Vietnam freight transport report q3 2015

... Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam' s strong domestic growth... affect Vietnam' s freight transport sector © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q3 2015 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. by road haulage companies © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ Chinese investment could

Q3 2015 www.bmiresearch.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 1750-5364 Published by:BMI Research Vietnam Freight Transport Report Q3 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: April 2015 BMI Research 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@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved. 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All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q3 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 Freight Transport ...................................................................................................................................... 9 Political ................................................................................................................................................. 11 Economic ............................................................................................................................................... 12 Industry Forecast .............................................................................................................. 14 Trade Forecast ........................................................................................................................................ 14 Table: Trade Overview (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Table: Key Trade Indicators (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Table: Main Import Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Table: Main Export Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Road Freight Forecast .............................................................................................................................. 20 Table: Road Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Rail Freight Forecast ............................................................................................................................... 23 Table: Rail Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Air Freight Forecast ................................................................................................................................ 25 Table: Air Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Company Profile ................................................................................................................ 29 Vietnam Airlines Cargo ............................................................................................................................ 29 Political Outlook ................................................................................................................ 32 Domestic Politics ..................................................................................................................................... 32 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Long-Term Political Outlook ..................................................................................................................... 36 Oil Price Outlook ............................................................................................................... 41 Global - Crude Oil, Refined Fuels And Natural Gas Prices, 10-year Forecasts .................................................... 41 Table: Energy Price Forecasts, 2013-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Table: Energy Price Forecasts, 2019-2024 ( Global 2019-2024) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Macroeconomic Forecasts ............................................................................................... 44 Economic Analysis ................................................................................................................................... 44 Table: Economic Activity (Vietnam 2010-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Demographic Forecast ..................................................................................................... 49 Table: Population Headline Indicators (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Table: Key Population Ratios (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Table: Population By Age Group (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Table: Population By Age Group % (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q3 2015 Methodology ...................................................................................................................... 54 Industry Forecast Methodology ................................................................................................................ 54 Sector-Specific Methodology .................................................................................................................... 55 Sources ................................................................................................................................................ 57 © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q3 2015 BMI Industry View BMI View: We continue to believe that the Vietnamese economy is set to perform strongly in 2015, due to continued strong foreign direct investment (FDI), healthy export growth and ongoing efforts by the government to improve macroeconomic fundamentals. In turn, the country's freight industry is set to benefit as a result. The outperformers in terms of mode will be inland waterways and road freight, due to consumer demand rising in Vietnam on the back of falling fuel prices and easier monetary policy and still-strong fiscal spending plans by the government. Vietnam and South Korea have concluded negotiations for a bilateral free trade agreement (FTA), which seeks to triple bilateral trade turnover to USD70bn by 2020, offering potentially significant upside risk over the medium to long term. The anticipated bounce from the FTA is an integral reason why we anticipate export growth in Vietnam to perform strongly over our medium term forecast period, growing by an average 6.52% y-o-y between 2015 and 2019. In 2015, total trade real growth will come in at 6.65%, with imports outperforming exports. Vietnam is poised to post strong private consumption growth of 6.5% in 2015, which is unchanged from last year. The country's consumers will benefit from lower oil prices, easier monetary policy and still-strong fiscal spending plans by the government, boosting the road freight mode in 2015. Moreover, Vietnam's exchange rates have shown a reasonable amount of resilience in the first half of 2015, which will help to conserve consumers' purchasing power, again, providing a boost to road freight. This will see growth for consumer-related goods such as passenger vehicles, mass grocery and retail remain strong over the course of 2015. In 2015, we have pencilled in y-o-y growth of 3.40% for the air freight mode in Vietnam, which is down on 2014's estimated gains of 9.96%. Looking further ahead to the medium term, the Vietnamese air freight sector will be buoyed by the news that two-way trade between India and Vietnam is anticipated to reach USD20bn by 2020, according to Vietnam's Ambassador to India Ton Sinh Thanh. Vietnam's growing rice exports could prove to be very popular with the Indian market, boosting air freight trade over the medium term as a result. Vietnam's rail freight industry is not set to enjoy the same level of annual tonnage growth in 2015 as last year, as the country put years of contracting growth behind it to post double-digit growth. However, the sector is now set to see positive growth both in 2015 and over the medium term as the manufacturing and oil and gas sectors are both poised to spur on the freight mode through increased exports out of Vietnam. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q3 2015 Indeed, Vietnamese crude oil exports increased 27% y-o-y to 867,207 metric tonnes (mt) or 205,052 barrels per day (b/d) in December 2014, according to data from Vietnam Customs, but state-owned PetroVietnam is likely to reduce production from four of its oil fields to cut costs, underlining why we expect slower rail freight growth in 2015. Key BMI Forecasts: ■ We forecast total road freight volumes will rise by 7.75% y-o-y over 2015 to reach 880.14mn tonnes. ■ We forecast total rail freight volumes will grow by 3.40% year on year over 2015 to reach 7.42mn tonnes. ■ We forecast total air freight volumes will rise by 3.40% year on year over 2015 to reach 208,700 tonnes. ■ We forecast total trade value to increase by 6.65% to reach USD319.27bn in 2015. ■ The top trade partners will be the US, China, Japan, South Korea and Germany. © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q3 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. Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q3 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ 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 World Bank stated at the start of 2014 that improved infrastructure could improve the country's economy substantially. ■ 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. 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 Ltd Page 10 Vietnam Freight Transport Report Q3 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 ■ 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 Ltd Page 11 Vietnam Freight Transport Report Q3 2015 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 6.6% annually between 2000 and 2013. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 17.2% 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 economic integration in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased foreign competition. ■ The government has continued to move forward with market reforms, including privatisation of state-owned enterprises, addressing the high level of bad loans in the banking sector as well as liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 32% of the population in 2013 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. ■ The potential for an escalation of political tensions with China over sovereign claims to parts of the South China Sea could have a negative impact on the economy. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q3 2015 SWOT Analysis - Continued ■ Market reforms could progress at a much slower pace as the government remains cautious about ceding ownership to foreign investors. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q3 2015 Industry Forecast Trade Forecast BMI View: Vietnamese export growth is set to grow in 2015 as a stronger US economy and continued inflows of foreign direct investment (FDI) to Vietnam's manufacturing sector dovetail to see export growth of 8.3%. That said, exports will likely underperform the 13.6% nominal growth pace set in 2014 owing to the weak euro and the ongoing regional economic slowdown, which temper our freight forecasts as a result - the air and rail freight sectors are set to see year-on-year tonnage throughput decrease in 2015 compared to 12 months previous. In terms of geographical breakdown, we believe the US market will be the key to sustaining robust export growth in Vietnam over the coming quarters amid ongoing regional headwinds. Indeed, the US remains the largest destination for Vietnamese exports, receiving 19.8% of the total in the first four months of 2015. While there was a poor run of economic data from the US in the month of April, we nevertheless expect the US economy to continue its recovery amid a healing labour market and weak global oil prices. Recovering US consumer confidence will in turn provide a boost to demand for Vietnamese goods, particularly for textiles and garments. In Q1 2015, the 'textiles and garments' category grew by 7.8% y-o-y to USD4.8bn, which is, by extension, welcome news to the air freight mode as it will be via air, as well as sea, that these exports are transported. The US accounted for 17.6% of all exports out of Vietnam in 2013 (latest available data), which underlines the importance of the US market to Vietnamese freight modes. While the US economy appears to be back on its feet, the regional economic slowdown in Vietnam's other key trading partners, particularly China, Japan and South Korea, will act as a drag on Vietnamese export growth, thus resulting in export growth in 2015 dipping slightly on 2014's 5.92% y-o-y gains. Indeed, China, Japan and South Korea received a combined 23.8% of the total for the first four months of 2015. Growth in exports to these major trading partners will likely be negatively impacted by ongoing general weakness in these economies. In China, ongoing economic rebalancing efforts by the Chinese government will continue to slow growth in the world's second largest economy. Import growth in China contracted by 12.3% y-o-y in March, reflecting the economic slowdown in recent quarters. Meanwhile, attempts to revive the Japanese economy appear to have fallen short, with real household income and industrial production growth remaining rather lacklustre. The ability to attract strong foreign direct investment (FDI) inflows to the manufacturing sector is another factor that will keep the Vietnamese export sector vibrant. The exports of manufactured goods are set to grow by 6.98% in 2015. Well-known multinational companies like Samsung (one of the largest foreign © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q3 2015 investors in Vietnam) and Procter and Gamble are increasing their investment in the country, which will only benefit the freight industry, in particular air freight as goods are flown out to more developed countries. In particular, Samsung (through its various subsidiaries) is running several large scale projects in Vietnam, including the construction of a second smartphone factory worth USD3.0bn in the northern province of Thai Nguyen and a USD1.0bn production plant in the province of Bac Ninh to manufacture LCD screens. According to the Ministry of Planning and Investment, registered capital investment from the South Korean giant is estimated to hit USD20.0bn by 2017. The total investment from Samsung in the country currently stands at around USD11.0bn. Strong Growth Ahead Imports and Exports Value (USDbn) (2013-2019) 600 400 200 Vietnam - Imports, USDbn 2019f 2018f 2017f 2016f 2015f 2014 2013 0 Vietnam - Exports, USDbn National statistics agency Medium Term In welcome news for the Vietnamese freight industry, Vietnam and South Korea have concluded negotiations for a bilateral free trade agreement (FTA) during a meeting between Vietnamese Prime Minister Nguyen Tan Dung and South Korean President Park Geun-hye on the sidelines of the ASEANKorea Commemorative Summit. The FTA seeks to triple bilateral trade turnover to USD70bn by 2020. The © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q3 2015 FTA covers 17 areas, including products, services and investment and intellectual property; however, it excludes rice, a sensitive product for Korean farmers, as reported by the Korea Times. The two Asian nations have held nine rounds of FTA talks since August 2012, reported Thanh Nien News. If Vietnam and South Korea can appease farmers in the latter country, the former is set to benefit from its large rice exports. The anticipated bounce from the FTA is one of the key reasons why we see export growth in Vietnam performing strongly over our medium term forecast period, growing by an average 6.52% y-o-y between 2015 and 2019. Long Term Coal production will remain the overwhelming power source of choice, most notably in China and India, and with Vietnam exporting significant amounts of coal, it is well placed to benefit from growing demand over the long term. Not only is coal the cheapest option, but it is relatively abundant, scalable and has a faster turnaround than other fuel sources. We forecast that despite rising environmental concerns, by 2024, coal will still account for approximately 70.0% of China's energy mix, down only marginally from about 73.0% currently. Although coal will remain the power source of choice, we do expect policy changes to boost growth in nuclear and renewable energy sources over the next decade. With Europe being the second largest export destination for Vietnamese goods (receiving 18.8% of the total for the first four months of 2015), weakness in the euro will undoubtedly weigh on European demand for Vietnam's exports going forward, a situation that has occurred in the first half of 2015. The euro has depreciated against the Vietnamese dong by about 20% since May 2014, making Vietnamese goods more expensive in euro terms and this is a scenario that could worsen in future, affecting demand for Vietnamese goods and thus having a detrimental effect on the country's freight modes, in particular air freight. Table: Trade Overview (Vietnam 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f Imports, real growth, % y-o-y 9.09 7.90 7.50 7.50 7.30 7.20 7.00 7.00 Exports, real growth, % y-o-y 15.71 6.00 5.92 5.80 6.20 6.60 6.80 7.20 Total Trade, real growth, % y-o-y 12.40 6.95 6.71 6.65 6.75 6.90 6.90 7.10 118.98 133.50 147.57 159.94 178.12 202.18 229.09 259.36 5.86 12.20 10.54 8.38 11.37 13.51 13.31 13.21 124.43 137.15 149.38 159.34 175.63 198.25 224.21 254.31 16.46 10.22 8.92 6.66 10.23 12.88 13.10 13.42 243.41 270.65 296.96 319.27 353.75 400.43 453.30 513.67 Imports, USDbn Import growth, % y-o-y Exports, USDbn Export growth, % y-o-y Total trade, USDbn © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q3 2015 Trade Overview (Vietnam 2012-2019) - Continued Total trade growth, % y-o-y 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 11.03 11.19 9.72 7.51 10.80 13.20 13.20 13.32 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators (Vietnam 2012-2019) 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f Agricultural raw materials, exports, USDmn 4,401.58 4,499.68 5,014.91 5,467.44 6,490.51 7,118.30 8,468.63 9,353.99 Agricultural raw materials, exports, % y-oy 4.24 2.23 11.45 9.02 18.71 9.67 18.97 10.45 Agricultural raw materials, imports, USDmn 3,430.55 4,624.12 5,036.73 5,372.49 5,796.29 6,648.59 7,396.26 8,490.14 Agricultural raw materials, imports, % y-oy -17.16 34.79 8.92 6.67 7.89 14.70 11.25 14.79 Ores and metals, exports, USDmn 980.08 1,095.55 1,199.83 1,284.69 1,423.20 1,616.30 1,834.96 2,093.42 Ores and metals, exports, % y-o-y 21.28 11.78 9.52 7.07 10.78 13.57 13.53 14.09 Ores and metals, imports, USDmn 4,262.93 5,364.30 5,969.23 6,500.53 7,155.36 8,278.82 9,305.92 10,684.77 Ores and metals, imports, % y-o-y -6.13 25.84 11.28 8.90 10.07 15.70 12.41 14.82 2,203.39 2,609.31 2,874.67 3,090.60 3,494.49 3,949.34 4,553.87 5,182.44 -1.40 18.42 10.17 7.51 13.07 13.02 15.31 13.80 8,471.23 10,158.45 11,251.96 12,212.37 12,952.95 15,295.55 16,716.99 19,470.02 8.54 6.06 18.09 9.29 16.47 Iron and steel, exports, USDmn Iron and steel, exports, % y-oy Iron and steel, imports, USDmn Iron and steel, imports, % y-oy 17.23 19.92 © Business Monitor International Ltd 10.76 Page 17 Vietnam Freight Transport Report Q3 2015 Key Trade Indicators (Vietnam 2012-2019) - Continued 2012 Manufactured goods, exports, USDmn 2014e 2015f 2016f 2017f 2018f 2019f 71,085.40 77,803.42 85,108.55 91,052.85 102,058.29 114,660.13 131,471.98 148,647.29 9.39 6.98 12.09 12.35 14.66 13.06 80,785.92 89,399.19 98,858.27 107,166.05 119,292.63 135,532.23 153,510.65 173,917.43 10.58 8.40 11.32 13.61 13.27 13.29 16,530.36 17,377.78 18,781.64 19,923.99 21,088.00 24,185.26 26,537.19 30,368.73 8.08 6.08 5.84 14.69 9.72 14.44 15,190.13 16,042.55 17,763.66 19,275.28 21,413.17 24,416.26 27,667.09 31,388.04 8.51 11.09 14.02 13.31 13.45 Manufactured goods, exports, % y-o-y Manufactured goods, imports, USDmn 14.31 Manufactured goods, imports, % y-o-y Fuels, exports, USDmn 9.20 Fuels, exports, % y-o-y Fuels, imports, USDmn 2013e 9.45 10.66 50.17 Fuels, imports, % y-o-y 21.22 5.13 5.61 10.73 e/f = BMI estimate/forecast. Source: UNCTAD, BMI Table: Main Import Partners 2006 2007 2008 2009 2010 2011 2012 2013 7,391 12,710 15,974 16,441 20,019 24,594 28,786 53,458 16.5 20.3 19.8 23.5 24.0 23.5 25.8 31.9 3,908 5,340 7,255 6,976 9,761 13,176 15,536 23,196 8.7 8.5 9.0 10.0 11.7 12.6 13.9 13.8 6,274 7,614 9,378 4,248 4,101 6,391 6,690 11,978 14.0 12.1 11.6 6.1 4.9 6.1 6.0 7.1 4,702 6,189 8,240 7,468 9,016 10,400 11,603 11,575 10.5 9.9 10.2 10.7 10.8 10.0 10.4 6.9 1,441 1,951 2,633 826 860 970 970 8,315 3.2 3.1 3.3 1.2 1.0 0.9 0.9 5.0 TOTAL 44,891 62,765 80,714 69,949 83,365 104,510 111,640 167,791 TOTAL, top 5 countries, USDm 23,717 33,804 43,480 35,960 43,758 63,584 108,521 China, Mainland, USDmn China, Mainland, USDmn, % of total Korea, Republic Of, USDmn Korea, Republic Of, USDmn, % of total Singapore, USDmn Singapore, USDmn, % of total Japan, USDmn Japan, USDmn, % of total China,P.R.:Hong Kong, USDmn China,P.R.:Hong Kong, USDmn, % of total © Business Monitor International Ltd 55,530 Page 18 Vietnam Freight Transport Report Q3 2015 Main Import Partners - Continued % from top 5 trade partners 2006 2007 2008 2009 2010 2011 2012 2013 52.8 53.9 53.9 51.4 52.5 53.1 57.0 64.7 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: Main Export Partners 2006 2007 2008 2009 2010 2011 2012 2013 7,845 10,105 11,887 11,356 14,238 16,928 19,668 22,930 19.7 20.8 19.0 19.9 20.4 18.2 17.8 17.6 3,243 3,646 4,850 4,909 7,309 11,125 12,388 15,351 8.1 7.5 7.7 8.6 10.5 12.0 11.2 11.8 5,240 6,090 8,468 6,292 7,728 10,781 13,060 12,917 Japan, USDmn, % of total 13.2 12.5 13.5 11.0 11.1 11.6 11.8 9.9 Korea, Republic Of, USDmn 843 1,243 1,794 2,065 3,092 4,715 5,580 6,523 Korea, Republic Of, USDmn, % of total 2.1 2.6 2.9 3.6 4.4 5.1 5.0 5.0 1,445 1,855 2,073 1,885 2,373 3,367 4,095 5,683 3.6 3.8 3.3 3.3 3.4 3.6 3.7 4.4 TOTAL 39,826 48,561 62,685 57,196 69,820 92,881 110,795 130,551 TOTAL, top 5 countries, USDm 18,616 22,939 29,072 26,507 34,740 46,916 54,792 63,403 46.7 47.2 46.4 46.3 49.8 50.5 49.5 48.6 United States, USDmn United States, USDmn, % of total China, Mainland, USDmn China, Mainland, USDmn, % of total Japan, USDmn Germany, USDmn Germany, USDmn, % of total % from top 5 trade partners 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 Ltd Page 19 Vietnam Freight Transport Report Q3 2015 Road Freight Forecast BMI View: In terms of the domestic picture, we forecast private consumption in Vietnam, lower levels of inflation, easier monetary policy and lower oil prices will boost consumers' purchasing power, which will prove beneficial for the road freight sector in Vietnam. Therefore, y-o-y growth in terms of tonnage transported by road is set to remain elevated, coming in at a forecast 7.75% in 2015, up on 2014's 6.77%. On the other hand, however, the recent sell off in many emerging market currencies, combined with a regional slowdown in aggregate real GDP growth will partially offset some of the tailwinds. Vietnam will see private consumption remain broadly the same in 2015, which is why our road freight tonnage handled forecast for the year does not differ so much from 2014. The rise in this mode will predominantly occur due to lower fuel prices for truckers. The Vietnamese economy is currently resting on a growth-inflation sweet spot, with consumer price inflation (CPI) coming in at just 0.9% y-o-y in March (in part owing to the slump in global oil prices) versus the peak of 23.0% in August 2011. Price stability and positive economic growth prospects will lend support to the Vietnamese dong, while a richer domestic consumer continues to benefit the road freight sector, hence our healthy growth forecast over the short term. The confluence of these factors will restore and shore up investor confidence, enhancing Vietnam's attractiveness as a place to invest and do business in, which should have a knock on effect on infrastructure, which could mean enhanced facilities for truckers and, therefore, a boost for the road freight sector. In line with our positive outlook for the Vietnamese economy, real GDP growth came in at 6.0% year-onyear (y-o-y) in Q1 2015. While the latest reading represented a slowdown from the 7.0% headline figure in the previous quarter, the economy nevertheless remains on a very strong growth trajectory and with the Vietnamese road freight sector carrying the bulk of cargo, it is in a healthy position as a result. © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q3 2015 GDP Growth To Remain High GDP Per Capita (USD) (% change) (2013-2024) 6,000 12.5 4,000 10 2,000 7.5 2024f 2023f 2022f 2021f 2020f 2019f 2018f 2017f 2016f 2015f 2014 5 2013 0 Vietnam - GDP per capita, USD (LHS) Vietnam - GDP per capita, USD, % y-o-y (RHS) f = BMI forecast. Source: General Statistics Office, Asian Development Bank, BMI Medium Term Over our forecast period to 2019, we expect to see y-o-y average growth to come in at a healthy 7.79%, as the sector goes from strength to strength. This is predicated on a glowing consumer picture, as well as Vietnam's rising stature as an attractive place for investment. Looking ahead, we expect the economy to continue growing robustly, on the back of greater foreign direct investment (FDI) inflows and ongoing efforts by the government to improve the country's business conditions, which will all boost the road freight sector as demand grows and increased investment improves Vietnam's reputation as a place to do business in Asia. While total registered capital of newly licensed projects contracted 14.3% y-o-y to USD712.3mn in the first two months of 2015 despite the 85.8% y-o-y increase in January, we believe the weak February performance will likely be transient. Informing our still positive outlook for investment growth are the reported plans by several large foreign enterprises to develop big projects in the country in 2015, which are positive signs for the road freight sector as this mode will continue to be the largest transporter of goods in © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q3 2015 Vietnam for the foreseeable future. Notably, Samsung (one of the leading foreign investors in Vietnam) has plans to invest in energy, shipbuilding and other infrastructure developments in the country through its various subsidiaries, with total investment reported to be around USD20.0bn. It is also looking to expand its mobile phone production capacity over the coming quarters. In addition, another multinational company, Procter and Gamble, will expand its footprint in Vietnam through setting up a USD100.0mn factory at the Vietnam-Singapore Industrial Park in the Binh Duong province that will manufacture razors for its Gillette brand. Long Term Vietnamese President Trưưng Tưn Sang stated on March 20 that his country values the growing relationship with Thailand, which he believes will flourish in the coming years. Thailand is not currently one of Vietnam's top five trade partners, but stronger links could change this over the long term, benefitting the latter's road freight industry as a result. Speaking at a reception hosted for Thai Deputy Prime Minister and Foreign Minister Thanasak Patimapragorn in Vietnamese capital city Hanoi, Sang lauded the outcome of the meeting of the Joint Committee on bilateral cooperation. Sang also expressed his gratitude to Thailand for paying attention to the needs of the Vietnamese community in Thailand, saying that he hopes a bilateral labour deal will be signed soon. Sang noted that the economic ties between the two nations were developing strongly with many large Thai firms investing in the country, reported Intellasia/Vietnamnet. Over the longer term, the Vietnamese government's decision to introduce tighter regulation to clamp down on overloaded trucks, which will now result in firms having to procure additional vehicles to transport their cargo, should promote driver safety and make the road freight sector more attractive as a direct consequence. The decision by Vietnam's Ministry of Transport (MOT) to increase control and oversight of overloaded vehicles so as to ensure driver safety is a positive development for the commercial vehicle (CV) sector. Previously, many truck owners had registered their vehicles to carry far less weight than the actual load transported. Subsequently, these overloaded trucks contributed to traffic accidents and caused damage to roads. Since April however, the MOT has clamped down on these errant practices and initial signs show that the policy has been successful, with the number of traffic accidents declining since then. Furthermore, the MOT's stricter regulation has made the truck market more competitive. According to an official from the ministry, as many as 60% of container trucks owned by local firms will be ineligible to © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q3 2015 transport containers under the new policy. This has resulted in transport firms having to buy or arrange for alternative vehicles, which are suitable to carry their goods. Table: Road Freight (Vietnam 2012-2019) 2012 Road Freight Tonnes (000) 2013 2014 2015f 2016f 2017f 2018f 2019f 722,156.40 765,070.40 816,857.10 880,142.24 951,611.16 1,026,523.84 1,105,191.98 1,188,832.05 Road freight tonnes, % y-o-y 10.40 5.94 6.77 7.75 8.12 7.87 7.66 7.57 Road freight tonneskm (mn ton km) 43,902.40 46,790.70 48,146.60 49,928.02 51,925.15 53,924.26 56,027.31 58,128.33 Road freight tonneskm, % y-o-y 9.40 6.58 2.90 3.70 4.00 3.85 3.90 3.75 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Rail Freight Forecast BMI View: Vietnam's rail freight industry in 2015 is not set to enjoy the same level of year-on-year tonnage growth compared to 2014 as years of consecutive growth contractions were put behind the sector to post double-digit growth; 3.40% is the 2015 forecast against 2014's 10.01% gains. This impressive growth came predominantly as a result of large increases in Vietnamese crude oil exports (27% y-o-y to 867,207 metric tonnes (mt) or 205,052 barrels per day (b/d) in December 2014, according to data from Vietnam Customs) and growth in the manufacturing sector. From a production perspective, the strong showing in the first quarter was rather broad-based. In the industry category, which accounted for 30.3% of nominal GDP in Q115, the manufacturing sector grew by a robust 9.5% y-o-y, while construction growth came in at 4.4% y-o-y. We expect the manufacturing sector to remain a key driver of growth over the coming quarters. The still relatively low labour costs in the country despite the recent wage hike, the generous tax incentives the government has to offer, as well as the ready supply of a young and dynamic workforce will greatly entice foreign manufacturing firms to invest © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q3 2015 and set up their production plants in Vietnam, continuing to boost demand for rail freight services in the country. Vietnam exported 9.29mn mt of crude, up 10.5% y-o-y from January to December 2014. While the export volume for December was 23.5% higher than November, the export value was 4.7% lower at USD414mn compared with November 2013. Greater demand for crude has a positive knock-on effect on Vietnam's rail freight sector, which is why we anticipate positive growth to remain in this freight mode both in 2015 and over the medium term also. Tempering our forecast, however, is the news that state-owned PetroVietnam is likely to reduce production from four of its oil fields to cut costs, as expenses have exceeded prices.This scenario has resulted in BMI deciding that double-digit growth seen in 2014 is unlikely to take place again in 2015. Rail Freight Finally Back On Track Rail Freight Tonnage (2006-2019) 10,000 15 10 7,500 5 5,000 0 2,500 -5 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -10 2006 0 Vietnam - Rail freight tonnes ('000) Vietnam - Rail freight tonnes, % y-o-y National Statistics Agency © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q3 2015 Medium Term The expansion of Japan's K Line into Vietnam's logistics sector in 2014 could offer upside risks to the rail freight sector going forward. The move is part of the company's wider strategy to reduce its exposure to the container shipping sector by increasing its exposure to more profitable sectors, including logistics. Should other firms follow suit, the rail freight mode could benefit and the mode is already set to perform steadily over our forecast period, averaging y-o-y growth of 3.60% to 2019. Long Term Discoveries and foreign investments are encouraging signs for both Vietnam's gas production and consumption growth prospects and, by extension, provide welcome news for rail freight as it is the mode most concerned with heavy industry transportation. This is reflected in our optimistic growth forecast for Vietnamese gas production and consumption. Nonetheless, gas prices and regional security pose risk to further growth. Table: Rail Freight (Vietnam 2012-2019) 2012 Rail freight tonnes ('000) 2018f 2019f 7,003.50 6,525.90 7,178.90 7,422.98 7,697.63 7,974.75 8,273.80 8,575.79 Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) -3.87 2013 5,066.79 12.96 3.00 3.70 2017f 4,024.60 3,804.10 4,297.20 4,426.12 4,567.75 4,723.06 4,893.09 -5.48 3.40 2016f 3.65 -3.30 10.01 2015f 3.75 Rail freight tonnes-km, % y-o-y -6.82 2014 3.20 3.60 3.40 3.60 3.55 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Air Freight Forecast BMI View: We believe that the Vietnamese air freight sector will grow by 3.40% in 2015, while over our forecast period to 2019 we anticipate annual gains to remain at a similar level, at 3.60% per annum. Short Term Vietnam's pharmaceutical industry, meanwhile, is currently facing challenges to compete with Indian drug firms, according to state management agencies. With domestic firms preferring to import materials for drug © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q3 2015 production, rather than spending money on research, the air freight sector by extension is poised to benefit from what could be a lucrative revenue stream. A free trade agreement signed with the ASEAN, of which Vietnam is a member, has also led to this rise in imports of Indian medicines. There were 4,269 registered Indian drugs in 2014, accounting for 26% of the total registered items in Vietnam, which is welcome news for Vietnam's air freight operations. Calm Skies For Mid Term Growth Air Freight Tonnage (2006-2019) 300 40 200 20 100 0 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -20 2006 0 Vietnam - Air Freight Tonnes (000) (LHS) Vietnam - Air freight tonnes % y-o-y (RHS) e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Medium Term Significant private sector interest in Vietnam's airport sector bodes well for the government's efforts to raise funds for additional projects and also provides potentially significant upside risk to our air freight forecasts over the medium and longer term. Nonetheless, we maintain our moderate forecast as we expect issues such as permit approvals, environmental clearances and land acquisition to result in project delays, hindering growth. Consequently, we currently forecast y-o-y air freight tonnage throughput growth of an average 3.60% between 2015 and 2019. © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q3 2015 Private sector interest in Vietnam's airports indicates that the government's plan to privatise the sector is gaining traction. French airport operator Aeroports de Paris (ADP) has expressed interest in being a strategic stakeholder of Airports Corporation of Vietnam (ACV) through a 25-30% ownership, according to the Vietnam Investment Review. In addition, ADP is also looking to work with Credit Suisse, Vietnam's Transport Ministry and ACV to raise USD2-3bn for the construction of the Long Thanh International Airport in southern Vietnam. Elsewhere, Vietnam Airlines has recently announced that it wants to buy the domestic passenger terminal at Hanoi's Noi Bai International Airport from the ACV, pitting itself against VietJet Air, which also wants to purchase Terminal 1 at Noi Bai. T&T Group, a Hanoi-based conglomerate had also requested in March 2015 that the Transport Ministry approve its investment into the Phu Quoc Airport - currently fully owned by AVC. With the country expected to see significant growth in air passenger traffic over the coming years (expanding by 25% between 2015 and 2019 to 10.4mn based on our forecast), the government has ambitious plans to develop airport infrastructure, and the partial privatisation of ACV's assets will help to unlock funds to support airport construction. The knock on-effect of this will be better facilities for air freighters, as well as increased foreign interest in the sector as Vietnam begins to better compete regionally. Besides the Long Thanh airport project which ADP is interested in and is estimated to cost USD15.8bn, there are also plans to build an additional terminal at Cam Ranh International Airport. The Cam Ranh project is expected to cost VND1.0tn (USD47mn), with the new terminal expected to operate in 2018. Meanwhile, construction of new terminals at the Cat Bi International Airport and Phu Cat Airport also commenced in January 2015. Beyond funding, the entrance of private players in the operations of Vietnam's airports will help improve efficiency in the sector. AVC currently operates all civil airports in Vietnam, and we believe a lack of private sector participation has resulted in several airports operating below capacity and becoming significant fiscal drags. As such, private investment would also allow various projects to operate in more competitive, revenue driven environment which will see standards and capacity utilisation improve. Long Term Despite this positive momentum in the airport sector, we highlight that we maintain our moderate outlook for airport infrastructure construction, as we believe there remain significant business environment challenges to the numerous airport expansion plans, even with additional funding provided by asset privatisation. © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q3 2015 Existing hurdles to project execution such as permit approvals, environmental clearances and land acquisition could result in delays of airport projects. A case in point is the possible expansion of the Tan Son Nhat Airport, which is expected to reach passenger capacity by 2017. While the Long Thanh International Airport has been planned with the intention of alleviating traffic at Tan Son Nhat, it is expected to enter its first phase of operations only in 2023. This could be delayed further; according to the Ho Chi Minh City government, plans to expand Tan Son Nhat are 'impossible' due to issues with site clearances, which involves relocation of residences and a significant compensation for land acquisition. Table: Air Freight (Vietnam 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f Air Freight Tonnes (000) 178.70 183.70 202.00 208.87 217.01 224.61 232.81 241.07 Air freight tonnes % y-o-y -10.78 2.80 9.96 3.40 3.90 3.50 3.65 3.55 Air freight tonnes-km (mn ton km) 480.90 469.80 530.40 544.99 561.34 577.05 594.08 611.90 12.70 -2.31 12.90 2.75 3.00 2.80 2.95 3.00 Air freight tonnes-km % y-o-y e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q3 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. 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.' ■ 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. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q3 2015 SWOT Analysis - Continued ■ 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.' ■ BMI believes that the rapidly expanding air cargo sector in Vietnam will be assisted by private investment as foreign companies, such as Samsung, seek secure supply chains to transport their goods. 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 Ltd Page 30 Vietnam Freight Transport Report Q3 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 Vietnam Airlines' IPO Fails To Attract Foreign Companies Vietnam Airlines' initial public offering (IPO) has failed to attract foreigners after a sixyear wait, it was reported by Bloomberg in 2014. The carrier had been planning an IPO since about 2008; however, the IPO ended on November 13 without a single foreign company buying into the deal, highlighting the challenges faced by the government's privatisation programme. However, two local institutional investors have registered to buy up to 98.61% of the shares offered. In an auction at the Ho Chi Minh City Stock Exchange, Vietnam Airlines had expected to generate nearly USD51mn with the sale of 49mn shares at VND22,300 (USD1.05) each, valuing the carrier at around USD1.5bn. Vietnam Airlines expects to list within a year of finalising the equitisation process, which it hopes to complete by endMarch. According to Chairman Pham Viet Thanh, no decision has yet been made over which of the country's two stock exchanges will carry the carrier's shares. © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q3 2015 Political Outlook Domestic Politics BMI View: The Communist Party of Vietnam (CPV)'s 12th National Congress, which will convene in January 2016, will maintain current pro-growth economic policies, but eschew political liberalisation. One of the CPV's biggest challenges will be cracking down on corruption. Meanwhile, the emergence of a new generation of CPV officials could lead to rifts with the old guard over the pace of reform, leading to policy confusion. We expect Vietnam to face politically intense months ahead as preparations for the ruling Communist Party of Vietnam (CPV)'s 12th National Congress, which is slated to convene for a five-year term starting in January 2016, get underway. Factional jostling for power has already begun, with officials aiming for top leadership positions within the party canvassing political support. Potential For Differing Policy Orientations Among New Party Leaders A Key Risk A major concern for businesses going forward is the potential impact that a reshuffle of party leadership will have on the country's political trajectory and current economic policies. The current Politburo of the CPV, which is the highest decision-making body in the party, has 10 out of its 16 members at retirement age (65 years old and above). They include President Truong Tan Sang, Prime Minister Nguyen Tan Dung (third highest ranked official), as well as Party Secretary General Nyugen Phu Trong (eighth highest ranked party member). While these members can possibly continue for one more term (they will be in their 70s during the term), the prospects of bringing new blood into the next Politburo, which the Central Committee will establish in the aftermath of the 12th National Congress, look highly likely. We believe up-and-coming young government officials will have the chance to step up and assume greater responsibilities. Indeed, the party has in recent years focused their attention on nurturing young officials, with leadership renewal firmly in mind. Rising officials who have shown immense potential have been given the opportunity to assume managerial responsibilities within the party, as well as being sent abroad for postgraduate or doctorate studies. However, we believe younger officials will be much keener to accelerate political and economic reforms against the wishes of the relatively more conservative old guard. Such differing policy orientations would have the potential to slow decision-making and affect the quality of policies being formulated. This could lead to policy confusion in the minds of investors. © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q3 2015 Political Oppression To Persist Even with the replacement of party leaders in the upcoming National Congress, which could result in a blend of youth and experience, we believe this will not change the fact that the CPV will want to maintain its monopoly on power. As a result, the suppression of dissidents will continue, meaning that the poor human rights record in the country will see no major improvement any time soon. The Vietnamese government will continue to restrict freedom of expression and the provision of rights to its people. Those who have voiced their disapproval of the ruling party will be arrested and severely punished with long prison sentences. According to Human Rights Watch (HRW), the government arrested at least 29 dissidents and rights activists in 2014. Those who had been imprisoned were allegedly harassed, tortured and assaulted. While Vietnam has ratified the United Nations Convention against Torture (CAT), it remains to be seen whether the country can fully abide by all the articles in the Convention. Eradicating Corruption Remains A Challenging Task Corruption of public institutions will also be hard to eradicate in Vietnam despite ongoing efforts by the government, and we believe new leaders emerging in 2016 are also unlikely to reduce corruption significantly any time soon. Indeed, 'crony capitalism' and rent-seeking behaviour remain deeply entrenched in the way business is conducted in the country. The government established the Central Steering Committee on Corruption Prevention in 2013, which is headed by Secretary General Nguyen Phu Trong, to combat public corruption. While several corrupt officials have been punished with jail sentences, progress on this front has been slow and will remain so over the coming years. According to the Transparency International's Corruption Perception Index, Vietnam had not witnessed a significant ranking improvement over recent years. In fact, Vietnam was ranked 119th out of 175 countries in 2014, marking a slight decline from its 112th ranking in 2011. Political Liberalisation To Occur At A Very Gradual Pace That said, we still expect political liberalisation to take place gradually, as plans by the government to attract more foreign direct investment (FDI) inflows to sustain strong economic growth are likely to engender mounting calls for political reforms. There is also increasing pressure for change amid growing public dissent against a single-party governance system. China To Dominate Foreign Policy © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q3 2015 Meanwhile, the ongoing maritime dispute with China over claims to parts of the South China Sea will continue to dominate Vietnam's foreign policy agenda over the coming years. Considering that China remains a key economic partner for Vietnam, we believe Hanoi will not want to break off ties with Beijing, and will continue to engage the latter in a bid to resolve the maritime rift. At the same time, we expect the growing assertiveness of China in the region to push Hanoi to forge deeper ties with the US as well as neighbouring countries that have an alliance with the US. Of late, Vietnam has sought to strengthen ties with the Philippines, which is also engaged in its own maritime dispute with China in the South China Sea. In a bid to support the Philippines' arbitration case against China, Vietnam made a formal submission of its political stance on the South China Sea dispute to the international arbitration court at the United Nations on December 12, 2014. Ties with the US also look set to strengthen over the coming years, with the US partially lifting its arms embargo on Vietnam. Limited Macroeconomic Risks Amid Preparations For Party Leadership Renewal The race for top spots looks set to heat up over the coming months, with government officials likely to be preoccupied with their political jockeying. We nevertheless believe this will not pose a major risk to the current macroeconomic environment. Indeed, 2015 will mark the final year of the current 11th National Congress's existing five-year term (which began in January 2011), and we believe it will stay the course with its policies of fostering steady growth and low inflation before passing the baton over to a new batch of political leaders. We maintain our forecast for Vietnam's real GDP growth to come in at 6.4% in 2015, marking an acceleration from the robust 6.0% in 2014. However, we note that businesses might face potential operational risks stemming from possible delays in obtaining approvals and permits from government officials for starting their new businesses and major development projects. The Years Ahead: Expect Continuity In Economic Reform Efforts Looking ahead, we expect the 12th National Congress to maintain the economic reform agenda over the coming years. We believe continued improvement in the country's macroeconomic fundamentals will help to keep the CPV in power amid growing public discontent over political oppression, and as such, we see no reason for the upcoming Congress to divert from policies aimed at strengthening the economy. In particular, we expect the Vietnamese government to persist with reforming its state-owned enterprises (SOEs) over the coming years in order to improve operational efficiency and reduce their need to borrow (SOEs currently account for more than half of non-performing loans in the banking system). While the government has aimed to privatise 432 SOEs by end-2015, numerous hurdles exist that will impede its ability to achieve its © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q3 2015 target. The government continues to adopt a cautious stance in ceding control of SOEs to foreigners, by selling only minority stakes in these state companies. This will weigh on investors' appetite for these shares. © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q3 2015 Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang Head of Government Prime Minister Nguyen Tan Dung (serving second and final five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam (CPV) Key Figures The 16-person Communist Party Politburo, elected by the 175-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 Chariman - 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 Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV in parliament) 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 the South China Sea Key Relations/ Treaties ASEAN and WTO Member BMI Short-Term Political Risk Rating 76.9 BMI Structural Political Risk Rating 57.7 Source: BMI, National Sources 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 Ltd Page 36 Vietnam Freight Transport Report Q3 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. Inflation was brought down from a double-digit high of 23.0% in August 2011 to a more benign rate of 1.8% by December 2014. However, a failure by the Vietnamese government to contain inflation at a reasonable level and uphold the real value of the dong, while not currently our core view, could undermine consumer and investor 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. 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 was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q3 2015 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. The deployment of an oil rig off Vietnam's coast by a Chinese state enterprise in May 2014 has also stoked anti-China sentiments among the Vietnamese people, who have subsequently attacked Chinese factories in the country to express their discontent. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounted to more than 20% of GDP in 2013 according to data from the IMF. 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 index score 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. Meanwhile, Vietnam scores 70.0/100 each for the 'characteristics of society', 'scope of state' and 'policy continuity' subcomponents. 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 Ltd Page 38 Vietnam Freight Transport Report Q3 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 and 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 Ltd Page 39 Vietnam Freight Transport Report Q3 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 Ltd Page 40 Vietnam Freight Transport Report Q3 2015 Oil Price Outlook Global - Crude Oil, Refined Fuels And Natural Gas Prices, 10-year Forecasts Table: Energy Price Forecasts, 2013-2018 2013 2014 2015f 2016f 2017f 2018f 105.90 96.30 56.00 58.00 60.00 62.00 98.00 93.06 52.00 55.00 58.00 59.00 Brent, USD/bbl 108.70 99.50 59.00 61.00 63.00 65.00 Urals, USD/bbl 107.90 98.09 57.00 59.00 61.00 63.00 Dubai, USD/bbl 105.40 96.50 55.00 57.00 59.00 61.00 Unleaded gasoline, Rotterdam, USD/bbl 115.19 110.71 70.25 69.90 69.95 70.50 Unleaded gasoline, New York, USD/bbl 118.70 114.83 70.75 71.15 72.20 73.00 Unleaded gasoline, Singapore, USD/bbl 115.89 112.46 69.75 70.65 72.00 73.20 Unleaded gasoline, global average, USD/bbl 116.59 112.67 70.25 70.57 71.38 72.23 Gasoil/diesel, Rotterdam, USD/bbl 124.81 111.00 67.85 71.50 75.00 78.00 Gasoil/diesel, Singapore, USD/bbl 123.15 112.45 67.75 72.00 75.50 78.20 Gasoil/diesel, global average, USD/bbl 124.84 111.82 67.90 71.73 75.10 78.00 Naphtha, Rotterdam, USD/bbl 100.27 98.30 59.30 64.00 67.20 70.56 Naphtha, Singapore, USD/bbl 100.27 98.62 59.60 64.40 67.60 71.00 Naphtha, global average, USD/bbl 100.27 98.46 59.45 64.20 67.40 70.78 Jet/kerosene, Rotterdam, USD/bbl 127.30 116.21 71.24 76.50 79.50 83.45 Jet/kerosene, New York, USD/bbl 125.10 117.36 72.25 77.50 80.50 84.20 Jet/kerosene, Singapore, USD/bbl 122.65 112.38 67.20 73.50 77.00 81.20 Jet/kerosene, global average, USD/bbl 125.02 115.32 70.23 75.83 79.00 82.95 Bunker fuel 180, Rotterdam, USD/bbl 95.07 83.64 44.14 44.00 46.00 45.50 Bunker fuel 180, New York, USD/bbl 97.52 96.85 52.09 50.00 51.50 50.50 Bunker fuel 180, Singapore, USD/bbl 93.96 86.96 45.80 46.50 48.50 47.75 Bunker fuel 180, global average, USD/bbl 95.52 89.15 47.34 46.83 48.67 47.92 Bunker fuel 380, Rotterdam, USD/bbl 91.24 79.84 40.16 42.50 44.50 42.50 Bunker fuel 380, New York, USD/bbl 93.13 83.55 44.16 45.00 46.75 44.50 Bunker fuel 380, Singapore, USD/bbl 95.84 83.27 44.94 45.50 47.50 45.00 Bunker fuel 380, Singapore, USD/bbl 95.84 83.27 44.94 45.50 47.50 45.00 Bunker fuel 380, global average, USD/bbl 93.40 82.22 43.09 44.33 46.25 44.00 Bunker fuel, Rotterdam, USD/bbl 93.16 88.04 42.15 43.25 45.25 44.00 Bunker fuel, New York, USD/bbl 95.33 94.02 48.13 47.50 49.13 47.50 Bunker fuel, Singapore, USD/bbl 94.90 90.23 45.37 46.00 48.00 46.38 OPEC basket, USD/bbl WTI, USD/bbl © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q3 2015 Energy Price Forecasts, 2013-2018 - Continued Bunker fuel, global average, USD/bbl Henry Hub, USD/mn BTU 2013 2014 2015f 2016f 2017f 2018f 94.46 90.76 45.22 45.58 47.46 45.96 3.74 4.50 3.00 3.30 3.50 4.00 f=BMI forecast. Source: BMI/Bloomberg Table: Energy Price Forecasts, 2019-2024 ( Global 2019-2024) 2019f 2020f 2021f 2022f 2023f 2024f OPEC basket, USD/bbl 63.00 67.00 69.00 72.00 74.00 75.00 WTI, USD/bbl 60.00 62.00 65.00 68.00 72.00 73.00 Brent, USD/bbl 66.00 70.00 72.00 75.00 77.00 78.00 Urals, USD/bbl 64.00 68.00 70.00 73.00 75.00 76.00 Dubai, USD/bbl 62.00 66.00 68.00 71.00 73.00 74.00 Unleaded gasoline, Rotterdam, USD/bbl 71.00 71.00 71.00 71.00 71.00 71.00 Unleaded gasoline, New York, USD/bbl 73.70 73.70 73.70 73.70 73.70 73.70 Unleaded gasoline, Singapore, USD/bbl 74.50 74.50 74.50 74.50 74.50 74.50 Unleaded gasoline, global average, USD/bbl 73.07 73.07 73.07 73.07 73.07 73.07 Gasoil/diesel, Rotterdam, USD/bbl 79.00 80.00 81.00 81.00 81.00 81.00 Gasoil/diesel, Singapore, USD/bbl 79.30 80.20 81.00 81.00 81.00 81.00 Gasoil/diesel, global average, USD/bbl 79.10 80.07 81.00 81.00 81.00 81.00 Naphtha, Rotterdam, USD/bbl 71.60 72.50 73.40 73.40 73.40 73.40 Naphtha, Singapore, USD/bbl 71.80 72.60 73.30 73.30 73.30 73.30 Naphtha, global average, USD/bbl 71.70 72.55 73.35 73.35 73.35 73.35 Jet/kerosene, Rotterdam, USD/bbl 84.85 98.50 98.50 98.50 98.50 99.50 Jet/kerosene, New York, USD/bbl 85.60 98.50 98.50 98.50 98.50 99.50 Jet/kerosene, Singapore, USD/bbl 82.60 97.00 97.00 97.00 97.00 98.00 Jet/kerosene, global average, USD/bbl 84.35 98.00 98.00 98.00 98.00 99.00 Bunker fuel 180, Rotterdam, USD/bbl 45.35 45.35 45.35 45.35 45.35 45.35 Bunker fuel 180, New York, USD/bbl 50.35 50.35 50.35 50.35 50.35 50.35 Bunker fuel 180, Singapore, USD/bbl 47.60 47.60 47.60 47.60 47.60 47.60 Bunker fuel 180, global average, USD/bbl 47.77 47.77 47.77 47.77 47.77 47.77 Bunker fuel 380, Rotterdam, USD/bbl 43.00 43.00 43.00 43.00 43.00 43.00 Bunker fuel 380, New York, USD/bbl 45.00 45.00 45.00 45.00 45.00 45.00 Bunker fuel 380, Singapore, USD/bbl 45.50 45.50 45.50 45.50 45.50 45.50 © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q3 2015 Energy Price Forecasts, 2019-2024 ( Global 2019-2024) - Continued 2019f 2020f 2021f 2022f 2023f 2024f Bunker fuel 380, Singapore, USD/bbl 45.50 45.50 45.50 45.50 45.50 45.50 Bunker fuel 380, global average, USD/bbl 44.50 44.50 44.50 44.50 44.50 44.50 Bunker fuel, Rotterdam, USD/bbl 44.18 44.18 44.18 44.18 44.18 44.18 Bunker fuel, New York, USD/bbl 47.68 47.68 47.68 47.68 47.68 47.68 Bunker fuel, Singapore, USD/bbl 46.55 46.55 46.55 46.55 46.55 46.55 Bunker fuel, global average, USD/bbl 46.13 46.13 46.13 46.13 46.13 46.13 4.20 4.20 4.20 4.20 4.20 4.20 Henry Hub, USD/mn BTU f=BMI forecast. Source: BMI, Bloomberg © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q3 2015 Macroeconomic Forecasts Economic Analysis BMI View: We expect continued strong foreign direct investment (FDI), healthy export growth and ongoing efforts by the government to improve macroeconomic fundamentals to keep the Vietnamese economy growing strongly in 2015. Consequently, we forecast Vietnam's real GDP growth to accelerate to 6.4% in 2015, from 6.0% in 2014. In line with our bullish economic outlook for Vietnam, the country's real GDP growth accelerated to an impressive 7.0% in Q414 from the revised 6.1% in the previous quarter. This in turn brought real GDP expansion for the year to 6.0%, surpassing the Bloomberg consensus estimate of 5.7% and marking Vietnam as one of the brightest growth spots in Asia. We expect Vietnam's robust economic growth momentum in 2014 to be carried over into 2015, largely on the back of greater foreign direct investment (FDI) inflows, continued healthy export growth as well as continual efforts by the Vietnamese government to improve macroeconomic fundamentals. As such, we forecast the Vietnamese economy to continue growing at a strong pace of 6.4% in real terms in 2015. © Business Monitor International Ltd Page 44 Vietnam Freight Transport Report Q3 2015 Strong Economic Expansion On The Cards Vietnam - Real GDP Growth, % Source: BMI, GSO FDI And Exports To Continue Driving Growth From an expenditure approach, the strong showing in 2014 owes largely to high foreign investor interest towards the country and the robust performance in the export sector. Latest data published by the General Statistics Office showed that total foreign registered capital rose 9.6% to USD15.6bn in 2014, with the manufacturing sector receiving the bulk of it (71.6%). While there is the potential for volatility in emerging and frontier markets as the US looks to tighten its monetary policy over the coming quarters, we nevertheless expect a continuation of strong FDI inflows to Vietnam. This is corroborated by our view that Vietnam can continue to attract foreign investors, particularly manufacturing firms, as it offers them attractively low wages, strong demographics that will ensure a continual supply of workers as well as generous tax incentives. Meanwhile, exports grew by 13.6% to approximately USD150.0bn over the course of 2014. Given the country's export orientation to the US, which received about 19% of total Vietnamese outbound shipments in 2014, a recovering US economy will bode well for the export sector going forward. © Business Monitor International Ltd Page 45 Vietnam Freight Transport Report Q3 2015 Manufacturing And Services Sectors To Remain Strong From a production perspective, broad-based growth was witnessed in 2014. Notably, the manufacturing sector rose by 8.5%, while construction grew by 7.1%. The service industry also posted robust growth of 6.0%. Over the coming quarters, we expect the Vietnamese economy to continue riding on strong manufacturing performances. The Purchasing Managers' Index (PMI), a leading measure of manufacturing performance, points to higher production activity. Indeed, the index came in at 52.7 in December 2014, marking the 16th consecutive month of expansion. In addition, continued FDI inflows to the sector will also help to keep factories running at high capacity utilisation. In addition to the manufacturing sector, we are also optimistic about the prospects of Vietnam's real estate and construction sectors. The easing of foreign property ownership rules, which will take effect in July 2015, should act as a catalyst to attract more foreign demand for domestic properties (see 'Easing Of Foreign Property Ownership Rules A Positive Step Forward', December 2, 2014). Since the construction sector is strongly correlated with the property market, we expect the former to continue putting in a strong performance over the coming quarters as well. That said, we note that business environment weakness could weigh on foreign participation in realty investment in the near term. Improving Macroeconomic Fundamentals Bode Well For Growth Ongoing efforts by the Vietnamese government to strengthen macroeconomic fundamentals and to forge financial stability following several economic missteps should also bode well for the economy. The economy has witnessed a rapid decline in inflation, which is further aided by the slump in global oil prices in H214. Consumer price inflation came in at a modest 1.8% year-on-year (y-o-y) in December 2014, down from 2.6% y-o-y in the previous month and marking a long way down from its peak of 23.0% recorded in August 2011. We expect price pressures to remain subdued over the coming months, owing in part to lower commodity prices. As such, we forecast average inflation to come in at 2.1% in 2015, down from our initial estimate of 5.3%. The government has also sought to address the high level of bad debt in the banking system via the Vietnam Asset Management Company (VAMC). The VAMC, established in July 2013, will purchase sour assets from local banks and sell them thereafter in a bid to allow these institutions to undergo much needed restructuring. © Business Monitor International Ltd Page 46 Vietnam Freight Transport Report Q3 2015 Price Pressures To Remain Subdued Vietnam - Headline Inflation, % chg y-o-y Source: BMI, GSO Key Challenges While we see positive developments in the economy, there are nevertheless some downside risks to our 2015 real GDP growth forecast. Chiefly, we note that the ongoing maritime dispute with China over sovereign claims to the South China Sea could lead to an economic backlash by China. Likewise, the country's fiscal woes and banking frailties are also key risks to the economy. © Business Monitor International Ltd Page 47 Vietnam Freight Transport Report Q3 2015 Table: Economic Activity (Vietnam 2010-2019) 2010 Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD 2011 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 112.9 134.6 155.5 170.4 6.4 6.2 5.2 5.4 1,267 1,496 1,712 1,859 185.8 199.3 220.6 248.4 280.0 314.9 6.0 6.4 6.6 6.4 6.4 6.3 2,007 2,133 2,341 2,616 2,925 3,266 Population, mn 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 96.4 Industrial production, % y-o-y, ave 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 8.5 4.3 3.6 3.2 3.6 3.5 3.4 3.5 3.5 3.5 3.5 Unemployment, % of labour force, eop e/f = BMI estimate/forecast. Source: National Sources/BMI © Business Monitor International Ltd Page 48 Vietnam Freight Transport Report Q3 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 Ltd Page 49 Vietnam Freight Transport Report Q3 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 Ltd 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 50 Vietnam Freight Transport Report Q3 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 Ltd Page 51 Vietnam Freight Transport Report Q3 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 Ltd Page 52 Vietnam Freight Transport Report Q3 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 Ltd Page 53 Vietnam Freight Transport Report Q3 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 Ltd Page 54 Vietnam Freight Transport Report Q3 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). Freight Transport Tonnage Estimation BMI aims to generate best estimate figures for Freight Transport countries where raw data on freight tonnage is not published or accessible. The estimate for tonnage data integrates macroeconomic, country area, transport and infrastructure data into our model. A parent market is selected which represents the benchmark for the region, we then use weighted scale factors to adjust the raw data of the parent to calculate estimated proxy figures for a given market. The three indicators which we estimate tonnage data for is Road Freight, Rail Freight and Air Freight. One indicator used in the estimation of all three indicators is Real GDP. This is the value of output for a given country adjusted for inflation. This is used to represent the size of an economy and the level of © Business Monitor International Ltd Page 55 Vietnam Freight Transport Report Q3 2015 transport activity in a country. Therefore this is one of the main scale factors used when generating our estimations. The additional indicators used in freight tonnage estimations are given below: ■ Population: The number of people living in a country. The figures are sourced from the UN/World Bank. ■ Total Road Length: The total length of the road network in a given country. The data is sourced from the CIA World Factbook. ■ Country Area: The sum of all land and water areas within international boundaries. The data is sourced from the CIA World Factbook. ■ Number of Airport (with paved runways): The number of airports with concrete or asphalt landing surfaces. The data is sourced from the CIA World Factbook. ■ Length of Railways: The total length of the railways network in a given country. The data is sourced from the CIA World Factbook. ■ Number of Airline Takeoffs: The number of domestic registered carrier departures worldwide from a given country. The data is sourced from the World Bank. Road Freight: Road freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 25% weighting for Population and 50% for Total Length of Road. The population in a country represents the demand for goods and thus the size of the road freight market. The total length of the road network will determine how much freight can be carried by heavy trucks and goods vehicles. Rail Freight: Rail freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 25% weighting for Country Area and 50% for Length of Railways. The length of railways and size of a country will determine the demand and capacity to carry rail freight. A large country with active railway network will likely utilise this to move greater volumes of goods over long distances. © Business Monitor International Ltd Page 56 Vietnam Freight Transport Report Q3 2015 Air Freight: Air freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 50% weighting for Number of Airline Takeoffs and 25% for Number of Airports (with paved runways). The number of domestic airline takeoffs is used to represent how active the airline market is in the country. Also airports with paved runways are a factor in air freight as it means a country is able to accommodate larger planes which carry goods. 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 Ltd Page 57 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... place again in 2015 Rail Freight Finally Back On Track Rail Freight Tonnage (2006-2019) 10,000 15 10 7,500 5 5,000 0 2,500 -5 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -10 2006 0 Vietnam - Rail freight tonnes ('000) Vietnam - Rail freight tonnes, % y-o-y National Statistics Agency © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q3 2015 Medium Term... Monitor International Ltd Page 34 Vietnam Freight Transport Report Q3 2015 target The government continues to adopt a cautious stance in ceding control of SOEs to foreigners, by selling only minority stakes in these state companies This will weigh on investors' appetite for these shares © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q3 2015 Table: Vietnam Political Overview... ineligible to © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q3 2015 transport containers under the new policy This has resulted in transport firms having to buy or arrange for alternative vehicles, which are suitable to carry their goods Table: Road Freight (Vietnam 2012-2019) 2012 Road Freight Tonnes (000) 2013 2014 2015f 2016f 2017f 2018f 2019f 722,156.40 765,070.40 816,857.10... International Ltd Page 16 Vietnam Freight Transport Report Q3 2015 Trade Overview (Vietnam 2012-2019) - Continued Total trade growth, % y-o-y 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 11.03 11.19 9.72 7.51 10.80 13.20 13.20 13.32 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators (Vietnam 2012-2019) 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f... elsewhere in this report © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q3 2015 Road Freight Forecast BMI View: In terms of the domestic picture, we forecast private consumption in Vietnam, lower levels of inflation, easier monetary policy and lower oil prices will boost consumers' purchasing power, which will prove beneficial for the road freight sector in Vietnam Therefore,... Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q3 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... the Vietnamese road freight sector carrying the bulk of cargo, it is in a healthy position as a result © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q3 2015 GDP Growth To Remain High GDP Per Capita (USD) (% change) (2013-2024) 6,000 12.5 4,000 10 2,000 7.5 2024f 2023f 2022f 2021f 2020f 2019f 2018f 2017f 2016f 2015f 2014 5 2013 0 Vietnam - GDP per capita, USD (LHS) Vietnam. .. keep the Vietnamese export sector vibrant The exports of manufactured goods are set to grow by 6.98% in 2015 Well-known multinational companies like Samsung (one of the largest foreign © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q3 2015 investors in Vietnam) and Procter and Gamble are increasing their investment in the country, which will only benefit the freight industry,... registered items in Vietnam, which is welcome news for Vietnam' s air freight operations Calm Skies For Mid Term Growth Air Freight Tonnage (2006-2019) 300 40 200 20 100 0 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -20 2006 0 Vietnam - Air Freight Tonnes (000) (LHS) Vietnam - Air freight tonnes % y-o-y (RHS) e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI... and dynamic workforce will greatly entice foreign manufacturing firms to invest © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q3 2015 and set up their production plants in Vietnam, continuing to boost demand for rail freight services in the country Vietnam exported 9.29mn mt of crude, up 10.5% y-o-y from January to December 2014 While the export volume for December was