... International Page 23 Vietnam Freight Transport Report Q4 2014 Table: Rail Freight, 2011-2018 2011 Rail freight tonnes ('000) Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) Rail freight tonnes-km,... affect Vietnam' s freight transport sector © Business Monitor International Page 12 Vietnam Freight Transport Report Q4 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. Vietnam Freight Transport Report Q4 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% Of Total), 2013 Source: General Statistics Office Of Vietnam Vietnam's dense
Q4 2014 www.businessmonitor.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1750-5364 Published by:Business Monitor International Vietnam Freight Transport Report Q4 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: July 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 Business Monitor International All rights reserved. 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Vietnam Freight Transport Report Q4 2014 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................. 10 Freight Transport .................................................................................................................................... 10 Political ................................................................................................................................................. 13 Economic ............................................................................................................................................... 14 Business Environment .............................................................................................................................. 15 Industry Forecast .............................................................................................................. 16 Road Freight ......................................................................................................................................... 18 Table: Road Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Inland Waterways .................................................................................................................................. 20 Table: Inland Waterway Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Rail Freight .......................................................................................................................................... 22 Table: Vietnam Transport Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Table: Rail Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Air Freight ............................................................................................................................................ 24 Table: Air Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Maritime Freight ................................................................................................................................... 26 Table: Maritime Freight (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Trade ................................................................................................................................................... 28 Table: Trade Overview (Vietnam 2011-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table: Key Trade Indicators, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table: Top Import Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table: Top Export Destinations, 2004-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Market Overview ............................................................................................................... 32 Industry Trends And Developments ................................................................................ 39 Multimodal ........................................................................................................................................... Maritime .............................................................................................................................................. Road .................................................................................................................................................... Air ...................................................................................................................................................... 39 39 41 41 Company Profile ................................................................................................................ 42 Vietnam Airlines Cargo ............................................................................................................................ 42 Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 45 Vietnam National Shipping Lines (Vinalines) ................................................................................................ 47 Political Outlook ................................................................................................................ 51 Domestic Politics ..................................................................................................................................... 51 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 © Business Monitor International Page 4 Vietnam Freight Transport Report Q4 2014 Long-Term Political Outlook ..................................................................................................................... 56 Oil Price Outlook ............................................................................................................... 61 Bunker Fuel: No End To Downtrend ........................................................................................................... 61 Table: BMI Bunker Fuel Price Forecast, 2014-2018 (USD/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Slower Fall, But Fall Nonetheless ............................................................................................................. Longer Term Trends Continue To Press HSFO ............................................................................................ Risks To Outlook .................................................................................................................................... Jet Fuel: Relative Short-Term Stability With Long-Term Risks ......................................................................... 63 67 68 69 Table: BMI Jet Fuel Price Forecast, 2014-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Longer Term Dynamics: Consolidation Poses Risk ....................................................................................... 74 Risks To Outlook .................................................................................................................................... 75 Diesel/Gasoil: Short-Term Overhang To Dissipate ......................................................................................... 76 Table: BMI Diesel/Gasoil Price Forecast, 2014-2018 (USD/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Supply Keeps Market Down ..................................................................................................................... Higher Crude Prices, Tighter Market To Provide Support .............................................................................. Long-Term Outlook: Diesel To Find Demand Support ................................................................................... Risks To Outlook .................................................................................................................................... 76 78 79 82 Macroeconomic Forecasts ............................................................................................... 83 Table: Foreign Direct Investment By Country Of Origin (Top Five) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Demographic Forecast ..................................................................................................... 89 Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Methodology ...................................................................................................................... 93 Industry Forecast Methodology ................................................................................................................ 93 Sector-Specific Methodology .................................................................................................................... 94 Sources ................................................................................................................................................ 95 © Business Monitor International Page 5 Vietnam Freight Transport Report Q4 2014 BMI Industry View We have downgraded Vietnam's growth forecast from 5.9% to 5.7% in 2014 on the back of weaker-thanexpected H1 2014 growth numbers, combined with the risk of a an economic backlash from China (see 'Political Tensions Pose Downside Risks To Growth', June 10). . That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue to believe that the economy will be driven by growth supportive government policies, as well as a strong outlook for foreign investment and exports. This is welcome news to the country's freight industry. Real GDP growth came in at 5.3% year-on-year (y-o-y) in Q214, according to the General Statistics Office (GSO), bringing growth for the first half of the year to 5.2% y-o-y. This marks an acceleration when compared to the 4.9% registered in the first half of 2013, and chimes with our view that the economy will continue to accelerate into 2014 and 2015. Growth was predominantly driven by strength the services sector as well as the industry and construction sectors, which contributed 2.6 and 2.1 percentage points respectively to growth. Although we see strong growth ahead, we have revised down our growth forecast for 2014 from 5.9% to 5.7% on the back of a slightly weaker than expected first half of the year, combined with the potential for an economic backlash from the ongoing political dispute with China (see 'Political Tensions Pose Downside Risks To Growth', June 10). That said, we have kept our 2015 real GDP growth forecast unchanged at 6.4%. We are sticking to the majority of our forecasts from last quarter, with the sole exception of the Port of Ho Chi Minh City, which we have slightly upgraded. Therefore, growth across the Vietnamese freight mix is set to be fairly healthy this year with road freight set to be the outperformer in annual gains terms at 6.01%. Meanwhile, rail and air freight will see y-o-y increases of 3.12% and 3.00% respectively. Headline Industry Data ■ 2014 rail freight tonnage is set to increase by 3.12% to 6.73mn tonnes. ■ 2014 air freight tonnage is forecast to rise by 3.00% to 189,210 tonnes. ■ Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.17.57%, whereas tonnage handled at the Port of Da Nang is forecast to increase 7.00%. ■ 2014 road freight tonnage is forecast to grow by 6.01% to 811.04mn tonnes. ■ 2014 total trade is forecast to rise by 6.55%. © Business Monitor International Page 7 Vietnam Freight Transport Report Q4 2014 Key Industry Trends MASkargo Expands Presence In Hanoi - The cargo division of Malaysia Airlines (MASkargo) has introduced its new airbus A330-200 freight flight to Hanoi, Vietnam, according to a company statement issued on April 17 2014. The flight will head for Hanoi's Noi Bai International Airport on every Wednesday and Friday from the Kuala Lumpur International Airport. The move is line with the company's efforts to increase its presence in the Vietnamese market. Government Approves Hanoi Road Project - The Vietnamese government has approved plans to build the Ring Road No 5 route around Hanoi, it was announced in May 2014. The 330km-long project is expected to cost about USD4bn. The proposed project will pass through 36 districts and the provinces of Ha Nam, Hoa Binh, Hai Duong, Thai Binh, Thai Nguyen, Bac Giang and Vinh Phuc. The road is expected to be completed by 2020. Government To Implement 14 Infrastructure Projects In Ho Chi Minh City - The Vietnamese government will implement 14 infrastructure projects in Ho Chi Minh City, Vietnam, with the USD9.44bn-worth of infrastructure projects including the repair and improvement of the Luong Dinh Cua Street and the construction of the new Ha Noi Expressway-Eastern Ring Road link road. The projects will be implemented under the public-private partnership, build-transfer and build-operate-transfer models. Key Risks To Outlook Despite the rise in political risk, the Vietnamese economy continues to motor on, and we forecast growth of 5.9% for 2014, although any escalation in political risk would pose downside risks. Exports were up by 16.9% y-o-y in the first four months of the year, while imports rose by a slower 13.7% y-o-y over the same period, resulting in a trade surplus of USD683mn. Industrial production expanded by 6.0% y-o-y in April, and by 5.4% y-o-y in the January-April period, driven by growth in textiles (22.4%), televisions (32.9%), and automobiles (16.7%). Although we do not envisage a swift resolution to the current dispute between Vietnam and China, we do not believe that it will escalate into military conflict either. That said, we caution that continued political unrest domestically, and a deteriorating environment for Chinese immigrant workers, could result in a decline in foreign investment, which would weigh on the country's economic outlook. © Business Monitor International Page 8 Vietnam Freight Transport Report Q4 2014 We have been arguing that China's growing military presence in the region would continue to dominate Vietnam's foreign policy agenda (see 'China To Dominate Foreign Policy Agenda', February 2014), with the deployment in early May of the drilling rig HD-981 by China in Vietnam's waters a case in point. Although we do not believe that the ongoing political dispute will escalate into military action and will instead be resolved diplomatically, we highlight that it could result in a further deterioration of Vietnam's relations with China. Moreover, it also sends a clear signal that China will continue to consolidate its economic, political and military influence in the region. Given these dynamics, we have downgraded Vietnam's Short-Term Political Risk Ratings from 79.0 to 76.9, with declines in the public unrest and security sub-components. © Business Monitor International Page 9 Vietnam Freight Transport Report Q4 2014 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for thousands of kilometres on a north-south axis, creates a need for long-distance freight haulage. ■ A recovery of activity levels at the nation's ports in 2010 is expected to continue over the mid-term to 2018. ■ Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. Weaknesses ■ The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. ■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. ■ Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is a growing problem. ■ Unresolved business environment issues and lack of significant improvement in access to infrastructure financing means that we remain very conservative on the growth potential of Vietnam's freight sector. ■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to it being the Asian country's largest export partner. ■ Vietnamese shipping company Vinashinlines has announced that 90% of its vessels, including Diamond Way and Sea Eagle, have been sold. The firm added that a number © Business Monitor International Page 10 Vietnam Freight Transport Report Q4 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued of the carriers had been purchased for prices above their original valuation, Hellenic Shipping News reported in early October 2013. Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. ■ Chinese investment could bring about much-needed improvements in the rail sector. ■ Growing international interest in Vietnam as a growth market within the box shipping sector. ■ The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. ■ The president of Russian Railways (RZD) has explained his belief that an investment in the construction of a new rail line in southern Vietnam will come in at more than US $2bn. Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about it now, because there is no project', but as it stands, an agreement of intent was signed on March 11 2013 between RZD, Vietnamese Railways and the mineral deposit company An Vien, also from Vietnam. ■ It was announced in June 2013 that the Laos government is to build a new railway line between the country and its Asian neighbours, Vietnam and Thailand. The 220km line will run from Laos's Western border with Thailand to the Lao Bao border gate in Vietnam. Construction will commence in August 2013 with an expected completion date of the second half of 2017. ■ The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen terminal project will entail a total investment of US$1.2bn and is likely to become operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be able to accommodate vessels with a capacity ranging between 8,000TEUs and 9,000TEUs. © Business Monitor International Page 11 Vietnam Freight Transport Report Q4 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group. The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country. ■ Vietnam-based Rang Dong Group has filed a petition to secure approval for developing Phan Thiet airport, reported the Daily in August 2013, citing the company's chairman Nguyen Van Dong. ■ Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international port in Ba RiaVung Tau province, are set to be leased for 30 years, according to official sources. ■ The World Bank stated at the start of 2014 that improved infrastructure could improve the country's economy substantially. Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. ■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in the sensitive South China Sea, subject to competing sovereignty claims. ■ A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Page 12 Vietnam Freight Transport Report Q4 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ■ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Page 13 Vietnam Freight Transport Report Q4 2014 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2012. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20.7% in 2012. Weaknesses ■ Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. Opportunities ■ WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. ■ The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Threats ■ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. ■ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Page 14 Vietnam Freight Transport Report Q4 2014 Business Environment SWOT Analysis Strengths ■ Vietnam has a large, skilled and low-cost workforce, which has made the country attractive to foreign investors. ■ Vietnam's location - its proximity to China and South East Asia, and its good sea links - makes it a good base for foreign companies to export to the rest of Asia, and beyond. Weaknesses ■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. ■ Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123 out of 176 countries. Opportunities ■ Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. ■ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Threats ■ Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. ■ Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Page 15 Vietnam Freight Transport Report Q4 2014 Industry Forecast The Vietnamese government will continue to promote pro-growth policies, by running a fiscal deficit albeit a declining one - maintaining a dovish stance with regard to monetary and exchange rate policy, restructuring many state owned enterprises (SOEs), promoting foreign direct investment and exports as well as attracting developmental-type aid. For the first six months of the year, we estimate that the government posted a fiscal deficit of approximately 4.3% of GDP, with spending rising by 9.7% year-on-year (y-o-y). At the same time, the State Bank of Vietnam (SBV) has maintained a dovish bias since the beginning of the year, cutting its refinancing rate by 50 basis points in March to 6.5% in an effort to spur lending. Indeed, the SBV recently also devalued the Vietnamese dong by 1% in June, in what we believe is a pre-emptive move to boost exports in the event of a slowdown driven by the ongoing political spat with China. Given low inflationary pressures, we would not be surprised to see either another cut to the refinancing rate, or another adjustment to the currency before year-end in the event of a slowdown in growth, although it is not our core view. Combined, both accommodative monetary and fiscal policy will continue to support growth over the coming quarters. Meanwhile, we have downgraded Vietnam's growth forecast from 5.9% to 5.7% for 2014 on the back of weaker-than-expected first half of 2014 growth numbers, combined with the risk of a an economic backlash from China. That said, we have maintained our forecast for growth to come in at 6.4% in 2015, and we continue to believe that the economy will be driven by growth supportive government policies, as well as a strong outlook for foreign investment and exports. © Business Monitor International Page 16 Vietnam Freight Transport Report Q4 2014 GDP To Enjoy Healthy Medium Term Real GDP, % change y-o-y (2000-2018) 8 7 6 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 5 Vietnam - Real GDP growth, % y-o-y Souce: Asian Development Bank, General Statistics Office To keep pace with growth, Vietnam will need to invest in its logistics sector, but BMI expects a lot of this investment to come from outside logistic and freight transport companies which will be keen to enter and expand into this high growth market. We believe that rapid urbanisation, driven by a healthy pipeline of government-led infrastructure projects over the next five years, will continue to spur rural-urban migration and foreign direct investment (FDI) into developed cities such as Ho Chi Minh and Hanoi. We have also already witnessed this to some extent in Vietnam's port sector, with considerable investment being made by container shipping lines and global port operators in the development of modern box terminals at Vietnam's ports. This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can be achieved with greater links between the country and its main export partner the US. Direct container shipping links between Vietnam and the US have been in operation since 2009, which have cut both time and cost, as previously Vietnamese shipments had to be transhipped via Singapore. Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam's exports set to benefit from the slow but steady recovery in the US economy. © Business Monitor International Page 17 Vietnam Freight Transport Report Q4 2014 Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we project China's economic growth to slow over the medium term, the country's real GDP growth outlook remains robust. Vietnam plays a key role in China's coal supply chain. Vietnam is China's fifth-largest coal supplier providing the country with the thermal coal it requires for its power stations. Vietnam's role in this supply chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors' reliance on coal. While we believe that the percentage supplied by coal fired power plants within China's overall energy mix will slip over the medium term, it will nevertheless remain above 70%. However, we note that China's fake data is expected to distort more export numbers until at least June, making it difficult for the analysts to assess the strength of the country's trade. Despite the crackdown in May 2013 on the practice of inflated invoices, which were used to disguise capital inflows, over-invoicing is still prevalent. This implies that the export data then was artificially boosted, making the recent data look weak by comparison. According to Royal Bank of Scotland, the government data that revealed the March exports had unexpectedly declined 6.6% y-o-y marked the height of distortions (Bloomberg). China is hesitant to revise figures that it acknowledged were inflated, but this leaves the analysts to do a lot of explanation on why the trade numbers are better than they appear. BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class, as the country starts to import more from abroad. Road Freight Road Dominates And Offers Best Links Into China Despite its low standing in road infrastructure, with the Global Economic Forum's Competitiveness Report 2013/14 ranking Vietnam's roads a very poor 102 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics needs are primarily met by road. In 2014 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country. © Business Monitor International Page 18 Vietnam Freight Transport Report Q4 2014 Road Reliant Freight Mode Breakdown (% Of Total), 2013 Source: BMI In 2014, we anticipate road freight volumes continuing to impress with y-o-y tonnage throughput growth of just over 6%. However, this will not quite hit the heady heights of the double digit growth enjoyed back in 2012 and the preceding five years. Over the medium term, we forecast road freight volume growth will average 7.59% per annum, reaching a projected 1.10bn tonnes by the end of 2018. There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road freight expertise, expand in Vietnam. Both FedEx and DHL have expanded their role in Vietnam in recent times. While some companies are breaking into Vietnam by developing their own operations in the country, others are getting a head start by acquiring and joining up with domestic freight operators. This is the route CEVA Logistics has taken entering into a joint venture with its long-term business partner Indo Trans Logistics Group. Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also plays a key role in linking Vietnam with its second-largest export partner China. © Business Monitor International Page 19 Vietnam Freight Transport Report Q4 2014 Vietnam's northern border links the country's with the south of China. Road links continue to be developed between the two and with them trucking services. Kerry Asia Road Transport (Kart), for example, offers a twice-weekly trucking link connecting Shenzhen and Hanoi. Table: Road Freight, 2011-2018 2011 2012 2013 2014f 2015f 2016f 2017f 2018f Road Freight 654,127.10 722,156.40 765,070.40 811,036.61 878,167.51 949,432.46 1,024,120.02 1,102,546.65 Tonnes (000) Road freight tonnes, % yo-y 11.43 10.40 5.94 6.01 8.28 8.12 7.87 7.66 Road freight tonnes-km (mn ton km) 40,130.10 43,902.40 46,790.70 50,070.85 54,324.79 58,840.69 63,573.48 68,543.21 Road freight tonnes-km, % y-o-y 10.92 9.40 6.58 7.01 8.50 8.31 8.04 7.82 e/f = BMI estimate/forecast. Source: National Statistics Agency Inland Waterways Mekong Offers Trade Links With Neighbours Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the second-largest freight transport mode in the country. In 2014, we are sticking to last quarter's forecast that the inland waterways sector will increase by 6.64% to reach 192.821mn tonnes, which will be slightly down on 2013's estimated 7.31% annual growth figure. Over our forecast period, we anticipate average annual growth of 6.34%. © Business Monitor International Page 20 Vietnam Freight Transport Report Q4 2014 Mekong Offers Trade Connections Map Of The Mekong River Source: BMI Vietnam's inland waterways stretch for 47,130km and the country's dense network of waterways ranks its seventh in the world in terms of length. The country's inland waterways include the Mekong River, which enables freight connections with Vietnam's neighbours. Although we highlight that the River's full potential has not been reached and so development in the River is an area for potential investment. © Business Monitor International Page 21 Vietnam Freight Transport Report Q4 2014 Table: Inland Waterway Freight, 2011-2018 2011 Inland Waterway Freight Tonnes (000) 2012 2013 2014f 2015f 2016f 2017f 2018f 160,164.50 168,493.00 180,812.70 192,821.44 205,047.81 218,027.10 231,629.74 245,913.37 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.64 6.34 6.33 6.24 6.17 Inland Waterway freight tonneskm (mn ton km) 34,371.70 37,018.30 39,344.40 42,347.78 45,596.91 49,046.13 52,661.00 56,456.84 Inland Waterway freight tonneskm % y-o-y 8.50 7.70 6.28 7.63 7.67 7.56 7.37 7.21 e/f = BMI estimate/forecast. Source: National Statistics Agency Rail Freight Network Lacking And No Impetus To Develop It Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in the country's freight transport sector remains small. In 2013, we estimate that Vietnam's rail freight volumes accounted for a negligible percentage of the total with the country's rail network transporting just 6.73mn tonnes of freight. In 2014, the rail freight sector is poised to register steady, if uninspiring, annual growth of 3.12%, which will at least provide a welcome return to positive growth following last year's contraction of 6.82%. Indeed, positive growth has been lacking from this sector over recent years but is set to return at least over our forecast period, with an average annual growth of 4.62% pencilled in between 2014 and 2018. There are two key factors that we believe have held back Vietnam's rail freight development and will continue to do so. © Business Monitor International Page 22 Vietnam Freight Transport Report Q4 2014 Table: Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) The first is the quality of Vietnam's railway infrastructure. The World Economic Forum's Global Competitiveness Report 2013/14 gives Vietnam's rail infrastructure a low ranking, placing it 58th globally out of 123 countries measured. A major problem for Vietnam's rail freight development is the relative shortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares with the country's 206,633km network of roads and 47,130km network of inland waterways. The second drawback for freight rail development in Vietnam is its gauge incompatibility with China. Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total. While the country has some standard gauge track, this system only accounts for 20% of the total. This means that rail freight trade between Vietnam and China is slowed by gauge changes, making road freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between the two nations. BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos). © Business Monitor International Page 23 Vietnam Freight Transport Report Q4 2014 Table: Rail Freight, 2011-2018 2011 Rail freight tonnes ('000) Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) Rail freight tonnes-km, % y-o-y 2017f 2018f 7,285.10 7,003.50 6,525.90 6,729.53 6,958.33 7,306.25 7,715.40 8,178.32 -7.33 2012 4,576.92 2.60 3.40 2016f 4,162.00 4,024.60 3,804.10 3,903.01 4,020.10 4,160.80 4,343.88 -5.48 3.12 2015f 6.00 -3.30 -6.82 2014f 5.60 5.08 -3.87 2013 3.00 5.00 3.50 4.40 5.37 e/f = BMI estimate/forecast. Source: National Statistics Agency Air Freight On Growth Trajectory As Vietnam Gets Better Connected Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector; although this is not expected to change, there is a lot of growth potential in this sector. The government has ambitious plans to modernise and expand the country's airport infrastructure over the long term. Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the USD1.2bn Van Don International airport in the northern province of Quang Ninh and the USD10bn Long Thanh International airport in the southern province of Dong Nai. For 2014, we are once again sticking to previous forecasts. We therefore anticipate that the Vietnamese air freight sector will grow by 3.00%, up from 2013's 2.80%, to reach 189,210 tonnes. Over the forecast period, we predict Vietnam's air freight levels to grow on average per annum by 3.96% to reach 223,040 tonnes. © Business Monitor International Page 24 Vietnam Freight Transport Report Q4 2014 Taking Off Vietnam Air Freight Tonnage, 000 tonnes 250 200 150 100 50 2018f 2017f 2016f 2015f 2014f 2013 2012 2011 2010 0 Vietnam - Air Freight Tonnes (000) e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam BMI expects the increase of air freight connections for Vietnam will come through the development of intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi. While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply chain, a key source of demand for air freight transport options. One example has been the impact the local production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand. Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's trade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term. The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with © Business Monitor International Page 25 Vietnam Freight Transport Report Q4 2014 the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations. Table: Air Freight (Vietnam 2011-2018) Air Freight Tonnes (000) Air freight tonnes % y-o-y Air freight tonnes-km (mn ton km) Air freight tonnes-km % y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 200.30 178.70 183.70 189.21 195.64 203.27 212.42 223.04 5.37 -10.78 2.80 3.00 3.40 3.90 4.50 5.00 426.70 480.90 469.80 477.79 489.73 504.42 522.08 542.96 -0.02 12.70 -2.31 1.70 2.50 3.00 3.50 4.00 e/f = BMI estimate/forecast. Source: National Statistics Agency Maritime Freight Vietnam Catching The Eye Of Shippers Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping announced a new intra-Asia service at the end of 2013, which should provide upside risk for the sector going forward. The new intra-Asia service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations and we have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for the port. Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector. As highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is an oil-producing nation, but its consumption needs have come to outweigh its supply and so the country is making use of the liquid bulk shipping sector to import oil. © Business Monitor International Page 26 Vietnam Freight Transport Report Q4 2014 Getting Better Connected UNCTADstat Liner Connectivity Index For Asia, 2004 & 2013 Source: UNCTADstat The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours. For more information on data and analysis of Vietnam's shipping sector, please see BMI's Vietnam Shipping Report. Table: Maritime Freight (Vietnam 2011-2018) 2011 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 Port of Ho Chi Minh City (Saigon New) throughput, tonnes, % y-o-y Port of Da Nang throughput, tonnes '000 Port of Da Nang throughput, tonnes, % y-o-y 2012 2013e 2014f 2015f 2016f 2017f 2018f 33450.7 36029.4 38866.7 41222.6 43986.4 47175.8 50747.6 54212.2 7.4 7.7 7.9 6.1 6.7 7.3 7.6 6.8 3868.0 4423.0 5010.2 5360.9 5709.4 6043.2 6406.8 6794.9 17.1 14.3 13.3 7.0 6.5 5.8 6.0 6.1 e/f = BMI estimate/forecast. Source: Port authorities © Business Monitor International Page 27 Vietnam Freight Transport Report Q4 2014 Trade Table: Trade Overview (Vietnam 2011-2018) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Imports, real growth, % y-o-y 4.10 9.09 7.90 7.50 7.50 7.30 7.20 7.00 Exports, real growth, % y-o-y 10.78 15.71 6.00 5.60 5.80 6.20 6.60 6.80 7.44 12.40 6.95 6.55 6.65 6.75 6.90 6.90 112.42 119.05 133.59 155.21 177.64 201.28 228.77 259.38 24.27 5.89 12.22 16.18 14.45 13.31 13.66 13.38 106.86 124.50 137.25 156.64 176.44 197.87 223.64 253.08 31.60 16.51 10.24 14.13 12.64 12.14 13.03 13.16 219.28 243.54 270.84 311.85 354.08 399.15 452.42 512.46 27.74 11.07 11.21 15.14 13.54 12.73 13.35 13.27 Total Trade, real growth, % y-o-y Imports, USDbn Import growth, % y-o-y Exports, USDbn Export growth, % y-o-y Total trade, USDbn Total trade growth, % y-o-y e/f = BMI estimate/forecast. Source: National Sources/BMI Table: Key Trade Indicators, 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Agricultural raw materials, exports, USDmn 3,395.43 3,611.25 4,085.08 4,789.16 5,519.76 6,396.68 7,221.63 8,317.16 Agricultural raw materials, exports, % y-oy -1.20 6.36 13.12 17.24 15.26 15.89 12.90 15.17 Agricultural raw materials, imports, USDmn 3,734.17 4,362.60 4,816.97 5,507.79 6,213.29 6,987.63 7,898.65 8,966.41 Agricultural raw materials, imports, % y-oy 40.04 16.83 10.42 14.34 12.81 12.46 13.04 13.52 Ores and metals, exports, USDmn 794.56 936.28 1,038.74 1,194.53 1,353.63 1,524.71 1,732.51 1,966.64 Ores and metals, exports, % y-o-y 33.69 17.84 10.94 15.00 13.32 12.64 13.63 13.51 Ores and metals, imports, USDmn 4,380.12 4,660.11 5,274.85 6,188.31 7,136.18 8,086.25 9,280.20 10,530.86 © Business Monitor International Page 28 Vietnam Freight Transport Report Q4 2014 Key Trade Indicators, 2011-2018 - Continued Ores and metals, imports, % y-o-y Iron and steel, exports, USDmn Iron and steel, exports, % y-oy Iron and steel, imports, USDmn Iron and steel, imports, % y-oy Manufactured goods, exports, USDmn Manufactured goods, exports, % y-o-y Manufactured goods, imports, USDmn Manufactured goods, imports, % y-o-y Fuels, exports, USDmn Fuels, exports, % y-o-y Fuels, imports, USDmn Fuels, imports, % y-o-y 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 32.72 6.39 13.19 17.32 15.32 13.31 14.77 13.48 2,001.30 2,393.82 2,677.63 3,109.12 3,549.79 4,073.86 4,616.02 5,303.97 23.31 19.61 11.86 16.11 14.17 14.76 13.31 14.90 75,042.01 79,480.00 89,223.98 103,702.81 118,726.96 134,376.88 152,914.66 173,241.74 12.26 16.23 14.49 13.18 13.80 13.29 54,334.08 63,709.07 70,487.53 80,793.28 91,318.20 102,572.47 116,360.96 131,848.32 10.64 14.62 13.03 12.32 13.44 13.31 74,013.10 78,376.54 87,956.83 102,192.43 116,964.18 132,426.78 150,603.63 170,668.23 12.22 16.18 14.45 13.22 13.73 13.32 17,080.91 19,787.49 21,744.44 24,719.73 27,758.29 31,127.17 35,028.32 39,718.32 9.89 13.68 12.29 12.14 12.53 13.39 14,091.50 14,948.60 16,830.41 19,626.65 22,528.20 25,593.14 29,145.41 33,144.21 16.61 14.78 13.60 13.88 13.72 23.94 33.15 5.91 17.25 24.28 54.08 5.90 15.85 45.88 6.08 12.59 Source: BMI calculation, UNCTAD Table: Top Import Destinations, 2004-2012 China, Mainland, USDmn China, Mainland, USDmn, % of total Korea, Republic Of, USDmn © Business Monitor International 2004 2005 2006 2007 2008 2009 2010 2011 2012 4,595 5,900 7,391 12,710 15,974 16,441 20,019 24,594 37,647 14.4 16.0 16.5 20.3 19.8 23.5 24.0 23.5 27.2 3,359 3,594 3,908 5,340 7,255 6,976 9,761 13,176 17,541 Page 29 Vietnam Freight Transport Report Q4 2014 Top Import Destinations, 2004-2012 - Continued Korea, Republic Of, USDmn, % of total Japan, USDmn Japan, USDmn, % of total Singapore, USDmn Singapore, USDmn, % of total Thailand, USDmn Thailand, USDmn, % of total 2004 2005 2006 2007 2008 2009 2010 2011 2012 10.5 9.8 8.7 8.5 9.0 10.0 11.7 12.6 12.7 3,553 4,074 4,702 6,189 8,240 7,468 9,016 10,400 11,803 11.1 11.1 10.5 9.9 10.2 10.7 10.8 10.0 8.5 3,618 4,482 6,274 7,614 9,378 4,248 4,101 6,391 11,421 11.3 12.2 14.0 12.1 11.6 6.1 4.9 6.1 8.3 1,859 2,374 3,034 3,744 4,906 4,514 5,602 6,384 7,310 5.8 6.5 6.8 6.0 6.1 6.5 6.7 6.1 5.3 TOTAL 31,969 36,761 44,891 62,765 80,714 69,949 83,365 104,510 138,166 TOTAL, top 5 countries, USDmn 16,984 20,424 25,310 35,597 45,753 39,648 48,500 % from top 5 trade partners 53.1 55.6 56.4 56.7 56.7 56.7 58.2 60,944 85,721 58.3 62.0 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report Table: Top Export Destinations, 2004-2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 5,025 5,924 7,845 10,105 11,887 11,356 14,238 16,928 19,427 19.0 18.3 19.7 20.8 19.0 19.9 20.4 18.2 17.0 2,899 3,228 3,243 3,646 4,850 4,909 7,309 11,125 14,755 10.9 9.9 8.1 7.5 7.7 8.6 10.5 12.0 12.9 3,542 4,340 5,240 6,090 8,468 6,292 7,728 10,781 13,722 Japan, USDmn, % of total 13.4 13.4 13.2 12.5 13.5 11.0 11.1 11.6 12.0 Korea, Republic Of, USDmn 608 664 843 1,243 1,794 2,065 3,092 4,715 5,199 Korea, Republic Of, USDmn, % of total 2.3 2.0 2.1 2.6 2.9 3.6 4.4 5.1 4.6 1,065 1,086 1,445 1,855 2,073 1,885 2,373 3,367 5,070 4.0 3.3 3.6 3.8 3.3 3.3 3.4 3.6 4.4 TOTAL 26,485 32,447 39,826 48,561 62,685 57,196 69,820 92,881 113,944 TOTAL, top 5 countries, USDmn 13,139 15,242 18,616 22,939 29,072 26,507 34,740 46,916 58,173 United States, USDmn United States, USDmn, % of total China, Mainland, USDmn China, Mainland, USDmn, % of total Japan, USDmn Germany, USDmn Germany, USDmn, % of total © Business Monitor International Page 30 Vietnam Freight Transport Report Q4 2014 Top Export Destinations, 2004-2012 - Continued % from top 5 trade partners 2004 2005 2006 2007 2008 2009 2010 2011 2012 49.6 47.0 46.7 47.2 46.4 46.3 49.8 50.5 51.1 Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Page 31 Vietnam Freight Transport Report Q4 2014 Market Overview The Vietnamese government will continue to promote pro-growth policies, by running a fiscal deficit albeit a declining one - maintaining a dovish stance with regard to monetary and exchange rate policy, restructuring many state owned enterprises (SOEs), promoting foreign direct investment and exports as well as attracting developmental-type aid. For the first six months of the year, we estimate that the government posted a fiscal deficit of approximately 4.3% of GDP, with spending rising by 9.7% year-on-year (y-o-y). At the same time, the State Bank of Vietnam (SBV) has maintained a dovish bias since the beginning of the year, cutting its refinancing rate by 50 basis points in March to 6.5% in an effort to spur lending. Indeed, the SBV recently also devalued the Vietnamese dong by 1% in June, in what we believe is a pre-emptive move to boost exports in the event of a slowdown driven by the ongoing political spat with China. Given low inflationary pressures, we would not be surprised to see either another cut to the refinancing rate, or another adjustment to the currency before year-end in the event of a slowdown in growth, although it is not our core view. Combined, both accommodative monetary and fiscal policy will continue to support growth over the coming quarters. Vietnam's export sector continues to be a driver of growth for the country, and we forecast this trend to remain in play over the coming months. Exports for the first six months of the year expanded by a robust 14.9% y-o-y, and saw the accumulated trade surplus rise to USD1.3bn in H114. Exports were primarily driven by strong growth in textiles, telephones and footwear of 18.2%, 17.1% and 21.9%, respectively, which together account for approximately 35% of the total. Moreover, we expect exports to continue driving growth going forward given that the Vietnamese government has been making a concerted push to build diplomatic and trade ties with many countries and is negotiating several free trade agreements. One of the most important ones is the Trans-Pacific Partnership (TPP), which could be signed by as early as 2015. Risks To Outlook: China, From Friend To Foe Although we have already downgraded our growth forecast slightly for this year, we continue to monitor risks from trade policy with China. Although we do not believe that the political tensions between Hanoi and Beijing will result in military conflict, there are non-negligible risks of an economic backlash. Indeed, the Chinese government has temporarily stopped Chinese state-owned companies from bidding for new contracts in Vietnam, which could see investment flows decline substantially over the coming quarters, posing downside risks to Vietnam's growth outlook. China accounted for 21.3% of foreign investment in © Business Monitor International Page 32 Vietnam Freight Transport Report Q4 2014 Vietnam in 2013, approximately 14.5% of Vietnam's exports, and about 27% of all visitors this year. As such, a sustained economic backlash could have a more severe impact on Vietnam's growth outlook. External Sector To Provide Tailwind We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity in the coming quarters. From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, which helped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend to remain in place. Indeed, the Vietnamese government has been making substantial efforts to promote trade and investment ties with other countries, and we believe it will help underpin exports over the coming months. A case in point was the fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to invest and develop the country's infrastructure and manufacturing sectors. While foreign direct investment fell by 30% y-o-y in the first quarter of 2014, it was not all bearish in our view. First, the number of projects increased by 32% y-o-y and second, the origin of the investments was much more diversified, which could suggests that it is more sustainable (see table). Third, we believe that foreign investment will continue to pick up as the business environment becomes increasingly attractive, particularly as more State Owned Enterprises (SOEs) are restructured and the limits on foreign ownership are raised. Moreover, Vietnam still boasts competitive wages compared to other manufacturing hubs such as China, Indonesia and Malaysia, which bodes well for cost competitiveness. Signs of Strong Momentum Abound We witnessed some highly positive data in the third quarter of 2013 that indicate strong momentum for growth into 2014. We highlight the rebound in manufacturing production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading in September, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI Testing Resistance', October 3 2013). More importantly, foreign direct investment (FDI) inflows into the country have accelerated significantly in recent months and are expected to surpass the government's full-year target of USD13bn - usually an indication of improving business sentiment, and a precursor for an acceleration in private sector investment. We believe that the positive ripple effects from the factors above will serve as strong tailwinds for 2014 growth. © Business Monitor International Page 33 Vietnam Freight Transport Report Q4 2014 Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight picture over the medium term. In terms of the former, China's real GDP grew by 7.7% in Q413, slightly above consensus expectations of 7.6%. For the year as a whole the economy also grew by 7.7%, which matches the performance seen in 2012. While a detailed breakdown of GDP by expenditure is unavailable as of yet, we do not expect its release to reveal a great deal of economic rebalancing taking place within the Chinese economy. The traditional drivers of real estate and infrastructure construction continue to dominate the economy. In terms of the US, we believe the appropriations bill recently passed by the US House of Representatives and Senate, and which President Barack Obama is expected to sign, may mark an easing in long-running partisan warfare over fiscal policy. Furthermore, we believe the deal will have positive ramifications for the economy in 2014, while still allowing for fiscal consolidation over the medium term. Finally, the bipartisan spending package sets the stage for a crisis-free resolution to the debt ceiling debate, which will come up in the weeks ahead. The appropriations package provides USD1.1trn for fiscal year 2014 (FY14), which runs through September 30, in line with a budget deal worked out between Democrats and Republicans in late 2013 that we noted as a meaningful first step toward de-escalating tensions over fiscal issues (see 'Deal Avoids Another Shutdown, But Future Progress Uncertain', December 11 2013). That legislation allowed higher spending caps in FY14 than those initially envisioned by the budget sequester that went into effect in early 2013, reducing the drag the fiscal drag on the economy, one reason we see real GDP growth accelerating to 2.8% this year from our estimate of 1.8% in 2013. We believe that greater clarity about the trajectory of fiscal policy this year will allow the US Federal Reserve to continue reducing extraordinary monetary stimulus to the economy, eliminating its quantitative easing programme by end-2014. Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger populations are generally more supportive of private consumption. The country has a population of 90.7mn, according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be 94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally. © Business Monitor International Page 34 Vietnam Freight Transport Report Q4 2014 Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 102nd out of 142 countries surveyed in its Global Competitiveness Report 2013-2014, which has improved from 123rd in 2011-12. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract investment in the country's aviation sector. The ministry believes that it is a difficult task to attract investment in the sector as it requires huge investment capital and high techniques and a longer time frame to take back the investment capital. The country recorded an increase in capacity of its domestic airports from 6mn passengers in 2000 to 52mn in 2012. Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule, according to the Civil Aviation Authorities of Vietnam. Vietnam is currently operating a state-owned airline Vietnam Airlines, as well as private airlines, namely Vietjet Air, Air Mekong and a foreign invested airline Jetstar Pacific. Additionally, the government has also granted approval to the development of 25 airports. Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. © Business Monitor International Page 35 Vietnam Freight Transport Report Q4 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% Of Total), 2013 Source: General Statistics Office Of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks © Business Monitor International Page 36 Vietnam Freight Transport Report Q4 2014 98th out of 145 countries on the World Economic Forum's Global Competitiveness Report 2013-14 on the Quality of Port Infrastructure - an improvement on recent years. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing trend for shipping lines to order larger container vessels. The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its USD4.5bn debt threatened to bring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is necessary if Vietnam is to compete with regional peers. Investment And Development Outlook The Vietnamese transport sector requires vast levels of investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in the transport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in transportation infrastructure, and we believe the Vietnamese government will continue to develop this sector over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016. According to our key infrastructure projects database, there are USD171bn worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a USD3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to sign a memorandum of understanding (MoU) for the construction of the USD3.6bn railway project in Vietnam. The project which will be implemented via a built, operate and transfer format, will connect Hoi Chi Minh City to Can Tho City. Upon signing the MoU, a JV will be formed by both the parties for executing the project as well as for conducting a feasibility study, which will be presented to the country's government. © Business Monitor International Page 37 Vietnam Freight Transport Report Q4 2014 Meanwhile, in Q2 2014 it was announced that Vietnam's Ministry of Transport is planning to construct an elevated monorail system to ease its traffic congestion and connect the existing railway routes in the country's capital Hanoi. The monorail system will be developed on a design, construct, operate and transfer basis. The project will involve the construction of 14 stations. The monorail trains will run 4.5m above the ground at an average speed of 70km per hour. The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated USD6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and international service centres. The airport, which was approved in 2011 at a cost of USD6.74bn, will be the country's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after becoming operational in 2020. Meanwhile, Shipowners in Vietnam offloaded more vessels from their fleets by the close of 2013. Firms planning to pare down their fleets include the Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that the economic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core businesses. In the road freight sphere, bad news was delivered at the end of October 2013, when it was announced that the Vietnamese government has granted approval to Hanoi General Export-Import Joint Stock Company (Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoi with localities in the northwest. The company invested USD17mn in the project, with USD2mn in the construction and USD12.4mn in land acquisition, over three years, according to the transport ministry. 'As the investment cost rose significantly and the property market at present is nearly frozen, it is impossible for us to reach the project deadline', Geleximco General Director Vu Van Tien said (Intellasia). The government has also approved a proposal by the country's Ministry of Transport and Ministry of Planning and Investment to alter the project's investment model to public-private partnership to make it more feasible and obtain official development assistance. © Business Monitor International Page 38 Vietnam Freight Transport Report Q4 2014 Industry Trends And Developments Multimodal Government To Implement 14 Infrastructure Projects In Ho Chi Minh City The government of Vietnam will implement 14 infrastructure projects in Ho Chi Minh City, Vietnam. The USD9.44bn infrastructure projects include repair and improvement of the Luong Dinh Cua Street and the construction of the new Ha Noi Expressway-Eastern Ring Road link road. The projects will be implemented under the public-private partnership, build-transfer and build-operate-transfer models. Construction work also includes five elevated highways, the Rach Chiec Bridge and the Southern Ring Road. Vietnam-based Sai Gon-Ha Noi Commercial Bank will provide loan facilities to Phu My Construction for the programme. The projects are expected to be completed by 2020. DB Schenker Takes Control Of JV One of Vietnam's leading logistics firms has sold off a 49% stake in its affiliate Schenker Gemadept Logistics Vietnam (SGL Vietnam), Cargonews Asia reported in March 2014. Gemadept Corporation (GMD) made the move to sell its shares to DB Schenker of Germany but the financial details of the deal were not made public. SGL was a joint venture (JV) between DB Schenker and GMD. A month earlier, Cargonews Asia had reported that Vietnamese logistics companies were struggling to survive, as foreign investors were proving to be fierce competition. Previously, foreign investors had only been able to own a 49% stake in Vietnamese firms but since January 2014, it has been possible for them to set up wholly invested firms in the country. Maritime Ho Chi Minh Set For Double-Digit Growth Double-digit annual growth is once more set to return to the Port of Ho Chi Minh City in 2014, matching the feat last achieved in 2012. We forecast container throughput to remain impressive over the next 12 months, rising 10% year-on-year (y-o-y) to reach 4.62mn twenty-foot equivalent units (TEUs). Tonnage throughput will not hit the same levels as the box side of operations. We forecast growth of 6.1% y-o-y to 41.22mn tonnes by the end of 2014. This is slightly down on the past few years as global economic headwinds weigh ever so slightly on demand. © Business Monitor International Page 39 Vietnam Freight Transport Report Q4 2014 Data for Vietnam's external sector continues to strengthen. Trade data for the first two months of the year show a trade surplus of USD244mn, which will help underpin the stability of the country's external sector. Traditionally Vietnam has been a trade deficit country, but in the past two years the trade account has swung into surplus, where we expect it will remain over the forecast period as the country expands its manufacturing export base. Foreign direct investment (FDI) in Vietnam shrunk by more than 60% y-o-y in the first two months of 2014, but industry sources have forecast growth in foreign capital influx in 2014. According to data released by the General Statistics Office, the processing and manufacturing industry accounted for USD1.18bn of the total foreign capital of US$1.54bn in the two months. Investments in new projects represented USD830mn of the total FDI. South Korea, with an investment of around USD469mn, is the biggest foreign investor in 2014 so far. The industry insiders' prediction for the rise in foreign investment in 2014 is based on the recent trend among foreign investors. According to the US-ASEAN Business Council, the US business community views Vietnam as a lucrative investment location, mainly because of an improved macro-economic environment and a commitment towards stable inflation and exchange rate. Danang Port To Sell Shares On June 11 Danang Port is scheduled to launch an initial public offering (IPO) in Hanoi on June 11. The port will sell more than 8.3mn shares at a cost of VND11, 400 (USD0.54) per share. Of the paid up capital, the number of shares being offered accounts for 12.57% (SeaShip News). SPCT Largest Ever Vessel The DP World-operated Saigon Premier Container Terminal (SPCT) in Ho Chi Minh City, Vietnam received its largest ever ship in the week ending May 24 - the NYK-owned 54,000 deadweight tonne (DWT) Northern Genius, reported PortNews. The ship, with a capacity of 4,300 twenty-foot equivalent units (TEUs), sailed up the Soai Rap River channel after its opening in early 2014. Northern Genius' call at the terminal follows the MSC vessel Xutra Bhum, which sailed up the channel in April. DP World Senior Vice President and Managing Director of the Asia Pacific Region, Rashid Abdulla, stated: 'The arrival of the Northern Genius so soon after the Xutra Bhum confirms the importance of SPCT in providing a vital trade route for the Vietnamese economy through the newly dredged Soai Rap River © Business Monitor International Page 40 Vietnam Freight Transport Report Q4 2014 channel. It underlines the opportunities now available for customers allowing cargo to be moved more efficiently on the doorstep of the capital city.' Meanwhile, Ho Chi Minh City Department of Transport Director, Tat Thanh Cang, explained: 'The new Soai Rap channel benefits the south of Vietnam boosting development of surrounding areas, providing business opportunities, access to overseas markets and creating jobs for local people. The arrival of this vessel shows industry interest in this important trade route and the capacity of SPCT to handle larger vessels than ever before.' Road Government Approves Hanoi Road Project The Vietnamese government approved plans to build the Ring Road No 5 route around Hanoi, it was announced in May 2014. The 330km-long project is expected to cost about USD4bn. The proposed project will pass through 36 districts and the provinces of Ha Nam, Hoa Binh, Hai Duong, Thai Binh, Thai Nguyen, Bac Giang and Vinh Phuc. The road is expected to be completed by 2020. Air MASkargo Expands Presence In Hanoi Malaysia Airlines' cargo division MASkargo has introduced its new airbus A330-200 freight flight to Hanoi, Vietnam, according to a company statement issued on April 17. The flight will head for Hanoi's Noi Bai International Airport on every Wednesday and Friday from the Kuala Lumpur International Airport. The move is line with the company's efforts to increase its presence in the Vietnamese market. © Business Monitor International Page 41 Vietnam Freight Transport Report Q4 2014 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 aircraft in the future. ■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new air route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and economic links between Vietnam and Indonesia', according to Bloomberg Business Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays, leaving Ho Chi Minh City at 10am local time, and arriving in Jakarta at 1pm local time. Jakarta is now connected to six ASEAN countries in total. ■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London, it was announced in April 2013, potentially opening the door for further link ups between the two countries. ■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport, Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built in the country. Thanh Nien News reported the chairman of the board, Airports Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started construction by now, in order to have the first phase completed by 2020.' © Business Monitor International Page 42 Vietnam Freight Transport Report Q4 2014 SWOT Analysis - Continued ■ There is further room for co-operation between Vietnam and the US in the coming years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held in Ho Chi Minh City in September 2013. ■ Vietnam Airlines began to take delivery of some 900 Nordisk light weight air cargo containers in January 2014. With the containers weighing less than conventional boxes due to being fashioned from AKE aluminium as opposed to normal aluminium, the costs associated with handling them will reduce due to lower fuel consumption and reduced carbon emissions. ■ In June 2014, Vietnam Airlines stated: 'SkyTeam, the global airline alliance, projects an increase of 18 % in membership cooperation for the year 2014. The increase is the result of more codeshares and bilateral agreements amongst its member airlines, benefiting global customers by offering more destinations and travel options.' Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the bellyholds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. © Business Monitor International Page 43 Vietnam Freight Transport Report Q4 2014 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 aircraft, 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 Delays and Cancellations Cause Concern Between January and May 2014, as many as 25% of the total flights of Vietnamese airlines were delayed or cancelled, which will be a real cause for concern for Vietnam Airlines Cargo going forward. The figures, released by the Vietnam Civil Aviation Administration, show that Vietnam Airlines was the least worst offender during this time with 14% of flights cancelled or delayed, with Jetstar Pacific seeing a whopping 50% of its flights either cancelled or delayed. According to Vietnam Net Bridge: 'The total number of passengers and the volume of cargo transport via Vietnam's airports were estimated at 24.7 million passengers and 448,000 tonnes of cargo, up 15% and 22% respectively.' © Business Monitor International Page 44 Vietnam Freight Transport Report Q4 2014 Vietnam Petroleum Transport Company (VIPCO) SWOT Analysis Strengths ■ Around 60% of VIPCO's fleet is employed by Petrolimex. ■ The company boasts a relatively young fleet. ■ It has diversified away from operating in a single sector, with a real estate arm. ■ Petrolimax was awarded the tag of one of the 'Top 100 Most Outstanding Enterprises In 2013' in Vientiane, Laos, in February 2014. Weaknesses ■ VIPCO only operates in one shipping sector. Opportunities ■ The company plans to expand its fleet, although no further information is currently forthcoming. ■ Petrolimex made a company announcement at the end of July 2013 to state that it had signed a memorandum of understanding (moU) with Japan International Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to 'cooperation in the trial project of double-shell tank against harmful matters'. ■ Both box and tonnage throughput growth at Vietnam's largest port, the Port of Ho Chi Minh City, is set to be healthy over the medium term. Threats ■ Vietnam's reliance on imported refined products is decreasing as the country brings online more refining capacity, which could negatively affect VIPCO. In the longer term, Vietnam's refining capacity could allow the state to export. Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime transport for petroleum products. The company has a diversified portfolio, including units that support its product tanker fleet - such as its port operations and freight forwarding services. It is also engaged in real estate. Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111 deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years. © Business Monitor International Page 45 Vietnam Freight Transport Report Q4 2014 VIPCO has a fleet expansion strategy in place and is prepared to invest either in newbuilds or purchasing tankers under the age of 10 years. The company plans to boost its fleet to 200,000DWT. The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted to other consignees. Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector. While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products. The company's shipping unit is complemented by its petrochemical terminal's sector. The board of directors of Petrolimex announced the establishment of a new whollyowned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil products, marine services and the repair and building of tankers. Financial Data 2013 Deputy General Director Tran Ngoc Nam explained at the end of December 2013 that profits were low at Petrolimex, owing to the Vietnamese government's efforts to curb inflation and stabilise the economy through retail price adjustment. In the first half of 2013 the company announced profits of VND898bn (USD42.69mn), however, according to Viet Nam News, earnings fell short 'of the full-year target of the country's largest fuel wholesaler at VND1.98trn (USD94.2mn) in 2013. With only 45% of the plan covered, Petrolimex said it will exert efforts to make it in the second half of this year.' Latest Activity Petrolimex Buys More Gasoline Than Expected Petrolimex has purchased 170,000 tonnes of gasoline, which is to be delivered between July and September 2014, Reuters has reported. The purchase, at steady to slightly weaker premiums, 'was about 20,000 tonnes more than its initial requirements, though it was unclear why the company had sought more', said the Reuters report. This move will keep VIPCO busy in the short term. © Business Monitor International Page 46 Vietnam Freight Transport Report Q4 2014 Vietnam National Shipping Lines (Vinalines) SWOT Analysis Strengths ■ Diversified fleet operating in dry bulk, container and oil transport. ■ Largest commercial shipping line in Vietnam. ■ On December 16 2012, Vinalines launched the second biggest bulk carrier in Vietnam in Hai Phong city. Named Vosco Sunrise, the bulk carrier has been designed to cater for a deadweight of 56,200DWT. Weaknesses ■ Vietnam does not play a role on the major Asia-Europe routes, despite developing as a direct port of call on these routes. ■ The USD3.6bn Van Phong International Port project, primarily constructed by stateowned Vinalines, was suspended in June 2011 following a reassessment of the geological conditions at the project site. ■ Vietnamese shipping company Vinalines is currently USD2.1bn in debt, reported Reuters in June 2012. ■ Vinalines' heavy exposure to Vietnam's domestic transport sector, which has been performing well recently, indicates that the firm's struggles go beyond the troubles facing the global industry. ■ According to chairman of Vietnam Shipowners' Association Vu Xuan Quynh, a large sell off of old tonnage is needed, with Vinalines seeking to offload around 1.4m DWT of ships, Sea Ship News reported in July 2013. ■ Vinalines was asked by the government to withdraw its plans to participate in the development of the northern Lach Huyen Port, reported Sea Ship News in March 2013. The company will continue to concentrate on its ongoing port projects; however, Hanoi said that it needs to make arrangement of funds before it can mull over additional expansion. Vinalines teamed up with Japan's Itochu, MOL and NYK for the development of the port. ■ The death sentence handed out to Vinalines' former chairman at the end of 2013 for embezzlement has done little for the company's reputation. © Business Monitor International Page 47 Vietnam Freight Transport Report Q4 2014 SWOT Analysis - Continued Opportunities ■ Vietnam is expanding its role in the global box market and it is fast becoming a mainstay port of call on Asia-Europe services. ■ Potential to increase its intra-Asia role, shown by the expansion work at Cai Mep, and well placed to be chosen as a partner on these services by major lines. Threats ■ While Vietnam has invested heavily in its port network, the logistics supply chain could be let down by the landside freight network, which will have a negative impact on operators. ■ In 2011, Vinalines posted its first ever loss in 15 years of operations, with further losses expected. ■ Overcapacity is a threat over the medium term, unless money is pumped into port facilities and infrastructure. ■ Vietnamese police issued an arrest warrant for the former chairman due to the scandal rocking the debt-mired company. Duong Chi Dung has been accused of deliberately mismanaging Vinalines during his tenure. ■ Vinalines has been stung by the poor performance of the three container terminals it has joint venture (JV) interests in. Company Overview Vinalines is Vietnam's largest commercial shipping line. Established in 1996, it caters for domestic trade in Vietnam and offers intra-Asia services. The company also has a port operating division that is the largest in Vietnam, controlling and managing ports in Quang Ninh, Hai Phong, Da Nang, Ho Chi Minh and Can Tho. Strategy Vinalines' 14 shipping companies operate a diverse fleet, dominated by dry bulk vessels but also boasting container ships, oil and product oil vessels. According to the company's website, Vinalines' fleet consisted of 128 vessels. The line is looking to expand, with a plan centred on increasing the proportion of specialised vessels such as box ships or oil tankers. In order to achieve this, the line was seeking to spend USD2bn on ordering new ships from Vietnamese yards seeking state funding for the plan. Vinalines has in fact ended up expanding its fleet quicker than intended, with the shipping line taking on 36 vessels © Business Monitor International Page 48 Vietnam Freight Transport Report Q4 2014 from the debt laden Vietnamese shipbuilder Vinashin in July 2010. Vinaline's chairman, Duong Chi Dung, said at the time that up to two-thirds of the acquired vessels could not be used as they failed to meet technical requirements. He estimated that the company would need to spend USD26mn to repair the vessels and purchase insurance cover. Dung added that the company expected some financial aid from the government for the project. Vinalines services the trade needs of Vietnam's domestic shipping market, but also has exposure to the intra-Asia trade lane after joining forces with NYK in December 2010 to launch a Thailand-Vietnam-Singapore (TVS) service. Vinalines provides a 1,100 twentyfoot equivalent unit (TEU) vessel for the service. BMI believes that Vinalines' presence on the intra-Asia trade route will increase, with major lines looking to expand into the route and the company well placed to enter partnerships with them. Vinalines is also increasing its contacts in the container sector, partnering with a number of the majors on container terminal projects in Vietnam. According to Port Strategy, Vietnam is of increasing interest in East Asia, due to the fact that it is focusing on becoming better connected with both short and long haul destinations. Providing the bedrock to this strategy are the new terminals constructed in the Cai Mep area. In September 2013, the wholly owned limited liability company, Quy Nhon port under Vinalines launched an initial public offering as part of ongoing restructuring of the company, approved back in February 2013. In a high-profile court case in Hanoi in January 2014, the former chairman of Vinalines, Duong Chi Dung admitted to handing out bribes to members of the country's ruling communist party in a bid to avoid his imminent arrest for embezzlement. Dung was sentenced to death in December for siphoning off millions of dong from the company. Financial Data 2013 Vinalines is bracing itself for a full-year loss of VND2.1trn (USD101mn) already as the company continues to perform abysmally following 2012's reported loss of VND2.44trn. The company's CEO, Nguyen Canh Viet, said: 'There are few transporting contracts amid these crisis times, while several partners refused to clear their payment on time, despite the cheap fares.' 2012 Vinalines announced a VND1,439bn (USD69.2mn) loss during the first half of 2012, which is around double the losses incurred for the corresponding period a year previous. The loss was attributed to a 'perfect storm of liquidity and jobs woes', according to Vinalines Director Nguyen Canh Viet, reported by Vietnam Investment Review. © Business Monitor International Page 49 Vietnam Freight Transport Report Q4 2014 Financial Data 2011 Vinalines recorded a VND62.15bn (USD3mn) profit for 2011, despite posting a loss of VND660bn (USD32mn) in H111 - the first time this has ever occurred in the company's 15 years of operations. The results came as a surprise to analysts who were expecting the company to suffer from the sinking of the bulker Vinalines Queen. In 2011, Vinalines shipped 36.8mn tonnes of cargo, which was a 1% annual increase on 2010. Latest Activity Vinalines May Go Public Vinalines is weighing up its options of going public in 2015 as the debt-ridden company looks to turnaround its poor financial fortunes. According to the Dau Tu online newspaper, Vinalines is set to 'announce the result of the corporate valuation by the end of this September, paving the way for an initial public offering (IPO)'. The Vietnamese government is seeking to sell as much as a 70% stake in Vinalines. © Business Monitor International Page 50 Vietnam Freight Transport Report Q4 2014 Political Outlook Domestic Politics BMI View: Vietnam's political outlook is stable and we see room for substantial reform over the coming years, particularly with regard to the business environment. Moreover, Vietnam is increasingly opening up to the international community, which will be good for longer term development. That said, Vietnam has a poor record in terms of the protection of human rights and there continues to be a lack of freedom for the press and media. The political outlook will remain broadly stable given the single-party system, and the government will continue to focus its attention on implementing reforms in a bid to stimulate growth and attract investment. The three broad areas of reform include: the business environment, the banking sector and education. In addition to the government's significant reform agenda, senior officials have been busy in recent months improving diplomatic and trade ties in an effort to increase cooperation in areas such as economic development, agriculture, education, financial sector reform and food security amongst others. The combination of reforms and stronger ties with the international community will bode well for the country's outlook over the coming years. That said, Vietnam will continue to suffer from high levels of corruption, a lack of transparency and a poor track record on human rights and the freedom of press. © Business Monitor International Page 51 Vietnam Freight Transport Report Q4 2014 Above Average, But Issues Remain Vietnam - Political Risk Ratings Source: BMI Vietnam's business environment remains somewhat weak, particularly in the category of institutions and corruption. That said, it is slightly above the regional average, and we are seeing increasing signs that the government is prioritising reform in this area with a particular focus on improving foreign investor's rights, restructuring many state owned enterprises (SOE) and reducing corruption. With regard to investment, foreigners will be allowed to own up to 60% equity in publicly listed companies, compared to the current limit of 49%. Foreign voting rights will also be raised for private companies to match the existing foreign ownership limit of 49% (we expect limits on private companies to be raised further over the coming years). Moreover, the government has drafted an investment law which will reduce the need for special certificates and permissions as well as improve access to information and strengthen the legal rights of foreign investors. © Business Monitor International Page 52 Vietnam Freight Transport Report Q4 2014 Tough Business Environment Vietnam - Business Environment Ratings Source: BMI The Ministry of Finance (MoF) also aims to restructure more than 300 SOEs by 2015, with officials unveiling plans to privatise 31 SOEs, and divest or potentially liquidate another 20 SOEs over the next two years. Although only 13 companies were equitised in 2013 (with nine companies missing their targeted dates), the rate of privatisation will likely pick up pace in 2014 and 2015 as 29 company executives have pledged to complete the process over the next two years, or face salary cuts and/or even the loss of their jobs. While progress is being made with regard to the country's business environment, corruption remains a key challenge. In recent months, there have been allegations of corruption across several industries including Vietnam's state-owned shipping giant Vinalines as well as the Sing-Viet City project, which aims to build an urban area in the Binh Chanh district. Moreover, several Vietnamese officials have been suspended following reports by the Japanese media claiming that civil servants received kick backs related to a highway project. Transparency international gives Vietnam a corruption perceptions score of 31 out of 100 (0 is very corrupt, and 100 is very clean) and ranks the country in 116th place out of 177. Not only does the agency suggest that Vietnam displays weak implementation of anti-corruption laws, but that perceptions of corruption within land management as well as the police and judiciary remain very high. As such, we see tackling corruption as a key challenge for the government in order to improve the political and business environment. © Business Monitor International Page 53 Vietnam Freight Transport Report Q4 2014 Corruption Remains A Problem Vietnam - Perceptions of Corruption* Source: Transparency International *Percentage of respondents who felt these institutions were corrupt/extremely corrupt. Banking Sector Reform Is Key Reform of the banking sector will remain a key priority for the government, however, the government risks not going far enough to attract sufficient investment at this stage. In February, foreign ownership ceilings were raised from 10% to 15% for organisations and from 15% to 20% for strategic investors. However, the cap on total foreign ownership remained at 30% which, according to several investors, is not high enough to compensate investors for the risk involved. The silver lining however, is that there is potential for these ceilings to be raised again in the near future given reports that government officials would be willing to yet again raise them once more. We believe that continued reform to the financial sector, which includes both the purchasing of bad debt from SOEs, as well as the raising of ownership caps, will bode well economic growth and financial market depth over the coming years. © Business Monitor International Page 54 Vietnam Freight Transport Report Q4 2014 Education Reform Also High On The Agenda Education reform will continue to be high on the government's agenda following the passing of a resolution in November 2013 by top Vietnamese officials for an across-the-board overhaul of the sector. Indeed, not only are perceptions of corruption in the educational sector very high, but it is also a very rigid educational system, lacks vocational training and career guidance, has poor syllabuses and offers low wages for teachers. Although we expect reform to go through over the coming quarters, there has been significant debate around the costs of such reform. The education ministry reportedly proposed a VND34.3tn (USD1.62bn) plan to reform the educational system over the next 10 years, but then later claimed that the cost was incorrectly reported. This drew huge criticism over the cost of reform, and several lawmakers also claimed that the plan was too vague. Uncertainty around costs, and the potential for lack of support from lawmakers could result in implementation risks going forward. International Cooperation Gaining Traction The government has also been very proactive in strengthening diplomatic, trade and investment ties with several countries which will bode well for economic growth. Importantly, Vietnam will also benefit from support in areas such as food security, tourism, energy reform, national defence as well as peace and climate change issues. We believe that the government's efforts will bear fruit over the coming years and will help Vietnam to strengthen both its economic and political ties with the international community. Some of the largest efforts have been made with key strategic trade partners, such as Japan and the US, for increased energy cooperation and investment. Moreover, Vietnam is also on track to sign a free trade agreement with the European Union and regional powerhouse South Korea in 2014, which will help to strengthen international trade and cooperation. Risks To Outlook Despite the reform drive across various sectors of the economy, we see two main risks. First, we believe that implementation of reforms could be a slow and difficult process, delaying the required reforms given vested interest groups, still-high levels of corruption and weak institutions. Second, Vietnam has a poor record in terms of the protection of human rights and there continues to be lack of freedom for the press and media. As such, increased cooperation with international agencies could put pressure on Vietnam to engage in further democratic reform, which could potentially create friction within the Communist Party, and weaken its authority. © Business Monitor International Page 55 Vietnam Freight Transport Report Q4 2014 Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Nguyen Minh Triet (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving first five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts National Assembly 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 in parliament) Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council BMI Short-Term Political Risk Rating 79.0 BMI Structural Political Risk Rating 57.7 Source: BMI Long-Term Political Outlook BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. © Business Monitor International Page 56 Vietnam Freight Transport Report Q4 2014 Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is currently causing widespread environmental damage and raising ire among the local population. There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as © Business Monitor International Page 57 Vietnam Freight Transport Report Q4 2014 was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom. Relations With China: Relations with China have become increasingly strained in recent years as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US - and potentially India and Japan - in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 57.7/100 is weighed down by a score of 29.0 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: © Business Monitor International Page 58 Vietnam Freight Transport Report Q4 2014 Public Unrest A Major Risk Vietnam - Long-Term Political Risk Ratings (score out of 100) Source: BMI Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even © Business Monitor International Page 59 Vietnam Freight Transport Report Q4 2014 dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario - Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Page 60 Vietnam Freight Transport Report Q4 2014 Oil Price Outlook Bunker Fuel: No End To Downtrend BMI View: Crude oil price lent some support to bunker fuel prices in Q2 2014, but we continue to maintain our view for a downtrend in prices through the rest of 2014 and to the end of our forecast period in 2018. This owes to a combination of poor technicals and fundamentals underpinning high sulphur fuel oil products. Table: BMI Bunker Fuel Price Forecast, 2014-2018 (USD/bbl) 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 109.74 108.00 103.00 101.00 101.00 93.30 98.01 103.10 99.00 96.00 94.00 95.00 108.88 105.36 106.36 105.10 100.00 97.00 97.00 Rotterdam 101.52 95.07 91.09 89.00 86.00 82.50 78.00 New York 104.67 97.52 99.02 94.00 91.00 87.00 83.00 Singapore 102.46 93.96 91.44 90.60 89.00 87.00 84.00 Global 102.88 95.52 93.85 91.20 88.67 85.50 81.67 Rotterdam 97.47 91.24 87.38 86.00 83.00 80.00 76.00 New York 100.32 93.13 91.57 88.00 86.00 83.00 80.00 Singapore 101.08 95.84 92.16 89.60 88.00 86.10 83.20 99.62 93.40 90.37 87.87 85.67 83.03 79.73 Rotterdam 99.50 93.16 89.23 87.50 84.50 81.25 77.00 New York 102.50 95.33 95.29 91.00 88.50 85.00 81.50 Singapore 101.77 94.90 91.80 90.10 88.50 86.55 83.60 Global 101.25 94.46 92.11 89.53 87.17 84.27 80.70 Crude Oil Brent WTI Dubai Bunker Fuel 180 Bunker Fuel 380 Global Bunker Fuel Average f=BMI forecast. Source: Bloomberg, BMI The average price of both 380 and 180 bunker fuel in Rotterdam, Singapore and New York moved slightly upwards in Q2 2014, with the spike in crude oil prices owing to Iraqi supply concerns causing a sharp © Business Monitor International Page 61 Vietnam Freight Transport Report Q4 2014 increase. A weaker fuel oil supply market vis-a-vis demand - which we expected from a pick-up in the global economy - contributed to this slight rise. However, we note that prices have quickly come down as crude oil supply worries ease, as the start of Q3 2014 saw prices move towards levels seen at the beginning of Q2 2014. Paring Down Gains Bunker Fuel - 180 (LHC) & 380 (RHC) Prices, Normalised To 100 At Chart Start Date Source: Bloomberg, BMI We also note that New York continued to maintain its price premium over other markets - a trend that has become more pronounced since mid-2012 for the 180 grade and mid-2013 for the 380 grade - while Rotterdam prices remained the softest of all three markets observed. © Business Monitor International Page 62 Vietnam Freight Transport Report Q4 2014 New York Falls Out Of Line Bunker Fuel - 180 (LHC) & 380 (RHC) Prices, USD/bbl Source: Bloomberg Slower Fall, But Fall Nonetheless We maintain our view that a slight improvement in the outlook for the global shipping sector and a reduction in heavy bunker fuel supplies will slow the rate of decline in bunker fuel prices, but prices will continue to trend downwards nonetheless. The charts below show that the decline in 380 grade prices has become gentler, but there is little momentum for an upswing in prices barring a crude oil price shock. In addition, the longer-term chart from 2012 shows that prices are now on the cusp of breaking long-term support, and short-term developments suggest that a further decline is likely in Q3 2014. © Business Monitor International Page 63 Vietnam Freight Transport Report Q4 2014 Slower Decline But Downtrend Still In Play Bloomberg Weighted Average Price Of Bunker Fuel 380 - 2012-Present (Top Chart) & 2013-Present (Bottom Chart) (USD/bbl) Source: Bloomberg, BMI ■ Singapore: Gains made in Q2 2014 will likely be pared back by a relatively healthy supply picture and weaker bunker fuel demand. Despite a cutback on heavy fuel oil in Japan, this is compensated by the rapid rise in China's fuel oil production from its refining expansion. Residual oil inventory levels are also at the highest level for the period 2011 to 2014, which will help to meet any unexpected surge in demand. © Business Monitor International Page 64 Vietnam Freight Transport Report Q4 2014 Inventory Levels In Good Health Singapore - Residual Oil Stocks (000b/d) Source: IE Singapore, Bloomberg ■ Rotterdam: Technicals indicate that bunker fuel prices, especially the 380 grade, have reached an inflexion point and there are no strong reasons to reverse the downtrend unless there is a spike in crude oil prices. The approaching start of the Emissions Control Area (ECA) in January 2015 will also discourage purchases for storage. © Business Monitor International Page 65 Vietnam Freight Transport Report Q4 2014 Poor Technicals, Fundamentals Bode Ill Rotterdam - Bunker Fuel 380 Price (USD/bbl) Source: Bloomberg, BMI We forecast that the average bunker fuel price in Rotterdam, Singapore and New York will be USD89.23/ bbl, USD95.29/bbl and USD91.80/bbl respectively for 2014. © Business Monitor International Page 66 Vietnam Freight Transport Report Q4 2014 No Hitting Of Q2 2014 Peaks Bunker Fuel Price Quarterly Forecast - 180 (LHC) & 380 (RHS) (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Longer Term Trends Continue To Press HSFO The following developments in the shipping industry will press demand for high sulphur fuel oil (HSFO) that we currently track for our bunker fuel price forecasts - harder: ■ Fuel efficiency: Newbuild container ships continue to be more fuel-efficient and larger, thereby reducing overall bunker fuel demand as older ships are phased out. For example, Siemens is the latest firm to boast of its fuel-saving innovation that will be deployed on 17 ships for the United Arab Shipping Co. The completion of these ships will add 1.4% to current global shipping capacity. ■ Cleaner Shipping Industry: Regulations such as the UN International Convention for the Prevention of Pollution from ships (MARPOL) and the International Maritime Organisation's Energy Efficiency Design Index (EEDI) will reduce demand for sulphur-heavy bunker fuels. ■ Emission Control Area (ECA): ECAs to come into force on January 1 2015 in North America and northern Europe will have the biggest impact on bunker fuel demand in New York and Rotterdam. The strict 0.1% limit on sulphur content will effectively phase out the use of HSFO unless expensive scrubbers are installed in the existing fleet. We expect traditional bunker fuel to lose market share to marine gasoil (MGO) in the immediate term. Moreover, new innovation in bunker fuel production will also displace traditional grades in these markets. For example, ExxonMobil's newly launched Heavy Distillate Marine ECA 50 (HDME 50) has been designed specifically to meet ECA requirements. It is also significant that Maersk signed an agreement with Quardrise Fuels International in July 2014 to support the latter's proprietary MSAR fuel, which promises not only to be cheaper than traditional bunker fuel but also cleaner. ■ LNG: Lloyd's Register's survey of 22 major international ports - 73% of which are located within ECAs clearly highlights the industry's optimism of using LNG not only for short-distance shipping but also for © Business Monitor International Page 67 Vietnam Freight Transport Report Q4 2014 deep-sea shipping as well. 64% of the ports surveyed stated that they are preparing or ready for LNG bunkering, while 76% are optimistic that LNG bunkering will take off by 2020. The rise of dual fuel ships that can run on both fuel oil and LNG further threatens demand for high sulphur bunker fuel. These underpin our view for a steep decline in bunker fuel prices through our forecast period, especially in Rotterdam and New York, though slower adoption of green shipping standards will see a slower rate of decline in Singapore. Clear Downtrend Ahead Bunker Fuel Price Forecast, 2014-2018 - 180 (LHC) & 380 (RHC) (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Risks To Outlook ■ Crude oil prices. A spike or collapse in crude oil prices will affect our bunker fuel price, which is derived by forecasting the spread with between crude oil prices; ■ Larger-than-expected cutback in high sulphur bunker fuel production. This may come about particularly from the shutdown of older refineries in Europe and East Asia, and put upward pressure on prices. ■ LNG prices. We have assumed LNG prices of about USD10 per mn British Thermal Units (mnBTU) in assessing the commercial viability of natural gas over oil-based bunker fuel in projecting the switch. Higher-than-projected prices, should there be delays in expected global LNG supply growth, will pose some upside risk to our bunker fuel price forecast. Nonetheless, we do not see this as a large risk as ships will have to turn to a cleaner fuel regardless to meet environmental regulations. ■ Fuel efficiency of LNG: The fuel efficiency of LNG as a shipping fuel, with future technology, is assumed to be the same as the oil-based bunker fuel we are forecasting. If it proves to be less fuel efficient, cost economics may not favour LNG as much. Once again, however, we note that the © Business Monitor International Page 68 Vietnam Freight Transport Report Q4 2014 upside gains from this will more likely accrue to fuels such as ultra-low sulphur diesel or low sulphur bunker fuel - a different product from that we are forecasting. Jet Fuel: Relative Short-Term Stability With Long-Term Risks BMI View: For the rest of 2014, we expect jet fuel prices to slowly climb as the market tightens, particularly from strong demand in the US. In the longer term, pressures for the aircraft industry to consolidate could see overall demand for jet fuel weaken and see prices fall faster towards the end of our forecast period in 2018. Table: BMI Jet Fuel Price Forecast, 2014-2018 2012 2013 2014f 2015f 2016f 2017f 2018f 111.7 108.8 109.7 108.0 103.0 101.0 101.0 93.3 98.0 103.1 99.0 96.0 94.0 95.0 108.9 105.4 106.4 105.1 100.0 97.0 97.0 Rotterdam 131.4 127.3 125.6 123.3 121.0 117.0 112.5 New York 130.7 125.1 125.4 122.5 119.5 116.0 111.5 Singapore 126.9 122.7 122.0 120.1 118.0 114.5 110.0 Global 129.7 125.0 124.3 122.0 119.5 115.8 111.3 Crude Oil Brent WTI Dubai Jet Fuel f=BMI forecast. Source: Bloomberg, BMI Easing Of Iraqi Fears Bring Prices Down Jet fuel prices at New York, Rotterdam and Singapore moved along with crude oil prices for the most of Q2 2014. The six-month high in all three markets in mid-June coincided with escalating political risk in Iraq, while the easing of crude oil supply concerns have also see jet fuel prices move downwards. © Business Monitor International Page 69 Vietnam Freight Transport Report Q4 2014 Going With The Flow Weekly Spot Jet Fuel (LHS) & Brent Crude Price (RHS) (USD/bbl) Source: Bloomberg Downside Supply Pressures To Be Tamed By Demand The decrease in jet fuel prices from late June has been more pronounced in the Singapore and the New York markets. We expect New York prices to remain moderate especially in early July, due to healthy supplies. Jet fuel stocks in the US East Coast at the start of July is at its second highest level for the same period in four years, in part due to a ramp up in imports in the past quarter. © Business Monitor International Page 70 Vietnam Freight Transport Report Q4 2014 Inventories In Good Health US - LHC: Jet Fuel Ending Stock Balance In East Coast (PADD 1, mn bbl) & RHC: Weekly Imports ('000b/d) Source: EIA While healthy stock levels in the US and an expected growth in summer refining volumes would limit price increases, healthy demand suggests that jet fuel prices in New York should not see any sharp declines in Q3 2014 unless crude oil prices fall abruptly. In fact, US demand for jet fuel in June 2014 and at the start of July 2014 is at its highest level in four years, and is set to continue on the back of an increase in passenger traffic over the summer. © Business Monitor International Page 71 Vietnam Freight Transport Report Q4 2014 Rebound In Jet Fuel Consumption US - Jet Fuel Weekly Product Supplied* ('000b/d) *Also an approximate for consumption. Source: EIA In Europe, prices could be supported by weak inventory levels at Antwerp-Rotterdam-Amsterdam (ARA); ARA stock levels have failed to show signs of picking up by the beginning of July, contrary to the trend in the previous years. Meanwhile, differing fuel standards have also limited the flow of jet fuel from the US Gulf Coast to Europe. However, lower crude prices and higher margins at the start of July 2014 will likely see refining activity pick up in North West Europe, in line with summer demand, to loosen the market over Q3 2014. Thus, we also expect prices in Rotterdam to remain relatively stable. © Business Monitor International Page 72 Vietnam Freight Transport Report Q4 2014 No Sign Of Early July Pick-Up Antwerp-Rotterdam-Amsterdam (ARA) - Jet Fuel Inventory Levels (tonnes) Source: PJK International, Bloomberg Prices in Singapore will remain softer than the other regions mainly due to a strong supply picture in Asia, with China in particular continuing to increase its jet fuel exports. Meanwhile, growing competition has seen airlines in the region seek to rationalise businesses both in the cargo and passenger sectors, which will likely see slower increase in fuel demand than supply growth. However, trading activities seeking to benefit from a price arbitrage between Singapore and Rotterdam that would arise from this situation will also limit price declines and we expect this to lift prices in Singapore in Q3 2014. Our 2014 jet fuel price forecasts for Singapore, Rotterdam and New York are USD122.03/bbl, USD125.55/ bbl and USD125.44/bbl respectively. © Business Monitor International Page 73 Vietnam Freight Transport Report Q4 2014 Moderate Increments Expected Jet Fuel - Quarterly Forecast (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Longer Term Dynamics: Consolidation Poses Risk We note that growing pressure for consolidation in the airlines industry, particularly in Europe and Asia against the onslaught of Middle Eastern and budget carriers, could weaken demand for jet fuel prices. The cost of oil will be key in the strategies of these firms moving forward, thereby accounting for the greater downward pressure on prices towards the tail-end of our forecast period from 2014 to 2018. © Business Monitor International Page 74 Vietnam Freight Transport Report Q4 2014 Consolidation Pressures To Weaken Overall Aircraft Fuel Demand Jet Fuel - Long-Term Price Forecast, 2014-2018 (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Risks To Outlook ■ Crude oil price: Given that oil products track crude oil prices, sudden upswing or downturn in crude oil prices poses both upside and downside risks to our forecasts. ■ Green fuel costs: Growing environmental consciousness could see the blending of crude oil-based jet fuel with biofuels become mandatory. Unless the costs of biofuel production and blending fall, this could have an upward effect on global jet fuel prices if it becomes mandatory to use more renewable fuel in commercial aircrafts. © Business Monitor International Page 75 Vietnam Freight Transport Report Q4 2014 Diesel/Gasoil: Short-Term Overhang To Dissipate BMI View: We have upwardly revised our diesel/gasoil price forecasts on the back of expectations for higher crude oil prices in 2014 and 2015. In the short-term, we expect a supply overhang to unwind in Q3 2014, which will also put some upward pressure on prices. In the longer term, we maintain our view for robust diesel/gasoil demand, though growing production will ensure that falling crude oil prices will have a larger effect on prices than consumption growth. Table: BMI Diesel/Gasoil Price Forecast, 2014-2018 (USD/bbl) 2012 2013 2014f 2015f 2016f 2017f 2018f 111.70 108.79 109.74 108.00 103.00 101.00 101.00 93.30 98.01 103.08 99.00 96.00 94.00 95.00 108.88 105.36 106.33 105.10 100.00 97.00 97.00 Rotterdam 130.36 124.81 123.89 121.72 117.41 114.69 114.41 New York 130.79 126.56 126.55 122.12 119.12 115.27 114.78 Singapore 128.18 123.15 124.05 122.46 117.02 114.02 113.85 Global 129.78 124.84 124.83 122.10 117.85 114.66 114.35 Crude Oil Brent WTI Dubai Gasoil/Diesel f=BMI forecast. Source: Bloomberg, BMI Supply Keeps Market Down Unlike gasoline, global diesel and gasoil prices remained relatively flat in Q1 2014 in Q2 2014 despite an increase in crude oil prices owing to political risks in Ukraine and Iraq. As expected, the end of the cold snap in the US East Coast saw New York's premium to other regional indicators unwind. © Business Monitor International Page 76 Vietnam Freight Transport Report Q4 2014 Political Risks Have Minimal Impact On Middle Distillates Singapore, New York & Rotterdam - Diesel/Gasoil Prices (USD/bbl) Source: Bloomberg In particular, Singapore and Rotterdam saw negligible quarter-on-quarter (q-o-q) change in prices, due to healthy supply in the market. At the end of June 2014, gasoil stocks in Rotterdam were at a 16-month high while middle distillate stocks in Singapore hit a 33-year high. Prices at Rotterdam have been kept down by growing exports from the US and Russia, and from a supply overhang from weak winter heating demand. Meanwhile, weak import demand from China in particular has also prevented Singapore gasoil from making further gains. © Business Monitor International Page 77 Vietnam Freight Transport Report Q4 2014 Supply Sees Inventory Build-Up Singapore & Antwerp-Rotterdam-Amsterdam (ARA) - Middle Distillate Stocks ('000bbl) Source: IE Singapore, PJK International, Bloomberg Higher Crude Prices, Tighter Market To Provide Support We expect diesel/gasoil prices to see more support in Q3 2014, despite the quarter traditionally seeing low seasonal demand. ■ Crude oil prices: Early July saw crude oil prices ease from a peak of about USD115/bbl in mid-June, as worries about Iraqi supplies ease and with the promise of Libyan crude returning to the market. However, we expect political risk from Iraq and Libya to continue to be priced-in to crude oil prices, and an upward revision of our crude oil forecast has also led to an increase in our oil product price forecasts in 2014 and 2015 in particular (see 'Geopolitical Risk Will Linger For Brent', July 4). ■ Tightening of supply market: The narrowing arbitrage for transatlantic trade for diesel, due to shipping constraints and weaker supplies flowing into Europe from Russia and the US, will put some pressure on diesel/gasoil. ■ Stronger demand: The closure of the Kurnell refinery in Australia and refinery outages in India thereby raising the country's import requirement - could also put some upward pressure on prices in Asia that may only unwind towards the end of Q3 2014. We have thus raised our forecast for diesel/gasoil for 2014. We expect prices to average USD123.89/bbl in Rotterdam, USD126.55/bbl in New York and USD124.05/bbl in Singapore. An early winter poses upside risk to this forecast, as it would see demand for gasoil spike in Q4 2014. © Business Monitor International Page 78 Vietnam Freight Transport Report Q4 2014 Uptick Expected Diesel/Gasoil Quarterly Price Forecast (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Long-Term Outlook: Diesel To Find Demand Support In the longer term to 2018, we maintain our positive demand outlook for diesel/gasoil demand that will prevent a steep fall in prices (see 'Diesel: Robust Demand To Tame impact Of Falling Crude Prices', April 10). These are the key factors we identify for the following markets: ■ New York: Economic recovery to prompt demand from the commercial transport sector, particularly from rail freight as North America's oil and gas renaissance and inadequate pipeline networks see the pick-up of rail transport. Latin American growth, in light of the region's deficit in refined oil production, will also lend demand support to prices at New York. ■ Rotterdam: Environment regulations will support gasoil demand especially from the shipping sector, as operators come under pressure to meet stringent sulphur conditions of the Emissions Control Area in North West Europe that will come into effect in 2015. Although economic growth remains weak, diesel consumption is bouncing back from low levels in 2012 in markets such as Italy, Spain and Portugal. ■ Singapore: Although we expect slower diesel demand growth in China, this will be compensated by industrial growth elsewhere in Asia. Agribusiness expansion will also drive diesel demand. We note Indonesia and India as two markets with strong diesel consumption potential, especially if newly elected governments succeed in pushing market reforms through, and with refining capacity inadequate particularly in Indonesia. © Business Monitor International Page 79 Vietnam Freight Transport Report Q4 2014 Healthy Diesel Demand Growth Expected Global - Distillate Fuel Oil & Gasoline Consumption (% chg y-o-y) f=BMI forecast. Source: Local statistical agencies, EIA, BMI Nonetheless, we also believe that new refineries in Asia and ongoing upgrades to US and Russian refineries in particular will keep the market adequately supplied and negate excessive upward pressure on diesel/ gasoil prices. For instance, China's downstream growth is building the country into the world's second largest refiner and is turning it into a net exporter of diesel, allowing it to help supply shortfalls in the region. © Business Monitor International Page 80 Vietnam Freight Transport Report Q4 2014 Supply Catches Up With Demand Growth Global - Distillate Fuel Oil Production & Consumption (000b/d) e/f=BMI estimate/forecast. Source: Local statistical agencies, EIA, BMI While the Middle East is still expected to remain a net importer of oil products, new mega-refinery projects will help the region catch up with its demand needs. This will ensure that the downward pressure of falling crude oil prices will influence price trends in diesel/gasoil more than robust demand for the product. © Business Monitor International Page 81 Vietnam Freight Transport Report Q4 2014 Crude Pressure Diesel/Gasoil Price Forecast, 2014-2018 (USD/bbl) f=BMI forecast. Source: Bloomberg, BMI Risks To Outlook ■ Crude oil prices: We currently forecast for the easing of political tensions especially between the West and Iran to lead to a slide in crude oil prices through to 2018. However, we note that persistent risks in the Middle East pose significant upside risk to our crude oil forecasts, and thus our oil product price forecasts. ■ The use of renewable energy for power generation presents the biggest downside risk to our outlook. Several energy-intensive industries deploying small power generators for production are looking to renewable sources of energy: companies are increasingly exploring renewable energy sources to replace diesel generators powering data centres and mining operations, while solar energy could significantly challenge diesel's market share in the Middle East' power market. ■ While this is not our core view, faster-than-expected growth in global gas production could also see the cleaner fuel displace diesel/gasoil for heating and electricity generation purposes, posing a downside risk particularly to the tail-end of our forecast period to 2018. © Business Monitor International Page 82 Vietnam Freight Transport Report Q4 2014 Macroeconomic Forecasts BMI View: Latest GDP figures show that the Vietnamese economy grew by 5.0% y-o-y in Q114, and we believe that our 2014 real GDP growth forecast of 5.9% remains in sight. Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels. Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive. Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by 5.0% year-on-year (y-o-y) in Q114, slightly faster than the 4.9% print registered in the Q113. Although it showed a deceleration from 6.0% recorded in Q413, we believe that the economy is still on track to hit our 2014 growth forecast of 5.9% in 2014. This would mark a slight acceleration from the 5.4% registered in 2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in 2014. We believe that the economy will be driven by a strengthening of private consumption, continued foreign direct investment into key areas of the economy, a more robust external sector, and a rebound in manufacturing activity over the coming quarters. That said, trend growth for the Vietnamese economy will average a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years. © Business Monitor International Page 83 Vietnam Freight Transport Report Q4 2014 Still-Strong Growth Vietnam - Real GDP Growth, (% chg y-o-y) Source: GSO, BMI A breakdown of the data show that all sectors of the economy witnessed an acceleration in growth over the quarter: agriculture, forestry and fisheries, which accounts for approximately 13% of GDP grew by 2.4% yo-y in Q114, while the industrial and construction sectors, which account for 40% of GDP expanded by 4.7% y-o-y. Importantly, the services sector which accounts for the lion's share of the economy at 47% of GDP, accelerated by a stellar 6.0% in Q114, contributing a whopping 2.8 percentage points of the overall growth figure. Going forward, we expect that the manufacturing, construction and service sectors will continue to do well on the back of policy driven efforts to stimulate growth. © Business Monitor International Page 84 Vietnam Freight Transport Report Q4 2014 Services Taking The Lead Vietnam - Breakdown of GDP By Component (% chg y-o-y) & Share % (RHS) Source: GSO, BMI Government Policy To Ensure Growth Remains Strong We believe that government policies aimed at promoting balanced economic growth, improving the stability of the banking system, diversifying exports, attracting foreign investment and attracting investment in infrastructure bode well for the economic outlook. In terms of promoting balanced growth, we note that the State Bank of Vietnam (SBV) has continued to rein in inflation, which, at 4.8% y-o-y in the first quarter, remains near record lows and well below the central bank's target of around 7.0%. The slight deceleration in economic activity in Q114, combined with the weak inflation data over the period prompted the SBV to cut its refinancing rate from 7.0% to 6.5% in March. Although we do not expect further cuts this year (see: Downside Risks To Interest Rate Forecast, March 21), the central bank has adopted a dovish tone, and could step in again should it feel that the economy needs more stimulus. With regard to banking sector reform, the SBV continues to push forward with reforms aimed at improving the stability of the sector and increasing credit to the economy. Two key policies are the reduction in non-performing loans, which according to Moody's, stands at approximately 15%, as well as offloading bad debt off of bank's balance sheets and on to the newly created Vietnam Asset Management Company (VAMC). By the end of 2013 the VAMC had purchased approximately US$1.9bn worth of bad debt, and it aims to increase the pace of purchases over the coming months. Combined, these policies should help stimulate credit growth over the coming quarters, which will help underpin broader economic activity. © Business Monitor International Page 85 Vietnam Freight Transport Report Q4 2014 External Sector To Boost Growth Vietnam - Trade Balance (US$mn) & Three-Month Moving Average Source: GSO, BMI External Sector To Provide Tailwind We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity in the coming quarters. From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, which helped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend to remain in place. Indeed, the Vietnamese government has been making substantial efforts to promote trade and investment ties with other countries, and we believe it will help underpin exports over the coming months. A case in point was the fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to invest and develop the country's infrastructure and manufacturing sectors. © Business Monitor International Page 86 Vietnam Freight Transport Report Q4 2014 Table: Foreign Direct Investment By Country Of Origin (Top Five) Jan-Mar 2014 Origin Jan-Mar 2013 Projects Value US$mn Origin Projects Value US$mn South Korea 76 534 Singapore 20 2,247 Hong Kong 21 265 Japan 50 299 British Virgin 6 239 Taiwan 5 84 Singapore 15 231 Korea 51 70 Canada has 2 226 Thailand 5 55 252 2,046 Total 191 2,927 Total GSO, BMI While foreign direct investment fell by 30% y-o-y in the first quarter of 2014, it was not all bearish in our view. First, the number of projects increased by 32% y-o-y and second, the origin of the investments was much more diversified, which could suggests that it is more sustainable (see table). Third, we believe that foreign investment will continue to pick up as the business environment becomes increasingly attractive, particularly as more State Owned Enterprises (SOEs) are restructured and the limits on foreign ownership are raised. Moreover, Vietnam still boasts competitive wages compared to other manufacturing hubs such as China, Indonesia and Malaysia, which bodes well for cost competitiveness. Risks To Outlook Although we believe that the Vietnamese economy is on track to hit our 5.9% growth target, we see downside risks to this view. First, we still forecast an impending slowdown in China, which would weigh on regional growth in general. Second, public sector capital investment and spending was flat y-o-y in Q114 and capital investment of the state budget actually contracted by 2.3% y-o-y over the period. While we do not see this as a large risk, if public spending were to lag, it could act as a drag on headline growth. Lastly, we highlight that the pace of reforms will be crucial to sustaining economic growth in 2014 and beyond. Failure by the government to restructure SOE's and provide a framework for foreign investors to participate in the equitisation of these companies in a timely manner could weigh on investment and growth. © Business Monitor International Page 87 Vietnam Freight Transport Report Q4 2014 Table: Vietnam - Economic Activity 2009 Nominal GDP, VNDbn 3 Nominal GDP, USDbn 3 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f 1,809,149 2,157,829 2,779,880 3,245,419 3,584,261 4,012,848 4,494,845 5,033,220 5,616,366 6,269,265 101.6 112.9 134.6 155.5 170.4 195.1 221.1 249.0 280.8 316.6 5.4 6.4 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4 1,152 1,267 1,497 1,712 1,859 2,108 2,368 2,643 2,957 3,309 Population , mn 4 88.2 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95 95.7 Industrial production , % y-o-y, ave 1,5 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 4.6 4.3 3.6 3.2 3.7 3.5 3.5 3.6 3.5 3.5 Real GDP growth, % y-o-y 3 GDP per capita, USD 3 Unemploy ment, % of labour force, eop 2,6 Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI. © Business Monitor International Page 88 Vietnam Freight Transport Report Q4 2014 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 key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 89 Vietnam Freight Transport Report Q4 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 90 Vietnam Freight Transport Report Q4 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 2 4 7 12 17 21 24 30 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 91 Vietnam Freight Transport Report Q4 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 100+ years 1990 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 Dependent ratio, % of total working age Dependent population, total, '000 1990 1995 2000 2005 2010 2013e 75.8 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age Pensionable population, total, '000 10.0 10.1 10.3 9.9 9.3 9.3 9.6 11.6 3,934 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast. Source: World Bank, UN, BMI © Business Monitor International Page 92 Vietnam Freight Transport Report Q4 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Page 93 Vietnam Freight Transport Report Q4 2014 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology There are a number of principal criteria that drive our forecasts for each transport variable: ■ GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own macroeconomic and demographic forecasts. ■ Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). • Port Traffic Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. ■ Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ■ Trends in historical modal split data; ■ Evidence of government policy favouring one or more modes over others; ■ Government and or private sector investment plans in specific modes. © Business Monitor International Page 94 Vietnam Freight Transport Report Q4 2014 Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Page 95 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... meet its freight needs, with © Business Monitor International Page 25 Vietnam Freight Transport Report Q4 2014 the sector offering savings in transport time, along with environment controlled options, which are vital for the transport of some medicines and vaccinations Table: Air Freight (Vietnam 2011-2018) Air Freight Tonnes (000) Air freight tonnes % y-o-y Air freight tonnes-km (mn ton km) Air freight. .. between 2014 and 2018 There are two key factors that we believe have held back Vietnam' s rail freight development and will continue to do so © Business Monitor International Page 22 Vietnam Freight Transport Report Q4 2014 Table: Vietnam Transport Network Length (km) Road 206,633 Railway 2,632 Inland Waterway 47,130 Source: CIA World Factbook (accessed January 21 2014) The first is the quality of Vietnam' s... country's logistics needs are primarily met by road In 2014 and beyond, we predict that road freight volumes in Vietnam will account for the majority of freight carried in the country © Business Monitor International Page 18 Vietnam Freight Transport Report Q4 2014 Road Reliant Freight Mode Breakdown (% Of Total), 2013 Source: BMI In 2014, we anticipate road freight volumes continuing to impress with y-o-y... International Page 35 Vietnam Freight Transport Report Q4 2014 Road Continues To Dominate Freight Mix Vietnam Freight Transport Mode Breakdown (% Of Total), 2013 Source: General Statistics Office Of Vietnam Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km This is the second largest sub-sector involved in domestic cargo transport, accounting... Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo Few foreign companies are present in the market and there are many small, family owned road freight companies operating informally © Business Monitor International Page 34 Vietnam Freight Transport Report Q4 2014 Vietnam. .. International Page 11 Vietnam Freight Transport Report Q4 2014 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ The Asian Development Bank (ADB) has announced that it will provide a US$410mn loan for the Vietnamese government, reports KHL Group The loan will enable the government to develop a new arterial road between Ho Chi Minh City, the Mekong Delta and the south of the country ■ Vietnam- based... Monitor International Page 21 Vietnam Freight Transport Report Q4 2014 Table: Inland Waterway Freight, 2011-2018 2011 Inland Waterway Freight Tonnes (000) 2012 2013 2014f 2015f 2016f 2017f 2018f 160,164.50 168,493.00 180,812.70 192,821.44 205,047.81 218,027.10 231,629.74 245,913.37 Inland waterway freight tonnes, % y-o-y 11.05 5.20 7.31 6.64 6.34 6.33 6.24 6.17 Inland Waterway freight tonneskm (mn ton km)... potential rail -freight projects between the two nations BMI highlights that developments in Vietnam' s rail network are taking place, but these have been focused on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam and Laos) © Business Monitor International Page 23 Vietnam Freight Transport Report Q4 2014 Table: Rail Freight, 2011-2018 2011 Rail freight tonnes... Nai For 2014, we are once again sticking to previous forecasts We therefore anticipate that the Vietnamese air freight sector will grow by 3.00%, up from 2013's 2.80%, to reach 189,210 tonnes Over the forecast period, we predict Vietnam' s air freight levels to grow on average per annum by 3.96% to reach 223,040 tonnes © Business Monitor International Page 24 Vietnam Freight Transport Report Q4 2014 Taking... companies from bidding for new contracts in Vietnam, which could see investment flows decline substantially over the coming quarters, posing downside risks to Vietnam' s growth outlook China accounted for 21.3% of foreign investment in © Business Monitor International Page 32 Vietnam Freight Transport Report Q4 2014 Vietnam in 2013, approximately 14.5% of Vietnam' s exports, and about 27% of all visitors