Vietnam freight transport report q1 2015

... Business Monitor International Page Vietnam Freight Transport Report Q1 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam' s strong domestic growth... Page 22 Vietnam Freight Transport Report Q1 2015 Table: Rail Freight (Vietnam 2011-2018) 2011 Rail freight tonnes ('000) Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) Rail freight. .. 15 Vietnam Freight Transport Report Q1 2015 Industry Forecast Vietnam' s freight mix is set to perform steadily in 2015 and into the midterm, as a combination of renewed political stability in Vietnam

Q1 2015 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q1 2015 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: October 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 Business Monitor International All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q1 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 Freight Transport ...................................................................................................................................... 9 Political ................................................................................................................................................. 12 Economic ............................................................................................................................................... 13 Business Environment .............................................................................................................................. 15 Industry Forecast .............................................................................................................. 16 Road Freight ......................................................................................................................................... 18 Table: Road Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Inland Waterways .................................................................................................................................. 19 Table: Inland Waterway Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Rail Freight .......................................................................................................................................... 21 Table: Vietnam Transport Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Table: Rail Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Air Freight ............................................................................................................................................ 23 Table: Air Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Maritime Freight ................................................................................................................................... 25 Table: Maritime Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Trade ................................................................................................................................................... 27 Table: Trade Overview (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Table: Key Trade Indicators (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Table: Top Import Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table: Top Export Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Market Overview ............................................................................................................... 31 Industry Trends And Developments ................................................................................ 39 Multimodal ........................................................................................................................................... Maritime .............................................................................................................................................. Road .................................................................................................................................................... Air ...................................................................................................................................................... 39 40 41 41 Inland Waterways .................................................................................................................................. 42 Company Profile ................................................................................................................ 43 Vietnam Airlines Cargo ............................................................................................................................ 43 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 46 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 48 Political Outlook ................................................................................................................ 52 Domestic Politics ..................................................................................................................................... 52 © Business Monitor International Page 4 Vietnam Freight Transport Report Q1 2015 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Long-Term Political Outlook ..................................................................................................................... 55 Macroeconomic Forecasts ............................................................................................... 60 Economic Analysis ................................................................................................................................... 60 Table: Economic Activity (Vietnam 2009-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Demographic Forecast ..................................................................................................... 67 Table: Population Headline Indicators (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Table: Key Population Ratios (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Table: Population By Age Group (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Table: Population By Age Group % (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Methodology ...................................................................................................................... 72 Industry Forecast Methodology ................................................................................................................ 72 Sector-Specific Methodology .................................................................................................................... 73 Sources ................................................................................................................................................ 74 © Business Monitor International Page 5 Vietnam Freight Transport Report Q1 2015 BMI Industry View The Vietnamese economy has gained momentum over recent quarters, growth that we expect to see reflected in the country's freight mix over the short term at least. However, in addition to the fragile banking sector, which is heavily burdened by the high level of non-performing loans, the health of Vietnam's external position has been a concern among investors and multinational companies alike. Indeed, the country has one of the highest external debts as a share of GDP among its regional peers, with the ratio at an estimated 37.6% in 2013. Heading into 2015, we expect to see annual growth across the freight modes to remain healthy across the board with road freight being the outperformer in terms of year-on-year (y-o-y) growth - 6.00%. Both rail and air freight are set to register the same level of growth in 2015 (3.40%), while the Vietnamese ports sector will once again see strong annual growth in terms of tonnage handled. Headline Industry Data ■ 2015 rail freight tonnage is set to increase by 3.40% to 6.96mn tonnes. ■ 2015 air freight tonnage is forecast to rise by 3.40% to 195,640 tonnes. ■ Tonnage handled at the port of Ho Chi Minh City in 2015 is forecast to grow 7.62%, whereas tonnage handled at the port of Da Nang is forecast to increase 6.50%. ■ 2015 road freight tonnage is forecast to grow by 6.00% to 859.30mn tonnes. ■ 2015 total trade is forecast to rise by 6.65%. © Business Monitor International Page 7 Vietnam Freight Transport Report Q1 2015 Key Industry Trends CEVA Looks To Vietnamese Growth: CEVA Logistics has announced the opening of a new branch office in Hanoi as the logistics company looks to take advantage of potential growth opportunities in and around the Vietnamese capital. Indeed, Nelson Chow, CEVA's managing director for Vietnam explained that 'we are excited to tap the opportunities for growth in north Vietnam'. Transport Minister Seeks Development Of Inland Waterways: Vietnamese Transport Minister Dinh La Thang wishes to see the government help boost inland waterway facilities and has been formulating policies likely to attract investments in the sector, it was reported by Dredging Today in August 2014. Inland waterways will be a cheaper mode of transport compared with road or rail transport and will help in creating a balance among different modes of transportation, according to Thang. Inland waterway transport faces a shortage of funds required for adjusting and dredging rivers and canals, according to a representative of the Waterway Transport Company. Long Thanh Airport Construction To Cost USD18bn: Vietnam's Deputy Transport Minister Nguyen Hong Truong has said that the construction of the Long Thanh International Airport in Dong Nai Province is set to cost USD18bn, according to airport-technology.com. The project will be carried out in three phases. The Vietnamese government will provide about VND84.36trn (USD3.98bn) towards the first phase of the project, which is estimated to cost about VND165.96trn (USD7.83bn). Key Risks To Outlook We expect Vietnam to continue fostering strong political and economic ties with Europe, with several high level delegation meetings between both parties expected over the coming years. Following the recent official visit by EU High Representative Catherine Ashton and European Commission President Manuel Barroso to Vietnam, Vietnam's Prime Minister Nguyen Tan Dung has recently made a visit to Europe, with the Europe-Vietnam free trade agreement high on his agenda. Switzerland-based food company Nestlé has unveiled plans to invest USD42mn in its Milo chocolate malt beverage factory at the Binh An facility in south east Vietnam. The expansion is part of the company's strategy to strengthen its presence in the country's growing nutritional beverage sector. The production capacity of the factory will be doubled as a result, thereby enabling the company to tap on the rapidly growing demand for Milo and other ready-to-drink products in the country. © Business Monitor International Page 8 Vietnam Freight Transport Report Q1 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis 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-distance freight haulage. ■ A recovery of activity levels at the nation's ports in 2010 is expected to continue over the mid-term to 2018. ■ Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN 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 network has two or more lanes and only 29% is tarred. ■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. ■ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. ■ Overcapacity is a growing problem. ■ Unresolved business environment issues and lack of significant improvement in access to infrastructure financing means that we remain very conservative on the growth potential of Vietnam's freight sector. ■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to it being the Asian country's largest export partner. ■ Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond Way and Sea Eagle, have been sold. The firm added that a number © Business Monitor International Page 9 Vietnam Freight Transport Report Q1 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued of the carriers had been purchased for prices above their original valuation, Hellenic Shipping News reported. Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. ■ Chinese investment could bring about much-needed improvements in the rail sector. ■ Growing international interest in Vietnam as a growth market within the box shipping sector. ■ The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. ■ The president of Russian Railways (RZD) has explained his belief that an investment in the construction of a new rail line in southern Vietnam will come in at more than USD2bn. Speaking to IA Prime, RZD President Vladimir Yakunin said that 'it is difficult to talk about it now, 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 deposit company An Vien, also from Vietnam. ■ It was announced in June 2013 that the Laos government is to build a new railway line between the country and its Asian neighbours, Vietnam and Thailand. The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate in Vietnam. Construction will commence in August 2013 with an expected completion date of the second half of 2017. ■ The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen terminal project will entail a total investment of USD1.2bn and is likely to become operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be able to accommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs. © Business Monitor International Page 10 Vietnam Freight Transport Report Q1 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a USD410mn loan for the Vietnamese government, reports KHL Group. The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country. ■ Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport, reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong. ■ Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tau province, are set to be leased for 30 years, according to official sources. ■ The World Bank stated at the start of 2014 that improved infrastructure could improve the country's economy substantially. ■ The Vietnamese government has approved plans to build the Ring Road No 5 route around Hanoi, it was announced in May 2014. ■ The Vietnamese government will implement 14 infrastructure projects in Ho Chi Minh City, with USD9.44bn-worth of infrastructure projects including the repair and improvement of the Luong Dinh Cua Street and the construction of the new Ha Noi Expressway-Eastern Ring Road link road. Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims. ■ A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Page 11 Vietnam Freight Transport Report Q1 2015 Political 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 oneparty system is generally conducive to short-term political stability. ■ Relations with the US have witnessed a marked improvement, and Washington sees 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. ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight 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. ■ 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 ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ■ 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. ■ Relations with China have deteriorated over recent years due to Beijing's more 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. © Business Monitor International Page 12 Vietnam Freight Transport Report Q1 2015 Economic 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. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20.7% in 2012. ■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports and diversify its export sector. Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam on this front could result in a decline in investment. ■ We see potential for political tensions with China could have a negative impact on the economy. © Business Monitor International Page 13 Vietnam Freight Transport Report Q1 2015 SWOT Analysis - Continued ■ Any prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Page 14 Vietnam Freight Transport Report Q1 2015 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors. ■ 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 ■ 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. ■ Vietnam remains a corrupt country. According to Transparency International's 2013 Corruption Perceptions Index, Vietnam ranks 116 out 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-tech skills and know-how. ■ 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 ■ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. ■ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. ■ The dispute with China in Q214 in the South China Sea suggests the potential for renewed political tensions going forward. © Business Monitor International Page 15 Vietnam Freight Transport Report Q1 2015 Industry Forecast Vietnam's freight mix is set to perform steadily in 2015 and into the midterm, as a combination of renewed political stability in Vietnam following the anti-China riots in May, stronger export growth and continued fervent foreign investment interest are expected to keep the country's manufacturing sector robust. Stronger manufacturing performance will in turn contribute to a pick-up in real GDP growth, which we expect to come in at 5.7% in 2014, ahead of an acceleration to 6.4% in 2015. There is slight downside risk on the horizon though due to tense relations at the time of writing between Vietnam and key trade partner China, which could have a slight detrimental impact on Vietnam's freight sector. We believe slowing growth in the country's manufacturing sector has likely been due to China's deployment of an oil rig in disputed waters off Vietnam's coast in May, which sparked an outbreak of antiChina violent protests in Vietnam. Several Chinese factories were damaged, while others were forced to shut down during the riot, affecting manufacturing orders as a result. With the Vietnamese government acting fast to stop a further escalation of violence, coupled with China's removal of its oil rig in July, renewed political stability in Vietnam will allow its resilient manufacturing sector to continue performing well. This will bode well for the gradual pick-up in growth momentum in the Vietnamese economy. © Business Monitor International Page 16 Vietnam Freight Transport Report Q1 2015 GDP To Enjoy Healthy Medium Term Real GDP growth, % change y-o-y (2001-2019) 8 7 6 2019f 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 5 Vietnam - Real GDP growth, % y-o-y e/f = BMI estimate/forecast. Source: Asian Development Bank, General Statistics Office, BMI. To keep pace with growth, Vietnam will 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 be keen to enter and expand into this high-growth market. We believe that rapid urbanisation, driven by a healthy pipeline of government-led infrastructure projects over the next five years, will continue to spur rural-urban migration and foreign direct investment (FDI) into developed cities such as Ho Chi Minh and Hanoi. We have also already witnessed this to some extent in Vietnam's port sector, with considerable investment being made by container shipping lines and global port operators 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 be achieved with greater links between the country and its main export partner the US. Direct container shipping links between Vietnam and the US have been in operation since 2009, which have cut both time and 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's exports set to benefit from the slow but steady recovery in the US economy. © Business Monitor International Page 17 Vietnam Freight Transport Report Q1 2015 Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we project China's economic growth to slow over the medium term, the country's real GDP growth outlook remains robust. 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's overall energy mix will slip over the medium term, it will nevertheless remain above 70%. BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum's Competitiveness Report 2013/14 ranking Vietnam's roads a very poor 102 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road. In 2015 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country. In 2015, we have pencilled in year-on-year (y-o-y) growth of 6.00%, a very healthy growth rate and ever so slightly up on 2014's estimated annual growth of 5.96%. However, even this level of growth will not quite hit the heady heights of the double-digit growth enjoyed back in 2012 and the preceding five years. Over the medium term, we forecast road freight volume growth will average 6.94% per annum, reaching a projected 1.13bn tonnes by the end of 2019. There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise, expand in Vietnam. Both FedEx and DHL have expanded their role in Vietnam in recent times. While some companies are breaking into Vietnam by developing their own operations in the country, 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. © Business Monitor International Page 18 Vietnam Freight Transport Report Q1 2015 Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also plays a key role in linking Vietnam with its second-largest export partner China. Vietnam's northern border links the country 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: Road Freight (Vietnam 2011-2018) 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 654,127.10 722,156.40 765,070.40 810,663.15 859,302.94 915,157.63 979,218.66 1,054,205.11 Road freight tonnes, % y-o-y 11.43 10.40 5.94 5.96 6.00 6.50 7.00 7.66 Road freight tonneskm (mn ton km) 40,130.10 43,902.40 46,790.70 50,047.18 53,750.67 57,943.23 62,603.61 67,497.46 Road freight tonneskm, % y-o-y 10.92 9.40 6.58 6.96 7.40 7.80 8.04 7.82 Road Freight Tonnes (000) e/f = BMI estimate/forecast. Source: National Statistics Agency, BMI Inland Waterways Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the second-largest freight transport mode in the country. In 2015, we once more anticipate a healthy growth picture with gains of 6.34% expected, slightly down on 2014's estimated y-o-y growth of 6.60% to reach 204.97mn tonnes. Over our forecast period to 2019, we anticipate average annual growth of 6.25%. © Business Monitor International Page 19 Vietnam Freight Transport Report Q1 2015 Mekong Offers Trade Connections Map Of The Mekong River Source: BMI Vietnam's inland waterways stretch for 47,130km and the country's dense network of waterways ranks its seventh in the world in terms of length. 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 so development in the River is an area for potential investment. © Business Monitor International Page 20 Vietnam Freight Transport Report Q1 2015 Table: Inland Waterway Freight (Vietnam 2011-2018) 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Inland Waterway Freight Tonnes (000) 160,164.50 168,493.00 180,812.70 192,753.43 204,971.63 217,942.54 231,537.74 245,814.01 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.60 6.34 6.33 6.24 6.17 Inland Waterway freight tonnes-km (mn ton km) 34,371.70 37,018.30 39,344.40 42,329.70 45,576.66 49,023.65 52,636.55 56,430.43 Inland Waterway freight tonnes-km % y-o-y 8.50 7.70 6.28 7.59 7.67 7.56 7.37 7.21 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Rail 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 the country's freight transport sector remains small. In 2013, we estimate that Vietnam's rail freight volumes accounted for a negligible percentage of the total with the country's rail network transporting just 6.73mn tonnes of freight. In 2014, the rail freight sector saw estimated y-o-y growth of 3.12%, a figure we forecast to improve slightly in 2015 to 3.40%. Positive growth has been lacking from this sector over recent years, but is set to return at least over our forecast period, with an average annual growth of 4.00% pencilled in between 2015 and 2019. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. © Business Monitor International Page 21 Vietnam Freight Transport Report Q1 2015 Table: Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) The first is the quality of Vietnam's railway infrastructure. The World Economic Forum's Global Competitiveness Report 2013/14 gives Vietnam's rail infrastructure a low ranking, placing it 58th globally out of 123 countries measured. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 206,633km network of roads and 47,130km 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 country has 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 road freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between the two 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 and Laos). © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2015 Table: Rail Freight (Vietnam 2011-2018) 2011 Rail freight tonnes ('000) Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) Rail freight tonnes-km, % y-o-y 2017f 2018f 7,285.10 7,003.50 6,525.90 6,729.53 6,958.33 7,215.79 7,504.42 7,834.61 -7.33 2012 4,444.23 2.60 3.40 2016f 4,162.00 4,024.60 3,804.10 3,903.01 4,020.10 4,148.74 4,289.80 -5.48 3.12 2015f 4.40 -3.30 -6.82 2014f 4.00 5.08 -3.87 2013 3.00 3.70 3.20 3.40 3.60 f = BMI forecast. Source: National Statistics Agency, BMI 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 industry; although this is not expected to change, there is a lot of growth potential in this sector. The government has ambitious plans to modernise and expand the country's airport infrastructure over the long term. Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the USD1.2bn Van Don International airport in the northern province of Quang Ninh and the USD10bn Long Thanh International airport in the southern province of Dong Nai. For 2015, we anticipate that the Vietnamese air freight sector will grow by 3.40%, up from 2014's 3.00%, to reach 195,640 tonnes. Over the forecast period, we predict Vietnam's air freight levels to grow on average per annum by a healthy 4.46% to reach 235,310 tonnes. © Business Monitor International Page 23 Vietnam Freight Transport Report Q1 2015 Taking Off Vietnam Air Freight Tonnage, 000 tonnes 250 300 200 200 150 100 100 50 2019f 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 0 2010 0 Vietnam - Air Freight Tonnes (000) e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI. 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 Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi. While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply chain, a key source of demand for air freight transport options. One example has been the impact the local production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to produce Microsoft phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand. Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's trade 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 © Business Monitor International Page 24 Vietnam Freight Transport Report Q1 2015 the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations. Table: Air Freight (Vietnam 2011-2018) Air Freight Tonnes (000) Air freight tonnes % y-o-y Air freight tonnes-km (mn ton km) Air freight tonnes-km % y-o-y 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 200.30 178.70 183.70 189.21 195.64 203.27 212.42 223.04 5.37 -10.78 2.80 3.00 3.40 3.90 4.50 5.00 426.70 480.90 469.80 477.79 489.73 504.42 522.08 542.96 -0.02 12.70 -2.31 1.70 2.50 3.00 3.50 4.00 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI. Maritime Freight Vietnam Catching The Eye Of Shippers Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping announced a new intra-Asia service at the end of 2013, which should provide upside risk for the sector going forward. The new intra-Asia service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations and we have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. 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 bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is an oil-producing nation, but its consumption needs have come to outweigh its supply and so the country is making use of the liquid bulk shipping sector to import oil. © Business Monitor International Page 25 Vietnam Freight Transport Report Q1 2015 Getting Better Connected UNCTADstat Liner Connectivity Index For Asia, 2004 & 2013 Source: UNCTADstat The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. Table: Maritime Freight (Vietnam 2011-2018) 2011 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 Port of Ho Chi Minh City (Saigon New) throughput, tonnes, % y-oy 2012 2013 2014f 2015f 2016f 2017f 2018f 33,450.7 36,029.4 38,866.7 41,807.5 44,991.3 48,433.8 52,184.4 56,187.5 7.4 7.7 7.9 7.6 7.6 7.7 7.7 7.7 Port of Da Nang throughput, tonnes '000 3,868.0 4,423.0 5,010.2 5,360.9 5,709.4 6,043.2 6,406.8 6,794.9 Port of Da Nang throughput, tonnes, % y-o-y 17.1 14.3 13.3 7.0 6.5 5.8 6.0 6.1 e/f = BMI estimate/forecast. Source: Port Authority, BMI © Business Monitor International Page 26 Vietnam Freight Transport Report Q1 2015 Trade Table: Trade Overview (Vietnam 2011-2018) 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Imports, real growth, % y-o-y 4.10 9.09 7.90 7.50 7.50 7.30 7.20 7.00 Exports, real growth, % y-o-y 10.78 15.71 6.00 5.60 5.80 6.20 6.60 6.80 7.44 12.40 6.95 6.55 6.65 6.75 6.90 6.90 112.40 118.98 133.50 150.23 171.94 197.98 228.77 259.38 24.17 5.86 12.20 12.54 14.45 15.14 15.56 13.38 106.84 124.43 137.15 151.62 170.78 194.62 223.64 253.08 31.49 16.46 10.22 10.55 12.64 13.96 14.91 13.16 219.24 243.41 270.65 301.85 342.72 392.60 452.42 512.46 27.63 11.03 11.19 11.53 13.54 14.55 15.24 13.27 Total Trade, real growth, % y-o-y Imports, USDbn Import growth, % y-o-y Exports, USDbn Export growth, % y-o-y Total trade, USDbn Total trade growth, % y-o-y e/f = BMI estimate/forecast. Source: National Statistics, BMI. Table: Key Trade Indicators (Vietnam 2011-2018) 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Agricultural raw materials, exports, USDmn 4,222.52 4,401.58 4,499.68 5,112.34 5,906.97 7,258.83 8,125.82 9,601.28 Agricultural raw materials, exports, % y-oy 44.21 4.24 2.23 13.62 15.54 22.89 11.94 18.16 Agricultural raw materials, imports, USDmn 4,140.97 3,430.55 4,624.12 5,112.11 5,758.54 6,420.23 7,492.83 8,358.44 Agricultural raw materials, imports, % y-oy 38.68 -17.16 34.79 10.55 12.65 11.49 16.71 11.55 Ores and metals, exports, USDmn 808.09 980.08 1,095.55 1,218.89 1,382.26 1,584.26 1,832.50 2,080.31 Ores and metals, exports, % y-o-y 10.07 21.28 11.78 11.26 13.40 14.61 15.67 13.52 Ores and metals, imports, USDmn 4,541.38 4,262.93 5,364.30 6,083.61 7,016.57 7,994.19 9,409.36 10,598.77 © Business Monitor International Page 27 Vietnam Freight Transport Report Q1 2015 Key Trade Indicators (Vietnam 2011-2018) - Continued Ores and metals, imports, % y-o-y Iron and steel, exports, USDmn Iron and steel, exports, % y-oy Iron and steel, imports, USDmn Iron and steel, imports, % y-oy Manufactured goods, exports, USDmn Manufactured goods, exports, % y-o-y Manufactured goods, imports, USDmn Manufactured goods, imports, % y-o-y Fuels, exports, USDmn Fuels, exports, % y-o-y Fuels, imports, USDmn Fuels, imports, % y-o-y 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 11.65 -6.13 25.84 13.41 15.34 13.93 17.70 12.64 2,234.58 2,203.39 2,609.31 2,923.15 3,338.88 3,909.67 4,504.06 5,181.60 66.24 -1.40 18.42 12.03 14.22 17.10 15.20 15.04 8,471.23 10,158.45 11,458.73 13,145.20 14,423.93 17,298.16 19,028.90 19.92 12.80 14.72 9.73 19.93 10.01 62,188.87 71,085.40 77,803.42 86,443.10 97,887.78 113,573.89 129,954.64 148,837.72 9.45 11.10 13.24 16.02 14.42 14.53 73,977.53 80,785.92 89,399.19 100,646.87 115,235.28 132,625.05 153,393.01 173,854.02 10.66 12.58 14.49 15.09 15.66 13.34 11,007.86 16,530.36 17,377.78 19,038.11 21,237.49 23,206.28 27,041.26 29,815.39 5.13 9.55 11.55 9.27 16.53 10.26 12,531.03 15,190.13 16,042.55 18,089.10 20,743.50 23,848.69 27,665.61 31,379.51 12.76 14.67 14.97 16.00 13.42 7,226.24 4.79 34.62 17.23 14.31 21.20 37.95 53.94 9.20 50.17 21.22 5.61 e/f = BMI estimate/forecast. Source: BMI Calculation, UNCTAD Table: Top Import Destinations, 2004-2012 China, Mainland, USDmn China, Mainland, USDmn, % of total Korea, Republic Of, USDmn © Business Monitor International 2004 2005 2006 2007 2008 2009 2010 2011 2012 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 37,647 14.4 16.0 16.5 20.3 19.8 23.5 24.0 23.5 27.2 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 17,541 Page 28 Vietnam Freight Transport Report Q1 2015 Top Import Destinations, 2004-2012 - Continued Korea, Republic Of, USDmn, % of total Japan, USDmn Japan, USDmn, % of total Singapore, USDmn Singapore, USDmn, % of total Thailand, USDmn Thailand, USDmn, % of total 2004 2005 2006 2007 2008 2009 2010 2011 2012 10.5 9.8 8.7 8.5 9.0 10.0 11.7 12.6 12.7 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 11,803 11.1 11.1 10.5 9.9 10.2 10.7 10.8 10.0 8.5 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 11,421 11.3 12.2 14.0 12.1 11.6 6.1 4.9 6.1 8.3 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 7,310 5.8 6.5 6.8 6.0 6.1 6.5 6.7 6.1 5.3 TOTAL 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510 138,166 TOTAL, top 5 countries, USDmn 16,984 20,424 25,310 35,597 45,753 39,648 48,500 % from top 5 trade partners 53.1 55.6 56.4 56.7 56.7 56.7 58.2 60,944 85,721 58.3 62.0 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, 2004-2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 19,427 19.0 18.3 19.7 20.8 19.0 19.9 20.4 18.2 17.0 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 14,755 10.9 9.9 8.1 7.5 7.7 8.6 10.5 12.0 12.9 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781 13,722 Japan, USDmn, % of total 13.4 13.4 13.2 12.5 13.5 11.0 11.1 11.6 12.0 Korea, Republic Of, USDmn 608 664 843 1,243 1,794 2,065 3,092 4,715 5,199 Korea, Republic Of, USDmn, % of total 2.3 2.0 2.1 2.6 2.9 3.6 4.4 5.1 4.6 1,065 1,086 1,445 1,855 2,073 1,885 2,373 3,367 5,070 4.0 3.3 3.6 3.8 3.3 3.3 3.4 3.6 4.4 TOTAL 26,485 32,447 39,826 48,561 62,685 57,196 69,820 92,881 113,944 TOTAL, top 5 countries, USDmn 13,139 15,242 18,616 22,939 29,072 26,507 34,740 46,916 58,173 United States, USDmn United States, USDmn, % of total China, Mainland, USDmn China, Mainland, USDmn, % of total Japan, USDmn Germany, USDmn Germany, USDmn, % of total © Business Monitor International Page 29 Vietnam Freight Transport Report Q1 2015 Top Export Destinations, 2004-2012 - Continued % from top 5 trade partners 2004 2005 2006 2007 2008 2009 2010 2011 2012 49.6 47.0 46.7 47.2 46.4 46.3 49.8 50.5 51.1 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 © Business Monitor International Page 30 Vietnam Freight Transport Report Q1 2015 Market Overview We see solid growth momentum in the Vietnamese economy carrying over to 2015, a scenario we expect to be mirrored in the country's freight sector also. This growth will be built on the back of continued foreign direct investment (FDI) inflows, strong performance in the manufacturing and export sectors, and ongoing efforts by the government to address the high level of bad debts in the banking sector. We maintain our forecast for real GDP to grow at 5.7% in 2014, ahead of an acceleration to 6.4% in 2015. Vietnam's export sector continues to be a driver of growth for the country, and we forecast this trend to remain in play over the coming months. Exports for the first six months of 2014 expanded by a robust 14.9% year-on-year (y-o-y), and saw the accumulated trade surplus rise to USD1.3bn in H114. Exports were primarily driven by strong growth in textiles, telephones and footwear of 18.2%, 17.1% and 21.9%, respectively, which together account for approximately 35% of the total and provide upside risk to our freight forecasts going forward. Moreover, we expect exports to continue driving growth given that the Vietnamese government has been making a concerted push to build diplomatic and trade ties with many countries and is negotiating several free trade agreements. One of the most important ones is the Trans-Pacific Partnership (TPP), which could be signed by as early as 2015. Risks To Outlook: China, From Friend To Foe Although we do not believe that the political tensions between Hanoi and Beijing will result in military conflict, there are non-negligible risks of an economic backlash. Indeed, the Chinese government has temporarily stopped Chinese state-owned companies from bidding for new contracts in Vietnam, which could see investment flows decline substantially over the coming quarters, posing downside risks to Vietnam's growth outlook. China accounted for 21.3% of foreign investment in Vietnam in 2013, approximately 14.5% of Vietnam's exports, and about 27% of all visitors this year. As such, a sustained economic backlash could have a more severe impact on Vietnam's growth outlook. An ongoing maritime dispute with China in the South China Sea has intensified in recent months and, while both parties have engaged in bilateral talks to resolve the rift, a breakthrough is unlikely. We believe that the dispute has provided the US with an opportunity to accelerate its 'pivot' to Asia. Recently, Washington is moving closer to lifting an arms embargo on Vietnam, paving the way for weapon sales to Vietnam to help it cope with growing external threats from China. © Business Monitor International Page 31 Vietnam Freight Transport Report Q1 2015 Stronger Ties With Europe We expect Vietnam to continue fostering strong political and economic ties with Europe, with several high level delegation meetings between both parties expected to take place over the coming years. Following the recent official visit by EU High Representative Catherine Ashton and European Commission President Manuel Barroso to Vietnam, Vietnam's Prime Minister Nguyen Tan Dung has recently made a visit to Europe, with the Europe-Vietnam free trade agreement high on his agenda. External Sector To Provide Tailwind We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity in the coming quarters. From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, which helped bring the trade surplus to USD1.0bn for the first three months of the year and we expect this trend to remain in place. Indeed, the Vietnamese government has been making substantial efforts to promote trade and investment ties with other countries, and we believe it will help underpin exports over the coming months. A case in point was the fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to invest and develop the country's infrastructure and manufacturing sectors. While FDI fell by 30% y-o-y in Q114, it was not all bearish in our view. First, the number of projects increased by 32% y-o-y and second, the origin of the investments was much more diversified, which could suggests that it is more sustainable. Third, we believe that foreign investment will continue to pick up as the business environment becomes increasingly attractive, particularly as more State Owned Enterprises (SOEs) are restructured and the limits on foreign ownership are raised. Moreover, Vietnam still boasts competitive wages compared to other manufacturing hubs such as China, Indonesia and Malaysia, which bodes well for cost competitiveness. Signs Of Strong Momentum Abound We witnessed some highly positive data in the third quarter of 2013 that indicate strong momentum for growth into 2014. We highlight the rebound in manufacturing production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading in September, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing Resistance', October 3 2013). More importantly, FDI inflows into the country have accelerated significantly in recent months and are expected © Business Monitor International Page 32 Vietnam Freight Transport Report Q1 2015 to surpass the government's full-year target of USD13bn - usually an indication of improving business sentiment, and a precursor for an acceleration in private sector investment. We believe that the positive ripple effects from the factors above will serve as strong tailwinds for 2014 growth. Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight picture over the medium term. In terms of the former, China's real GDP grew by 7.7% in Q413, slightly above consensus expectations of 7.6%. For the year as a whole the economy also grew by 7.7%, which matches the performance seen in 2012. While a detailed breakdown of GDP by expenditure is unavailable as of yet, we do not expect its release to reveal a great deal of economic rebalancing taking place within the Chinese economy. The traditional drivers of real estate and infrastructure construction continue to dominate the economy. In terms of the US, we believe the appropriations bill recently passed by the US House of Representatives and Senate, and which President Barack Obama is expected to sign, may mark an easing in long-running partisan warfare over fiscal policy. Furthermore, we believe the deal will have positive ramifications for the economy in 2014, while still allowing for fiscal consolidation over the medium term. Finally, the bipartisan spending package sets the stage for a crisis-free resolution to the debt ceiling debate, which will come up in the weeks ahead. The appropriations package provides USD1.1trn for fiscal year 2014 (FY14), which runs through September 30, in line with a budget deal worked out between Democrats and Republicans in late 2013 that we noted as a meaningful first step toward de-escalating tensions over fiscal issues (see 'Deal Avoids Another Shutdown, But Future Progress Uncertain', December 11 2013). That legislation allowed higher spending caps in FY14 than those initially envisioned by the budget sequester that went into effect in early 2013, reducing the drag the fiscal drag on the economy, one reason we see real GDP growth accelerating to 2.8% this year from our estimate of 1.8% in 2013. We believe that greater clarity about the trajectory of fiscal policy this year will allow the US Federal Reserve to continue reducing extraordinary monetary stimulus to the economy, eliminating its quantitative easing programme by end-2014. Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to 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. © Business Monitor International Page 33 Vietnam Freight Transport Report Q1 2015 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 market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. 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 102nd out of 142 countries surveyed in its Global Competitiveness Report 2013-2014, which has improved from 123rd in 2011-12. 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 and 527km 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 airports from 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. This total puts the country in a poor 97th place in comparison with other countries. © Business Monitor International Page 34 Vietnam Freight Transport Report Q1 2015 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% of total), 2013 Source: General Statistics Office of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 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 limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes 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 © Business Monitor International Page 35 Vietnam Freight Transport Report Q1 2015 98th out of 145 countries on the World Economic Forum's Global Competitiveness Report 2013-14 on the Quality of Port Infrastructure - an improvement on recent years. As such, APMT's commitment to improving CMIT's facilities is an important step both 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 USD4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary 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 the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector 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 USD171bn-worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a USD3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. Meanwhile, in Q214 it was announced that Vietnam's Ministry of Transport is planning to construct an elevated monorail system to ease its traffic congestion and connect the existing railway routes in the country's capital Hanoi. The monorail system will be developed on a design, construct, operate and transfer basis. The project will involve the construction of 14 stations. The monorail trains will run 4.5m above the ground at an average speed of 70km per hour. © Business Monitor International Page 36 Vietnam Freight Transport Report Q1 2015 The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated USD6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. The airport, which was approved in 2011 at a cost of USD6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. Meanwhile, Shipowners in Vietnam offloaded more vessels from their fleets by the close of 2013. Firms planning to pare down their fleets include the Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that the economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core businesses. In the road freight sphere, bad news was delivered at the end of October 2013, when it was announced that the Vietnamese government has granted approval to Hanoi General Export-Import Joint Stock Company (Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoi with localities in the northwest. The company invested USD17mn in the project, with USD2mn in the construction and USD12.4mn in land acquisition, over three years, according to the transport ministry. 'As the investment cost rose significantly and the property market at present is nearly frozen, it is impossible for us to reach the project deadline', Geleximco General Director Vu Van Tien said (Intellasia). The government has also approved a proposal by the country's Ministry of Transport and Ministry of Planning and Investment to alter the project's investment model to public-private partnership to make it more feasible and obtain official development assistance. UAE-based Etihad Cargo has started a new freight service between Abu Dhabi and the Noi Bài International Airport in Hanoi, Vietnam, which should provide a boost to the air freight sector in Vietnam. The company will deploy an Airbus A330-200F freighter for the new service, offering a heavy uplift capacity of 60 tonnes. The new service will be dedicated to the transport of raw materials, consumer goods and perishables to Hanoi. The service will also cater to the Gulf region, Europe and Africa with large quantities of electronics and textiles during the return flight. The new service will enable the company to © Business Monitor International Page 37 Vietnam Freight Transport Report Q1 2015 capitalise on the strong import and export demand to and from Vietnam and the rest of South East Asia, while offering growing customer base with more choice for transporting goods globally, according to Etihad Airways Chief Strategy and Planning Officer Kevin Knight (Air Cargo World). © Business Monitor International Page 38 Vietnam Freight Transport Report Q1 2015 Industry Trends And Developments Multimodal DB Schenker Acquires 100% Stake In Gemadept Logistics German freight and logistics company DB Schenker acquired the remaining 49% shares in its Vietnamese joint venture (JV), dubbed Schenker Gemadept Logistics, from Gemadept Logistics, it was announced in August 2014, reported by TransREporter. In July 2007, DB Schenker and Gemadept formed a JV to offer logistics and supply chain services with 51% and 49% stakes respectively. The integration will follow immediately, with the newly formed entity set to offer DB Schenker's established solutions catering to customers from various vertical markets like electronics, retail and consumer goods. Juergen Braunbach, CEO of Schenker Vietnam, said: 'DB Schenker has been delivering top-class logistics solutions in Vietnam for over 20 years and remains committed to growing this energetic market hence this move to acquire full ownership of Schenker Gemadept Logistics.' JV To See New Cold Storage Facility In Ho Chi Minh Kawasaki Kisen Kaisha Ltd (K Line) is to join forces with both Japan Logistics Systems Corp and Cool Japan Fund Inc to establish a new cold storage facility around Vietnam's largest city. The Ho Chi Minh City project will see the joint venture 'construct and operate an around 9,300 sq m cold storage facility on a 20,000 sq m tract of land,' according to Transport Journal in September 2014. CEVA Looks To Vietnamese Growth A new branch office has been opened in Hanoi by CEVA Logistics as the logistics company looks to take advantage of potential growth opportunities in and around the Vietnamese capital. Indeed, Nelson Chow, CEVA's managing director for Vietnam explained that 'we are excited to tap the opportunities for growth in north Vietnam'. On the subject of the new office that will handle both air and ocean freight, as well warehousing and distribution among other things, the company announced in a statement: 'Significant investments in developing the infrastructural connectivity in and outside of Hanoi with new highways, new airport and seaport connections have helped to position northern Vietnam as a key growth region.' © Business Monitor International Page 39 Vietnam Freight Transport Report Q1 2015 Maritime Congestion Drives Up Shipping Costs Shippers will continue to face higher freight charges when trading across Vietnam's maritime borders as a result of congestion caused by their preference for two facilities in Ho Chi Minh. The additional charges drive up operational costs and reduce Vietnam's attractiveness for importers and exporters. Shippers using Vietnamese ports are facing significant increases to operating costs following the addition of 10 freight surcharges in 2014. The surcharges, including a terminal handling charge, container imbalance surcharge and port congestion surcharge, have soared by as much as 20-30% since 2013. Demand at Vietnam's ports has increased in the last decade due to its strengthening position as a manufacturing hub. This is highlighted by the country's growing container liner connectivity - Vietnam climbed from 16th place in Asia in 2004 to ninth place in 2014 on the UNCTAD Liner Connectivity Index. The country's port facilities have undergone a period of rapid investment and development since 2007 to try to keep pace with demand, but congestion remains an issue. Despite the number of new port developments, shippers prefer to use container terminals in Ho Chi Minh and Cat Lai owing to their proximity to major manufacturing centres and therefore cheaper supply chain costs. Shippers could utilise other terminals but choose not to, because these facilities are further away from production hubs. This leads to an underutilisation at other facilities, such as at the port of Cai Mep in southern Vietnam, where just three of five available terminals are in use. The congestion issue will continue in the short term (2014-2015) as little can be done within this timeframe to entice shippers away from terminals at Ho Chi Minh and Cat Lai. Moreover, demand will continue to rise as a recovery in US and European economies will increase the demand for Vietnam's manufactured goods. Congestion is set to be further exacerbated by the upcoming Chinese New Year rush, which will place further pressure on the Ho Chi Minh and Cat Lai facilities. To solve the congestion issue in the medium term, Vietnam's ports in the south of the country, such as Cai Mep, will need to lower costs to attract shippers and shipping lines. Lower port fees will reduce operating costs and encourage shippers to travel longer distances to reach these ports from the manufacturing hubs. It is vital for the congestion issue at Vietnam's ports to be addressed and for other facilities to be utilised, otherwise Vietnam's position as a low-cost manufacturing hub will be eroded by high transport costs. © Business Monitor International Page 40 Vietnam Freight Transport Report Q1 2015 Companies Take On Logistics Work To Prevent High Charges At Ports High fees at ports of Vietnam have pushed import and export companies to take on the logistics work themselves, VietNamNet Bridge reported. In July, companies received notices from shipping firms about a new port congestion surcharge, equal to USD50-100 per container. Shipping firms have increased 10 types of charges and surcharges by 20-30% over the period of 2013, according to the representatives from different professional associations. In addition, shipping firms have increased the number of charges levied on exports and imports from 10 to 15, as stated by Truong Thuy Lien of the Vietnam Leather and Footwear Association. Road Transport Firms Complain About Long Waits Due To Loading Rule Vehicles are queuing up at Vietnamese ports as a new regulation calling for the verification of the loading capacity of vehicles takes effect, VietNamNet Bridge reported. Several transport companies have complained about the long waits at the ports as the port authorities' officers supervise the cargo handling process to check that vehicles do not exceed the total loading capacity indicated in their registration certificates. According to the new regulation, vehicles with loads exceeding the allowed capacity in their registration certificates will be required to remove the excess for clearance. Also, ports found to be violating the new regulation by permitting overloaded vehicles to travel on roads a second time or more will face the suspension of their operations for one to three months. Air Long Thanh Airport Construction To Cost USD18bn The construction of the Long Thanh International Airport in Dong Nai Province, Vietnam, is estimated to cost USD18bn, according to Vietnam's Deputy Transport Minister Nguyen Hong Truong (airporttechnology.com). The project will be carried out in three phases. The Vietnamese government will provide about VND84.36trn (USD3.98bn) towards the first phase of the project, which is estimated to cost about VND165.96trn (USD7.83bn). The airport will help relieve the burden on Ho Chi Minh City's Tan Son Nhat International Airport, which is expected to be too small to handle the number of planes and passengers by 2017. © Business Monitor International Page 41 Vietnam Freight Transport Report Q1 2015 Inland Waterways Transport Minister Seeks Development Of Inland Waterways Vietnamese Transport Minister Dinh La Thang plans to seek the government's help to boost inland waterway facilities by formulating policies likely to attract investments in the sector, it was reported by Dredging Today in August 2014. Inland waterways will be a cheaper mode of transport compared with road or rail transport and will help in creating a balance among different modes of transportation, according to Thang. Inland waterway transport faces a shortage of funds required for adjusting and dredging rivers and canals, according to a representative of the Waterway Transport Company. © Business Monitor International Page 42 Vietnam Freight Transport Report Q1 2015 Company Profile Vietnam Airlines Cargo SWOT Analysis Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ■ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the bellyholds of its parent company's planes. Opportunities ■ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the bellyholds of aircrafts in the future. ■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new air route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and economic links between Vietnam and Indonesia', according to Bloomberg Business Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays, leaving Ho Chi Minh City at 10:00 local time, and arriving in Jakarta at 13:00 local time. Jakarta is now connected to six ASEAN countries in total. ■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013, potentially opening the door for further link ups between the two countries. ■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport, Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built in the country. Thanh Nien News reported the chairman of the board, Airports Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started construction by now, in order to have the first phase completed by 2020.' © Business Monitor International Page 43 Vietnam Freight Transport Report Q1 2015 SWOT Analysis - Continued ■ There is further room for co-operation between Vietnam and the US in the coming years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held in Ho Chi Minh City in September 2013. ■ Vietnam Airlines began to take delivery of some 900 Nordisk light weight air cargo containers in January 2014. With the containers weighing less than conventional boxes due to being fashioned from AKE aluminium as opposed to normal aluminium, the costs associated with handling them will reduce due to lower fuel consumption and reduced carbon emissions. ■ In June 2014, Vietnam Airlines stated: 'SkyTeam, the global airline alliance, projects an increase of 18 % in membership cooperation for the year 2014. The increase is the result of more codeshares and bilateral agreements amongst its member airlines, benefiting global customers by offering more destinations and travel options.' Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the bellyholds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. © Business Monitor International Page 44 Vietnam Freight Transport Report Q1 2015 Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies to Gatwick Airport, with cargo space available in the bellyholds of planes going to and from London. Etihad Airways announced at the start of the October 2013 that it had launched its first commercial passenger service between Abu Dhabi and Ho Chi Minh City. Vietnam Airlines is its codeshare partner and its VN code will be placed on the Abu Dhabi-Ho Chi Minh City sector. Taking advantage of the fast-growing market, Etihad Airways President and CEO James Hogan explained that: 'The United Arab Emirates is Vietnam's seventh largest trading partner and its largest in the Gulf region. In 2012, exports from Vietnam to the UAE exceeded USD2bn for the first time - up 82% on 2011 - and forecast to exceed USD4bn in 2013. The 13.1-tonne belly-hold capacity of our Airbus A330-200 aircrafts, which equates to more than 9,500 tonnes per year, gives us sufficient capacity to boost the volume and value of trade between the UAE and Vietnam and to other markets in the GCC, Europe and North America.' Latest Activity Privatisation To Go Ahead Vietnam Airlines is set to be partially privatised by the end of 2015, bringing to an end, a long-running search for a backer. The airline is to sell a 25% stake in an initial public offering (IPO) in November 2014 and the company explained in a statement: 'Based on the equitisation plan approved by the Prime Minister, Vietnam Airlines will quickly implement steps to proceed with the IPO in late November 2014.' The move would still see the Vietnamese government holding a 75% stake in Vietnam Airlines, while the remaining 25% would be sold to a mixture of strategic investors, employees and members of the public. © Business Monitor International Page 45 Vietnam Freight Transport Report Q1 2015 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ Around 60% of VIPCO's fleet is employed by Petrolimex. ■ The company boasts a relatively young fleet. ■ It has diversified away from operating in a single sector, with a real estate arm. ■ Petrolimax was awarded the tag of one of the 'Top 100 Most Outstanding Enterprises In 2013' in Vientiane, Laos, in February 2014. Weaknesses ■ VIPCO only operates in one shipping sector. Opportunities ■ The company plans to expand its fleet, although no further information is currently forthcoming. ■ Petrolimex made a company announcement at the end of July 2013 to state that it had signed a memorandum of understanding (moU) with Japan International Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to 'cooperation in the trial project of double-shell tank against harmful matters'. ■ Both box and tonnage throughput growth at Vietnam's largest port, the Port of Ho Chi Minh City, is set to be healthy over the medium term. Threats ■ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term, Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including units that support its product tanker fleet - such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. © Business Monitor International Page 46 Vietnam Freight Transport Report Q1 2015 VIPCO has a fleet expansion strategy in place and is prepared to invest either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. The board of directors of Petrolimex announced the establishment of a new whollyowned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil products, marine services and the repair and building of tankers. Financial Data Q2 2014 Net revenues at VIPCO in the second quarter of 2014 were up to VND172,183mn from the previous quarter's VND163,840mn, according to Vietstock. Net profit after tax in this quarter also stood at VND22,813mn, which was a welcome return to positive growth after Q1 2014's contraction of VND14,999mn. 2013 Deputy General Director Tran Ngoc Nam explained at the end of December 2013 that profits were low at Petrolimex, owing to the Vietnamese government's efforts to curb inflation and stabilise the economy through retail price adjustment. In the first half of 2013 the company announced profits of VND898bn (USD42.69mn), however, according to Viet Nam News, earnings fell short 'of the full-year target of the country's largest fuel wholesaler at VND1.98trn (USD94.2mn) in 2013. With only 45% of the plan covered, Petrolimex said it will exert efforts to make it in the second half of this year.' Latest Activity ONGC Signs LOI For Offshore Work ONGC Videsh Limited (OVL), the international subsidiary of Indian state-run oil and gas company ONGC, and state-owned PetroVietnam, have signed a Letter of Intent (LOI) to participate in the exploration of Vietnam's oil and gas offshore, it was reported in September 2014. The LOI provides for expansion of exploration activities by OVL in Vietnam by considering participation in 2-3 additional blocks, pending requisite approvals and technical and commercial viability. PetroVietnam may consider participation in some of the exploration blocks of OVL on mutually agreeable terms subject to due-diligence. This move will keep VIPCO busy in the short term. © Business Monitor International Page 47 Vietnam Freight Transport Report Q1 2015 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ On December 16 2012, Vinalines launched the second biggest bulk carrier in Vietnam in Hai Phong city. Named Vosco Sunrise, the bulk carrier has been designed to cater for a deadweight of 56,200DWT. Weaknesses ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The USD3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. ■ According to chairman of Vietnam Shipowners' Association Vu Xuan Quynh, a large sell off of old tonnage is needed, with Vinalines seeking to offload around 1.4m DWT of ships, Sea Ship News reported in July 2013. ■ Vinalines was asked by the government to withdraw its plans to participate in the development of the northern Lach Huyen Port, reported Sea Ship News in March 2013. The company will continue to concentrate on its ongoing port projects; however, Hanoi said that it needs to make arrangement of funds before it can mull over additional expansion. Vinalines teamed up with Japan's Itochu, MOL and NYK for the development of the port. ■ The death sentence handed out to Vinalines' former chairman at the end of 2013 for embezzlement has done little for the company's reputation. Opportunities ■ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. © Business Monitor International Page 48 Vietnam Freight Transport Report Q1 2015 SWOT Analysis - Continued ■ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. ■ Vinalines is weighing up its options of going public in 2015 as the debt-ridden company looks to turnaround its poor financial fortunes. Threats ■ While Vietnam has invested heavily in its port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ■ In 2011, Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ■ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture (JV) interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend USD2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than intended, with the shipping line taking on 36 vessels © Business Monitor International Page 49 Vietnam Freight Transport Report Q1 2015 from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chairman, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels could not be used as they failed to meet technical requirements. He estimated that the company would need to spend USD26mn to repair the vessels and purchase insurance cover. Dung added that the company expected some financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market, but also has exposure to the intra-Asia trade lane after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming better connected with both short and long haul destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. In September 2013, the wholly owned limited liability company, Quy Nhon port under Vinalines launched an initial public offering as part of ongoing restructuring of the company, approved back in February 2013. In a high-profile court case in Hanoi in January 2014, the former chairman of Vinalines, Duong Chi Dung admitted to handing out bribes to members of the country's ruling communist party in a bid to avoid his imminent arrest for embezzlement. Dung was sentenced to death in December for siphoning off millions of dong from the company. In October 2014, Vietnamese Prime Minister Nguyen Tang Dung and European Commission President Jose Manuel Barroso stressed that they are committed to establishing a free trade deal between Vietnam and Europe that should bolster the Vietnamese shipping sector. Financial Data 2013 Vinalines is already bracing itself for a full-year loss of VND2.1trn (USD101mn) as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (USD69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', © Business Monitor International Page 50 Vietnam Freight Transport Report Q1 2015 according to Vinalines Director Nguyen Canh Viet, reported by Vietnam Investment Review. 2011 Vinalines recorded a VND62.15bn (USD3mn) profit for 2011, despite posting a loss of VND660bn (USD32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. Latest Activity Vinalines Sees Gains Vinalines announced in August 2014 that the company had increased its total shipping volumes to 13.5mn tonnes, an increase of 1% compared to a year previous, while total cargo volumes were found to have increased by 4% to 33.6mn tonnes. Addressing the company's conference to lay down Vinalines' second half year plan, Nguyen Van Cong, Vice-Minister of Transport, explained that while there were still difficulties ahead, Vinalines should be content with its efforts in the first half of 2014. © Business Monitor International Page 51 Vietnam Freight Transport Report Q1 2015 Political Outlook Domestic Politics BMI View: The Vietnamese government will continue to face a myriad of challenges over the coming years, and despite China's recent decision to move its oil rig out of the disputed waters, the relationship between Hanoi and Beijing will remain at the centre of foreign policy. Meanwhile, we expect Vietnamese authorities will continue to also focus on economic and business environment reforms in an effort to stimulate growth and attract foreign direct investment. China National Petroleum Corporation (CNPC) removed the CNOOC-owned 981 oil rig on July 16, which has temporarily helped diffuse tensions between Beijing and Hanoi, but we believe that relations between the two countries will remain weak over the coming quarters and China will continue to dominate Vietnam's foreign policy agenda. Despite an agreement by Hanoi and Beijing in mid-2013 to establish a naval emergency hotline to improve communications between the two navies, which had helped to calm bilateral tensions over territorial disputes in the South China Sea, prior to the recent flare up in tensions, we believe that China's influence will continue to grow in the region, which will put Vietnam and neighbouring countries under increasing amount of military and economic pressure. While we expect tensions to abate over the very short term, and China's removal of the rig could be interpreted as a small victory for Vietnam, we believe that tensions have the potential to flare up again in the coming quarters. As such, we have kept our short-term political risk ratings for the country unchanged since downgrading them in May from 79.0 to 76.9. Indeed, CNPC could very well return, particularly if further studies support the commercial feasibility of oil and gas resources in the waters off the Paracel Islands, which its drilling campaign has identified. As such, China's national oil companies (NOC) could continue to explore in these waters to test its full hydrocarbon potential as long as there are no military repercussions for China. If commercial feasibility is confirmed, it could even see Beijing assert its territorial claims more boldly than it is currently doing. The dispute has already prompted Prime Minister Nguyen Tan Dung to announce additional fiscal measures aimed at beefing up Vietnam's maritime border. In early July, the government announced that it would set aside USD540mn to build new coast guard ships, which will include 32 new vessels as well as other related equipment, in an effort to shore up defences and the capacity for the coast guard to protect fishermen and enforce the country's maritime borders. © Business Monitor International Page 52 Vietnam Freight Transport Report Q1 2015 End To The Dispute, Or Just A Pause? Asia - Map of South China Sea Source: BMI Although China will remain a major foreign policy concern, Vietnam has made a substantial effort in recent quarters to strengthen its political ties with the international community with respect to defence and trade. In June, Vietnamese Defence Minister Phung Quang Thanh held bilateral meetings with his counterparts from the US, UK and France and focussed on the topics of promoting peace and stability in the region, as well as maritime security in the context of China's increasing influence. Moreover, officials have been promoting Vietnam as a key investment destination and trade partner, with the government holding meetings with key governments across the world in order to promote trade, investment, cooperation and development assistance. A recent example includes the visit to Vietnam in June by Italian Prime Minister Matteo Renzi, © Business Monitor International Page 53 Vietnam Freight Transport Report Q1 2015 which marked the first time an Italian prime minister had visited Vietnam since the two countries established diplomatic ties in 1973. Busy On The Domestic Front To Spur Investment & Growth Vietnam's domestic policy focus will continue to be aimed at improving the country's macroeconomic credentials while improving the business environment in an effort to attract foreign investment. To this end, the government has been pushing for several policies which include motions to allow Vietnamese citizens living abroad more flexibility in maintaining their citizenship, which is important for both investment and remittances. Moreover, the Vietnamese government has asked several ministries to be more flexible and ease the requirements for foreign workers, in a bid to help reduce the shortage of skilled workers in the country. At the same time, the government has continued to push for the lifting of caps and restrictions on foreign ownership of domestic companies, and this, combined with the drive to privatise many state-owned enterprises (SOEs), will result in increased foreign investment over the coming years. In addition to these policies, the government also aims to reduce the amount of red tape businesses face. In July, Finance Minister Dinh Tien Dung said that the country would aim to reduce the time and paperwork needed for businesses to file their taxes. According to the World Bank, Vietnam ranked in 99th place in its 2014 report in terms of doing business, marking a deterioration from the 2013 ranking of 88th. However, when it comes to paying taxes, Vietnam ranked a much worse 149th, suggesting a huge burden on businesses. The proposals aim to revise tax procedures and cut tax preparation time to 337 hours a year by the end of this year, resulting in savings of 200 hours. Risks To Outlook Although we expect the political environment in Vietnam to remain stable, we would not be surprised to see political tensions flare up again with China, and this could pose risks to economic activity should the dispute escalate given that China is one of Vietnam's largest trade partners. Moreover, on the domestic front, while the Vietnamese government has attempted to make significant progress with regard to the business environment, policy implementation has been slow, and corruption remains a key challenge for the country, which could weigh on investment. Transparency international gave Vietnam a corruption perceptions score of 31 out of 100 in 2013 (0 is very corrupt, and 100 is very clean) and ranked the country in 116th place out of 177. Meanwhile, Japan recently suspended official development aid to Vietnam as Japanese prosecutors pressed charges against a Tokyo-based consultancy for allegedly bribing Vietnamese officials to win contracts funded by Japanese official development assistance. © Business Monitor International Page 54 Vietnam Freight Transport Report Q1 2015 Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Nguyen Minh Triet (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving first five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts National Assembly Chairman - Nguyen Sinh Hung, Minister of National Defence - Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President - Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. Main Political Parties (number of seats in parliament) Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council BMI Short-Term Political Risk Rating 76.9 BMI Structural Political Risk Rating 57.7 Source: BMI Long-Term Political Outlook BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. © Business Monitor International Page 55 Vietnam Freight Transport Report Q1 2015 Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is currently causing widespread environmental damage and raising ire among the local population. There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as © Business Monitor International Page 56 Vietnam Freight Transport Report Q1 2015 was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom. Relations With China: Relations with China have become increasingly strained in recent years as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 57.7/100 is weighed down by a score of 29.0 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: © Business Monitor International Page 57 Vietnam Freight Transport Report Q1 2015 Public Unrest A Major Risk Vietnam - Long-Term Political Risk Ratings (score out of 100) Source: BMI Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even © Business Monitor International Page 58 Vietnam Freight Transport Report Q1 2015 dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario - Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Page 59 Vietnam Freight Transport Report Q1 2015 Macroeconomic Forecasts Economic Analysis BMI View: We have downgraded Vietnam's growth forecast from 5.9% to 5.7% in 2014 on the back of weaker-than-expected H114 growth numbers, combined with the risk of an economic backlash from China. That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue to believe that the economy will be driven by growth supportive government policies, as well as a strong outlook for foreign investment and exports. Real GDP growth came in at 5.3% year-on-year (y-o-y) in Q214, according to the General Statistics Office (GSO), bringing growth for the first half of the year to 5.2% y-o-y. This marks an acceleration when compared to the 4.9% registered in the first half of 2013, and chimes with our view that the economy will continue to accelerate into 2014 and 2015. Growth was predominantly driven by strength in the services sector as well as the industry and construction sectors, which contributed 2.6 and 2.1 percentage points respectively to growth. Although we see strong growth ahead, we have revised down our growth forecast for 2014 from 5.9% to 5.7% on the back of a slightly weaker than expected first half of the year, combined with the potential for an economic backlash from the ongoing political dispute with China (see 'Political Tensions Pose Downside Risks To Growth', June 10). That said, we have kept our 2015 real GDP growth forecast unchanged at 6.4%. © Business Monitor International Page 60 Vietnam Freight Transport Report Q1 2015 Slight Downgrade, But Powering Along Vietnam - Real GDP Growth, % chg y-o-y Source: GSO, SBV The Vietnamese government will continue to promote pro-growth policies, by running a fiscal deficit albeit a declining one - maintaining a dovish stance with regard to monetary and exchange rate policy, restructuring many state owned enterprises (SOEs), promoting foreign direct investment and exports as well as attracting developmental-type aid. For the first six months of the year, we estimate that the government posted a fiscal deficit of approximately 4.3% of GDP, with spending rising by 9.7% y-o-y. At the same time, the State Bank of Vietnam (SBV) has maintained a dovish bias since the beginning of the year, cutting its refinancing rate by 50 basis points in March to 6.5% in an effort to spur lending. Indeed, the SBV recently also devalued the Vietnamese dong by 1% in June, in what we believe is a pre-emptive move to boost exports in the event of a slowdown driven by the ongoing political spat with China. Given low inflationary pressures, we would not be surprised to see either another cut to the refinancing rate, or another adjustment to the currency before year-end in the event of a slowdown in growth, although it is not our core view. Combined, both accommodative monetary and fiscal policy will continue to support growth over the coming quarters. © Business Monitor International Page 61 Vietnam Freight Transport Report Q1 2015 Services Powering Ahead Vietnam - Real GDP Growth By Category, % chg y-o-y & Share of GDP, % Source: GSO Manufacturing And Retailing To Help Support Growth The industrial sector, which accounts for approximately 33% of the economy and includes manufacturing, mining, water management, and power generation accelerated by 6.1% y-o-y in June and 5.8% for the first half of the year. At 21% of GDP, manufacturing accounts for the lion's share, accelerating by a robust 7.8% y-o-y in H114, driven by textiles (21% y-o-y), leather goods (19.2%), and motored vehicles (22.9%), a trend we expect will remain in play given the continued strength in the country's domestic demand and export markets. Moreover, as we highlighted in previous articles (see Manufacturing To Remain Strong, June 20), the manufacturing sector will continue to see strong growth, particularly as it moves up the value chain into higher value sectors such as Information and Communications Technology (ICT). The retail sector expanded by 12.2% y-o-y in H114, with accommodation and catering services growing by 13.1% and travel services by a whopping 20.5% over the period. © Business Monitor International Page 62 Vietnam Freight Transport Report Q1 2015 Manufacturing To Remain Strong Vietnam - Industrial Production, % chg y-o-y, 6mma Source: Bloomberg Exports Continue To Strengthen Vietnam's export sector continues to be a driver of growth for the country, and we forecast this trend to remain in play over the coming months. Exports for the first six months of the year expanded by a robust 14.9% y-o-y, and saw the accumulated trade surplus rise to USD1.3bn in H114. Exports were primarily driven by strong growth in textiles, telephones and footwear of 18.2%, 17.1% and 21.9%, respectively, which together account for approximately 35% of the total. Moreover, we expect exports to continue driving growth going forward given that the Vietnamese government has been making a concerted push to build diplomatic and trade ties with many countries and is negotiating several free trade agreements. One of the most important ones is the Trans-Pacific Partnership (TPP), which could be signed by as early as 2015. © Business Monitor International Page 63 Vietnam Freight Transport Report Q1 2015 Diversified & Picking Up Vietnam - Exports By Category, % chg y-o-y & Share of Total Source: GSO Investment and Infrastructure Development To Drive Growth The investment picture also remains very bullish in Vietnam as the country has been able to attract both private investment as well as foreign aid, which will help underpin both short-and long-term growth. There were a total of 656 investments in H114 with a total value of USD4.9bn, and although this figure marks a 16.4% decline from last year, we do not believe that it highlights a lack of opportunities going forward. The largest source of investment this year has been from South Korea at USD1.1bn, followed by Hong Kong (USD867mn), Singapore (USD559mn), Japan (USD438mn), and Indonesia (USD352mn).The Vietnamese government continues to restructure many of their SOEs, and several companies, such as Samsung, continue to be attracted to the country's lower labour costs, which suggests that foreign investment will continue to flow to Vietnam. Indeed, in July, Samsung received approval from the government to build a USD1.0bn plant. From a developmental perspective, the ASEAN Infrastructure Fund (AIF) approved a USD100mn loan for the power sector in May, and could provide another USD200mn in loans. Moreover, the World Bank in June approved two credits worth USD500mn to support economic management, reforms and infrastructure development in the northern region of the country. © Business Monitor International Page 64 Vietnam Freight Transport Report Q1 2015 Investment To Remain A Driver of Growth Vietnam - Foreign Direct Investment By Source, USDmn Source: GSO Risks To Outlook: China, From Friend To Foe Although we have already downgraded our growth forecast slightly for this year, we continue to monitor risks from trade policy with China. Although we do not believe that the political tensions between Hanoi and Beijing will result in military conflict, there are non-negligible risks of an economic backlash. Indeed, the Chinese government has temporarily stopped Chinese state-owned companies from bidding for new contracts in Vietnam, which could see investment flows decline substantially over the coming quarters, posing downside risks to Vietnam's growth outlook. China accounted for 21.3% of foreign investment in Vietnam in 2013, approximately 14.5% of Vietnam's exports, and about 27% of all visitors this year. As such, a sustained economic backlash could have a more severe impact on Vietnam's growth outlook. © Business Monitor International Page 65 Vietnam Freight Transport Report Q1 2015 Table: Economic Activity (Vietnam 2009-2018) 2009 Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD Population, mn 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 101.6 112.8 134.6 155.6 5.4 6.4 6.2 5.2 1,152 1,266 1,496 1,713 170.6 194.9 220.8 248.6 280.4 316.2 5.4 5.7 6.4 6.6 6.4 6.4 1,860 2,105 2,364 2,639 2,952 3,303 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 Industrial production, % y-o-y, ave 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 Unemployment, % of labour force, eop 4.6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5 3.5 National Sources/BMI, e = Estimate, f = BMI Forecast © Business Monitor International Page 66 Vietnam Freight Transport Report Q1 2015 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy. Population (1990-2050) 150 100 50 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 0 Vietnam - Population, mn f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 67 Vietnam Freight Transport Report Q1 2015 Vietnam Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 68,909 80,887 84,947 89,047 93,386 97,057 99,811 na 1.1 0.9 1.0 0.9 0.7 0.5 Population, total, male, '000 33,892 39,827 41,830 43,970 46,158 47,980 49,302 Population, total, female, '000 35,017 41,060 43,117 45,077 47,228 49,076 50,508 Population ratio, male/female 0.97 0.97 0.97 0.98 0.98 0.98 0.98 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast. Source: World Bank, UN, BMI Table: Key Population Ratios (Vietnam 1990-2025) Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age © Business Monitor International 1990 2000 2005 2010 2015f 2020f 2025f 39,197 50,153 56,330 62,305 66,093 68,401 70,001 56.9 62.0 66.3 70.0 70.8 70.5 70.1 29,712 30,733 28,617 26,741 27,292 28,655 29,810 75.8 61.3 50.8 42.9 41.3 41.9 42.6 Page 68 Vietnam Freight Transport Report Q1 2015 Key Population Ratios (Vietnam 1990-2025) - Continued Youth population, total, '000 1990 2000 2005 2010 2015f 2020f 2025f 25,778 25,543 23,038 20,918 20,950 20,690 19,395 65.8 50.9 40.9 33.6 31.7 30.2 27.7 3,934 5,190 5,578 5,823 6,342 7,964 10,414 10.0 10.3 9.9 9.3 9.6 11.6 14.9 Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age f = BMI forecast. Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 1990 Urban population, '000 2020f 2025f 13,957.7 19,715.6 23,174.6 27,064.2 31,383.5 35,771.3 40,027.3 Urban population, % of total Rural population, '000 2000 20.3 24.4 2005 27.3 2010 30.4 2015f 33.6 36.9 40.1 54,952.2 61,172.3 61,773.2 61,983.2 62,003.1 61,285.7 59,783.9 Rural population, % of total 79.7 75.6 72.7 69.6 66.4 63.1 59.9 Life expectancy at birth, male, years 66.1 69.0 69.9 70.7 71.7 72.7 73.7 Life expectancy at birth, female, years 75.1 78.5 79.6 80.2 80.7 81.2 81.7 Life expectancy at birth, average, years 70.6 73.8 74.8 75.5 76.2 77.0 77.8 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 9,314 7,127 6,897 7,228 7,012 6,574 5,922 Population, 5-9 yrs, total, '000 8,606 9,253 7,023 6,790 7,180 6,968 6,535 Population, 10-14 yrs, total, '000 7,856 9,162 9,117 6,898 6,757 7,147 6,936 Population, 15-19 yrs, total, '000 7,359 8,492 9,050 9,011 6,865 6,725 7,116 Population, 20-24 yrs, total, '000 6,644 7,672 8,332 8,873 8,936 6,802 6,664 Population, 25-29 yrs, total, '000 6,005 7,065 7,470 8,111 8,772 8,837 6,717 Population, 30-34 yrs, total, '000 5,138 6,351 6,909 7,285 8,021 8,680 8,747 Population, 35-39 yrs, total, '000 3,888 5,803 6,241 6,763 7,207 7,939 8,596 Population, 40-44 yrs, total, '000 2,462 4,994 5,719 6,147 6,684 7,127 7,856 Population, 45-49 yrs, total, '000 2,016 3,753 4,935 5,647 6,054 6,588 7,031 © Business Monitor International Page 69 Vietnam Freight Transport Report Q1 2015 Population By Age Group (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 50-54 yrs, total, '000 1,968 2,345 3,699 4,855 5,521 5,926 6,457 Population, 55-59 yrs, total, '000 2,045 1,885 2,237 3,541 4,677 5,330 5,733 Population, 60-64 yrs, total, '000 1,668 1,790 1,734 2,068 3,352 4,443 5,079 Population, 65-69 yrs, total, '000 1,411 1,770 1,609 1,562 1,906 3,104 4,134 Population, 70-74 yrs, total, '000 1,027 1,322 1,530 1,399 1,379 1,695 2,776 Population, 75-79 yrs, total, '000 752 984 1,080 1,263 1,166 1,159 1,437 Population, 80-84 yrs, total, '000 429 596 731 814 964 900 903 Population, 85-89 yrs, total, '000 223 336 385 482 545 653 617 Population, 90-94 yrs, total, '000 71 132 177 209 267 306 372 Population, 95-99 yrs, total, '000 15 40 52 74 89 115 133 Population, 100+ yrs, total, '000 1 6 11 16 23 30 38 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group % (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 13.52 8.81 8.12 8.12 7.51 6.77 5.93 Population, 5-9 yrs, % total 12.49 11.44 8.27 7.63 7.69 7.18 6.55 Population, 10-14 yrs, % total 11.40 11.33 10.73 7.75 7.24 7.36 6.95 Population, 15-19 yrs, % total 10.68 10.50 10.65 10.12 7.35 6.93 7.13 Population, 20-24 yrs, % total 9.64 9.49 9.81 9.97 9.57 7.01 6.68 Population, 25-29 yrs, % total 8.72 8.73 8.79 9.11 9.39 9.11 6.73 Population, 30-34 yrs, % total 7.46 7.85 8.13 8.18 8.59 8.94 8.76 Population, 35-39 yrs, % total 5.64 7.17 7.35 7.60 7.72 8.18 8.61 Population, 40-44 yrs, % total 3.57 6.17 6.73 6.90 7.16 7.34 7.87 Population, 45-49 yrs, % total 2.93 4.64 5.81 6.34 6.48 6.79 7.04 Population, 50-54 yrs, % total 2.86 2.90 4.36 5.45 5.91 6.11 6.47 Population, 55-59 yrs, % total 2.97 2.33 2.63 3.98 5.01 5.49 5.74 Population, 60-64 yrs, % total 2.42 2.21 2.04 2.32 3.59 4.58 5.09 Population, 65-69 yrs, % total 2.05 2.19 1.90 1.75 2.04 3.20 4.14 Population, 70-74 yrs, % total 1.49 1.63 1.80 1.57 1.48 1.75 2.78 Population, 75-79 yrs, % total 1.09 1.22 1.27 1.42 1.25 1.20 1.44 Population, 80-84 yrs, % total 0.62 0.74 0.86 0.92 1.03 0.93 0.91 © Business Monitor International Page 70 Vietnam Freight Transport Report Q1 2015 Population By Age Group % (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 85-89 yrs, % total 0.32 0.42 0.45 0.54 0.58 0.67 0.62 Population, 90-94 yrs, % total 0.10 0.16 0.21 0.24 0.29 0.32 0.37 Population, 95-99 yrs, % total 0.02 0.05 0.06 0.08 0.10 0.12 0.13 Population, 100+ yrs, % total 0.00 0.01 0.01 0.02 0.03 0.03 0.04 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Page 71 Vietnam Freight Transport Report Q1 2015 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Page 72 Vietnam Freight Transport Report Q1 2015 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology There are a number of principal criteria that drive our forecasts for each transport variable: ■ GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own macroeconomic and demographic forecasts. ■ Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). • Port Traffic Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. ■ Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. © Business Monitor International Page 73 Vietnam Freight Transport Report Q1 2015 Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Page 74 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... of Dong Nai For 2015, we anticipate that the Vietnamese air freight sector will grow by 3.40%, up from 2014's 3.00%, to reach 195,640 tonnes Over the forecast period, we predict Vietnam' s air freight levels to grow on average per annum by a healthy 4.46% to reach 235,310 tonnes © Business Monitor International Page 23 Vietnam Freight Transport Report Q1 2015 Taking Off Vietnam Air Freight Tonnage,... International Page 34 Vietnam Freight Transport Report Q1 2015 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% of total), 2013 Source: General Statistics Office of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accounting... between 2015 and 2019 There are two key factors that we believe have held back Vietnam' s rail freight development and will continue to do so © Business Monitor International Page 21 Vietnam Freight Transport Report Q1 2015 Table: Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) The first is the quality of Vietnam' s... potential rail -freight projects between the two 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 and Laos) © Business Monitor International Page 22 Vietnam Freight Transport Report Q1 2015 Table: Rail Freight (Vietnam 2011-2018) 2011 Rail freight. . .Vietnam Freight Transport Report Q1 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a USD410mn loan for the Vietnamese government, reports KHL Group The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country ■ Vietnam- based... International Page 20 Vietnam Freight Transport Report Q1 2015 Table: Inland Waterway Freight (Vietnam 2011-2018) 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Inland Waterway Freight Tonnes (000) 160,164.50 168,493.00 180,812.70 192,753.43 204,971.63 217,942.54 231,537.74 245,814.01 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.60 6.34 6.33 6.24 6.17 Inland Waterway freight tonnes-km (mn... 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 © Business Monitor International Page 18 Vietnam Freight Transport Report Q1 2015 Road freight plays a key role not only in Vietnam' s domestic logistics sector, but also in the country's export supply chain Road is the main form of transport. .. keep up with the pace of demand ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims ■ A drop in international demand for exports would negatively affect Vietnam' s freight transport sector © Business Monitor International Page 11 Vietnam Freight Transport Report Q1 2015 Political SWOT Analysis Strengths... to boost skills levels could leave Vietnam a second-rate economy for an indefinite period ■ The dispute with China in Q214 in the South China Sea suggests the potential for renewed political tensions going forward © Business Monitor International Page 15 Vietnam Freight Transport Report Q1 2015 Industry Forecast Vietnam' s freight mix is set to perform steadily in 2015 and into the midterm, as a combination... Monitor International Page 19 Vietnam Freight Transport Report Q1 2015 Mekong Offers Trade Connections Map Of The Mekong River Source: BMI Vietnam' s inland waterways stretch for 47,130km and the country's dense network of waterways ranks its seventh in the world in terms of length The country's inland waterways include the Mekong River, which enables freight connections with Vietnam' s neighbours Although