Vietnam freight transport report q2 2010

Q2 2010

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VietnaM

freight transport Report
INCLUDES 5-YEAR FORECASTS TO 2014

ISSN 1750-5364
Published by Business Monitor International Ltd.


VIETNAM
FREIGHT TRANSPORT
REPORT Q2 2010
INCLUDES 5-YEAR FORECASTS TO 2014

Part of BMI’s Industry Survey & Forecasts Series
Published by: Business Monitor International
Publication date: March 2010

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Vietnam Freight Transport Report Q2 2010

© Business Monitor International Ltd

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Vietnam Freight Transport Report Q2 2010

CONTENTS
Executive Summary .........................................................................................................................................5
SWOT Analysis.................................................................................................................................................6
Vietnam Road Haulage SWOT............................................................................................................................................................................... 6
Vietnam Political Swot........................................................................................................................................................................................... 6
Vietnam Economic Swot ....................................................................................................................................................................................... 7
Vietnam Business Environment Swot ..................................................................................................................................................................... 7

Business Environment Ratings ......................................................................................................................8
Table: Asia Pacific Freight Business Environment Ratings................................................................................................................................... 8
Freight Industry Ratings ........................................................................................................................................................................................ 9
Transport Intensity Index..................................................................................................................................................................................... 10
Vietnam Logistics Performance Index (LPI)........................................................................................................................................................ 10
Economic Risk Summary...................................................................................................................................................................................... 10
Political Risk Summary........................................................................................................................................................................................ 11
Business Environment Risk Summary .................................................................................................................................................................. 12
Legal Code/Corruption........................................................................................................................................................................................ 12
Red Tape.............................................................................................................................................................................................................. 12
Labour Force....................................................................................................................................................................................................... 13

Industry Trends And Developments ............................................................................................................14
Road .................................................................................................................................................................................................................... 14
Rail ...................................................................................................................................................................................................................... 15
Air........................................................................................................................................................................................................................ 16
Sea ....................................................................................................................................................................................................................... 17

Industry Forecast Scenario ...........................................................................................................................20
Global Oil Products Price Outlook...................................................................................................................................................................... 20
Table: Oil Product Price Assumptions, Q409-Q410 (US$/bbl)............................................................................................................................ 21
Table: Oil Product Price Forecasts (US$/bbl)..................................................................................................................................................... 22

Macroeconomic Outlook...................................................................................................................................................................................... 23
Table: Vietnam – Economic Activity, 2007-2014................................................................................................................................................. 25
Transport Outlook ............................................................................................................................................................................................... 25
Table: Freight Transport Data And Forecasts, 2006-2014.................................................................................................................................. 26
Table: Freight Carried, Domestic, 2006-2014 (mn tonnes-km) ........................................................................................................................... 27

Trade Environment.........................................................................................................................................28
Table: Total Value Of Imports By Category, 2006-2014 (US$mn) ...................................................................................................................... 29
Table: Value Of Exports By Category, 2006-2014 (US$mn)................................................................................................................................ 30
Table: Vietnam’s Top Export Destinations, 2002-2006 (US$mn)........................................................................................................................ 31
Table: Vietnam’s Export Trade, 2003-2006 (% growth y-o-y)............................................................................................................................. 32
Table: Vietnam’s Import Trade, 2003-2005 (% growth y-o-y)............................................................................................................................. 32
Table: Vietnam’s Top Import Sources, 2002-2006 (US$mn) ............................................................................................................................... 33

Market Overview.............................................................................................................................................34
Multi-Modal.............................................................................................................................................................................................................. 34
Competitive Landscape........................................................................................................................................................................................ 34
Road.......................................................................................................................................................................................................................... 37

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Vietnam Freight Transport Report Q2 2010

Infrastructure....................................................................................................................................................................................................... 37
Competitive Landscape........................................................................................................................................................................................ 37
Rail ........................................................................................................................................................................................................................... 41
Competitive Landscape........................................................................................................................................................................................ 41

Air............................................................................................................................................................................................................................. 44
Competitive Landscape........................................................................................................................................................................................ 44
Company Profile: Vietnam Airlines ..................................................................................................................................................................... 48
Water ........................................................................................................................................................................................................................ 50
Infrastructure....................................................................................................................................................................................................... 50
Maritime Competitive Landscape ........................................................................................................................................................................ 51
Company Profile: Vietnam Petroleum Transport Jsc (VIPCO) ........................................................................................................................... 58
Table: Vietnam Petroleum Transport’s Key Financial Data, 2007-Q109............................................................................................................ 59
Company Profile: Doan Xa Port.......................................................................................................................................................................... 60
Table: Doan Xa Port’s Financial Performance, 2007 And 2008 ......................................................................................................................... 61
Pipelines ................................................................................................................................................................................................................... 62
Competitive Landscape........................................................................................................................................................................................ 62

Country Snapshot: Vietnam Demographic Data .........................................................................................63
Section 1: Population........................................................................................................................................................................................... 63
Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 63
Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 64
Section 2: Education And Healthcare.................................................................................................................................................................. 64
Table: Education, 2002-2005 .............................................................................................................................................................................. 64
Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 64
Section 3: Labour Market And Spending Power .................................................................................................................................................. 65
Table: Employment Indicators, 1999-2004.......................................................................................................................................................... 65
Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 65

BMI Methodology ...........................................................................................................................................66
How We Generate Our Industry Forecasts .......................................................................................................................................................... 66
Transport Industry ............................................................................................................................................................................................... 66
Sources ..................................................................................................................................................................................................................... 67

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Vietnam Freight Transport Report Q2 2010

Executive Summary
Vietnam’s Prime Minister Nguyen Tan Dung approved the Viet Nam Seaport Development Master Plan,
which will require a total investment of VND360-440trn (US$19.5-23.8bn) by 2020. The plan aims to
increase the transportation capacity of the country by 500-600mn tonnes of goods by 2015, 900-1,000mn
tonnes by 2020 and 2,100mn tonnes by 2030. The primary focus of the plan from now to 2015 will be the
international transit port Van Phong in Khanh Hoa Province, development of the Lach Huyen seaport
complex in Hai Phong, and a seaport at the Nghi Son oil refinery. Although Vietnam has 266 ports, the
majority of maritime infrastructure is outdated and has barely any support infrastructure to transport
goods from the port to the rest of the country. The increased traffic levels in Vietnam’s urban areas and
the country’s general fast-paced economic development have increased the volume of exports and imports
to and from the country, thus creating a pressing need for better infrastructure between ports and inland.
The new master plan will improve the port infrastructure in the country.
Since our last report we have cut back our macroeconomic forecasts for Vietnam, acknowledging the
danger of a ‘double dip’ growth slowdown. We now estimate GDP growth of 5.3% in 2009 (up from
5.1% earlier) but have reduced the projection for 2010 to 4.4% (was 5.9%) and have also trimmed 2011 to
5.5% (was 6.8%). Our forecast for 2010-2014 is for an annual average GDP growth rate of 5.9% per
annum, representing a reduction on the 7.3% average rate achieved in the preceding five-year period. We
maintain some adjustments to mode-specific freight carried forecasts. In road haulage, we have trimmed
our forecast to take account of the global downturn and lower freight demand. We still see road-freight
turnover running ahead of the general rate of economic expansion in Vietnam. Air freight is beginning to
emerge from a difficult period. WTO membership has been supportive of greater freight transport
turnover relative to GDP across all modes, but particularly so for shipping. On the downside, the 2009
contraction in trade had a particularly strong impact on shipping and Vietnam is expected to export less
coal by sea as its domestic power needs rise. The net result of this is that we expect freight carried growth

across all modes, measured in mntkm, to average 7.4% a year in 2010-2014.
According to our latest estimates, transport and communications GDP rose by 6.5% in 2009, 1.2
percentage points (pps) faster than overall GDP, which we estimate to have increased 5.3%. For the 20102014 forecast period, we expect the transport and communications sector to continue outpacing the
economy as a whole in value terms. It will achieve average annual growth of 6.9%, versus 5.9% for
overall GDP. The value of transport and communications GDP will rise to US$7.0bn in nominal terms by
2014, of 4.5% of Vietnam’s GDP. By modes, we project that air freight to be the fastest growing, rising
by 7.7% per annum, followed by road haulage at 7.6%, shipping (7.4%), pipelines (6.8%) and rail (6.5%).

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Vietnam Freight Transport Report Q2 2010

SWOT Analysis
Vietnam Road Haulage SWOT

Strengths

ƒ Vietnam’s strong domestic growth rate coupled with its geography; a long country
stretching for thousands of kilometres on a north-south axis creates a need for longdistance freight haulage.

Weaknesses

ƒ The generally poor state of the road network. Despite new highway construction, only
13.5% of the road network is considered to be in good condition, only 26% has two or
more lanes and only 29% is tarred. Construction of the second north-south highway
may be a waste of resources given the pressing need for improvement of secondary
roads.

Opportunities

ƒ The beginnings of local commercial vehicle production, which will help improve the
stock of lorries used by road haulage companies.

Threats

ƒ The attractiveness of other modes of freight transport, particularly inland waterways
and coastal shipping. If progress towards a better-integrated national road network is
too slow, freight growth will divert away from the trucking industry.

Vietnam Political Swot

Strengths

Weaknesses

Opportunities

Threats

ƒ

Communist Party government appears committed to market-oriented reforms,
although specific policies will doubtless be discussed at the 2011 National Congress.

ƒ

The one-party system is generally conducive to short-term political stability.

ƒ

Relations with the US are generally improving, and Washington sees Hanoi as a
potential geopolitical ally in South East Asia.

ƒ

Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.

ƒ

There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight
control over political dissent.

ƒ

The government recognises the threat that corruption poses to its legitimacy, and has
acted to clamp down on graft among party officials.

ƒ

Vietnam has allowed legislators to be more vocal in criticising government policies,
opening up opportunities for more checks and balances within the one-party system.

ƒ

The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of
the one-party system, and street demonstrations to protest economic conditions could

develop into a full-on challenge of undemocractic rule.

ƒ

Although domestic control will ensure little change to the political scene in the next
few years, over the longer term, the one-party-state will probably be unsustainable.

ƒ

Relations with China have deteriorated over the past year due to Beijing’s more
assertive stance over disputed islands in the South China Sea and domestic criticism
of a large Chinese investment into a bauxite mining project in the central highlands,
which could potentially cause widescale environmental damage.

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Vietnam Freight Transport Report Q2 2010

Vietnam Economic Swot

Strengths

Weaknesses

Opportunities

Threats

ƒ

Vietnam has been one of the fastest-growing economies in Asia in recent years, with
GDP growth averaging 7.6% annually between 2000 and 2007.

ƒ

The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 20% in 2004.

ƒ

Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving
the economy vulnerable as the global economy continues to suffer in 2010. The fiscal
picture is clouded by considerable ‘off-the-books’ spending.

ƒ

The heavily-managed and weak dong currency reduces incentives to improve quality of
exports, and also serves to keep import costs high, thus contributing to inflationary press

ƒ

WTO membership has given Vietnam access to both foreign markets and capital,
while making Vietnamese enterprises stronger through increased competition.

ƒ

The government will in spite of the current macroeconomic woes, continue to move

forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.

ƒ

Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban
population to rise from 29% of the population to more than 50% by the early 2040s.

ƒ

Inflation and deficit concerns have caused some investors to reassess their hitherto
upbeat view of Vietnam. If the government focuses too much on stimulating growth
and fails to root out inflationary pressure, it risks prolonging macroeconomic instability,
which could lead to a potential crisis.

ƒ

Prolonged macroeconomic instability could prompt the authorities to put reforms on
hold, as they struggle to stabilise the economy.

Vietnam Business Environment Swot

Strengths

Weaknesses

Opportunities

Threats

ƒ

Large, skilled, low-cost workforce has made Vietnam attractive to foreign investors.

ƒ

Vietnam’s location –proximity to China and South East Asia and good sea links –
makes it a good base for foreign firms to export to the rest of Asia, and beyond.

ƒ

Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate to
cope with the country’s economic growth and links with the outside world.

ƒ

One of the world’s most corrupt countries. Its score in Transparency International’s
2009 Corruption Perceptions Index was 2.7.

ƒ

Increasingly attracting investment from key Asian economies, such as Japan, South
Korea and Taiwan. This offers possibility of transfer of high-tech skills and knowhow.

ƒ

Pressing ahead with privatisation of state-owned enterprises and the liberalisation of
the banking sector. This should offer foreign investors new entry points.

ƒ

Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.

ƒ

Labour unrest remains a lingering threat. A failure by the authorities to boost skills
levels could leave Vietnam a second-rate economy for an indefinite period.

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Vietnam Freight Transport Report Q2 2010

Business Environment Ratings
The freight transport sector in the Asia Pacific region offers one of the most attractive business
environments for the industry worldwide. There are various reasons for this. First, the region offers a
powerful combination of future growth and economies of scale. It contains arguably the two most
significant of the four BRIC (Brazil, Russia, India and China) economies, which, it is argued, are the
powerhouses of future global growth. China and India combine vast geographical size, large populations,
globally competitive labour costs and as yet untapped infrastructure potential. To this must be added the
‘third BRIC’, Russia, which, although outside the region, has critically important trade and transport links
to Asia (such as crude oil exports to China). Second, at a ‘big picture’ level, most of the regional power
centres are committed to reasonably pragmatic and relatively stable, market-based policies. Countries that
in the past were either fervently communist (China, Vietnam) or capitalist (Malaysia, Taiwan) share a
much wider non-ideological common ground focused on how to achieve a sustainable rise in living
standards. This is not to say, of course, that the area is free of tensions and flash points (North Korea,
China-Japan, India-Pakistan to name just a few).

Table: Asia Pacific Freight Business Environment Ratings

Limits of potential returns

Risks to realisation of returns

Freight transport
market

Country
structure

Limits

Market
risks

Country
risk

Risks

Overall
rating

Regional
rank

Singapore

52.5

79.6

66.1

80.0

90.1

86.0

72.1

1

Australia

50.0

83.4

66.7

75.0

81.7

79.0

70.4

2

India

62.5

71.0

66.7

60.0

60.8

60.5

64.9

3

South Korea

47.5

76.4

61.9

60.0

74.6

68.7

64.0

4

China

72.5

47.6

60.1

60.0

68.4

65.0

61.6

5

Japan

52.5

50.5

51.5

75.0

83.6

80.2

60.1

6

Malaysia

42.5

67.0

54.7

60.0

70.9

66.6

58.3

7

Vietnam

50.0

71.3

60.7

55.0

50.5

52.3

58.1

8

Thailand

42.5

72.5

57.5

55.0

58.6

57.1

57.4

9

Indonesia

50.0

71.4

60.7

50.0

46.8

48.1

56.9

10

Hong Kong

47.5

39.5

43.5

70.0

84.3

78.5

54.0

11

Pakistan

50.0

54.3

52.2

55.0

32.6

41.6

49.0

12

Philippines

40.0

55.6

47.8

50.0

49.7

49.8

48.4

13

Taiwan

27.5

38.0

32.8

65.0

72.5

69.5

43.8

14

Scores out of 100, with 100 highest. Source: BMI

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Vietnam Freight Transport Report Q2 2010

Strong freight transport growth rates are combined with a very encouraging infrastructure investment
picture across most of the region.
By mode, road haulage will grow as road infrastructure and vehicle density is extended and as the shift to
smaller/higher value loads continues. Rail freight will benefit from long-distance economies of scale,
whether from the opening up of the Australian hinterland or big projects such as the new Silk Road route.
Shipping is being lifted by the surge in trans-Pacific commodity and manufacturers’ trade routes, while
air freight is growing on the back of liberalisation and the budget airline boom. While the freight transport
industry in the region suffers from patchy regulation and in some areas there are ongoing issues with
corruption and cronyism, it is on the whole much more open and competitive than in the past. A strong
positive factor is the dynamic and outward facing role played by foreign trade.

Freight Industry Ratings
Our overall freight transport rating for Vietnam stands at 58.1 (out of a theoretical maximum score of
100). This is composed of a score of 60.7 for potential returns (reflecting factors such as market size,
growth and the competitive environment), which gets a 70% weighting, and a lower score of 52.3 for
risks to those returns (reflecting factors such as market orientation, regulatory environment and other
country-risk issues), which gets a 30% weighting.
Vietnam’s freight transport traffic, measured in mntkm, rose by an annual average of 10.2% in 2005-2009
and, according to our projections, will decelerate to an annual average of 7.4% in 2010-2014.
According to official information, there is a wide range of transport sector investment projects in the
pipeline, across road, rail, air and sea. Work is underway to develop the Mekong basin area, and new
seaports are planned. While there is no doubt that Vietnam’s transport infrastructure is expanding, our
rating for this category is constrained by poor planning and limited project management experience.
Vietnam is moving towards a full market economy, but is doing so at a relatively slow pace, given that
the reform process started nearly two decades ago. The country gained access to the WTO in 2007. In the
transport sector, state-owned enterprises (SOEs) continue to be dominant in many areas. There is not yet a
clear legal framework for the protection of passenger and freight customer rights.
Freight transport competition remains limited, with SOEs dominating key transport modes. There are few
foreign entrants, although we expect more to arrive during the forecast period. To be able to operate in the
country, significant negotiations and procedures are required. Although the government favours attracting
more foreign direct investment (FDI), the local environment is not yet fully supportive of competitive
markets.

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Vietnam Freight Transport Report Q2 2010

Transport Intensity Index
This index is derived by calculating the average annual growth rate for total trade (imports plus exports)
over a 10-year period running from 2005 through to 2014. As such, it is a mix of actual performance (the
five-year 2005-2009 period) and projected performance (2010-2014). In Vietnam’s case, actual average
annual trade growth in 2005-2009 was a strong 18.8%, which in our projections will ease substantially to
11.1% per annum in 2010-2014. The annual average across the 10 years as a whole is 16.8%.

Vietnam Logistics Performance Index (LPI)
In 2007, the World Bank launched its Logistics Performance Index (LPI), intended as ‘the first in-depth
cross-country assessment of the logistics gap among countries’. The LPI was calculated on a five-point
scale and based on survey responses from over 800 logistics professionals. Countries were given an
aggregate LPI score, which was in turn made up of seven sub-categories, covering criteria such as the
quality of customs, infrastructure and international shipments, logistics competence, tracking and tracing,
domestic logistics costs and timeliness.
In the 2007 survey, Vietnam was ranked 53rd in the world with an LPI score of 2.9. For comparison with
the major OECD economies, the Netherlands was ranked second in the world with an LPI of 4.2;
followed by Germany (third with an LPI of 4.1), the UK (ninth, LPI of 4.0) and the US (14th, LPI of 3.8).
In comparison with other Asian economies, Singapore was the world number one with an LPI score of
4.2, followed by Australia (17th, LPI of 3.8) and Taiwan (21st, LPI of 3.6). Then came South Korea (25th,
LPI of 3.5), Malaysia (27th, LPI of 3.5), China (30th, LPI of 3.3), Thailand (31st, LPI of 3.3) and Indonesia
(43rd, LPI of 3.0). Vietnam was therefore close to the bottom end of the regional LPI ranking, ahead of
Papua New Guinea (95th, LPI of 2.4) and Laos (117th, LPI of 2.3). In terms of the different components of
the index, Vietnam’s best performing areas, ranked in order, were domestic logistics costs, timeliness,
international shipments, and tracking and tracing. Weaker areas in descending order were customs,
logistics competence, and infrastructure.

Economic Risk Summary
Inflation To Continue Rising
Consumer price inflation hit 6.5% y-o-y in December, boosted by a VND800/lite fuel price hike on
November 20 and a 3% devaluation of the dong on November 25. The December reading was the highest

since April, but we expect consumer price inflation to rise further in H110, potentially hitting double
digits by mid-year. However, we expect inflation to decelerate in H210 as the authorities tighten fiscal
and monetary policy, coming in at 7.0% by December 2010. A failure to tighten fiscal and monetary
policy would pose upside risks to our forecast that inflation will average 9.0% in 2010.

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Vietnam Freight Transport Report Q2 2010

Long-Term Risk
We believe Vietnam will need to tighten fiscal and monetary policy sharply in 2010 in order to bring the
balance of payments back to a sustainable level. With external demand still weak, we are forecasting real
GDP growth dropping to 4.4% in 2010 from an expected 5.1% in 2009. The co-existence of slowing
economic growth and increasing inflation will inevitably raise debate about economic policy at the
Communist Party of Vietnam’s (CPV) National Congress, scheduled for January 2011. We believe the
political impetus is still behind continued economic reform, but that Vietnam will have to lower its
economic growth targets and adjust its economic policy mix in order to avoid further macroeconomic
turbulence.
While successful in boosting domestic demand and bringing about a recovery in growth from 3.1% y-o-y
in Q109 to 4.4% and 5.2% in Q209 and Q309, Vietnam’s sizeable fiscal and monetary stimulus package
implemented over 2009 has also led to a widening trade deficit through a high degree of import leakage.
With Vietnam’s foreign exchange reserves below the three months’ worth of imports, we expect Vietnam
to depreciate the dong towards VND19,000/US$, raise interest rates by 500bps to 12.0% and tighten
fiscal policy in 2010 in order to avoid a balance-of-payments crisis.

Political Risk Summary
Political Repression To Increase In 2010

Tranh Anh Kim, leader of the pro-democracy Bloc 8406 group, was jailed for 5½ years on December 28
for subversion and four other pro-democracy activists arrested with Kim in July 2009 are to be tried in
court in early 2010. We expect the Vietnamese government to continue tightening the screw on political
dissidents ahead of the Communist Party of Vietnam’s five-yearly National Congress in January 2011.
While Vietnam scores 80 out of 100 in our short-term political risk rating, its 52.8 long-term political risk
rating reflects our opinion that one-party rule is ultimately unsustainable.
Long-Term Risk
Vietnam’s relations with China have come to the forefront of an internal power struggle within the
Communist Party of Vietnam, pitting economic reformers centred around Prime Minister Nguyen Tan
Dung against more conservative Politburo members with links to China. With the two factions seeking to
strengthen their positions ahead of the 2011 National Congress, we believe the reformists will maintain
the upper hand. The sensitive power balance within the Politburo will limit the scope for a further
rapprochement between Vietnam and US, with bilateral ties also strained by Hanoi’s suppression of
Catholic activists.

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Vietnam Freight Transport Report Q2 2010

Business Environment Risk Summary
Vietnam is making headway in improving its dilapidated infrastructure with construction on a number of
ports, power plants and road projects commenced in 2009. Nonetheless, it will take a number of years, if
not decades, until Vietnam’s infrastructure rating of 37.2 comes anywhere near the 68.0 China scores. On
the economic reform front, the government’s privatisation process is gaining pace again with the listing of
Vietcombank , VietInBank and Eximbank in 2009. We are also expecting improvements in the
business environment from the Vietnam-Japan Economic Partnership agreement and a free trade
agreement currently under negotiation with the European Union.

Equity Sale Rules Loosened
The minimum period for share holdings is to be decreased from three to two days after purchase in a
measure aimed at boosting the liquidity of the domestic stock market, according to Vu Bang, chairman of
the State Securities Commission. Poor transparency at listed corporates and the relative illiquidity of
shares have held back foreign investment into the Vietnamese stock market, in spite of the strong growth
potential for the economy. An improvement of corporate governance standards and increased liquidity
should raise the profile of the Vietnamese stock market and thus widen the financing options for
corporates.

Legal Code/Corruption
Legal Code
Vietnam’s judicial system is based on communist legal theory and the French civil law system.
Corruption
Vietnam has a bad record on transparency. The state was ranked 120th (out of 180) in Transparency
International’s Corruption Perceptions Index in 2009, with a score of 2.7.

Red Tape
Vietnam compares favourably with its regional peers in terms of bureaucracy, and about the same as
developed states. According to World Bank data, 28 separate procedures are required to enforce a
contract, which takes an average of 120 days. The East Asia and Pacific average is 24 and 193,
respectively, while the process involves 18 procedures and 213 days in high-income OECD states.
Conversely, World Bank data state that it takes 11 procedures and 56 days to start a business in Vietnam,
compared with an average of nine and 61 in East Asia and Pacific and six and 25 in high-income OECD
states.

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Vietnam Freight Transport Report Q2 2010

Labour Force
Size
Reliable data on the labour force in Vietnam are difficult to find. However, it is estimated that the
working age population in the country is 42.1mn, approximately 61% of the total. An estimated 10.2mn
live in urban areas, with the remaining 31.9mn in rural areas. ‘Technically skilled workers’ form an
estimated force of 8.84mn, accounting for 20.99% of the total. The south-east region has the highest rate
of skilled workers (30.13%), followed by the Red River delta (27.99%) and Coastal South Central
(20.85%). The lowest rate was reported in the north-west region.
Education
The adult male illiteracy rate was estimated at 4% for males and 9% for females in 2000, with the youth
illiteracy rate 3% for both genders.
Regulation
The Vietnam labour force is comparatively heavily regulated, according to World Bank’s Employment
Laws Index. Its score of 56 indicates that regulations are tighter than the East Asia and Pacific average,
and a bit tighter than OECD high-income states. Disaggregating the data, the regulations for hiring
workers are looser than those for firing workers, with scores of 43 and 48, respectively, the combination
of which suggests a more regulated workforce than regional peers.
Issues
Fears of growing unemployment and rising social unrest in the cities is slowing down the reform of
SOEs. The SOEs are an inefficient and loss-making legacy of a different era, and would have gone
bankrupt a long time ago if the market had had its way. However, the fear of creating mass
unemployment in the cities by laying off surplus labour has prevented meaningful reform. As a result, the
SOEs continue to crowd out the more productive private sector, while adding to the government’s fiscal
woes by forcing the state to absorb their losses.

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Vietnam Freight Transport Report Q2 2010

Industry Trends And Developments
Road
In January Vietnam was seeking loans from the World Bank (WB) and the Japan International
Cooperation Agency (JICA) to finance the construction of an expressway costing US$2.5bn, reported The
Saigon Times Daily. The 130km-long expressway, will connect Danang City to Quang Ngai Province.
Work will done by the state-owned Vietnam Expressway starting in 2010. JICA is expected to fund a
65km-long section from Danang City to Tam Ky in Quang Nam Province. The WB is expected to fund
the remaining 66km-long stretch from Tam Ky to Quang Ngai Province. Vietnam has a total road
network of 222,000km, although only 19% of it is paved, indicating the poor condition of road
infrastructure in the country. Vietnam’s Ministry of Transport and Communications estimates that it will
require close to US$60bn up to 2020 to fund road infrastructure projects.
The Transport Ministry approved the term-end report for the Ben Luc-Long Thanh highway project,
reported Intellasia. The project, involving investments of US$1.7bn, will be carried out by the stateowned Vietnam Expressway Investment and Development Company (VEC). The 58km-long highway
will have four lanes totalling 27.5m in width. VEC, the main investor, is considering acquiring loans from
the Asian Development Bank (ADB) and using its counterpart capital to finance the project.
The Ministry of Transport and the People’s Committee of Lao Cai province in Vietnam began the bidding
package for the A7 section of the Noi Bai-Lao Cai expressway project on December 20 2009, reported
Intellasia.net. The first phase of the bidding package includes construction work on a road with total
length of 26.7km. The winning bidder for the package was China-based Guangxi Road and Bridge
Construction, with a contract price of VND1.6trn (US$86.6mn). Construction is expected to take 38
months. The roads and ports sectors are seeing the greatest level of activity in transport infrastructure in
Vietnam, with the government funnelling public funds and loans from multilateral institutions for their
development.
The Hanoi-Hai Phong highway construction project in Vietnam was set to be financed with loans from
Czech-based KB Bank, it was stated in December 2009. The prime minister of Vietnam has provided, inprinciple, approval to Vietnam Development Bank (VDB) for securing 10-year loans from KB Bank for
the project. The highway project involves construction of a 105.5km-long expressway, six lanes and road

surfacing. Along the highway, two sudden-stop lanes, six intersections, nine large bridges, 21 medium
bridges and 22 overhead bridges will also be built. This follows another infrastructure financing
agreement between Vietnam and the Czech Republic. In March 2008, Vietindebank, one of Vietnam’s
major state-owned banks and the Czech Export Bank have entered into an agreement to jointly provide
funding for projects in Vietnam, including large infrastructure projects. The funding for all the planned

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projects will be worth US$956mn, of which US$720 will go towards the construction of a road in
southern Vietnam and part of the remaining US$236mn will go into the development of a waste-treatment
plant.
The Vietnamese Transport Ministry started work on a 61.3km-long four-lane expressway that will
connect Thai Nguyen, Bac Ninh and Hanoi, said the Vietnam News Agency. The expressway is expected
to ease the traffic on National Highway 3 and facilitate the growth of trade between Hanoi and other
northern parts of the country. The project also includes construction of six junctions, 29 bridges and other
facilities. The Japan International Cooperation Agency (JICA) will provide a VND6.1trn (US$338.89mn)
loan for the VND8.1trn (US$450mn) project, which is scheduled to be completed by 2013.
The Vietnamese road authority has signed a build-operate-transfer (BOT) contract with local company
Bien Hoa-Vung Tau Expressway Development (BVEC) for the expansion of National Highway 51. The
national highway, linking the provinces of Dong Nai and Ba Ria-Vung Tau, will be expanded to 32.9m in
width. The project also includes expansion of 10 bridges and construction of 12 new bridges. The project
will require an investment of VND3.31trn (US$185.36mn), out of which 10% will be provided by
investors, with the rest to be contributed by commercial loans.
According to Thai News Service, as cited by Cargo News Asia in early November, truck drivers were
travelling on alternative streets to avoid paying tolls on the Hanoi Highway in Ho Chi Minh City,

Vietnam. They were choosing to drive down a small street running parallel to the Hanoi Highway. The
news came after a two-day protest by drivers over charges at the toll station. The station was shifted to the
Hanoi Highway in August 2009 to collect fees from heavy transport vehicles. The Ho Chi Minh City
Cargo Transportation Association said the city Infrastructure Investment Joint Stock Company (CII) put
the toll station in the wrong place and was unfairly collecting toll fees from trucks travelling between the
Cat Lai Port, Hanoi Highway and Nguyen Huu Canh Street. The move by truck drivers to avoid paying
the frees led to traffic congestion in the area.

Rail
A consortium formed from French construction company VINCI Construction Grands Projets and French
manufacturer LOHR Industrie has signed an agreement for the construction of the first light railway line
in Ho Chi Minh city in Vietnam. The project, with an estimated cost of EUR200mn (US$297.77),
involves design and construction of 12km railway line that will have a total of 23 stations. Under the
terms of the agreement, the consortium will hold discussions until June 30 2010 with an intention to enter
into an Early Contractor Involvement (ECI) design-build contract for the project.

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Air
Vietnam Airlines (VNA) registered a 2.3% year-on-year (y-o-y) increase in cargo throughput to 131,220
tonnes in 2009. The airline reported a 13% y-o-y increase in domestic air freight traffic to 87,000
tonnes. VNA expects a turnover of VND32trn (US$1.78bn) in 2010, with a profit US$8.3mn - 30%
higher than 2009’s turnover of US$1.36bn and 42% less than 2008’s profit of US$14mn. VNA plans to
triple its existing aircraft fleet of 50 by 2020. VNA was established as a state-owned airline in 1989 and
merged with a number of service companies in 1996 to give it its present form. The airline operates 64

routes to 20 domestic and 24 international destinations. The carrier provides passenger air services to 25
destinations in 15 countries. Its cargo operations serve 20 destinations in Asia, the Middle East, Australia
and Europe, with partner networks serving other destinations.
Vietnam’s Quang Ninh province People’s Committee received the construction plan for the Van Don
international airport. The plan was submitted by the US-based Rockingham Asset Management Group.
The US$1.2bn project will be carried out on build-operate-transfer (BOT) basis, and the airport is
expected to become operational in 2014. Its control will be transferred to Vietnamese authorities in 2048.
The Vietnamese government has ambitious plans to modernise and expand the country’s airport
infrastructure, though some, like the Long Thanh international airport, have been in the pipeline for years
with little progress being made. However, the government’s willingness to get projects off the ground
provides grounds for optimism. The Ministry of Transport announced in early May 2009 that it will
upgrade and expand Vietnam’s main airports. Plans include new international airports in Phu Quoc, Long
Thanh, Cam Ranh, Chu Lai, Danang and Hue. The Noi Bai airport in Hanoi will be expanded, as will the
Cat Bi airport in Haiphong.
Quang Nam province in Vietnam was in November seeking a new investor for its delayed Chu Lai
international airport project. Spanish project management and consulting firm Garuda Group had signed a
memorandum of understanding (MoU) in April 2009 for carrying out a feasibility study for the airport,
which it was unable to complete. US-based Airis International Holdings (Airis) has expressed its interest
in developing the airport. Airis has also recently submitted a new investment plan for the development of
Chu Lai airport. According to a master plan released in 2008, the transport ministry intended to increase
the handling capacity of the airport to 2.2mn passengers and 1.5mn tonnes of air cargo by 2015 and
4.1mn passengers and 5mn tonnes of cargo by 2025.
South Korea’s Korean Air (KAL) opened a 747-400 freighter service to Hanoi, Vietnam in the last week
of October 2009, aimed at capitalising on the country’s increasing importance in the Asian trade market.
The airline was set to operate four times a week to Hanoi, which included two direct flights out of Seoul
Incheon International Airport and two with connections through Singapore. Vietnam is witnessing huge
industrial development and several international manufacturers are establishing operations in the country.
KAL is the larger of South Korea’s two airlines. By 2006, its fleet had grown to 118 planes. The company

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operates passenger routes to 77 destinations in 28 countries. The group’s freight division, Korean Air
Cargo, is the world’s third-largest cargo carrier and, as with its passenger division, is a member of
SkyTeam Cargo.

Sea
The ASEAN Ports Association (APA), a collective of port authorities representing South East Asian
states, has launched a project to develop the region’s ports in partnership with the German Technical
Cooperation (GTZ), a development organisation. The news follows the implementation of an ambitious
free-trade agreement (FTA) between the Association of Southeast Asian Nations (ASEAN) and China
that is expected to place increased pressure on the countries’ trade infrastructure over the next few years.
The plan, titled ‘Sustainable Port Development in the ASEAN Region’, will help finance developments at
nine ports across five ASEAN states: Sihanoukville Autonomous Port and Phnom Penh Autonomous Port
(Cambodia), Port of Tanjung Priok and Port of Tanjung Priok (Indonesia), Port of Iloilo and Port of
Cagayan de Oro (the Philippines), Bangkok Port and Laem Chabang Port (Thailand), and Saigon Port
(Vietnam). APA and GTZ’s participation will ensure that the development and the expansion of the ports
is undertaken in a manner that is sustainable and will benefit the long-term economic growth of the
countries in which they are based. BMI believes that planned development of South East Asia’s ports is a
necessity if the region is to keep pace with its growing trade volumes. We expect growing bilateral trade
with China, in particular, to place additional demand on the region’s port sector over the coming decade.
China became the region’s largest export market in 2007, over taking the US. In January 2010, the
ASEAN-5 (Malaysia, Singapore, the Philippines, Singapore and Indonesia) and Brunei signed an FTA
with China, creating the world’s third-largest trade bloc. The agreement eliminates tariffs on 90% of
goods traded between the countries and China. Four other states, Laos, Cambodia, Vietnam and
Myanmar, are on course to join the trade bloc in 2015.

BMI believes that, in principle, the agreement is good news for the region. It will further reduce
countries’ reliance on developed markets, in particular the US, for export growth, and will offset what is
likely to be a sluggish recovery in consumer demand in the West. However, from a logistical perspective,
we caution that the move raises questions regarding ASEAN’s ability to cope with a projected increase in
trade volumes. Using the World Economic Forum’s 2010 survey on the quality of port infrastructure
across different states as a gauge of port sector development, we note that only three countries from the
region – Singapore, Malaysia and Thailand – rank in the top 50 of the 133 nations represented in the
survey. Moreover, four states rank in the bottom 50: Cambodia (89th), Indonesia (95th), Vietnam (99th)
and the Philippines (112th). A lack of modern container ports in the region is perhaps the most significant
point to note. Manufactured goods make up a significant proportion of the exports of most ASEAN states,
and imports from China are also significantly composed of consumer goods. One potential problem we
highlight is the dependence of some states on a single large facility for container shipments. For example,
Indonesia, which has a population of some 230mn people, has just one container port, Tanjung Priok,

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with a capacity of more than 1mn twenty-foot equivalent units (TEUs) a year. Since January 16 2010, the
port authority has adapted to an influx of Chinese products by implementing a 24-hour container handling
service at the port, reports Bisnis Indonesia. While such measures allow ports to manage increased cargo
throughput in the short term, BMI believes that expansion and development of the port sector is needed to
meet the demands of longer-term growth. Development agencies are able to assist in ensuring these
expansions are sustainable and of benefit to both the region’s economy and its environment, however, in
our view, the main source of financing must be individual governments and/or the private sector.
Vietnam’s Prime Minister Nguyen Tan Dung approved the Vietnam Seaport Development Master Plan,
which will require a total investment of VND360-440trn (US$19.5-23.8bn) by 2020. The plan aims to

increase the transportation capacity of the country by 500-600mn tonnes of goods by 2015, 900-1,000mn
tonnes by 2020 and 2,100mn tonnes by 2030. The primary focus of the plan from now to 2015 will be the
international transit port Van Phong in Khanh Hoa Province, development of the Lach Huyen seaport
complex in Hai Phong and a seaport at the Nghi Son oil refinery. Though Vietnam has 266 ports, the
majority of maritime infrastructure is outdated and has barely any support infrastructure to transport
goods from the port to the rest of the country. The increased traffic levels in Vietnam’s urban areas and
the country’s general fast-paced economic development have increased the volume of exports and imports
to and from the country, thus creating a pressing need for better infrastructure between ports and inland.
The new master plan will improve the port infrastructure in the country.
Netherlands-based engineering firm DHV was in December awarded a US$100mn contract for work on a
250km stretch of Vietnam’s Mekong River. The project will involve deepening and widening the river as
well as constructing 18 bridges and a new lock to ease transport. The Mekong River stretches almost
5,000km from its source in China, running through Myanmar, Laos, Thailand, Cambodia and finally
Vietnam before discharging into the South China Sea. As a result, the river could act as an important
inland trade artery for the region. However, many of the bridges currently spanning the river are too low,
preventing large-scale shipping on the waterway. After DHV completes restructuring the bridges and
dredging, the Mekong will be able to handle shipping of up to 600 deadweight tonnes (dwt). The project
is due to be complete in 2014, which will be none too soon. With Vietnam’s economy expected to grow
by over 10% per year until 2014, the country’s GDP should reach US$154.4bn, almost five times its size
in 2000. This is the result of Vietnam’s emerging status as a manufacturing hub, with Ho Chi Minh City,
located close to the Mekong delta, at the epicentre of domestic production. Indeed, Vietnam’s maritime
traffic is set to grow from 122,155mn tonnes-km to 163,785mn tonnes-km in 2014. Taiwan’s Formosa
Plastics Group is currently constructing the port of Son Duong, which it hopes will become the largest
deep-sea port in Southeast Asia. The port, which has an estimated cost of US$1.2bn, will accommodate
vessels with a capacity of 200,000-400,000dwt. However, US$20-25bn needs to be invested in Vietnam’s
port sector by 2020, according to the Vietnam Maritime Administration (Vinamarine), as cited by Lloyd’s
List. The country’s port throughput continues to grow, supported by increasing foreign investment, but
there are fears that ports will not be able to keep up with demand. Of the US$20-25bn it has been

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suggested needs to be invested, only 12%-15% is expected to come from the Vietnamese government,
with the rest to be raised from the private sector at home and overseas. This is pertinent, as the current
Mekong River works are being funded by outside sources, the World Bank in this instance.
In early November 2009, it was reported that Vietnam National Shipping Lines (Vinalines) had started
work on the development of an international transhipment port complex in Van Phong Bay in the Khanh
Hoa Province in Vietnam. The transhipment port complex will be developed in four phases. Vinalines has
started the construction of the first two wharves as part of the first phase of construction, involving an
investment of VND4trn (US$250mn). The wharves, with a total length of 650m are scheduled to be
completed by 2013. The first phase will be carried out from 2010 to 2015. The rankings of the Global
Competitiveness Report published by the World Economic Forum annually highlight the weakness of the
port sector’s infrastructure in Vietnam. Though the country has 266 ports, the majority of maritime
infrastructure is outdated and has barely any support infrastructure to transport goods from the port to the
rest of the country. The upgrading of Van Phong transhipment port complex will help the country
considerably improve the condition of its ports.

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Industry Forecast Scenario
Global Oil Products Price Outlook

Chilling Out
Nothing short of a weather miracle can empty brimming storage tanks and take some of the pressure off
the beleaguered refining industry. Another prolonged period of snow and arctic temperatures is needed in
January and February in order to ensure that the inventory position improves sufficiently. There is some
scope for this, but there are likely to be continuing stock surpluses and narrow refining margins in 2010.
Demand growth, particularly for jet and diesel, needs to be strong and sustained if the products markets
are to have a good year. Otherwise, rising crude costs and weak product demand implies more misery for
refinery operators.
The December 2009 cold snap, combined with increasing seasonal demand and stock draws helped
underpin product market sentiment at the end of 2009, boosting crack spreads and refining margins in the
US and Europe. The winter of 2008/09 was unusually cold, and the current season needs to be colder still
if the stock draw is to accelerate and margin strength be retained. Huge distillate volumes are still being
stored offshore, while gasoline stocks have been on the rise. It could be that positive sentiment evaporates
as soon as the last snow melts.
After December’s heavy snow in the north east US, distillate inventories started to fall, down by 10mn
bbl in the month. This boosted heating oil prices before the US distillate market lost some of its shortlived strength in the second week of January as the de-stocking trend reversed on the back of lower-thanexpected demand growth and forecasts for normal weather temperature in the short term in the main
heating-fuel markets.
Improving gasoline demand, along with a slowing of stock builds in December, supported gasoline prices.
In early January gasoline stock builds once again accelerated, in part reflecting the difficult US driving
conditions and consequent demand weakness. Any continuation of this situation will undermine gasoline
market sentiment and encourage traders to liquidate long positions, putting downwards pressure on prices.
European product market sentiment strengthened appreciably as the winter weather hit and arbitrage
opportunities opened up for gasoline to the US and West Africa. The gasoline spread against Brent crude
in Rotterdam rose to above US$7 per barrel (bbl) in early January from about US$6/bbl in the first week
of December. Unfortunately, recent bullish developments in the European gasoline market may be
countered by increased gasoline stock builds in the US.

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The European naphtha market may remain strong over the next months amid useful and persistent
arbitrage opportunities to Asia and improving economic growth prospects. Even the European distillates
market has been gaining momentum on the back of the region’s icy temperatures and fewer import
cargoes. These developments led to stock draws and a narrowing of the contango in the gasoil market.
This could result in some reduction of the ample offshore distillate stocks, standing in excess of 100mn
bbl. Given the persistent overhang in distillate stocks in Europe, still well above the five-year average,
prices are not expected to improve appreciably over the near term.
The Energy Information Administration (EIA) estimates that OECD commercial oil inventories were
2.69bn bbl at the end of 2009, or about 58 days of forward cover, and about 80mn bbl more than the fiveyear average for that time of year. It predicts OECD oil inventories will remain at the upper end of the
historical range in 2010.
Revised Forecasts
BMI estimates that the global wholesale price for premium unleaded gasoline was US$81.41/bbl in
Q409. This compares with US$77.16 in Q309. Over the year the price ranged from a monthly low of
US$49.33 in January 2009 to US$83.25/bbl in November. Gasoline prices in Q409 were up from
US$56.37 in Q408.
Table: Oil Product Price Assumptions, Q409-Q410 (US$/bbl)

Gasoline

Q409

Q110f

Q210f

Q310f

Q410f

Rotterdam Premium Unleaded

82.09

83.68

101.24

103.64

95.39

NY Harbour Unleaded

81.66

88.83

98.45

111.92

94.91

Singapore Premium Unleaded

80.48

91.37

97.50

101.84

93.58

Global average

81.41

87.96

99.06

105.80

94.63

Rotterdam

80.92

91.66

91.79

98.23

94.06

Mediterranean

81.27

93.68

92.52

98.28

94.45

Singapore

81.79

89.03

93.78

99.27

95.06

Global average

81.33

91.46

92.70

98.60

94.52

Rotterdam

83.40

93.74

95.72

100.51

96.94

NY Harbour

83.90

102.11

94.37

111.05

97.55

Singapore

82.75

92.82

94.36

99.72

96.20

Global average

83.35

96.22

94.82

103.76

96.90

Gasoil

Jet/kerosene

f = forecast. Source: BMI

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Table: Oil Product Price Forecasts (US$/bbl)

Gasoline

2007

2008

2009

2010f

2011f

2012f

2013f

2014f

Rotterdam Premium Unleaded

75.75

100.12

70.60

95.99

98.30

104.09

104.09

104.09

NY Harbour Unleaded

78.75

102.54

69.70

98.53

100.91

106.84

106.84

106.84

Singapore Premium Unleaded

74.98

102.64

70.21

96.07

98.39

104.18

104.18

104.18

Global average

76.49

101.77

70.17

96.86

99.20

105.04

105.04

105.04

Rotterdam

77.02

122.62

68.74

93.94

96.20

101.86

101.86

101.86

Mediterranean

77.69

121.75

69.13

94.73

97.02

102.73

102.73

102.73

Singapore

77.03

119.53

69.01

94.29

96.56

102.24

102.24

102.24

Global average

77.24

121.30

68.96

94.32

96.60

102.28

102.28

102.28

Rotterdam

81.13

126.61

70.81

96.73

99.06

104.89

104.89

104.89

NY Harbour

82.48

127.13

71.18

101.27

103.71

109.81

109.81

109.81

Singapore

79.17

121.11

69.99

95.77

98.08

103.85

103.85

103.85

Global average

80.93

124.95

70.66

97.92

100.29

106.18

106.18

106.18

Gasoil

Jet/kerosene

Sources: 2000-2006 historical data: EIA. 2007/2008 historical data: IEA. Forecasts: BMI.

For Q110 we forecast an average global gasoline price of US$87.96/bbl, up 8% quarter-on-quarter (q-o-q)
and 68% year-on-year (y-o-y), from US$52.22/bbl in Q109. For 2010 as a whole, BMI puts gasoline at an
average US$96.86/bbl, with the price expecting to peak in July at more than US$116/bbl. Gasoline prices
will rise 38.0% y-o-y in 2010.
In Q409 gasoil averaged US$81.33/bbl, based on a composite global price. This was a y-o-y rise of
almost 8%. Our revised forecast for Q110 is for global gasoil to average US$91.46, up 12.5% q-o-q. The
weather will have helped gasoil prices relative to gasoline, in spite of the unusually large inventory
position. For 2010 as a whole, we forecast an average price of US$94.32/bbl, probably peaking in January
2010 if cold weather persists. The full-year outturn will be a 36.8% increase y-o-y.
Jet prices averaged US$83.35/bbl in Q409, using the composite for New York, Singapore and Rotterdam.
The y-o-y increase was just under 6%, with jet lagging behind the gain in gasoil prices. The monthly low
in 2009 was US$53.75 in February 2009, with the price reaching US$84.74/bbl in November 2009. In
Q110 we assume an average global jet price of US$96.22, up 15.4% q-o-q and 69.5% y-o-y. For 2010 as
a whole we forecast US$97.92/bbl, up from US$70.66/bbl in 2009.

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In 2009 naphtha was a surprisingly robust performer among the major refined products, gaining 92%
between January and November. In Q409 naphtha averaged US$73.44, up from US$66.21/bbl in Q3 and
US$54.70 in Q2. We put the 2010 average naphtha price at US$80.44/bbl, up 35.6% y-o-y.
Looking further ahead, we see gasoline prices rising to US$99.20/bbl in 2011 and stabilising around
US$105.04/bbl from 2012. Gasoil is expected to climb to US$96.60 in 2011, reaching a plateau of
US$102.28/bbl from 2012. The price of jet is forecast to average US$100.29/bbl in 2011, before levelling
out at US$106.18/bbl from 2012.

Macroeconomic Outlook
Double Dip Now Our Core Scenario
With Vietnam’s balance of payments yet again approaching breaking point, we expect a sharp tightening
of fiscal and monetary policy in 2010, which will see real GDP growth dip to 4.4% from an expected
5.3% in 2009. This will raise criticism of economic policy at the 11th National Congress in January 2011,
but we expect the market reform agenda to be maintained.
We have shifted our Vietnam growth outlook from expecting a gradual economic recovery in 2010 to a
double-dip scenario with real GDP expansion dipping from an expected 5.3% in 2009 to 4.4% in 2010.
This is based on our expectations that fiscal and monetary policy will have to be tightened sharply in
early 2010 in order to rein in the widening trade deficit and halt inflationary pressures. Our outlook for
Vietnam has much in common with that for China. However, while the policy aims of the respective
governments are similar, we view the macroeconomic concerns in Vietnam as more alarming, at least in
the short term, as Hanoi’s fiscal and monetary resources are considerably more limited.
As a consequence, we find it likely that the inevitable shift towards tighter monetary and fiscal policy will
come earlier in Vietnam than in China. Indeed, while Hanoi’s fiscal and monetary stimulus has helped
economic growth recover from a low of 3.1% y-o-y in Q109 to 5.2% in Q309, it has also been a key
factor, in our view, behind a considerable widening of the trade deficit over the same period to US$1.9bn
in October. While the return to positive growth in G3 markets in H209 and 2010 should give some

support to Vietnamese exports, we believe a continuation of the current accommodative policy would
lead to a further widening of the trade deficit.
With Vietnam’s foreign exchange reserves in Q409 estimated at below the three months of imports seen
as a minimum, we believe drastic policy action will be needed to avoid a balance-of-payments crisis. This
will include:
A downward adjustment of the dong towards our VND19,000/US$ end-2009 forecast, from
VND17,862/US$ on November 6, to stem the outflow of US dollars through the trade channel.

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A hiking of policy rates to uphold public confidence in the dong, stem capital outflows, and contain
upward pressure on inflation through higher import prices. We are now expecting 500bps of hikes in
2010, bringing the Vietnam base rate from 7.0% in November 2009 to 12.0%.
A reduction of the fiscal deficit from VND118trn (US$6.6bn), or 7.2% of GDP, to VND105trn
(US$5.9bn), or 5.7% of GDP, in 2010 on the back of reductions in current and capital expenditure
growth.
Implications For Growth
We expect the fiscal and monetary tightening to lead to a double dip in growth after the tentative rebound
seen in the last three quarters of 2009. We are expecting real GDP growth to come in at 4.4% in 2010, as
weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in
spite of the devaluation of the dong. This will mean that the slowdown in domestic demand will be harder
felt. With inflation expected to average roughly 9.0% in 2010, we expect government consumption to
decrease by 3.5% in real terms, which will shave 0.3 percentage points (pp) off headline growth. A more
marked effect will be coming from a slowdown in private consumption growth as credit conditions are
tightened. We expect private consumption growth (in real terms) to slow to 2.3% from an expected 4.9%

in 2009 and 9.2% in 2008. This should see the contribution to growth from private consumption decrease
to 1.6pp in 2010 from 3.3pp in 2009 and a massive 6.0pp in 2008.
We are, on the other hand, expecting an increase in the contribution from gross fixed capital formation
from 0.4pp to 1.1pp as FDI disbursements, down 12.1% y-o-y to US$8bn in January-October 2009,
recover and state-and aid-financed projects gather pace. However, the precarious state of the property
market, where activity and prices have been supported by the loan-subsidy programme, is a risk to this
forecast. While only a minority of property purchases are financed through bank lending, higher interest
rates should still have an impact on the market and on commercial and residential construction.
Policy Rebalancing Needed At 2011 Party Congress
We expect the slowdown in growth in 2009 and 2010 to make economic policy the main matter of debate
during the Communist Party of Vietnam (CPV)’s 11th National Congress scheduled for January 2011.
The macroeconomic rollercoaster ride experienced in recent years has raised criticism against Prime
Minister Nguyen Tan Dung, the most important proponent of economic reform, from more conservative
members in the Politburo. We believe the mainstay of the CPV is still behind Nguyen’s reform agenda,
meaning that there will be no drastic shift in the socio-economic development strategy for 2011-2016.
However, we expect measures to be taken to achieve greater macroeconomic stability, including a
reduction of official growth targets, a shift in monetary policy towards inflation targeting and increased
exchange rate flexibility. This is likely to come at a cost to economic growth in the short term, and we are
consequently forecasting real GDP growth of 5.5% and 6.0% in 2011 and 2012, respectively, as the

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