are US$171bn worth of infrastructure projectsplanned or currently under way in Vietnam's transport sector One of the most expensive of these is a US

$3.6bn plan to build the Van Phong International Entrepot The project will begin with the construction oftwo deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year The project is currentlysuspended, however, due to an ongoing review of geological conditions at the site

The air freight sector will undoubtedly benefit from the planned construction work on a new passengerterminal at Long Thanh international airport Costing an estimated US$6.7bn, the work would also

international service centres The airport, which was approved in 2011 at a cost of US$6.74bn, will be thecountry's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year afterbecoming operational in 2020

Industry Trends And Developments

Maritime

Government To Invest In Port Development

The Vietnamese government is to invest in four big port development projects by 2020, reported

VietNamNet Bridge at the end of June The projects are marked as key initiatives by the Vietnam MaritimeBureau (Vinamarine), according to Vinamarine's head, Nguyen Nhat The construction of big ports in HaiPhong and Van Phong, as well as deepening of the Hau River and the expansion of the Cai Mep Port areincluded in the projects The building of the first two piers at Hai Phong is also set to secure financialsupport from the government

Meanwhile, the processing of 100,000 deadweight tonnage capacity ships will be permitted at the quays,which are due to be operational by 2016 Additionally, the state intends to secure investments to build eightwharfs

N&M Commodities To Build Deepwater Port

Australian firm N&M Commodities is to build a huge deepwater port on Hon Khoai Island in the

southern-most province of Ca Mau, Vietnam, it was reported at the end of June 2013 A proposal regarding theconstruction of the port, worth US$3.5bn, has been received by the government from the Ca Mau People'sCommittee The huge deepwater port will have 12 berths to cater to coal, containers, ro-ros, oil and othercommodities and will have the capacity to receive ships with up to 250,000 deadweight tonnage of capacity.The port will be spread over an area of more than 320 hectares Work is expected to take place at thebeginning of 2014

ERRIA Acquires 51% Stake In APMSS

Meanwhile, ERRIA's CEO Henrik N Andersen will be appointed as ECS's new chairman This transactionenables ERRIA to record significant and immediate growth It will also make sure that ERRIA implementits strategic goal to grow as revealed at the Annual General Meeting in April.

Multimodal

DHL Intends To Invest EUR10mn

German logistics specialist DHL Supply Chain is planning to make an investment of EUR10mn (US

$13mn) for the expansion of its footprints in Vietnam over the next few years As part of the expansion, thelogistics specialist aims to construct new facilities, including a second build-to-suit distribution centre inBac Ninh, which is due to be completed in Q3 2013 The company will also make investments in additionalinformation technology, including a warehouse management system and a transportation managementsystem

Meanwhile, DHL also announced plans to considerably raise its vehicle fleet and deploy more than 100vehicles by 2015 This investment would amount to a forecast EUR140mn (US$180mn) with the majority

of this total going towards new facilities

Oscar de Bok, CEO South and South East Asia, DHL Supply Chain, stated: 'Growing talent and training iskey for DHL In the last three years, we have doubled our headcount in Vietnam to the current 800 staff.'

He added: 'To meet the demands of our future business and expand our workforce to some 2,200 people by

2015, we have rigorous training and development programmes in place to grow the local talent pool anddeploy industry leading practices in the country.'

Kerry Logistics Buys Majority Stake In Tin Thanh Express

Hong Kong-based Kerry Logistics has expanded its network in Vietnam with the acquisition of a majority stake in Tin Thanh Express, it was reported in May 2013 Through this purchase, Kerry Logistics intends

to provide one-stop-shop logistics and supply chain solutions to multi-national and local companies

throughout Vietnam The new joint venture company, named Kerry TTC Express, is a combination of

Kerry Logistics' international freight network along with TTC Express' local competence and connections inVietnam