Vietnam freight transport report q4 2015

... Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam' s strong domestic growth... © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q4 2015 Road Transport dominates freight mix in Vietnam 2015 Vietnam Freight Mode Breakdown % of Total BMI calculation... Office of Vietnam, BMI © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q4 2015 Market Overview BMI View: The Vietnam freight industry is dominated by road transport,

Q4 2015 www.bmiresearch.com VIETNAM FREIGHT TRANSPORT REPORT INCLUDES 5-YEAR FORECASTS TO 2019 ISSN 1750-5364 Published by:BMI Research Vietnam Freight Transport Report Q4 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: August 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q4 2015 INCLUDES 5-YEAR FORECASTS TO 2019 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: August 2015 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q4 2015 CONTENTS BMI Industry View ............................................................................................................... 7 SWOT .................................................................................................................................... 9 Freight Transport ...................................................................................................................................... 9 Political ................................................................................................................................................. 11 Economic ............................................................................................................................................... 12 Operational Risk ..................................................................................................................................... 14 Industry Forecast .............................................................................................................. 16 Trade Forecast ........................................................................................................................................ 16 Table: Trade Overview (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Table: Key Trade Indicators (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Table: Main Import Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table: Main Export Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Road Freight Forecast .............................................................................................................................. 22 Table: Road Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Rail Freight Forecast ............................................................................................................................... 25 Table: Rail Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Air Freight Forecast ................................................................................................................................ 28 Table: Air Freight (Vietnam 2012-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Market Overview ............................................................................................................... 32 Company Profile ................................................................................................................ 34 Vietnam Airlines Cargo ............................................................................................................................ 34 Political Outlook ................................................................................................................ 36 Foreign Policy ........................................................................................................................................ 36 Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Long-Term Political Outlook ..................................................................................................................... 41 Oil Price Outlook ............................................................................................................... 45 Global - Crude Oil, Refined Fuels And Natural Gas Prices, 10-Year Forecasts ................................................... 45 Table: Energy Price Forecasts (Global 2013-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Table: Energy Price Forecasts (Global 2019-2024) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Macroeconomic Forecasts ............................................................................................... 48 Economic Analysis ................................................................................................................................... 48 Table: Economic Activity (Vietnam 2010-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Demographic Forecast ..................................................................................................... 54 Table: Population Headline Indicators (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Table: Key Population Ratios (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q4 2015 Table: Population By Age Group (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Table: Population By Age Group % (Vietnam 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Methodology ...................................................................................................................... 59 Industry Forecast Methodology ................................................................................................................ 59 Sector-Specific Methodology .................................................................................................................... 60 Sources ................................................................................................................................................ 62 © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q4 2015 BMI Industry View BMI View: Strong foreign direct investment (FDI), in addition to steady trade growth and the prospect of ongoing infrastructure development, both public and private, will impact favourably on the freight industry. Falling fuel prices will encourage road transport whilst rail transport will be spurred on by new investment both domestic and foreign. Government approval of the development project of Long Thanh Int'l Airport signals recognition of the need to strengthen Vietnam's credentials as an air transport hub for the Southeast Asian region. We expect export growth in Vietnam to be maintained at a steady level in the medium term, averaging 6.52% y-o-y between 2015 and 2019. In 2015, total trade real growth will come in at 6.65%, with imports outperforming exports. Of the key trade indicators, agricultural exports will see the biggest year on year growth in 2015, with fuel exports seeing the smallest growth figures. The signing of a free trade zone agreement between Eurasian Economic Union (EEU) and Vietnam will drive trade growth between the two markets. Strong foreign direct investment, infrastructure development and growing export through 2015 are set to benefit the road freight sector in Vietnam. This will set y-o-y growth in terms of tonnage transported by road on an upward curve with a forecast growth of 7.75% in 2015 up from 6.77% in 2014, rising to 8.12% in 2016. Road freight companies look set to benefit in particular from falling fuel prices and rising consumer demand, as they strive to offer economical alternatives to air and shipping freight. Year-on-year tonnage growth of the rail freight industry is set to half in 2015 to 5.07% compared to 10.01 in 2014 with further contraction predicted to the coming years, this despite increased investment in infrastructure development and the proposed construction of new lines, such as a partnership with Russia. Access from private investment using the PPP model is likely to facilitate development Following a spike in 2014, air freight in Vietnam looks set to grow by 6.27% in 2015 with levels expected to remain similar until 2019, as the country is credited with one of the three fastest growing air freight industries in the world. Growth will be facilitated by the in-flow of hi-tech manufacturing from China and India along with government action to restructure the market and increase the role of the industry in key economic zones and remote areas. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q4 2015 Recent developments ■ Russia and Vietnamese Railways sign co-operation agreement with the construction of a railway line in the south of Vietnam marking the start of the joint development of infrastructure between the two countries. ■ The Ministry of Transport approves the restructure of the air freight market by 2020 in order to develop the cargo transport market and increase the role of airfreight, especially in key economic zones and remote areas ■ Vietnam Airlines adds Boeing 787-9 Dreamliner and new generation Airbus A350 XWB to fleet, in addition to securing access from Heathrow Airport. ■ Government approves construction of Long Thanh Int'l Airport, which will begin in 2019. ■ Third-party logistics provider C. H. Robinson Worldwide opens new global forwarding office in Ho Chi Minh City. Key BMI Forecasts: ■ We forecast total road freight volumes will rise by 7.75% y-o-y over 2015 to reach 880.14mn tonnes. ■ We forecast total rail freight volumes will grow by 5.07% year on year over 2015 to reach 7.54mn tonnes. ■ We forecast total air freight volumes will rise by 6.27% year on year over 2015 to reach 214.67 tonnes. ■ We forecast total trade value to increase by 6.65% to reach USD319.27bn in 2015. ■ The top export trade partners will be the US, China, Japan, South Korea and Germany, with imports led by China, South Korea, Singapore, Japan and China © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q4 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for thousands of kilometres on a north-south axis - creates a need for long-distance freight haulage. ■ Recent cooperation between Russia and Vietnam signals the beginning of a joint infrastructure development starting with the construction of a railway line in the south of the country. ■ Government approval of the restructure of the air freight market by 2020 will see the development of the cargo transport market and increase the role of airfreight, particularly in key economic zones and remote areas. ■ High level of foreign direct investment into Vietnam's manufacturing sector continues to be a strong driver for international transport and logistics services. 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. ■ Despite air freight seeing the third fastest growth in the world, it appears that Vietnam has struggled to establish a comprehensive logistics chain to take advantage of this growth. 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. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q4 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued 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. ■ The World Bank stated at the start of 2014 that improved infrastructure could improve the country's economy substantially. ■ Increase in hi-tech production moving into Vietnam from China and telecoms from India will increase demand in transport capacity and particularly air freight. ■ Government approval of the VND336.7 trillion (US$16 billion) construction of Long Thanh international in the southern Dong Nai Province provides opportunity for new routes and increased capacity, with the handling of five million tons of cargo by 2050. ■ Vietnam's signing of a free trade deal with Russia-led Eurasian Economic Union (EEU) will drive trade growth and therefore between the two markets opening up new opportunity for the freight industry. 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. ■ Need for transport services in the country to meet growing customer demand through rapid modernisation and expansion or competitiveness will be threatened. © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q4 2015 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the coming years. The one-party system is generally conducive to short-term political stability. ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. ■ Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Threats ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea. © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q4 2015 Economic SWOT Analysis Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 6.5% annually between 2000 and 2014. ■ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 17.2% in 2012. ■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports and diversify its export sector. Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global economic uncertainties. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. ■ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high. Opportunities ■ WTO membership and the ASEAN economic integration in 2015 should give Vietnam greater access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased foreign competition. ■ The government has continued to move forward with market reforms, including privatisation of state-owned enterprises, addressing the high level of bad loans in the banking sector as well as liberalising the banking sector. ■ Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 32% of the population in 2013 to more than 50% by the early 2040s. Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam on this front could result in a decline in investment. ■ The potential for an escalation of political tensions with China over sovereign claims to parts of the South China Sea could have a negative impact on the economy. © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q4 2015 SWOT Analysis - Continued ■ Market reforms could progress at a much slower pace as the government remains cautious about ceding ownership to foreign investors. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q4 2015 Operational Risk SWOT Analysis Strengths ■ Vietnam has a high number of university graduates with skilled degrees and a high literacy rate for its income level. • In addition to a number of regional and international flight options, Vietnam has an extensive inland waterway system. • Growing levels of foreign investment encourage further trade and spin-off industries. • Vietnam's rate of violent crime is generally low, and foreigners are unlikely to be targeted. Weaknesses ■ High labour costs increase overall operating costs, and difficulty in hiring foreigners creates shortages of skilled labour. • Underdeveloped rail capacity overburdens the road network. • An underdeveloped banking sector decreases the options for keeping money in the state. • Vietnam's military forces are only a quarter the size of China's, meaning that Beijing would probably prevail in any naval battle over maritime disputes in the South China Sea. Opportunities ■ Explosive growth in demand for tertiary education will increase the number of highly skilled graduates in the medium term. • Vietnam is easily accessible from the main shipping routes, and growth in the number of port facilities will provide adequate capacity. • Increased foreign participation in the banking sector will increase the availability of funds for loans. Threats ■ Dysfunctional labour-management relations increase the risk of disruption and strike action. © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q4 2015 SWOT Analysis - Continued • Vietnam's reliance on imported oil poses risks in the form of energy and fuel shortages. • Corruption and inefficiency in the legal system. • Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider political and social unrest. © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q4 2015 Industry Forecast Trade Forecast BMI View: 2015 will see export growth of 5.8% just down from 2014's 5.92%, though this is expected to rise over the following three years. That said, exports will likely underperform the 8.92% nominal growth pace set in 2014, settling at 6.66% in 2015, with rice exports in the first half of 2015 down 6.2 percent from the same period last year to 3.05 million tonnes, according to the Agriculture Ministry. Import growth is likely to remain steady in 2015, with dipping only slightly by 2019. In terms of geographical breakdown, we believe the US market will be the key to sustaining robust export growth in Vietnam over the coming quarters amid ongoing regional headwinds. Indeed, the US remains the largest destination for Vietnamese exports, receiving 19.8% of the total in the first four months of 2015. While there was a poor run of economic data from the US in the month of April, we nevertheless expect the US economy to continue its recovery amid a healing labour market and weak global oil prices. Recovering US consumer confidence will in turn provide a boost to demand for Vietnamese goods, particularly for textiles and garments. In Q1 2015, the 'textiles and garments' category grew by 7.8% y-o-y to USD4.8bn, which is, by extension, welcome news to the air freight mode as it will be via air, as well as sea, that these exports are transported. The US accounted for 17.6% of all exports out of Vietnam in 2013 (latest available data), which underlines the importance of the US market to Vietnamese freight modes. While the US economy appears to be back on its feet, the regional economic slowdown in Vietnam's other key trading partners, particularly China, Japan and South Korea, will act as a drag on Vietnamese export growth, thus resulting in export growth in 2015 dipping slightly on 2014's 5.92% y-o-y gains. Indeed, China, Japan and South Korea received a combined 23.8% of the total for the first four months of 2015. Growth in exports to these major trading partners will likely be negatively impacted by ongoing general weakness in these economies. In China, ongoing economic rebalancing efforts by the Chinese government will continue to slow growth in the world's second largest economy. Import growth in China contracted by 12.3% y-o-y in March, reflecting the economic slowdown in recent quarters. Meanwhile, attempts to revive the Japanese economy appear to have fallen short, with real household income and industrial production growth remaining rather lacklustre. The ability to attract strong foreign direct investment (FDI) inflows to the manufacturing sector is another factor that will keep the Vietnamese export sector vibrant. The exports of manufactured goods are set to grow by 7.08% in 2015. Well-known multinational companies like Samsung (one of the largest foreign investors in Vietnam) and Procter and Gamble are increasing their investment in the country, which will © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q4 2015 only benefit the freight industry, in particular air freight as goods are flown out to more developed countries. In particular, Samsung (through its various subsidiaries) is running several large scale projects in Vietnam, including the construction of a second smartphone factory worth USD3.0bn in the northern province of Thai Nguyen and a USD1.0bn production plant in the province of Bac Ninh to manufacture LCD screens. According to the Ministry of Planning and Investment, registered capital investment from the South Korean giant is estimated to hit USD20.0bn by 2017. The total investment from Samsung in the country currently stands at around USD11.0bn. Trade Sees Steady Growth Through To 2019 Imports and Exports Value (2013-2019) 600 400 200 Vietnam - Imports, USDbn 2019f 2018f 2017f 2016f 2015f 2014 2013 0 Vietnam - Exports, USDbn f = BMI forecast. Source: ADB, General Statistics Office of Vietnam, BMI Medium Term In welcome news for the Vietnamese freight industry, Vietnam and South Korea have concluded negotiations for a bilateral free trade agreement (FTA) during a meeting between Vietnamese Prime Minister Nguyen Tan Dung and South Korean President Park Geun-hye on the sidelines of the ASEANKorea Commemorative Summit. The FTA seeks to triple bilateral trade turnover to USD70bn by 2020. The FTA covers 17 areas, including products, services and investment and intellectual property; however, it © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q4 2015 excludes rice, a sensitive product for Korean farmers, as reported by the Korea Times. The two Asian nations have held nine rounds of FTA talks since August 2012, reported Thanh Nien News. If Vietnam and South Korea can appease farmers in the latter country, the former is set to benefit from its large rice exports. The anticipated bounce from the FTA is one of the key reasons why we see export growth in Vietnam performing strongly over our medium term forecast period, growing by an average 6.52% y-o-y between 2015 and 2019. Long Term Coal production will remain the overwhelming power source of choice, most notably in China and India, and with Vietnam exporting significant amounts of coal, it is well placed to benefit from growing demand over the long term. Not only is coal the cheapest option, but it is relatively abundant, scalable and has a faster turnaround than other fuel sources. We forecast that despite rising environmental concerns, by 2024, coal will still account for approximately 70.0% of China's energy mix, down only marginally from about 73.0% currently. Although coal will remain the power source of choice, we do expect policy changes to boost growth in nuclear and renewable energy sources over the next decade. With Europe being the second largest export destination for Vietnamese goods (receiving 18.8% of the total for the first four months of 2015), weakness in the euro will undoubtedly weigh on European demand for Vietnam's exports going forward, a situation that has occurred in the first half of 2015. The euro has depreciated against the Vietnamese dong by about 20% since May 2014, making Vietnamese goods more expensive in euro terms and this is a scenario that could worsen in future, affecting demand for Vietnamese goods and thus having a detrimental effect on the country's freight modes, in particular air freight. Table: Trade Overview (Vietnam 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f Imports, real growth, % y-o-y 9.09 7.90 7.50 7.50 7.30 7.20 7.00 7.00 Exports, real growth, % y-o-y 15.71 6.00 5.92 5.80 6.20 6.60 6.80 7.20 Total Trade, real growth, % y-o-y 12.40 6.95 6.71 6.65 6.75 6.90 6.90 7.10 118.98 133.50 147.57 159.94 178.12 202.18 229.09 259.36 5.86 12.20 10.54 8.38 11.37 13.51 13.31 13.21 124.43 137.15 149.38 159.34 175.63 198.25 224.21 254.31 16.46 10.22 8.92 6.66 10.23 12.88 13.10 13.42 243.41 270.65 296.96 319.27 353.75 400.43 453.30 513.67 Imports, USDbn Import growth, % y-o-y Exports, USDbn Export growth, % y-o-y Total trade, USDbn © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q4 2015 Trade Overview (Vietnam 2012-2019) - Continued Total trade growth, % y-o-y 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 11.03 11.19 9.72 7.51 10.80 13.20 13.20 13.32 f = BMI forecast. Source: ADB, General Statistics Office of Vietnam, BMI Table: Key Trade Indicators (Vietnam 2012-2019) 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 3,882 4,482 4,864 5,301 6,246 6,883 8,144 9,026 -8.0 15.4 8.5 9.0 17.8 10.2 18.3 10.8 3,767 3,363 4,677 4,982 5,205 6,095 6,599 7,702 Agricultural raw materials, imports, % y-oy -9.0 -10.7 39.1 6.5 4.5 17.1 8.3 16.7 Ores and metals, exports, USDmn 729 1,055 1,102 1,179 1,276 1,472 1,639 1,892 Ores and metals, exports, % y-o-y -9.8 44.8 4.5 7.0 8.2 15.3 11.4 15.5 Ores and metals, imports, USDmn 4,759 4,369 5,779 6,289 6,769 7,953 8,788 10,204 Ores and metals, imports, % y-o-y 4.8 -8.2 32.3 8.8 7.6 17.5 10.5 16.1 Iron and steel, exports, USDmn 2,395 2,589 2,930 3,150 3,576 4,031 4,663 5,295 Iron and steel, exports, % y-o-y 7.2 8.1 13.2 7.5 13.5 12.7 15.7 13.6 Iron and steel, imports, USDmn 6,959 8,172 10,167 11,012 11,048 13,542 14,172 16,967 Iron and steel, imports, % y-o-y -3.7 17.4 24.4 8.3 0.3 22.6 4.7 19.7 78,489 89,452 91,874 Agricultural raw materials, exports, USDmn Agricultural raw materials, exports, % y-oy Agricultural raw materials, imports, USDmn 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 26.2 14.0 2.7 98,383 112,654 124,875 145,703 163,012 7.1 14.5 10.8 16.7 11.9 83,710 97,013 102,206 110,872 125,294 140,987 161,530 181,741 13.2 15.9 5.4 8.5 13.0 12.5 14.6 12.5 11,353 14,709 16,092 17,012 16,959 20,155 21,003 24,731 29.6 9.4 5.7 -0.3 18.8 4.2 17.8 11,452 15,978 16,687 18,087 19,677 22,731 25,355 29,031 4.4 8.4 8.8 15.5 11.5 14.5 3.1 -8.6 39.5 e/f = BMI estimate/forecast. Source: UNCTAD, BMI © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q4 2015 Table: Main Import Partners 2006 2007 2008 2009 2010 2011 2012 2013 7,391 12,710 15,974 16,441 20,019 24,594 28,786 53,458 16.5 20.3 19.8 23.5 24.0 23.5 25.8 31.9 3,908 5,340 7,255 6,976 9,761 13,176 15,536 23,196 8.7 8.5 9.0 10.0 11.7 12.6 13.9 13.8 6,274 7,614 9,378 4,248 4,101 6,391 6,690 11,978 14.0 12.1 11.6 6.1 4.9 6.1 6.0 7.1 4,702 6,189 8,240 7,468 9,016 10,400 11,603 11,575 10.5 9.9 10.2 10.7 10.8 10.0 10.4 6.9 1,441 1,951 2,633 826 860 970 970 8,315 3.2 3.1 3.3 1.2 1.0 0.9 0.9 5.0 TOTAL 44,891 62,765 80,714 69,949 83,365 104,510 111,640 167,791 TOTAL, top 5 countries, USDm 23,717 33,804 43,480 35,960 43,758 55,530 63,584 108,521 52.8 53.9 53.9 51.4 52.5 53.1 57.0 64.7 China, Mainland, USDmn China, Mainland, USDmn, % of total Korea, Republic Of, USDmn Korea, Republic Of, USDmn, % of total Singapore, USDmn Singapore, USDmn, % of total Japan, USDmn Japan, USDmn, % of total China,P.R.:Hong Kong, USDmn China,P.R.:Hong Kong, USDmn, % of total % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report. Table: Main Export Partners 2006 2007 2008 2009 2010 2011 2012 2013 7,845 10,105 11,887 11,356 14,238 16,928 19,668 22,930 19.7 20.8 19.0 19.9 20.4 18.2 17.8 17.6 3,243 3,646 4,850 4,909 7,309 11,125 12,388 15,351 8.1 7.5 7.7 8.6 10.5 12.0 11.2 11.8 5,240 6,090 8,468 6,292 7,728 10,781 13,060 12,917 Japan, USDmn, % of total 13.2 12.5 13.5 11.0 11.1 11.6 11.8 9.9 Korea, Republic Of, USDmn 843 1,243 1,794 2,065 3,092 4,715 5,580 6,523 Korea, Republic Of, USDmn, % of total 2.1 2.6 2.9 3.6 4.4 5.1 5.0 5.0 1,445 1,855 2,073 1,885 2,373 3,367 4,095 5,683 3.6 3.8 3.3 3.3 3.4 3.6 3.7 4.4 39,826 48,561 62,685 57,196 69,820 92,881 110,795 130,551 United States, USDmn United States, USDmn, % of total China, Mainland, USDmn China, Mainland, USDmn, % of total Japan, USDmn Germany, USDmn Germany, USDmn, % of total TOTAL © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2015 Main Export Partners - Continued TOTAL, top 5 countries, USDm 2006 2007 2008 2009 2010 2011 2012 2013 18,616 22,939 29,072 26,507 34,740 46,916 54,792 63,403 46.7 47.2 46.4 46.3 49.8 50.5 49.5 48.6 % from top 5 trade partners Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q4 2015 Road Freight Forecast BMI View: Strong foreign direct investment, infrastructure development and growing exports through 2015 are set to benefit the road freight sector in Vietnam. This will set y-o-y growth in terms of tonnage transported by road on an upward curve with a forecast growth of 7.75% in 2015 up from 6.77% in 2014, rising to 8.12% in 2016. Road freight companies look set to benefit in particular from falling fuel prices and rising consumer demand, as they strive to offer economical alternatives to air and shipping freight. Short Term Vietnam will see private consumption remain broadly the same in 2015, which is why our road freight tonnage handled forecast for the year does not differ so much from 2014. The rise in this mode will predominantly occur due to lower fuel prices for truckers. The Vietnamese economy is currently resting on a growth-inflation sweet spot, with consumer price inflation (CPI) coming in at just 0.9% y-o-y in March (in part owing to the slump in global oil prices) versus the peak of 23.0% in August 2011. Price stability and positive economic growth prospects will lend support to the Vietnamese dong, while a richer domestic consumer continues to benefit the road freight sector, hence our healthy growth forecast over the short term. The confluence of these factors will restore and shore up investor confidence, enhancing Vietnam's attractiveness as a place to invest and do business in, which should have a knock on effect on infrastructure, which could mean enhanced facilities for truckers and, therefore, a boost for the road freight sector. © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q4 2015 Glowing Consumer Picture Impacts On Road Transport GDP Per Capita (2013-2024) 6,000 12.5 4,000 10 2,000 7.5 2024f 2023f 2022f 2021f 2020f 2019f 2018f 2017f 2016f 2015f 2014 5 2013 0 Vietnam - GDP per capita, USD (LHS) Vietnam - GDP per capita, USD, % y-o-y (RHS) f = BMI forecast. Source: General Statistics Office, Asian Development Bank, BMI Medium Term Over our forecast period to 2019, we expect to see y-o-y average growth to come in at a healthy 7.79%, as the sector goes from strength to strength. This is predicated on a glowing consumer picture, as well as Vietnam's rising stature as an attractive place for investment. Looking ahead, we expect the economy to continue growing robustly, on the back of greater foreign direct investment (FDI) inflows and ongoing efforts by the government to improve the country's business conditions, which will all boost the road freight sector as demand grows and increased investment improves Vietnam's reputation as a place to do business in Asia. Long Term Vietnamese President Trưưng Tưn Sang stated on March 20 that his country values the growing relationship with Thailand, which he believes will flourish in the coming years. Thailand is not currently one of Vietnam's top five trade partners, but stronger links could change this over the long term, benefitting the © Business Monitor International Ltd Page 23 Vietnam Freight Transport Report Q4 2015 latter's road freight industry as a result. Speaking at a reception hosted for Thai Deputy Prime Minister and Foreign Minister Thanasak Patimapragorn in Vietnamese capital city Hanoi, Sang lauded the outcome of the meeting of the Joint Committee on bilateral cooperation. Sang also expressed his gratitude to Thailand for paying attention to the needs of the Vietnamese community in Thailand, saying that he hopes a bilateral labour deal will be signed soon. Sang noted that the economic ties between the two nations were developing strongly with many large Thai firms investing in the country, reported Intellasia/Vietnamnet. Over the longer term, the Vietnamese government's decision to introduce tighter regulation to clamp down on overloaded trucks, which will now result in firms having to procure additional vehicles to transport their cargo, should promote driver safety and make the road freight sector more attractive as a direct consequence. The decision by Vietnam's Ministry of Transport (MOT) to increase control and oversight of overloaded vehicles so as to ensure driver safety is a positive development for the commercial vehicle (CV) sector. Table: Road Freight (Vietnam 2012-2019) 2012 Road Freight Tonnes (000) 2016f 2017f 2018f 2019f 722,156 765,070 816,857 880,142 951,611 1,026,523 1,105,191 1,188,832 Road freight tonnes, % y-o-y Road freight tonnes-km (mn ton km) 2013 2014 2015f 10.4 5.9 6.8 7.7 8.1 7.9 7.7 7.6 43,902 46,790 48,146 50,399 52,546 54,648 57,260 59,935 9.4 6.6 2.9 4.7 4.3 4.0 4.8 4.7 Road freight tonnes-km, % y-o-y f = BMI forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q4 2015 Rail Freight Forecast BMI View: Year-on-year tonnage growth of the rail freight industry is set to half in 2015 to 5.07% compared to 10.01 in 2014 with growth levels predicted drop further in the coming years, this despite increased investment in infrastructure development and the proposed construction of new lines, such as a partnership with Russia. Access from private investment using the PPP model is likely to facilitate development. Short Term Vietnam exported 9.29mn mt of crude, up 10.5% y-o-y from January to December 2014. While the export volume for December was 23.5% higher than November, the export value was 4.7% lower at USD414mn compared with November 2013. Greater demand for crude has a positive knock-on effect on Vietnam's rail freight sector, which is why we anticipate positive growth to remain in this freight mode both in 2015 and over the medium term also. Tempering our forecast, however, is the news that state-owned PetroVietnam is likely to reduce production from four of its oil fields to cut costs, as expenses have exceeded prices. This scenario has resulted in BMI deciding that double-digit growth seen in 2014 is unlikely to take place again in 2015. © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q4 2015 Demand For Crude Impacts Positively On Rail Freight Rail Freight Tonnage (2006-2019) 10,000 15 10 7,500 5 5,000 0 2,500 -5 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -10 2006 0 Vietnam - Rail freight tonnes ('000) Vietnam - Rail freight tonnes, % y-o-y f = BMI forecast. Source: General Statistics Office of Vietnam, BMI Medium Term The expansion of Japan's K Line into Vietnam's logistics sector in 2014 could offer upside risks to the rail freight sector going forward. The move is part of the company's wider strategy to reduce its exposure to the container shipping sector by increasing its exposure to more profitable sectors, including logistics. Should other firms follow suit, the rail freight mode could benefit and the mode is already set to perform steadily over our forecast period, averaging y-o-y growth of 3.5% to 2019. Long Term Discoveries and foreign investments are encouraging signs for both Vietnam's gas production and consumption growth prospects and, by extension, provide welcome news for rail freight as it is the mode most concerned with heavy industry transportation. This is reflected in our optimistic growth forecast for Vietnamese gas production and consumption. Nonetheless, gas prices and regional security pose risk to further growth. © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q4 2015 Table: Rail Freight (Vietnam 2012-2019) 2012 Rail freight tonnes ('000) 2018f 2019f 7,003.50 6,525.90 7,178.90 7,542.90 7,808.41 8,085.61 8,375.07 8,678.25 Rail freight tonnes, % y-o-y Rail freight tonnes-km (mn ton km) -3.87 2013 5,797.80 12.96 4.16 3.52 2017f 4,024.60 3,804.10 4,297.20 4,475.96 4,782.00 5,102.78 5,439.65 -5.48 5.07 2016f 3.62 -3.30 10.01 2015f 3.58 Rail freight tonnes-km, % y-o-y -6.82 2014 6.84 3.55 6.71 6.60 6.58 f = BMI forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q4 2015 Air Freight Forecast BMI View: Following a spike in 2014, air freight in Vietnam looks set to grow by 6.27% in 2015 with levels expected to remain similar until 2019, as the country is credited with one of the three fastest growing air freight industries in the world. Growth will be facilitated by the in-flow of hi-tech manufacturing from China and India along with government action to restructure the market and increase the role of the industry in key economic zones and remote areas. June 2015 saw the approval of the construction of a Long Thanh Int'l Airport to serve as an aviation hub in both the country and the Southeast Asian region. Short Term Vietnam's pharmaceutical industry, meanwhile, is currently facing challenges to compete with Indian drug firms, according to state management agencies. With domestic firms preferring to import materials for drug production, rather than spending money on research, the air freight sector by extension is poised to benefit from what could be a lucrative revenue stream. A free trade agreement signed with the ASEAN, of which Vietnam is a member, has also led to this rise in imports of Indian medicines. There were 4,269 registered Indian drugs in 2014, accounting for 26% of the total registered items in Vietnam, which is welcome news for Vietnam's air freight operations. © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q4 2015 Year-On-Year Growth Unchanged Across Medium Term Air Freight Tonnage (2006-2019) 300 40 200 20 100 0 2019f 2018f 2017f 2016f 2015f 2014 2013 2012 2011 2010 2009 2008 2007 -20 2006 0 Vietnam - Air Freight Tonnes (000) (LHS) Vietnam - Air freight tonnes % y-o-y (RHS) f = BMI forecast. Source: General Statistics Office of Vietnam, BMI Medium Term Significant private sector interest in Vietnam's airport sector bodes well for the government's efforts to raise funds for additional projects and also provides potentially significant upside risk to our air freight forecasts over the medium and longer term. Nonetheless, we maintain our moderate forecast as we expect issues such as permit approvals, environmental clearances and land acquisition to result in project delays, hindering growth. Consequently, we currently forecast y-o-y air freight tonnage throughput growth of an average 6.6% between 2015 and 2019. Private sector interest in Vietnam's airports indicates that the government's plan to privatise the sector is gaining traction. French airport operator Aeroports de Paris (ADP) has expressed interest in being a strategic stakeholder of Airports Corporation of Vietnam (ACV) through a 25-30% ownership, according to the Vietnam Investment Review. In addition, ADP is also looking to work with Credit Suisse, Vietnam's Transport Ministry and ACV to raise USD2-3bn for the construction of the Long Thanh International Airport in southern Vietnam. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q4 2015 Elsewhere, Vietnam Airlines has recently announced that it wants to buy the domestic passenger terminal at Hanoi's Noi Bai International Airport from the ACV, pitting itself against VietJet Air, which also wants to purchase Terminal 1 at Noi Bai. T&T Group, a Hanoi-based conglomerate had also requested in March 2015 that the Transport Ministry approve its investment into the Phu Quoc Airport - currently fully owned by AVC. With the country expected to see significant growth in air passenger traffic over the coming years (expanding by 25% between 2015 and 2019 to 10.4mn based on our forecast), the government has ambitious plans to develop airport infrastructure, and the partial privatisation of ACV's assets will help to unlock funds to support airport construction. The knock on-effect of this will be better facilities for air freighters, as well as increased foreign interest in the sector as Vietnam begins to better compete regionally. Besides the Long Thanh airport project which ADP is interested in and is estimated to cost USD15.8bn, there are also plans to build an additional terminal at Cam Ranh International Airport. The Cam Ranh project is expected to cost VND1.0tn (USD47mn), with the new terminal expected to operate in 2018. Meanwhile, construction of new terminals at the Cat Bi International Airport and Phu Cat Airport also commenced in January 2015. Beyond funding, the entrance of private players in the operations of Vietnam's airports will help improve efficiency in the sector. AVC currently operates all civil airports in Vietnam, and we believe a lack of private sector participation has resulted in several airports operating below capacity and becoming significant fiscal drags. As such, private investment would also allow various projects to operate in more competitive, revenue driven environment which will see standards and capacity utilisation improve. Long Term Despite this positive momentum in the airport sector, we highlight that we maintain our moderate outlook for airport infrastructure construction, as we believe there remain significant business environment challenges to the numerous airport expansion plans, even with additional funding provided by asset privatisation. Existing hurdles to project execution such as permit approvals, environmental clearances and land acquisition could result in delays of airport projects. A case in point is the possible expansion of the Tan Son Nhat Airport, which is expected to reach passenger capacity by 2017. While the Long Thanh International Airport has been planned with the intention of alleviating traffic at Tan Son Nhat, it is expected to enter its first phase of operations only in 2023. This could be delayed further; according to the Ho Chi Minh City government, plans to expand Tan Son Nhat are 'impossible' due to issues with site clearances, which involves relocation of residences and a significant compensation for land acquisition. © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q4 2015 Table: Air Freight (Vietnam 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 178 183 202 214 229 244 260 277 -10.8 2.8 10.0 6.3 6.8 6.7 6.6 6.6 Air freight tonnes-km (mn ton km) 480 469 530 555 595 637 680 727 Air freight tonnes-km % y-o-y 12.7 -2.3 12.9 4.7 7.2 7.0 6.9 6.8 Air Freight Tonnes (000) Air freight tonnes % y-o-y f = BMI forecast. Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q4 2015 Market Overview BMI View: The Vietnam freight industry is dominated by road transport, which accounts for 99% of all tonnage transported. Despite efforts to develop the country's rail infrastructure and good prospects for investment in air transport in the region, road transport, in terms of tonnage, looks set to increase its share marginally over the other two transport forms in the next four years. Road transport remains the dominant form of freight transport in the country, accounting for a 99% share of the mix in 2015. Further development and investment throughout the year and, into the medium term, will reinforce its competitiveness despite a threat posed by the introduction of new regulations and international differences concerning load capacity. Rail freight transport accounted for 0.85% of the total freight mix in 2015, as poor infrastructure continues to impact on its competitiveness compared to other transport methods. General recognition of the need for modernisation has seen the Vietnam Railways Corporation (VRC) open the doors for private investment and DSVN sign a cooperation agreement with Russian Railways. Air transport plays a small but important part in the freight mix, providing vital links to the rest of Asia as well as other trading regions. Its 0.024% share of all freight transport in 2015 looks set to remain steady in the coming years. Vietnam's role in international markets such as high-tech and pharmaceutical impacts on the country's air freight industry, while competitiveness with other Asian carriers is also a key factor in its success. © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q4 2015 Road Transport dominates freight mix in Vietnam 2015 Vietnam Freight Mode Breakdown % of Total BMI calculation Cost, speed and infrastructure benefits have all played a historical part in the dominance of road transport in the region, however its share in 2009 was lower, with rail transport playing a slightly larger role. Since then, lack of recognition for the need for investment in the rail infrastructure has contributed to the steady demise of its role, from 0.96% in 2012 to 0.85% today. Hovering at around 0.024% the role of air freight in Vietnam has been steady through previous years, with issues such as external economic factors and private investment levels playing a part in determining yearly figures for the industry. The lack of investment in air freight services and support structures has hampered the industry's ability to maintain competitiveness and increase its influence in the freight mix. Despite increased growth in 2016 to 6.83% strengthened by Vietnam's growing role in the Asian high-tech industry and government investment in infrastructure, air freight share will fall from 0.024 in 2015 to 0.023% in 2019. Rail freight is also likely to reduce its share in the overall freight mix, from 0.85% in 2015 to 0.72% in 2019 as road transport continues to offer price and service advantages. The dominance of the road freight industry will increase from 99.13% in 2015 to 99.25% in 2019, aided by economic growth and falling fuel costs, as well as government efforts to increase capacity and in turn, reduce road congestion. © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q4 2015 Company Profile Vietnam Airlines Cargo SWOT Analysis Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ■ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the bellyholds of its parent company's planes. Opportunities ■ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the bellyholds of aircrafts in the future. ■ 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. ■ BMI believes that the rapidly expanding air cargo sector in Vietnam will be assisted by private investment as foreign companies, such as Samsung, seek secure supply chains to transport their goods. Threats ■ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q4 2015 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. 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. Latest Activity ■ ■ April saw the company begin its new direct service from Heathrow Airport following a seven-year wait for slot availability. With the new fleet of 787-9 Dreamliners due to start operating later in the summer, the airline said it will operate five weekly services to Hanoi and Ho Chi Minh City. This frequency is expected to be increased to a daily service. Vietnam Airlines chief executive Dr Pham Ngoc Minh said: 'Our vision, and that of the government of Vietnam, is for Vietnam Airlines to become the major carrier in Southeast Asia - this move represents a tremendous step forwards in achieving that goal.' In March, the company announced that it is to reduce both revenue and profit targets in 2015. Meanwhile, it increased its investment plan by almost two-and-a-half times predicting that consolidated revenue for 2015 is likely reach VND70.156 trillion (USD3.3 billion), 2.5% lower than the previous year's estimated results. The aviation company's pre-tax profit goal is also set at VND613.5 billion (USD28.7 million), a 5% fall on the previous year. The company blamed lower targets on falling fuel prices which have led to decreased fuel surcharges on tickets. © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q4 2015 Political Outlook Foreign Policy BMI View: Despite increasing political and international pressures, China will continue to hold a firm stance on its nine-dash line claims to the South China Sea. Therefore, there remains no end in sight to the ongoing maritime dispute between Vietnam and China. That said, we believe Vietnam will not want to strain ties with China given the latter's increasing economic importance. It has been a year since China deployed its oil rig off Vietnam's coast in May 2014, sparking off anti-China riots in Vietnam. While tensions between Vietnam and China have somewhat eased following the removal of the Chinese oil rig, the risk of renewed strains to their relationship remains. Indeed, negotiations between both parties to resolve their long-standing maritime dispute over their claims to the Spratly and Paracel Islands in the South China Sea have not yielded any significant progress. With Beijing maintaining its firm stance on its nine-dash line claims that currently place most parts of the South China Sea under Chinese jurisdiction, a solution to the ongoing maritime conflict will prove elusive. An Escalation Of Maritime Tensions Could Force A Downgrade Vietnam - Short-Term Political Risk Index, Out Of 100 Source: BMI © Business Monitor International Ltd Page 36 Vietnam Freight Transport Report Q4 2015 China Not Yielding To Mounting International Pressures Political and international pressures have also been mounting over recent years, urging a quick resolution to the ongoing maritime dispute. However, China has not succumbed to any of these pressures. While Manila filed an international arbitration case at the United Nations in relation to its own maritime dispute with China in the South China Sea, Beijing has flatly refused to participate in any of the tribunal's legal proceedings. Vietnam also piled on the pressure by formally submitting its political stance on the South China Sea dispute to the arbitral tribunal on December 12, 2014. Likewise, the Chinese government has not softened its stance with regards to its sovereign claims to the South China Sea. Strongest Statement By ASEAN Unlikely To Lead To A Resolution In the latest development, ASEAN issued its strongest statement to date following its 26th summit (27-28 April) in Malaysia. In the statement, ASEAN cited that ongoing reclamation works carried out by China have the potential to 'undermine peace, security and stability in the South China Sea', reflecting growing anxiety among leaders of the 10-member bloc with regards to China's increasing assertiveness in the region. While ASEAN has adopted a tougher stance against China, we believe that the strong statement is also unlikely to yield any form of compromise from Beijing. We therefore also expect little progress to be made in finding a solution to the maritime dispute under the leadership of current chair, Malaysia. China To Remain Aggressive Meanwhile, China is likely to persist with its aggressive actions in the South China Sea in a bid to protect its nine-dash line claims. In particular, China will continue to step up its efforts to strengthen its naval capabilities in the region as well as to intensify surveillance operations in a bid to limit other countries' access to the disputed islands. In addition, reclamation efforts by China will continue to accelerate. Land reclamation has been carried out on at least seven disputed islands based on satellite images. Most notably, China has completed a 2-km long airstrip on Woody Island (which forms part of the Paracel Islands). Given that Chinese vessels have previously clashed with Vietnamese ships, any miscalculated steps by any actors in the disputed waters could lead to unintended skirmishes. Moreover, Vietnam has also reportedly conducted significant land reclamation activities at two disputed areas, namely Sand Cay and West London Reef in the Spratly region, which could further incur the wrath of the Chinese government. © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q4 2015 Vietnam Forging Collaborations In The Face Of Rising Threats From China In order to not fight a lone battle against China's aggressive behaviour in the South China Sea, Vietnam has sought to form a strategic partnership with the Philippines. At present, details of the impending partnership are being discussed between both countries' leaders. China's aggressive behaviour in the region is also providing the US a chance to accelerate its geopolitical rebalancing efforts towards Asia. Indeed, Vietnam has sought to strengthen its ties with the US, as well as with Japan, to bolster its diplomatic deterrence against China. The US partially lifted an arms embargo on Vietnam in order to aid the latter in building up its defence capabilities in the face of rising security threats from China. In addition, the Philippines (which is also deeply embroiled in its own maritime dispute with China) signed a defence pact in with the US in April 2014, allowing the US to further increase its existing military presence in the archipelago. China An Important Economic Partner Vietnam - Tourist Arrivals By Countries, % Of Total Source: BMI, Vietnam National Administration of Tourism © Business Monitor International Ltd Page 38 Vietnam Freight Transport Report Q4 2015 Vietnam Can't Afford To Lose China As An Economic Partner Despite the ongoing maritime dispute, we nevertheless believe Vietnam will not want to strain ties with China, given the importance of the latter as a key economic partner. Indeed, China remains one of Vietnam's key export destinations, accounting for about 10% of total Vietnamese outbound shipments. In addition, China is also the third largest foreign investor in the country, contributing as much as 16.0% of Vietnam's total foreign registered capital. According to the latest data from the Vietnam National Administration of Tourism, China accounted for the largest proportion (24.7%) of tourist arrivals in 2014. As such, we maintain Vietnam's short-term political risk index score at 76.9 out of 100, but may look to downgrade it in the event of an escalation of maritime tensions. Table: Vietnam Political Overview System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang Head of Government Prime Minister Nguyen Tan Dung (serving second and final five-year term) Last Election Parliamentary - May 2011 Presidential - July 2011 Composition Of Current Government Communist Party of Vietnam (CPV) Key Figures The 16-person Communist Party Politburo, elected by the 175-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang. Other Key Posts National Assembly Chariman - Nguyen Sinh Hung, Minister of National Defence Phung Quang Thanh, Minister of Planning and Investment - Bui Quang Vinh, Vice President - Nguyen Thi Doan, Central Bank Governor - Nguyen Van Binh. Main Political Parties (number of seats Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV in parliament) has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology. Next Election Presidential and Parliamentary - May 2016 Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in the South China Sea Key Relations/ Treaties ASEAN and WTO Member BMI Short-Term Political Risk Index © Business Monitor International Ltd 76.9 Page 39 Vietnam Freight Transport Report Q4 2015 Vietnam Political Overview - Continued System of Government BMI Structural Political Risk Index Single-Party Socialist Republic 57.7 Source: BMI, National Sources © Business Monitor International Ltd Page 40 Vietnam Freight Transport Report Q4 2015 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. 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. Although inflation was brought down from a double-digit high of 23.0% in August 2011 to a more benign rate of 4.1% by end-2014, a failure by the Vietnamese government to contain inflation at a reasonable level and uphold the real value of the dong, while not currently our core view, could undermine consumer and investor confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q4 2015 There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese 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 amounted to more than 20% of GDP in 2013 according to data from the IMF, 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 score of 57.7/100 is weighed down by a score of 29.0 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q4 2015 Public Unrest A Major Risk Vietnam - Long-Term Political Risk Index (Scores Out Of 100) Source: BMI Scenarios For Political Change Core Scenario - CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older and more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario - Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q4 2015 dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario - Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Ltd Page 44 Vietnam Freight Transport Report Q4 2015 Oil Price Outlook Global - Crude Oil, Refined Fuels And Natural Gas Prices, 10-Year Forecasts Table: Energy Price Forecasts (Global 2013-2018) 2013 2014 2015f 2016f 2017f 2018f 105.90 96.30 56.00 58.00 60.00 62.00 98.00 93.06 52.00 55.00 58.00 59.00 Brent, USD/bbl 108.70 99.50 59.00 61.00 63.00 65.00 Urals, USD/bbl 107.90 98.09 57.00 59.00 61.00 63.00 Dubai, USD/bbl 105.40 96.50 55.00 57.00 59.00 61.00 Unleaded gasoline, Rotterdam, USD/bbl 115.19 110.71 70.25 69.90 69.95 70.50 Unleaded gasoline, New York, USD/bbl 118.70 114.83 70.75 71.15 72.20 73.00 Unleaded gasoline, Singapore, USD/bbl 115.89 112.46 69.75 70.65 72.00 73.20 Unleaded gasoline, global average, USD/bbl 116.59 112.67 70.25 70.57 71.38 72.23 Gasoil/diesel, Rotterdam, USD/bbl 124.81 111.00 67.85 71.50 75.00 78.00 Gasoil/diesel, Singapore, USD/bbl 123.15 112.45 67.75 72.00 75.50 78.20 Gasoil/diesel, global average, USD/bbl 124.84 111.82 67.90 71.73 75.10 78.00 Naphtha, Rotterdam, USD/bbl 100.27 98.30 59.30 64.00 67.20 70.56 Naphtha, Singapore, USD/bbl 100.27 98.62 59.60 64.40 67.60 71.00 Naphtha, global average, USD/bbl 100.27 98.46 59.45 64.20 67.40 70.78 Jet/kerosene, Rotterdam, USD/bbl 127.30 116.21 74.16 77.00 80.30 83.45 Jet/kerosene, New York, USD/bbl 125.10 117.36 74.57 78.50 81.40 84.20 Jet/kerosene, Singapore, USD/bbl 122.65 112.38 70.45 74.00 77.80 81.20 Jet/kerosene, global average, USD/bbl 125.02 115.32 73.06 76.50 79.83 82.95 Bunker fuel 180, Rotterdam, USD/bbl 95.07 83.64 52.98 53.00 52.00 51.50 Bunker fuel 180, New York, USD/bbl 97.52 96.85 61.34 58.00 56.00 54.50 Bunker fuel 180, Singapore, USD/bbl 93.96 86.96 54.10 55.00 54.50 54.00 Bunker fuel 180, global average, USD/bbl 95.52 89.15 56.14 55.33 54.17 53.33 Bunker fuel 380, Rotterdam, USD/bbl 91.24 79.84 49.48 49.50 48.50 48.00 Bunker fuel 380, New York, USD/bbl 93.13 83.55 57.84 54.50 52.50 51.00 Bunker fuel 380, Singapore, USD/bbl 95.84 83.27 50.60 51.50 51.00 50.50 125.23 111.97 71.93 72.00 74.50 76.00 Bunker fuel 380, global average, USD/bbl 93.40 82.22 52.64 51.83 50.67 49.83 Bunker fuel, Rotterdam, USD/bbl 93.16 88.04 51.23 51.25 50.25 49.75 Bunker fuel, New York, USD/bbl 95.33 94.02 59.59 56.25 54.25 52.75 Bunker fuel, Singapore, USD/bbl 94.90 90.23 52.35 53.25 52.75 52.25 OPEC basket, USD/bbl WTI, USD/bbl Marine Gasoil, global average, USD/bbl © Business Monitor International Ltd Page 45 Vietnam Freight Transport Report Q4 2015 Energy Price Forecasts (Global 2013-2018) - Continued Bunker fuel, global average, USD/bbl Henry Hub, USD/mn BTU 2013 2014 2015f 2016f 2017f 2018f 94.46 90.76 54.39 53.58 52.42 51.58 3.74 4.50 3.00 3.30 3.50 4.00 f = BMI forecast. Source: BMI, Bloomberg Table: Energy Price Forecasts (Global 2019-2024) 2019f 2020f 2021f 2022f 2023f 2024f OPEC basket, USD/bbl 63.00 67.00 69.00 72.00 74.00 75.00 WTI, USD/bbl 60.00 62.00 65.00 68.00 72.00 73.00 Brent, USD/bbl 66.00 70.00 72.00 75.00 77.00 78.00 Urals, USD/bbl 64.00 68.00 70.00 73.00 75.00 76.00 Dubai, USD/bbl 62.00 66.00 68.00 71.00 73.00 74.00 Unleaded gasoline, Rotterdam, USD/bbl 71.00 71.00 71.00 71.00 71.00 71.00 Unleaded gasoline, New York, USD/bbl 73.70 73.70 73.70 73.70 73.70 73.70 Unleaded gasoline, Singapore, USD/bbl 74.50 74.50 74.50 74.50 74.50 74.50 Unleaded gasoline, global average, USD/bbl 73.07 73.07 73.07 73.07 73.07 73.07 Gasoil/diesel, Rotterdam, USD/bbl 79.00 80.00 81.00 81.00 81.00 81.00 Gasoil/diesel, Singapore, USD/bbl 79.30 80.20 81.00 81.00 81.00 81.00 Gasoil/diesel, global average, USD/bbl 79.10 80.07 81.00 81.00 81.00 81.00 Naphtha, Rotterdam, USD/bbl 71.60 72.50 73.40 73.40 73.40 73.40 Naphtha, Singapore, USD/bbl 71.80 72.60 73.30 73.30 73.30 73.30 Naphtha, global average, USD/bbl 71.70 72.55 73.35 73.35 73.35 73.35 Jet/kerosene, Rotterdam, USD/bbl 85.05 87.00 89.00 91.00 93.00 95.00 Jet/kerosene, New York, USD/bbl 85.80 87.00 90.00 92.00 94.00 96.00 Jet/kerosene, Singapore, USD/bbl 82.80 84.00 87.00 89.00 91.00 93.00 Jet/kerosene, global average, USD/bbl 84.55 86.00 88.67 90.67 92.67 94.67 Bunker fuel 180, Rotterdam, USD/bbl 51.00 51.00 51.00 51.00 51.00 51.00 Bunker fuel 180, New York, USD/bbl 53.00 53.00 53.00 53.00 53.00 53.00 Bunker fuel 180, Singapore, USD/bbl 53.50 53.00 53.00 53.00 53.00 53.00 Bunker fuel 180, global average, USD/bbl 52.50 52.33 52.33 52.33 52.33 52.33 Bunker fuel 380, Rotterdam, USD/bbl 47.50 47.50 47.50 47.50 47.50 47.50 Bunker fuel 380, New York, USD/bbl 49.50 49.50 49.50 49.50 49.50 49.50 Bunker fuel 380, Singapore, USD/bbl 50.00 49.50 49.50 49.50 49.50 49.50 © Business Monitor International Ltd Page 46 Vietnam Freight Transport Report Q4 2015 Energy Price Forecasts (Global 2019-2024) - Continued 2019f 2020f 2021f 2022f 2023f 2024f Marine Gasoil, global average, USD/bbl 76.50 78.00 80.00 80.00 80.00 80.00 Bunker fuel 380, global average, USD/bbl 49.00 48.83 48.83 48.83 48.83 48.83 Bunker fuel, Rotterdam, USD/bbl 49.25 49.25 49.25 49.25 49.25 49.25 Bunker fuel, New York, USD/bbl 51.25 51.25 51.25 51.25 51.25 51.25 Bunker fuel, Singapore, USD/bbl 51.75 51.25 51.25 51.25 51.25 51.25 Bunker fuel, global average, USD/bbl 50.75 50.58 50.58 50.58 50.58 50.58 4.20 4.20 4.20 4.20 4.20 4.20 Henry Hub, USD/mn BTU f = BMI forecast. Source: BMI, Bloomberg © Business Monitor International Ltd Page 47 Vietnam Freight Transport Report Q4 2015 Macroeconomic Forecasts Economic Analysis BMI View: We hold a positive view of the Vietnamese economy on the back of rising foreign investor interest, continued efforts by the government to improve the country's business environment, and the potential for greater private sector participation. As such, we maintain our forecast for real GDP growth of 6.4% in 2015, up from 6.0% in 2014. In line with our positive outlook for the Vietnamese economy, real GDP growth came in at 6.0% year-onyear (y-o-y) in Q115. While the latest reading represented a slowdown from the 7.0% headline figure in the previous quarter, the economy nevertheless remains on a very strong growth trajectory. The Q115 real GDP growth number also surpassed the Bloomberg consensus estimate of 5.7%. Looking ahead, we expect the economy to continue growing robustly, on the back of greater foreign direct investment (FDI) inflows and ongoing efforts by the government to improve the country's business conditions. Some of these efforts include privatising the state-owned enterprises (SOEs), strengthening the banking sector and ensuring that inflation remains manageable over the coming years. Owing to a solid start to the year, which has undoubtedly reinforced our bullish view of the Vietnamese economy, we maintain our forecast for the country's real GDP growth to accelerate to 6.4% in 2015 from 6.0% in 2014. © Business Monitor International Ltd Page 48 Vietnam Freight Transport Report Q4 2015 Strong Growth Trajectory Vietnam - Real GDP Growth, % 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015f e/f = BMI estimate/forecast. Sources: BMI, GSO Broad-Based Growth Across Various Key Sectors From a production perspective, the strong showing in the first quarter was rather broad-based. In the industry category, which accounted for 30.3% of nominal GDP in Q115, the manufacturing sector grew by a robust 9.5% y-o-y, while construction growth came in at 4.4% y-o-y. We expect the manufacturing sector to remain a key driver of growth over the coming quarters. The still relatively low labour costs in the country despite the recent wage hike, the generous tax incentives the government has to offer, as well as the ready supply of a young and dynamic workforce will greatly entice foreign manufacturing firms to invest and set up their production plants in Vietnam. In a sign that the manufacturing sector has the capacity to sustain its current strong growth momentum, the Purchasing Manager's Index (PMI) came in at 50.7 in March, marking the 19th consecutive month of industrial output expansion (PMI figure above 50 represents expansion). © Business Monitor International Ltd Page 49 Vietnam Freight Transport Report Q4 2015 19 Straight Months Of Expansion Vietnam - Purchasing Managers' Index (PMI) Source: Bloomberg, BMI Relaxation Of Foreign Property Ownership Rule A Catalyst For Greater FDI Inflows At the same time, we believe there is also strong upside potential for the real estate and construction sectors. The easing of foreign property ownership rules, due to take effect from July 2015, will allow greater foreign participation in the country's property market, which has struggled over recent years (see 'Easing Of Foreign Property Ownership Rules A Positive Step Forward', December 2, 2014). Looser monetary policy by the State Bank of Vietnam (SBV) amid rapidly falling inflation (we are forecasting a total of 50 basis points (bps) worth of cuts to the refinancing rate, taking it to 6.00% in 2015) would lend support to the property and construction sectors. Meanwhile, regarding the other major categories, the services sector rose by 5.8% y-o-y while the smaller 'agriculture, forestry and fishery' category posted positive gains of 2.1% yo-y. © Business Monitor International Ltd Page 50 Vietnam Freight Transport Report Q4 2015 Rapid Inflation Declines Provide Room For Further Easing Vietnam - Headline Inflation, % chg y-o-y Source: BMI, GSO Strong Growth, Stable Inflation Work Wonders For Investor Confidence Continued efforts by the Vietnamese government to foster macroeconomic stability will also help the country to attract greater foreign direct investment (FDI) inflows, and hence accelerate gross fixed capital formation (GFCF) growth over the coming quarters and years. We forecast GFCF to grow by 12.0% in real terms in 2015 from an estimated 9.5% in 2014. Indeed, following several economic missteps wherein the government was fully focussed on boosting real GDP growth at the expense of inflation, efforts by the administration to work towards achieving a balance between the two have since yielded positive results. The economy is currently resting on a growth-inflation sweet spot, with consumer price inflation (CPI) coming in at just 0.9% y-o-y in March (in part owing to the slump in global oil prices) versus the peak of 23.0% in August 2011. Price stability and positive economic growth prospects will lend support to the Vietnamese dong. The confluence of these factors will restore and shore up investor confidence, enhancing Vietnam's attractiveness as a place to invest and do business in. © Business Monitor International Ltd Page 51 Vietnam Freight Transport Report Q4 2015 Improving Macroeconomic Fundamentals To Lend Support Vietnam - Exchange Rate, VND/USD Source: Bloomberg, BMI Vietnam's Rising Stature As An Attractive Place For Investment While total registered capital of newly licensed projects contracted 14.3% y-o-y to USD712.3mn in the first two months of 2015 despite the 85.8% y-o-y increase in January, we believe the weak February performance will likely be transient. Informing our still positive outlook for investment growth are the reported plans by several large foreign enterprises to develop big projects in the country in 2015. Notably, Samsung (one of the leading foreign investors in Vietnam) has plans to invest in energy, shipbuilding and other infrastructure developments in the country through its various subsidiaries, with total investment reported to be around USD20.0bn. It is also looking to expand its mobile phone production capacity over the coming quarters. In addition, another multinational company, Procter and Gamble, will expand its footprint in Vietnam through setting up a USD100.0mn factory at the Vietnam-Singapore Industrial Park in the Binh Duong province that will manufacture razors for its Gillette brand. © Business Monitor International Ltd Page 52 Vietnam Freight Transport Report Q4 2015 SOE Reform To Crowd In The Private Sector The government has also sent a strong signal to investors that it will seek to accelerate the privatisation of SOEs. For instance, a working group will be established to simplify the privatisation process, while the list of state companies that will be selling government shares and the size of those share sales will be made public in a bid to attract foreign investors. Crucially, we believe continued efforts to reform state enterprises (which have burdened the banking system with a large amount of bad debts) will improve the health of domestic banks, and at the same time free up resources that can be re-allocated to the private sector. Considering that Vietnam is running a current account surplus despite suffering from a fiscal shortfall, this implies that the private sector has a large pool of savings. Unlocking these savings would result in greater private sector participation in the country's economic development, providing an immense boost to growth over the long term. Table: Economic Activity (Vietnam 2010-2019) 2010 Nominal GDP, USDbn Real GDP growth, % y-o-y GDP per capita, USD 2011 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f 112.9 134.6 155.5 6.4 6.2 170.4 5.2 5.4 1,267 1,496 1,712 1,859 185.8 199.3 220.6 248.4 280.0 314.9 6.0 6.4 6.6 6.4 6.4 6.3 2,007 2,133 2,341 2,616 2,925 3,266 Population, mn 89.0 89.9 90.8 91.7 92.5 93.4 94.2 95.0 95.7 96.4 Industrial production, % y-o-y, ave 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5 8.5 4.3 3.6 3.2 3.6 3.5 3.4 3.5 3.5 3.5 3.5 Unemployment, % of labour force, eop e/f = BMI estimate/forecast. Sources: National Sources/BMI © Business Monitor International Ltd Page 53 Vietnam Freight Transport Report Q4 2015 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail the population pyramid for 2015, the change in the structure of the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split and life expectancy. Population (1990-2050) 150 100 50 2050f 2045f 2040f 2035f 2030f 2025f 2020f 2015f 2010 2005 2000 1990 0 Vietnam - Population, mn f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 54 Vietnam Freight Transport Report Q4 2015 Vietnam Population Pyramid 2015 (LHS) & 2015 Versus 2050 (RHS) Source: World Bank, UN, BMI Table: Population Headline Indicators (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f 68,909 80,887 84,947 89,047 93,386 97,057 99,811 na 1.1 0.9 1.0 0.9 0.7 0.5 Population, total, male, '000 33,892 39,827 41,830 43,970 46,158 47,980 49,302 Population, total, female, '000 35,017 41,060 43,117 45,077 47,228 49,076 50,508 Population ratio, male/female 0.97 0.97 0.97 0.98 0.98 0.98 0.98 Population, total, '000 Population, % y-o-y na = not available; f = BMI forecast. Source: World Bank, UN, BMI Table: Key Population Ratios (Vietnam 1990-2025) Active population, total, '000 Active population, % of total population Dependent population, total, '000 Dependent ratio, % of total working age © Business Monitor International Ltd 1990 2000 2005 2010 2015f 2020f 2025f 39,197 50,153 56,330 62,305 66,093 68,401 70,001 56.9 62.0 66.3 70.0 70.8 70.5 70.1 29,712 30,733 28,617 26,741 27,292 28,655 29,810 75.8 61.3 50.8 42.9 41.3 41.9 42.6 Page 55 Vietnam Freight Transport Report Q4 2015 Key Population Ratios (Vietnam 1990-2025) - Continued Youth population, total, '000 1990 2000 2005 2010 2015f 2020f 2025f 25,778 25,543 23,038 20,918 20,950 20,690 19,395 65.8 50.9 40.9 33.6 31.7 30.2 27.7 3,934 5,190 5,578 5,823 6,342 7,964 10,414 10.0 10.3 9.9 9.3 9.6 11.6 14.9 Youth population, % of total working age Pensionable population, '000 Pensionable population, % of total working age f = BMI forecast. Source: World Bank, UN, BMI Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 1990 Urban population, '000 2020f 2025f 13,957.7 19,715.6 23,174.6 27,064.2 31,383.5 35,771.3 40,027.3 Urban population, % of total Rural population, '000 2000 20.3 24.4 2005 27.3 2010 30.4 2015f 33.6 36.9 40.1 54,952.2 61,172.3 61,773.2 61,983.2 62,003.1 61,285.7 59,783.9 Rural population, % of total 79.7 75.6 72.7 69.6 66.4 63.1 59.9 Life expectancy at birth, male, years 66.1 69.0 69.9 70.7 71.7 72.7 73.7 Life expectancy at birth, female, years 75.1 78.5 79.6 80.2 80.7 81.2 81.7 Life expectancy at birth, average, years 70.6 73.8 74.8 75.5 76.2 77.0 77.8 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, total, '000 9,314 7,127 6,897 7,228 7,012 6,574 5,922 Population, 5-9 yrs, total, '000 8,606 9,253 7,023 6,790 7,180 6,968 6,535 Population, 10-14 yrs, total, '000 7,856 9,162 9,117 6,898 6,757 7,147 6,936 Population, 15-19 yrs, total, '000 7,359 8,492 9,050 9,011 6,865 6,725 7,116 Population, 20-24 yrs, total, '000 6,644 7,672 8,332 8,873 8,936 6,802 6,664 Population, 25-29 yrs, total, '000 6,005 7,065 7,470 8,111 8,772 8,837 6,717 Population, 30-34 yrs, total, '000 5,138 6,351 6,909 7,285 8,021 8,680 8,747 Population, 35-39 yrs, total, '000 3,888 5,803 6,241 6,763 7,207 7,939 8,596 Population, 40-44 yrs, total, '000 2,462 4,994 5,719 6,147 6,684 7,127 7,856 Population, 45-49 yrs, total, '000 2,016 3,753 4,935 5,647 6,054 6,588 7,031 © Business Monitor International Ltd Page 56 Vietnam Freight Transport Report Q4 2015 Population By Age Group (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 50-54 yrs, total, '000 1,968 2,345 3,699 4,855 5,521 5,926 6,457 Population, 55-59 yrs, total, '000 2,045 1,885 2,237 3,541 4,677 5,330 5,733 Population, 60-64 yrs, total, '000 1,668 1,790 1,734 2,068 3,352 4,443 5,079 Population, 65-69 yrs, total, '000 1,411 1,770 1,609 1,562 1,906 3,104 4,134 Population, 70-74 yrs, total, '000 1,027 1,322 1,530 1,399 1,379 1,695 2,776 Population, 75-79 yrs, total, '000 752 984 1,080 1,263 1,166 1,159 1,437 Population, 80-84 yrs, total, '000 429 596 731 814 964 900 903 Population, 85-89 yrs, total, '000 223 336 385 482 545 653 617 Population, 90-94 yrs, total, '000 71 132 177 209 267 306 372 Population, 95-99 yrs, total, '000 15 40 52 74 89 115 133 Population, 100+ yrs, total, '000 1 6 11 16 23 30 38 f = BMI forecast. Source: World Bank, UN, BMI Table: Population By Age Group % (Vietnam 1990-2025) 1990 2000 2005 2010 2015f 2020f 2025f Population, 0-4 yrs, % total 13.52 8.81 8.12 8.12 7.51 6.77 5.93 Population, 5-9 yrs, % total 12.49 11.44 8.27 7.63 7.69 7.18 6.55 Population, 10-14 yrs, % total 11.40 11.33 10.73 7.75 7.24 7.36 6.95 Population, 15-19 yrs, % total 10.68 10.50 10.65 10.12 7.35 6.93 7.13 Population, 20-24 yrs, % total 9.64 9.49 9.81 9.97 9.57 7.01 6.68 Population, 25-29 yrs, % total 8.72 8.73 8.79 9.11 9.39 9.11 6.73 Population, 30-34 yrs, % total 7.46 7.85 8.13 8.18 8.59 8.94 8.76 Population, 35-39 yrs, % total 5.64 7.17 7.35 7.60 7.72 8.18 8.61 Population, 40-44 yrs, % total 3.57 6.17 6.73 6.90 7.16 7.34 7.87 Population, 45-49 yrs, % total 2.93 4.64 5.81 6.34 6.48 6.79 7.04 Population, 50-54 yrs, % total 2.86 2.90 4.36 5.45 5.91 6.11 6.47 Population, 55-59 yrs, % total 2.97 2.33 2.63 3.98 5.01 5.49 5.74 Population, 60-64 yrs, % total 2.42 2.21 2.04 2.32 3.59 4.58 5.09 Population, 65-69 yrs, % total 2.05 2.19 1.90 1.75 2.04 3.20 4.14 Population, 70-74 yrs, % total 1.49 1.63 1.80 1.57 1.48 1.75 2.78 Population, 75-79 yrs, % total 1.09 1.22 1.27 1.42 1.25 1.20 1.44 Population, 80-84 yrs, % total 0.62 0.74 0.86 0.92 1.03 0.93 0.91 © Business Monitor International Ltd Page 57 Vietnam Freight Transport Report Q4 2015 Population By Age Group % (Vietnam 1990-2025) - Continued 1990 2000 2005 2010 2015f 2020f 2025f Population, 85-89 yrs, % total 0.32 0.42 0.45 0.54 0.58 0.67 0.62 Population, 90-94 yrs, % total 0.10 0.16 0.21 0.24 0.29 0.32 0.37 Population, 95-99 yrs, % total 0.02 0.05 0.06 0.08 0.10 0.12 0.13 Population, 100+ yrs, % total 0.00 0.01 0.01 0.02 0.03 0.03 0.04 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 58 Vietnam Freight Transport Report Q4 2015 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account ■ Testing the directional movement and magnitude of coefficients ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) ■ All results are assessed to alleviate issues related to autocorrelation and multicollinearity © Business Monitor International Ltd Page 59 Vietnam Freight Transport Report Q4 2015 BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Sector-Specific Methodology There are a number of principal criteria that drive our forecasts for each transport variable: ■ GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own macroeconomic and demographic forecasts. ■ Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ■ Trends manifested through historical data; ■ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Freight Transport Tonnage Estimation BMI aims to generate best estimate figures for Freight Transport countries where raw data on freight tonnage is not published or accessible. The estimate for tonnage data integrates macroeconomic, country area, transport and infrastructure data into our model. A parent market is selected which represents the benchmark for the region, we then use weighted scale factors to adjust the raw data of the parent to calculate estimated proxy figures for a given market. The three indicators which we estimate tonnage data for is Road Freight, Rail Freight and Air Freight. One indicator used in the estimation of all three indicators is Real GDP. This is the value of output for a given country adjusted for inflation. This is used to represent the size of an economy and the level of © Business Monitor International Ltd Page 60 Vietnam Freight Transport Report Q4 2015 transport activity in a country. Therefore this is one of the main scale factors used when generating our estimations. The additional indicators used in freight tonnage estimations are given below: ■ Population: The number of people living in a country. The figures are sourced from the UN/World Bank. ■ Total Road Length: The total length of the road network in a given country. The data is sourced from the CIA World Factbook. ■ Country Area: The sum of all land and water areas within international boundaries. The data is sourced from the CIA World Factbook. ■ Number of Airport (with paved runways): The number of airports with concrete or asphalt landing surfaces. The data is sourced from the CIA World Factbook. ■ Length of Railways: The total length of the railways network in a given country. The data is sourced from the CIA World Factbook. ■ Number of Airline Takeoffs: The number of domestic registered carrier departures worldwide from a given country. The data is sourced from the World Bank. Road Freight: Road freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 25% weighting for Population and 50% for Total Length of Road. The population in a country represents the demand for goods and thus the size of the road freight market. The total length of the road network will determine how much freight can be carried by heavy trucks and goods vehicles. Rail Freight: Rail freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 25% weighting for Country Area and 50% for Length of Railways. The length of railways and size of a country will determine the demand and capacity to carry rail freight. A large country with active railway network will likely utilise this to move greater volumes of goods over long distances. © Business Monitor International Ltd Page 61 Vietnam Freight Transport Report Q4 2015 Air Freight: Air freight tonnage data is estimated with parent market data which is then scaled by a 25% weighting for Real GDP, 50% weighting for Number of Airline Takeoffs and 25% for Number of Airports (with paved runways). The number of domestic airline takeoffs is used to represent how active the airline market is in the country. Also airports with paved runways are a factor in air freight as it means a country is able to accommodate larger planes which carry goods. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 62 [...]... Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q4 2015 Road Transport dominates freight mix in Vietnam 2015 Vietnam Freight Mode Breakdown % of Total BMI calculation Cost, speed and infrastructure benefits have all played a historical part in the dominance of road transport in the region, however its share in 2009 was lower, with rail transport playing a slightly larger role... -5.48 5.07 2016f 3.62 -3.30 10.01 2015f 3.58 Rail freight tonnes-km, % y-o-y -6.82 2014 6.84 3.55 6.71 6.60 6.58 f = BMI forecast Source: General Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q4 2015 Air Freight Forecast BMI View: Following a spike in 2014, air freight in Vietnam looks set to grow by 6.27% in 2015 with levels expected to... International Ltd Page 30 Vietnam Freight Transport Report Q4 2015 Table: Air Freight (Vietnam 2012-2019) 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 178 183 202 214 229 244 260 277 -10.8 2.8 10.0 6.3 6.8 6.7 6.6 6.6 Air freight tonnes-km (mn ton km) 480 469 530 555 595 637 680 727 Air freight tonnes-km % y-o-y 12.7 -2.3 12.9 4.7 7.2 7.0 6.9 6.8 Air Freight Tonnes (000) Air freight tonnes % y-o-y f... Statistics Office of Vietnam, BMI © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q4 2015 Market Overview BMI View: The Vietnam freight industry is dominated by road transport, which accounts for 99% of all tonnage transported Despite efforts to develop the country's rail infrastructure and good prospects for investment in air transport in the region, road transport, in terms... this report © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q4 2015 Road Freight Forecast BMI View: Strong foreign direct investment, infrastructure development and growing exports through 2015 are set to benefit the road freight sector in Vietnam This will set y-o-y growth in terms of tonnage transported by road on an upward curve with a forecast growth of 7.75% in 2015. .. Corporation of Vietnam (ACV) through a 25-30% ownership, according to the Vietnam Investment Review In addition, ADP is also looking to work with Credit Suisse, Vietnam' s Transport Ministry and ACV to raise USD2-3bn for the construction of the Long Thanh International Airport in southern Vietnam © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q4 2015 Elsewhere, Vietnam Airlines... for Vietnamese gas production and consumption Nonetheless, gas prices and regional security pose risk to further growth © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q4 2015 Table: Rail Freight (Vietnam 2012-2019) 2012 Rail freight tonnes ('000) 2018f 2019f 7,003.50 6,525.90 7,178.90 7,542.90 7,808.41 8,085.61 8,375.07 8,678.25 Rail freight tonnes, % y-o-y Rail freight. .. Vietnam Freight Transport Report Q4 2015 SWOT Analysis - Continued • Vietnam' s reliance on imported oil poses risks in the form of energy and fuel shortages • Corruption and inefficiency in the legal system • Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider political and social unrest © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q4 2015 Industry... of which Vietnam is a member, has also led to this rise in imports of Indian medicines There were 4,269 registered Indian drugs in 2014, accounting for 26% of the total registered items in Vietnam, which is welcome news for Vietnam' s air freight operations © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q4 2015 Year-On-Year Growth Unchanged Across Medium Term Air Freight. .. Monitor International Ltd Page 18 Vietnam Freight Transport Report Q4 2015 Trade Overview (Vietnam 2012-2019) - Continued Total trade growth, % y-o-y 2012 2013 2014 2015f 2016f 2017f 2018f 2019f 11.03 11.19 9.72 7.51 10.80 13.20 13.20 13.32 f = BMI forecast Source: ADB, General Statistics Office of Vietnam, BMI Table: Key Trade Indicators (Vietnam 2012-2019) 2012 2013 2014e 2015f 2016f 2017f 2018f 2019f