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The Vietnam Business Forecast Report
Q1 2009
Published by Business Monitor International Ltd
Includes 10-year forecasts to end-2018
ISSN 1745-0764
© 2008 Business Monitor International. All rights reserved.
Analyst: Mark Bohlund
All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.
Editor: Matt Mirecki Key Sector Analysts: L. Holland, G. Thethy, A. Marshall Sub-Editors: Delaina Haslam/Petra Kamula Subscriptions Manager: Dan Xue Marketing Manager: Leila Scott Production: Lisa Church/Chuoc Lam Publishers: Richard Londesborough/Jonathan Feroze Copy Deadline: 7 November 2008
All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.
555 7.8 5.6
GDP per capita, US$ [9]
Real GDP growth, % change y-o-y [1,10]
Unemployment, % of labour force, eop [11]
17.2
53.0
32.4
17.2
2.9
9.05
-0.94
-0.50
-4.54
36.98
32.44
18,777.34
15,859.00
15,913.00
8.3
8.4
839,211
-3.8
-96,399
5.3
8.4
638
53.05
85.02
2005
17.0
49.7
32.3
19.7
3.6
13.38
-0.27
-0.16
-5.23
44.83
39.60
21,208.61
16,017.59
16,072.00
7.4
6.8
973,790
-3.6
-25,830
4.8
8.2
710
60.99
85.90
2006
17.1
45.1
30.5
21.8
4.3
22.00
-8.41
-6.00
-12.44
60.83
48.39
23,386.28
16,045.00
16,018.00
8.3
12.6
1,143,442
-3.9
-75,500
4.5
8.5
821
71.38
87.00
2007
15.2
37.6
30.8
24.0
2.8
20.00
-16.66
-13.00
-21.29
85.16
63.87
22,100.00
16,509.00
17,000.00
22.6
23.2
1,326,393
-5.7
-75,980
5.0
6.0
885
78.02
88.20
2008f
15.0
37.2
33.3
28.0
2.5
20.00
-9.52
-8.00
-20.01
95.38
75.37
22,860.00
17,500.00
18,000.00
15.0
10.0
1,512,088
-6.8
-100,000
4.8
5.0
939
84.00
89.50
2009f
16.4
37.0
32.6
34.0
3.0
27.00
-8.63
-9.00
-17.74
109.69
91.95
21,930.00
17,500.00
17,000.00
7.8
5.5
1,773,679
-5.2
-95,600
4.4
9.3
1149
104.33
90.84
2010f
15.7
37.2
31.7
41.0
2.9
31.00
-5.41
-7.00
-15.80
126.14
110.34
20,640.00
16,500.00
16,000.00
5.2
5.0
2,071,657
-7.9
-168,744
4.3
8.8
1407
129.48
92.00
2011f
14.9
37.0
30.5
49.0
3.1
37.00
-3.12
-5.00
-12.66
145.06
132.41
19,350.00
15,500.00
15,000.00
5.3
5.5
2,407,265
-6.8
-169,513
4.3
8.2
1724
160.48
93.10
2012f
14.0
36.1
29.5
55.0
3.1
41.21
1.61
3.00
-7.30
159.57
152.27
18,125.00
14,000.00
14,500.00
4.8
5.5
2,792,428
-6.2
-160,8230
5.3
8.0
1976
186.16
94.20
2013f
Notes: f BMI forecasts. 1 Constant 1994 prices; 2 1995=100; 3 The Oxford Economic Forecasting model is used when generating certain forecasts.; 4 Annual average; 5 Goods f.o.b.; 6 Goods f.o.b. minus f.o.b.; 7 Foreign reserves minus gold; Sources: 8 Asian Development Bank. As of July 1. 9 BMI calculation; 10 General Statistics Office, BMI calculation; 11 General Statistics Office; 12 IMF, Ministry of Finance; 13 IMF; 14 Asian Devlopment Bank; 15 World Bank.
16.1
Industrial production index, % y-o-y, ave [11]
2.6
58.1
7.04
Forex reserves (- gold), US$bn [7,14]
Import cover, months g&s [9]
Foreign debt, % of exports [9]
-3.44
Current account, % of GDP [9]
15.4
-1.56
Current account, US$bn [11]
33.8
-5.52
Trade balance, US$bn [6,11]
Foreign debt, % of GDP [9]
32.00
Imports, US$bn [5,11]
Foreign debt, US$bn [15]
26.48
21,378.25
Exchange rate VND/EUR, eop [9]
Exports, US$bn [5,11]
15,768.00
15,742.12
Exchange rate VND/US$, eop [13]
4.8
Consumer prices, % y-o-y, ave [3,11]
Exchange rate VND/US$, ave [13]
9.5
715,307
-4.5
Consumer prices, % y-o-y, eop [2,11]
Nominal GDP, VNDbn [11]
Budget balance, % of GDP [9]
-50,001
45.55
Nominal GDP, US$bn [9]
Budget balance, VNDbn [12]
83.12
Population, mn [8]
2004
TABLE: VIETNAM - MACROECONOMIC DATA AND FORECASTS vietnam Q1 2009
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vietnam Q1 2009
Contents Executive Summary............................................................................................................................ 5 Global Slowdown Brings Risks To Economic Recovery
Chapter 1: Political Outlook................................................................................................ 7 SWOT Analysis.......................................................................................................................................................7 BMI Political Risk Ratings...................................................................................................................................8
Domestic Politics................................................................................................................................ 9 Premier Under Pressure, But Reform Agenda Intact The current economic slowdown has raised speculation that reformist Prime Minister Nguyen Tan Dung will be challenged by traditionalists within the Communist Party of Vietnam (CPV).
Table: VIETNAM Political Overview.............................................................................................................9
Foreign Politics.................................................................................................................................10 Hanoi Balancing Between Beijing And Washington
Chapter 2: Economic Outlook........................................................................................... 13 SWOT Analysis.................................................................................................................................................... 13 BMI Economic Risk Ratings............................................................................................................................. 14
Economic Activity.............................................................................................................................15 Outlook For 2009 Deteriorating, Recovery Expected in 2010 We have revised up our 2008 GDP growth forecast somewhat from 5.5% to 6.0%, while simultaneously bringing down the 2009 projection from 7.0% to 5.0%.
Table: ECONOMIC ACTIVITY............................................................................................................................. 15
Monetary Policy................................................................................................................................ 17 Central Bank Turns To Supporting Growth Vietnam has moved to relax monetary policy as prices began to fall in October 2008.
Table: MONETARY POLICY............................................................................................................................... 18
Balance of Payment.........................................................................................................................19 Slowing FDI Disbursements Pose Risks To BoP The trade balance has moved back into focus as Vietnam is poised for a slowdown in the export sector due to weaker demand in key overseas market, most notably the US.
Table: BALANCE OF PAYMENTS...................................................................................................................... 20
Currency Forecast............................................................................................................................22 Government To Allow Dong Depreciation In 2008-2009
Investment Climate..........................................................................................................................23 Hanoi Could Move To Ease FDI Rules In 2009 We believe the Vietnamese government may soon move to ease rules on foreign direct investment in order to boost investment inflows to cover the trade deficit, expected at US$21.3bn in 2008 and US$20bn in 2009.
Banking Sector.................................................................................................................................24 Banking Sector Offers Ample Opportunities For Foreigners We view the Vietnamese banking sector as a veritable Shangri-la for early entrants as poorly-capitalised and inefficient domestic banks are ill-prepared for the opening of the banking market to foreign entrants as pledged in Vietnam’s accession to the WTO in January 2007.
Chapter 3: 10 -Year Forecast............................................................................................ 29 The Vietnam Economy To 2018.......................................................................................................29 A Bumpy Road To Stardom We remain positive about Vietnam’s growth prospects over the next ten years, believing that the macroeconomic woes of 2008 and 2009 will have been a useful exercise for a government still inexperienced in managing a market economy.
Table: VIETNAM Long-Term Macroeconomic Forecasts.................................................................... 29
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Chapter 4: Special Report................................................................................................. 33 Why The US Can Remain World Superpower..................................................................................33 Wealth Is Shifting East The US’s current financial woes will not necessarily undermine its position as a global superpower.
Table: GEOPOLITICAL POWER INDEX............................................................................................................. 33
Chapter 5: Business Environment.................................................................................... 43 SWOT Analysis.................................................................................................................................................... 43 BMI Business Environment Risk Ratings........................................................................................................ 44
Business Environment Outlook.......................................................................................................45 TABLE: BMI BUSINESS AND OPERATIONALRISK RATINGS............................................................................ 45
Institutions........................................................................................................................................ 47 TABLE: BMI LEGAL FRAMEWORK RATINGS.....................................................................................................47
Infrastructure....................................................................................................................................49 Market Orientation...........................................................................................................................51 TABLE: ASIA, FDI ANNUAL INFLOWS................................................................................................................ 53 TABLE: TOP EXPORT DESTINATIONS................................................................................................................ 54 BMI TRADE RATINGS......................................................................................................................................... 55
Operational Risk...............................................................................................................................56
Chapter 6: Key Sectors...................................................................................................... 57 Telecoms............................................................................................................................................ 57 Executive Summary BMI continues to believe that broadband subscriber growth will be strong over the next five years.
TABLE: TELECOMS SECTOR - MOBILE - HISTORICAL DATA & FORECASTS................................................... 58
Power................................................................................................................................................. 61 Executive Summary Vietnam is ranked third ahead of Pakistan in BMI’s updated Power Business Environment rating, thanks largely to the growth potential of power consumption and energy demand, plus healthy scores in several other categories.
TABLE: VIETNAM POWER - HISTORICAL DATA & FORECASTS........................................................................ 63
Chapter 7: BMI Global Assumptions................................................................................ 65 Global.................................................................................................................................................65 TABLE: GLOBAL ASSUMPTIONS........................................................................................................................ 65
United States....................................................................................................................................66 Eurozone............................................................................................................................................67 Japan..................................................................................................................................................69 China..................................................................................................................................................70 Commodities..................................................................................................................................... 71
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c h a p t e rExecutive 1 Political Summary Outlook
Global Slowdown Brings Risks To Economic Recovery Macroeconomic risks are on the rise again due to a deteriorating outlook for the important export sector and FDI disbursements in 2009 as key overseas markets dip into recession and foreign investors struggle to find financing. Weaker external demand will prompt the government and central bank to stimulate domestic demand through easing fiscal and monetary policy, which may create risks for the anticipated decline in inflation towards single digit levels over 2009. We are currently expecting GDP growth to remain weak in 2009, but to rebound to above-trend growth of 9.3% in 2010 as the global economy recovers and foreign investment disbursements resume strength. However, persistent inflation remains a risk to Vietnam’s long-term growth prospects.
Turbulent economic conditions over the past year have prompted criticism of Prime Minister Nguyen Tan Dung’s reform agenda by more conservative factions within the higher echelons of the Communist Party of Vietnam (CPV), who fear that Vietnam’s rapid opening to world markets has unduly exposed it to the caprices of global financial markets. We foresee a temporary slowing of market reform as the government focuses on stabilising the economy and bolstering growth in the face of weakening external demand. Nonetheless, we believe the main reform agenda will remain intact and could in fact be accelerated in certain areas in order to attract more foreign investment.
We have revised down our GDP growth forecast for 2009 from 7.0% to 5.0% as weaker overseas demand will combine with still struggling domestic demand to slow economic momentum. The worrying outlook for the export sector, in view of stagnant or even negative growth in key overseas markets such as the US and the EU, brings back risks to Vietnam’s balance of payments situation, which could renew concerns about the value of the dong, in particular if double-digit inflation proves to be more persistent than expected. We are forecasting inflation to fall to 10% by the end of 2009 on the back of slower domestic demand and falling global prices of key commodity items.
Vietnam’s first ever personal income tax law will become effective on January 1 2009, replacing a previous system in which expatriates and local residents were taxed at different levels. The new bill provides a common set of rules for individuals resident in Vietnam for 183 days or more in a 12-month period, stipulating personal income to be taxed at a rate between 5% and 35%, with a personal allowance of VND48mn (US$2,800) and an additional allowance of VND19mn (US$1,120) per dependent. As such the new bill reduces the highest marginal tax level applicable to expatriates from 40% to 35%. A new feature in the bill compared to previous legislation is that it covers non-employment income such as interest, dividends and capital gains on real estate and securities investment.
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chapter 1
Political Outlook
SWOT Analysis Strengths The Communist Party government appears committed to market-oriented reforms necessary to double 2000’s GDP per capita by 2010, as targeted. The one-party system is generally conducive to short-term political stability. Relations with the US are generally improving, 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 that 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 Vietnamese dissidents are seeking external help, especially from the US. This could complicate Vietnam-US relations, with Washington having criticised Hanoi over its restrictions on religious freedom. 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.
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BMI Political Risk Ratings President Nguyen Minh Triet visited Russia on October 27-29 2008 to oversee the signing of a series of economic agreements with his Russian counterpart, Dimitri Medvedev. Most notably, the countries will increase cooperation in the area of natural resources, with both Gazprom (oil and gas) and RUSAL (aluminium) signing deals to expand their operations in Vietnam. Russia still benefits from close ties formed with Vietnam during the communist era, which it hopes will to use as a basis to increase trade. According to Medvedev, annual bilateral trade with Vietnam will increase from US$1.0bn in 2007 to US$3.0bn in the coming years.
Singapore Australia Hong Kong New Zealand China Japan Vietnam Taiwan Malaysia South Korea Laos North Korea Sri Lanka Indonesia Cambodia Thailand Philippines India Bangladesh Myanmar Pakistan Regional average: 73.6
S-T Political 94.2 86.5 86.0 82.1 81.0 80.8 80.0 78.3 78.1 77.1 77.1 76.9 68.1 67.7 67.3 65.8 64.2 62.5 57.3 55.8 48.5 Emerging markets average: 66.2
Rank Trend 4 = 13 = 16 = 24 = 27 = 28 = 33 + 37 = 38 41 = 41 = 44 = 74 = 81 = 82 = 89 = 94 = 100 = 109 = 114 = 123 Global average: 69.0
Japan New Zealand Australia South Korea Hong Kong Singapore Malaysia India Taiwan Sri Lanka China Thailand Philippines North Korea Pakistan Vietnam Indonesia Cambodia Bangladesh Laos Myanmar Regional average: 63.7
L-T Political 90.1 82.7 81.2 80.2 76.9 74.8 74.2 71.3 66.4 62.7 60.4 56.8 57.0 55.1 54.4 53.8 53.6 51.9 50.4 46.5 31.3 Emerging markets average: 60.2
Rank Trend 10 = 17 = 23 = 24 = 36 = 39 = 42 = 46 = 56 = 69 = 77 = 91 = 92 = 96 = 97 = 100 = 102 = 105 = 111 = 116 = 133 = Global average: 63.9
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political outlook
Domestic Politics Premier Under Pressure, But Reform Agenda Intact How to weather the current economic turmoil was the primary focus of the Communist Party of Vietnam (CPV)’s central committee’s emergency plenary meeting in Hanoi on October 2-4 2008. In addition to the normal stocktaking on achievements over the past two years, the committee is believed to have prepared contingency plans to protect Vietnam’s exportfocused manufacturing sector, which has been the prime driver of growth in recent years, in the likely event of a further slowdown in the US and other developed economies.
BMI View The current economic slowdown has raised speculation that reformist Prime Minister Nguyen Tan Dung will be challenged by traditionalists within the Communist Party of Vietnam (CPV). We see the risk of regime upheaval as being low, although public discontent with the government and one-party rule may rise in tandem with
Turbulent economic conditions over the past year have prompted criticism of Prime Minister Nguyen Tan Dung’s reform agenda by more conservative factions within the Politburo and the Central Committee, the most important decision-making bodies of the CPV. A faction led by Nong Duc Manh, general secretary of the CPV, challenged Dung’s policymaking at a plenary meeting in July as runaway inflation and a ballooning trade deficit almost resulted in a collapse of the Vietnamese dong.
increased economic hardship. Over the longer term, high economic growth will ultimately be insufficient to contain pressures for increased political freedom.
Manh and his supporters fear that Vietnam’s rapid opening to world markets has unduly exposed it to the caprices of global financial market. While the premier has undoubtedly been under pressure over the past year, we believe his standing is strong within the wider party and see no major risk to either his position or the economic reform agenda he has presided over. However, with the pains of slower growth likely to prompt increased discontent with Communist Party rule, we foresee a readjustment of economic policies in 2009 to support lowTable: Vietnam Political Overview System of Government
Single-Party Socialist Republic
Head of State
President Nguyen Minh Triet (serving first five-year term)
Head of Government
Prime Minister Nguyen Tan Dung (serving first five-year term)
Last Election
Parliamentary – May 2007 Communist Party Congress – April 2006
Composition Of Current Government
Communist Party of Vietnam
Key Figures
The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises of the top leadership of the CPV. Its most important members are: Party General Secretary Nong Duc Manh, State President Nguyen Minh Triet, Prime Minister Nguyen Ten Dũng and General Minister of Public Security Le Hong Anh.
Other Key Posts
Deputy Prime Minister – Nguyen Sinh Hung, Foreign Minister – Pham Gia Khiem, Minister of Planning and Investment – Vo Hong Phuc, Vice President – Truong My Hoa, Central Bank Governor – Nguyen Van Giau
Main Political Parties (number of seats in parliament)
Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originating from Southern Vietnam, and an older generation, originating from the North, more aligned to traditionally communist ideology.
Next Election
Presidential and Parliamentary – May 2012 CPV Congress – Spring 2011
Ongoing Disputes
Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea.
Key Relations/ Treaties
ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council.
BMI Short-Term Political Risk Rating
79.2
BMI Structural Political Risk Rating
51.8
Source: BMI
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income households. Indeed Dung told the National Assembly at the opening of its fourth session on October 16 2008 that ‘the 2009 overall socioeconomic target is to continue to put priority on inflation control, actively minimise negative impacts of the financial crisis and the global economic recession, ensure macroeconomic stability, implement improved social welfare, remain stable socioeconomic growth, keep political stability and ensure national defense, security and social order.’ This underlines our view that economic reform will be put on the backburner over the coming year. While the risks of public unrest should not be overstated, there are, nevertheless, risks to political stability to be considered in 2009. As in neighbouring China, the public tolerance of one-party rule is largely vested in the ruling Communist Party’s ability to deliver rapid economic growth and a concomitant improvement of living standards for the general public. With the economy now slowing down and persistently high inflation eroding wage gains, public discontent with economic policy, corruption by party officials, and one-party rule in general, may rise. We have accordingly downgraded our short-term political risk rating from 86.7 at the beginning of 2008 to 79.2 on the back of a lower social stability reading and a readjustment of our assessment of policy continuity. We expect a further repositioning of economic policy towards redistributive policies in 2009 as Hanoi seeks to dampen the fallout of the economic slowdown. However, economic reform is likely to proceed at a steady pace over the remainder of our forecast period, laying the ground for continued GDP growth at around 8% annually. Indeed, reform could actually be accelerated in some areas where the government has previously been reluctant to liberalise, such as foreign investment regulation and allowing greater competition within the power sector. Yet, while rapid economic growth may quell public discontent with political freedom in the short term, we believe one-party rule is inherently unsustainable in the longer term, especially as general income and education levels rise. We thus accord Vietnam a considerably lower long-term political risk rating. Moreover, with debate within the CPV on government policy rising, we have readjusted our long-term political risk rating somewhat, from 53.8 to 51.8, on a reduced policy continuity reading.
Foreign Politics Hanoi Balancing Between Beijing And Washington As we have noted in the past, Vietnam’s growing importance on the international stage carries a number of risks. Hanoi has been strengthening ties with the US, and has ambitions of becoming a regional leader in South East Asia, but doing so will mean competing with China, who is already suspicious of American influence in the area. The global financial crisis has only made this balancing act more difficult, as China looks to boost its own economy by competing more aggressively with ASEAN in low-cost manufacturing. Although historically difficult, Vietnam’s relations with the United States have improved markedly since the early 1990s, and they were officially normalised in the summer of 1995. Since then, the US has become and increasingly important trading partner for Vietnam, in
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particular after Hanoi and Washington signed a bilateral trade agreement in 2001. Moreover, Washington played an integral part in helping Vietnam gain accession to the WTO in 2007. In his official visit to the United States this year, Vietnamese Prime Minister Nguyen Tan Dung solicited economic advice from a range of US experts – perhaps a sign that his country valued American guidance on its path to development. Trade between the two countries has increased rapidly over the past years, with the volume of goods exchanged growing from US$1.5bn in 2001 to over US$12.5bn in 2007, making the US the foremost destination for Vietnamese exports (22.6%). The rapid growth of Vietnam’s exports to the United States over the past year contrasts with China’s, which seem to be approaching a plateau. While shipments from Vietnam in the period covering January to September 2008 grew by an average of 20%, those from China increased by only 6%. Furthermore, at US$8.7bn in 2007, the US trade deficit with Vietnam is much less conspicuous than the US$262bn shortfall it recorded with China. According to the Congressional Research Service, a shift to Vietnam could partially offset the rising deficit with China. In addition to any benefit provided by trade agreements, Vietnam and the US share a common interest in checking China’s growing diplomatic and commercial influence in South East Asia. From the US perspective, an understanding with Vietnam would help it pursue broad strategic goals in region by adding it to a grouping of friendly governments which already includes those of Japan, South Korea and Taiwan. However, Vietnam must tread carefully in its dealings with Washington, since it does not want Beijing to see the relationship as a direct challenge. Nonetheless, as demand from overseas markets softens, China and Vietnam will increasingly see one another as commercial rivals. China’s growth in Q308 (9.0%) was below expectations, and there is a growing body of anecdotal evidence to suggest that the financial crisis is forcing local manufacturers out of business. Vietnam competes favourably with China in the low value-added manufacturing sector, in particular after Beijing imposed a new labour law in early 2008, raising minimum wage requirements in effort to boost domestic demand and gradually decrease its dependence on low-value added manufacturing. That said, slumping external demand means that China is now likely to compete more aggressively with ASEAN suppliers in these low cost products, as it tries to prop its ailing export sector. China and Vietnam are also competing for influence in Cambodia and Laos, in addition to disputing ownership of the Spratly Islands in the South China Sea. In spite lingering suspicions of Beijing’s foreign policy motives, Vietnam’s economic relations with China have improved markedly. A recent sign of these improving relations is the Asian Development Bank’s announcement that it would fund the construction of a highway connecting Hanoi to Kunming in China’s Yunnan province. The 244km road is expected to cut travel time between the two cities by half, and provide a huge boost to Vietnam’s impoverished northwest.
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chapter 1 2
Political Outlook Economic Outlook
SWOT Analysis Strengths Vietnam has been one of the fastest-growing economies in Asia in recent years, averaging growth of 8.0% a year. 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.
Weaknesses Vietnam suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to external shocks. The fiscal picture is clouded by considerable ‘off-the-books’ spending. 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 pressures.
Opportunities WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. The government will continue to move forward with market reforms, including privatisation of the State-Owned Enterprises sector, and liberalising the banking sector. 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.
Threats Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government fails to curb inflation, it risks prolonging macroeconomic instability, which could lead to a potential crisis. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy.
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BMI Economic Risk Ratings Consumer price inflation in Vietnam fell 0.19% month-on-month (m-o-m) (26.7% yearon-year [y-o-y]) in October, for the first monthly decrease since March 2007. The main factors driving the decrease were lower food and foodstuff prices, which together account for 42.80% of the CPI basket. Although the price of rice – a key component of the basket – has been in steady decline since May, the latest figures also reveal slowing prices for a host of goods and services whose cost continued to grow even as rice was getting cheaper. This suggests that the economy is cooling, which should take some pressure off inflation as the central bank begins to ease monetary policy.
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Singapore Taiwan Malaysia Hong Kong South Korea China Philippines India Indonesia Thailand Japan New Zealand Australia Cambodia Myanmar Pakistan Vietnam Laos Bangladesh Sri Lanka Regional average: 67.8
S-T Economy 88.8 87.5 85.2 83.1 81.5 80.8 78.8 78.3 75.8 72.1 70.2 64.4 63.1 61.5 60.8 52.3 50.8 50.0 47.3 34.8 Emerging markets average: 60.9
Rank Trend 3 = 4 = 6 = 9 = 10 12 = 19 + 20 = 31 39 = 46 63 70 = 76 = 79 = 112 = 117 = 121 + 128 = 138 = Global average: 63.1
Singapore South Korea Hong Kong Taiwan Malaysia Japan China Australia Thailand Indonesia India Philippines New Zealand Pakistan Vietnam Bangladesh Cambodia Sri Lanka Laos Myanmar Regional average: 63.3
L-T Economy 78.8 76.4 76.0 75.9 72.9 71.9 71.6 70.5 70.3 67.4 66.8 64.8 63.8 55.1 54.2 53.4 48.7 48.4 46.7 33.4 Emerging markets average: 55.3
Rank Trend 4 = 9 = 10 = 11 = 15 = 19 + 21 = 25 26 = 35 = 38 46 + 48 85 88 = 89 = 104 = 107 = 113 + 135 = Global average: 57.5
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ECONOMIC outlook
Economic Activity Outlook For 2009 Deteriorating, Recovery Expected in 2010
BMI View
Odds now appear tilted towards a more prolonged economic downturn in Vietnam as an adverse global macroeconomic backdrop extends the policy-induced slowdown in 2008. Our previous outlook envisaged the Vietnamese economy taking off again in H209 as eased monetary conditions and a global recovery gave impetus to domestic and external demand. This anticipation now looks overly optimistic as the true depths of the financial troubles in the European and US economies have been revealed, prompting us to revise our outlook for a host of export-dependent Asian economies.
We have revised up our 2008 GDP growth forecast somewhat from 5.5% to 6.0%, while simultaneously bringing down the 2009 projection from 7.0% to 5.0%. Further revisions might be needed on the back of a deeper-thananticipated recession in the US. Going beyond 2009 we believe Vietnam will be in position to benefit from a recovery of global growth, and we have thus raised our 2010 forecast from
Growth Likely To Slow Further In Q408
8.5% to 9.3% on the back of a lower base in
The Vietnamese economy rebounded somewhat in Q308, with y-o-y growth jumping from 5.8% in Q208 to 6.5%, according to our breakdown of cumulative estimates released by the General Statistics Office. The rebound was largely due to a renewed momentum in the industrial sector where growth rose from 7.9% to 9.7% y-o-y on what we believe was mainly due to the government’s efforts to boost exports to close the widening trade deficit. Manufactured exports, such as textiles and electronics, increased rapidly in the period after a weak spell in May as credit concerns engulfed the corporate sector.
the preceding year.
Slower Still In Q408
Quarterly GDP growth (y-o-y % chg)
This resulted in the sector’s contribution to overall growth jumping from 2.4pps in Q208 to 3.2pps in Q308. However, we believe this effect will be short-lived and that growth in manufacturing of 11.9% y-o-y in Q308 may soon fall into single digits as demand from major export markets weakens. This slowdown is already noticeable in industrial production figures where the rolling 3-month moving average has fallen from 16.9% y-o-y in May 2008 to 15.5% in October. We are also expecting a further decline in the construction sector, which contracted by 1.9% y-o-y in Q308 compared to a 13.6% y-o-y expansion in the same quarter a year earlier. The rapid shift of momentum cut the sector’s contribution to GDP growth from 1.3 percentage points (pps) in Q307 to a negative 0.2pps in Q308. We expect growth in the sector to descend further into negative territory as the Vietnamese property market remains in dire straits, with real estate prices in Ho Chi Minh City down by as much as 60% from peaks in early 2008.
Source: BMI
table: ECONOMIC ACTIVITY
2007
2008f
2009f
2010f
2011f
2012f
2013f
Nominal GDP, VNDbn [2]
1,143,442.0
1,326,392.7
1,512,087.7
1,773,678.9
2,071,656.9
2,407,265.3
2,792,427.8
Nominal GDP, US$bn [3]
71.38
78.02
84.00
104.33
129.48
160.48
186.16
Real GDP growth, % change y-o-y [1,4]
8.5
6.0
5.0
9.3
8.8
8.2
8.0
GDP per capita, US$ [3]
821
885
939
1149
1407
1724
1976
Population, mn [5]
87.00
88.20
89.50
90.84
92.00
93.10
94.20
Industrial production index, % y-o-y, ave [2]
17.1
15.2
15.0
16.4
15.7
14.9
14.0
Unemployment, % of labour force, eop [2]
4.5
5.0
4.8
4.4
4.3
4.3
5.3
Notes: f BMI forecasts. 1 Constant 1994 prices; Sources: 2 General Statistics Office. 3 BMI calculation; 4 General Statistics Offices, BMI calculation; 5 Asian Development Bank. As of July 1
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vietnam Q1 2009
A positive note for the Vietnamese economy is that liquidity conditions are considerably better than in many other countries, meaning that lending is more available. Moreover, the capping of lending rates at 18% means that real interest rates are still in negative territory. Nevertheless, banks are now cutting both deposit and lending rates in order to boost credit growth as many companies are unwilling to borrow at current rates as they expect inflation to trend downwards over the coming 18 months. The State Bank of Vietnam has urged banks to cut rates and boost lending as credit growth has slowed to 19.6% y-o-y in January-October 2008 compared to a 30% y-o-y expansion in the same period last year. We believe the lower expansion rate could be a positive as it would lay the ground for a continued soft landing of the Vietnamese economy as global growth enters into a less expansionary phase.
Economic Malaise To Extend Into 2009 Dip In Growth To Extend Into 2009 Real GDP (Annual chg, %)
Source: BMI
Nonetheless, a deteriorating outlook for the export-focused manufacturing sector has been important factor in our decision to revise down our 2009 growth forecast. With the sharp deterioration in US import demand and demand likely to be stagnant in the EU, we anticipate growth in the manufacturing sector to slow to a virtual standstill (+1.5%) in 2009 after having posted double-digit figures since 1999. The situation will be somewhat better for the construction industry as we believe the sector will have bottomed out in late 2008/early 2009, posting an overall expansion of 3.0% in 2009 after a 2.5% contraction in 2008. The services sector should be able to catch a bit of the slack left by the industrial sector, with growth in the important trade segment slowing from an estimated 8.8% in 2008 to 5.3% in 2009. Growth will be more resilient in other services industries with the transport and communication subcategory slowing from 10.2% in 2008 to 7.5% in 2009. We expect the financial sector to against the wind, with growth accelerating from 9.4% in 2008 to 13.4% in 2009 as global banking giants HSBC, Standard Chartered and ANZ Bank start rolling out their branch network and domestic players boost their investment in technology and human resources. However, the sector currently accounts for less than 2.5% of total GDP and will thus have a very marginal effect on overall GDP growth. Going beyond 2009, we believe Vietnam will be in position to benefit from a recovery of global growth, and we have thus raised our 2010 forecast from 8.5% to 9.3% on the back of a lower base in the preceding year. Manufacturing will then resume its position as the main driver of GDP growth with the construction and services sectors also returning to double-digit growth levels.
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ECONOMIC outlook
Monetary Policy Central Bank Turns To Supporting Growth Inflation in Vietnam has largely been driven by high volatility in the price of food and foodstuff, which together account for 42.8% of the consumer price inflation (CPI) basket. As such, inflation rose rapidly in tandem with the spike in the price of rice in H108, but decelerated and started falling in H208 as a good harvest allayed concerns about food security.
BMI View Vietnam has moved to relax monetary policy as prices began to fall in October 2008. We believe this change in policy is wise given the rising downside risks to growth, but caution that aggressive monetary easing could contribute to lingering inflationary pressures in the economy.
As we predicted in H108, the headline y-o-y inflation measure reached a peak in Q308 (28.4% in August) and is now on a robust downward trajectory. With global commodity prices falling, slowing domestic demand and strong base effects kicking in, we believe we could see a rapid fall in inflation in H109, with the headline measure possibly hitting single digits by Q309. However, our core scenario is that inflation will stabilise at around 10-12% in H209 as falling food and fuel prices find a floor, and the State Bank of Vietnam (SBV)’s monetary easing takes effect. The central bank cut the benchmark base rate by 200bps from 14.00% to 12.00% in two steps on October 20 and November 3 2008 in a bid to cushion the expected economic slowdown. The SBV also reduced the compulsory reserve ratio from 11% to 10% for VND deposits and from 11% to 9% for US$ deposits, releasing funds at local banks, and raised the interest rate it pays on banks’ compulsory reserves after having repeatedly urged banks to boost their lending in order to alleviate the strains on cash-starved corporates. The central bank is hoping that these measures will boost lending as credit growth remains in negative territory in real terms. Indeed, credit growth has slowed markedly in 2008 to 19.6% y-o-y in January-October 2008, which can be compared to a growth rate 37.73% in the same period a year earlier, when inflation was still in single digits. The SBV has repeatedly urged banks to boost lending instead of investing in bonds, and we are waiting to see if a tentative acceleration in loan growth in October will translate into a more sustained recovery. We are currently expecting another 100bps of rate cuts by the end of the 2008, coupled with other measures aimed at raising credit growth towards the full-year target of 30%, in order to support economic growth. We are pencilling in a 200bps of additional rate cuts in 2009, but caution that further easing might be needed as external demand weakens. However, monetary easing focused on supporting growth brings upside risks to inflation in the short-to-medium term. This could lead to inflation expectations becoming anchored at a higher level than previously, but we see this as a lesser risk to Vietnam’s longer-term growth prospects than that of a sharp downturn in 2009 disrupting economic activity.
Risks To Banking Sector
A failure to bring inflation back to single digits over the next 18 months could, particularly if coupled with a still-sizeable current account deficit, bring renewed risks to market confidence in the dong.
Food Prices Leading CPI Lower
Overall CPI & Food Component (m-o-m % chg)
Source: BMI
Turnaround In Inflation Spells Better Times For Banks
Consumer Price Inflation (m-o-m and y-o-y % chg)
Source: BMI
The sharp expansion of credit in 2007 (54%) and the steep monetary tightening effected by the SBV in May and June 2008, which saw the base rate being raised from 8.75% to 14.00% within the span of two weeks, have raised fears about the health of Vietnam’s fledgling banking sector. We have previously stated that the risks are mainly concentrated Business Monitor International Ltd
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vietnam Q1 2009
at smaller, less-capitalised, joint-stock commercial banks (JSCBs), which exposed themselves heavily to the booming stock and real estate market in order to gain market shares from the state-owned commercial banks and the older and larger JSCBs. Nguyen Dong Tien, deputy governor at the SBV, has estimated that non-performing loans (NPLs) amounted to VND35trn (US$2.1bn) in January-September 2008, equivalent to 2.92% of outstanding debt. Tien stated that this ratio may rise to 4% by the end of the year, a projection we deem plausible. However, as we have previously cautioned, NPL ratios could be up to five-fold higher by international standards, as the transparency of the Vietnamese banking sector remains poor.
Real Credit Growth Turns Negative Vietnam – Credit Growth & Inflation (%)
Source: BMI
A noticeable risk to the Vietnamese loan portfolio is the borrowing to property speculators during the booming real estate market of 2006 and 2007. However, we have so far seen few indications of rising defaults on real estate loans with the NPL ratio still below 2.5%. With property prices having fallen by more than 30% in some areas of Hanoi and Ho Chin Minh City in 2008, it is likely to be only a matter of time until an increasing number property developers start defaulting on their loans. However, property loans amounted to VND115trn (US$6.9bn) in January-September 2008, 9.15% of total loans, meaning that the risks from a slowdown in the property should not be exaggerated. With the risks to some of the smaller JSCBs in mind, the SBV imposed a temporary moratorium on new banking licenses on July 29 2008, pending new regulation on bank charters. The SBV has also required commercial banks to raise their chartered capital to VND1trn (US$60mn) by the end of 2008 in a bid to spur consolidation in the banking sector and reduce the risk of bank collapses. Nine joint-stock commercial banksare currently under-capitalised according to the SBV and thus at risk of forced mergers with larger better-capitalised players. We see banking sector consolidation as the most likely outcome of the current liquidity squeeze, and see only a minor risk of bank failures and government bail-outs going forward. We have previously suggested that the government might raise the current 30% cap on foreign ownership in order to aid a capital replenishment of banking sector. Our core scenario is that the cap will remain in place, but a lifting of it remains a possible scenario should Vietnamese banks start to fold (see Banking Sector).
table: MONETARY POLICY Lending rate, %, eop [1,4] Real Lending Rate, %, eop [1,5]
2006
2007
2008f
2009f
2010f
2011f
2012f
2013f
11.00
10.70
10.10
9.70
9.40
9.30
9.50
8.00
3.56
2.40
-12.50
-5.30
1.60
4.10
4.20
3.2
Consumer prices, % y-o-y, eop [2,6]
6.8
12.6
23.2
10.0
5.5
5.0
5.5
5.5
Consumer prices, % y-o-y, ave [3,6]
7.4
8.3
22.6
15.0
7.8
5.2
5.3
4.8
Exchange rate VND/US$, eop [4]
16,072.00
16,018.00
17,000.00
18,000.00
17,000.00
16,000.00
15,000.00
14,500.00
Exchange rate VND/US$, ave [4]
16,017.59
16,045.00
16,509.00
17,500.00
17,500.00
16,500.00
15,500.00
14,000.00
Exchange rate VND/EUR, eop [5]
21,208.61
23,386.28
22,100.00
22,860.00
21,930.00
20,640.00
19,350.00
18,125.00
Notes: f BMI forecasts. 1 Annual average; 2 1995=100; 3 The Oxford Economic Forecasting model is used when generating certain forecasts.; Sources: 4 IMF. 5 BMI calculation; 6 General Statistics Office.
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ECONOMIC outlook
Balance Of Payments Slowing FDI Disbursements Pose Risks To BoP Due to its relatively small financial market, Vietnam is less vulnerable to the large portfolio investment outflows which in early Q408 created acute liquidity shortages in countries such as India and South Korea. The Vietnamese stock market boom, which saw the Viet Nam Index rise by 144% in 2006, was very much of a home-grown affair with the foreign presence in the market limited to a number of long-term investors. We believe this was a crucial factor in Vietnam, earlier this year, avoiding the fate of Thailand in 1997 (see our online service, June 20 2008, ‘Vietnam & Argentina: Crisis Potential’), when a rapid exit by foreign portfolio investor broke the currency peg, sending the economy into a tailspin.
BMI View The trade balance has moved back into focus as Vietnam is poised for a slowdown in the export sector due to weaker demand in key overseas market, most notably the US. With the trade deficit anticipated at around US$20bn for 2009, Vietnam will be dependent on a continued inflow of foreign direct investment (FDI), development assistance and remittances. As FDI disbursements may be deferred in 2009 due to the
In Vietnam’s case, the main concern in Q208 was a rapid widening of the trade deficit (252% y-o-y in January-May 2008), which brought doubts about the viability of the balance of payments position, and by extension the value of the dong and the overall sustainability of the Vietnamese growth story. The Vietnamese government avoided a wider balance of payments crisis at the time by implementing a set of policies aimed at limiting imports and
global economic slowdown and tighter financial conditions, Vietnam is again at risk of a balance of payments crisis.
boosting exports. However, the radical improvement seen in the trade account in H208 is now at risk of coming undone as economic conditions are deteriorating rapidly in many of Vietnamese key markets, most notably the US.
High Reliance On US Demand Increases Vulnerability
At The Brink Of The Abyss
Monthly Exports, Imports & Trade Balance (US$mn)
We have previously highlighted the risk posed by the export sector’s strong dependence on US consumer demand – the US absorbed 22.6% of Vietnam’s exports in 2007 – and with the financial crisis now spreading from Wall Street to Main Street it is likely to only be a matter of time before the ripples reach Vietnam. A slowdown in external demand would have a severe effect on Vietnam as it is one of the most trade dependent economies in the region, if not the world, with an exports-to-GDP-ratio of 67.8% (2007). The growth rate of Vietnamese exports to the US has indeed fallen over the year, although it recorded a still healthy 20% y-o-y in January to August. With US data showing a contraction of non-oil imports, we believe Vietnam will experience growing difficulties in selling garment and apparel, and other key products in the US market. Indeed, companies in the sizeable garment sector, which ships roughly 55% of exports to the US, reported that orders from foreign partners were down by 25-50% y-o-y in September 2008 in spite of them having cut prices. Demand conditions are unlikely to be better in the EU, Vietnam’s second-largest export destination, which recieved 19.3% of Vietnam’s exports in 2007. Vietnamese exports are also likely to take a hit from falling prices of key export commodities such as oil, rice, coffee and rubber. We thus anticipate export growth to fall from 36.7% y-o-y in January-October 2008, to 18% in 2009. This will come in tandem with a fall in import growth from 42.6% in January-September 2008 to 12% in 2009 on the back of a drop in imports of input goods, falling imported commodity prices and weaker domestic demand. The commencement of operations at the Dung Quat oil refinery, with a capacity of 140,000 barrels per day will depress both exports and import growth by reducing the export of crude oil and the imports of refined oil products. The deteriorating global Business Monitor International Ltd
Source: BMI
US Exposure A Risk In 2009 Exports by Destination 2007
Source: IMF
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vietnam Q1 2009
macroeconomic backdrop means that we are unlikely to see as robust a performance in the trade account in 2009 as we did in H208. We are forecasting the trade deficit to contract slightly in 2009, to US$20.0bn after a US$21.3bn shortfall in 2008. These are mammoth sums, corresponding to 21% and 25% of GDP respectively, making Vietnam highly dependent on a continued inflow of remittances, loans and investment. Vietnam has an advantage over countries like India in this respect as inflows on the financial account are dominated by foreign direct investment (FDI), official development assistance (ODA) and remittances rather than more volatile portfolio investment, which can rather easily be retracted in the event of market or economic turbulence.
Massive Trade Deficit Still A Risk Trade Balance (US$bn)
FDI Disbursement At Risk In Spite Of Record Pledges
Source: General Statistics Office f = BMI forecast.
We are estimating the inflow of FDI, ODA and remittances to amount to roughly US$20bn in 2008, thus covering the trade deficit. We are expecting a similar inflow next year, but are seeing growing downside risks to this forecast as the disbursement of foreign investment plans might be deferred or cancelled altogether, on the back of a considerably more pessimistic outlook for the global economy. The government is expecting FDI pledges for 2008 to amount to US$62bn, which would correspond to 79.5% of expected GDP, after pledges in January-October amounted to a massive US$58.3bn. However, we believe this sum does not adequately reflect the outlook for FDI disbursements in 2009 as many investment plans (especially the bigger ones worth US$1bn or more and requiring a high degree of financial leverage) are likely to be affected by impaired borrowing conditions and heightened risk aversion.
Massive Pledges Do Not Represent Outlook For FDI Disbursements
Foreign Direct Investment (FDI) Pledges (US$bn) 70 60 50 40 30 20
As the pie charts below illustrate, a large share of the pledged FDI comes from exportdependent East Asian economies such as Singapore, South Korea and Taiwan where companies are likely to be severely affected by constricted credit conditions, which will impair financing for larger investment projects in the near term.
2007
2008 (JanOct)
2006
2005
2004
2003
2002
2000
0
2001
10
Source:GSO
Moreover, by looking at a sectoral breakdown of the FDI figures provided by the General Statistics Office, we can see that FDI remains heavily weighted towards the industrial and petroleum sector (c. 45% of total) and the construction industry (c. 30%), two sectors
table: BALANCE OF PAYMENTS
2004
2005
2006
2007
2008f
2009f
Exports, US$bn [1,5]
26.48
32.44
39.60
48.39
63.87
75.37
Imports, US$bn [1,5]
32.00
36.98
44.83
60.83
85.16
95.38
Trade balance, US$bn [2,5]
-5.52
-4.54
-5.23
-12.44
-21.29
-20.01
Current account, US$bn [5]
-1.56
-0.50
-0.16
-6.00
-13.00
-8.00
Current account, % of GDP [6]
-3.44
-0.94
-0.27
-8.41
-16.66
Forex reserves (- gold), US$bn [3,7]
7.04
9.05
13.38
22.00
2.6
2.9
3.6
4.3
35.70
50.64
60.87
69.00
Import cover, months g&s [6] OPEC basket, US$/b, ave [4,8]
2010f
2011
2012
2013
91.95
110.34
132.41
152.27
109.69
126.14
145.06
159.57
-17.74
-15.80
-12.66
-7.30
-9.00
-7.00
-5.00
3.00
-9.52
-8.63
-5.41
-3.12
1.61
20.00
20.00
27.00
31.00
37.00
41.21
2.8
2.5
3.0
2.9
3.1
3.1
101.50
71.50
81.50
81.50
81.50
81.50
Notes: f BMI forecasts. 1 Goods f.o.b.; 2 Goods f.o.b. minus f.o.b.; 3 Foreign reserves minus gold; 4 Global assumptions correct when forecasts generated.; Sources: 5 General Statistics Office. 6 BMI calculation; 7 Asian Development Bank; 8 OPEC
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ECONOMIC outlook
with very bleak prospects in the short term. The former is likely to be affected by rapidly deteriorating demand conditions for the low value-added consumer products that dominate the Vietnamese manufacturing sector, while the sharp fall in the global price of crude has dramatically altered the revenue projections for investments in the oil sector. The residential construction industry will, for its part, be affected by tighter domestic lending conditions and the slump in the real estate market – property prices in Hanoi and Ho Chi Minh City have fallen by up to 30% in 2008 – which has put many investment projects on hold. We are expecting the real estate market to bottom out in 2009 and return to better health in 2010, meaning that investment by longer-term focused players with a ready access to financing will be forthcoming also in 2009. Moreover, we are anticipating a continued disbursement of FDI into projects in the infrastructure sector, where foreign companies have become increasingly involved in the construction of ports and power plants. Nonetheless, we see a risk that FDI inflows in 2009 will fall short of the US$11bn projected for 2008. While weaker FDI disbursement remains a risk to the balance of payments, it is mitigated by the fact that it is likely to be coupled with a fall in imports as a large share of the latter is made up by capital goods for investment projects (the FDI sector accounts for roughly one-third of total imports). Looking beyond 2009, we believe that FDI inflows should remain robust on the back of Vietnam’s solid macroeconomic fundamentals and continued attractiveness as an alternative to China for manufacturing operations. We are thus expecting a solid inflow of foreign direct investment to bolster growth over the remainder of our five-year forecast period (2009-2013). In addition to weaker FDI disbursements, we are seeing increasing risks to our forecast that remittances from overseas Vietnamese will amount to US$10bn in 2009, up from an estimated US$8bn in 2008. The mainstay of remittances come from sizeable overseas communities in the US and the eurozone, and with both these economies expected to be in recession for at least part of 2009, we see a risk that remittance inflows to Vietnam could suffer. Nonetheless, while FDI and ODA disbursements and remittances may all slow in 2009 and thus put pressure on the dong, it will not be on par with the repatriation of foreigninvested funds in financial assets which saw currencies like the South Korean won depreciate sharply in 2008. With the government and central bank appearing to be willing to
Vietnam Becoming Vital Link In Asian Supply Chain FDI By Country Of Origin (Jan- Aug 2008)
Source:GSO Source: General Statistics Office
Construction & Industry Still Dominate FDI Vietnam – FDI By Sector (2007)
Source: General Statistics Office
let the dong slip somewhat against the US dollar and euro in order to support the export sector, and readjust its cost competitiveness vis-à-vis Asian competitors who have seen their currencies depreciate sharply over 2008, we see no major risk to Vietnam’s external payments position in 2009 and 2010.
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vietnam Q1 2009
Exchange Rate Policy Government To Allow Dong Depreciation In 2008-2009 We have been reinforced in our view that the Vietnamese government will let the dong slip towards VND17,000/US$ by end-2008 in order to support a continued improvement in the trade account. The dong has fared better than most Asian currencies in 2008 due to its relative imperviousness to outflows of ‘footloose’ portfolio investment, but has slipped in mid-October on what we believe is anticipation that dollar demand will increase over the coming year as exports and inbound investment slow.
Core View We are now changing our medium-term outlook on the Vietnamese dong as the focus of policymaking in Hanoi shifts back to supporting growth. This is likely to translate into a return of the State Bank of Vietnam (SBV)’s long-running exchange-rate policy of depreciating the dong to boost the export sector, currently at risk from a slowdown in US demand. However, over the long term we expect Hanoi to effect a gradual shift of monetary Focus Switching Back To Growth
policy away from managing the currency towards inflation-targeting, although the risks of high currency volatility as seen in India and South Korea may serve as a deterrent.
Exchange Rate VND/US$
17,000 16,500 16,000 15,500 15,000 14,500
Source: BMI
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
14,000
We maintain our view that Hanoi is likely to let the dong depreciate towards VND17,000/ US$ by end-2008 in order to support the improvement of the trade balance without putting the deceleration in consumer price inflation at risk. However, as consumer price inflation measures fall in tandem with commodity prices, we believe the SBV – effectively the government – will move towards allowing the dong to depreciate as the outlook for the export sector continues to deteriorate. Indeed, the growth of Vietnam’s exports to the US market has fallen from 29% y-o-y in January to an average of 20% over the January-September 2008 period. Moreover, prices for a number of key export commodities, rice and coffee to name two, are now falling. A deteriorating trade balance would in itself put downward pressure on the dong by increasing the demand for foreign currency. However, we believe the government will want to steer the currency lower in order to maintain Vietnam’s cost competitiveness vis-à-vis China and other rivals in low value-added manufacturing in order to attract further investment into the export-focused manufacturing sector. We have thus revised our end-2009 target from VND16,000/US$ to VND18,000/US$. While growth concerns will dominate the SBV’s exchange-rate policy in 2009, we believe monetary concerns will return to the forefront in 2010 as growth gains traction on a recovering of the global economy. We thus expect the dong to appreciate to VND17,000/US$ by the end of 2010, as a rebound in exports and investment bolsters the balance of payments and the Vietnamese government heeds advice from the IMF to allow the value of the dong to a higher degree be determined by market forces.
Risks To Outlook With the trade deficit forecast to come in at around US$20bn in both 2008 and 2009,
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Vietnam remains dependent on a continuous inflow of foreign investment. FDI pledges amounted to US$53.1bn in January-September 2008, according to the Vietnamese government. However, we caution that a high degree of pledged FDI may be withheld until global conditions have stabilised. This risk is particularly pertinent as a high degree of FDI into Vietnam comes from Japanese, Korean and Singaporean companies, which are now undergoing a liquidity squeeze that is likely to affect future investment plans. Moreover, the lion’s share of official developments assistance pledges has come from the same countries, where governments could now move to reduce spending on such overseas assistance due to impaired public finances. There is also anecdotal evidence that overseas Vietnamese, many of whom live in the US, are scaling back remittances to relatives back home. We are sceptical of these reports, but still highlight downside risks to our forecasts of remittances amounting to US$8bn in 2008 and US$10bn in 2009, which brings risks to the overall balance of payments situation.
Turnaround In Inflation Spells Better Times For Banks
Consumer Price Inflation (m-o-m and y-o-y % chg)
Source: BMI
Investment Climate Hanoi Could Move To Ease FDI Rules In 2009 The Vietnamese government is pushing forward with the so-called ‘equitisation’ process of privatising state-owned enterprises (SOEs) in spite of the current turmoil in global financial market. We believe foreign investment in select companies could be forthcoming on the back of Vietnam’s solid long-term growth prospects, but that sales of smaller, poorly-managed SOEs will be difficult to implement, in particular if only non-controlling stakes are on offer. Moreover, the government may have to reconsider its restrictions on foreign investment in key sectors, such as banking and telecoms.
BMI View We believe the Vietnamese government may soon move to ease rules on foreign direct investment in order to boost investment inflows to cover the trade deficit, expected at US$21.3bn in 2008 and US$20bn in 2009. Presently, far-reaching restrictions have limited the attraction of privatisations of state-owned enterprises (SOEs).
Hanoi has faced an uphill struggle in transferring companies in the vast state-owned sector to private hands, much due to its continued unwillingness to foreign investors taking a controlling stakes in ‘blue-chip’ SOEs in key sectors. Only 80 SOEs, 15% of the government target, were privatised in the first eight months of 2008, according to the National Steering Committee for Enterprise Reform. The Vietnamese government issued a decree on October 10 2008, outlining the regulations for foreign investors buying stakes in SOEs, to replace a previous decree from 2005, but the new bill has failed to disperse uncertainty over the framework for foreign investments in ‘equitised’ SOEs. Moreover, the decree covers mostly smaller SOEs in which foreign investors have little interest. The decree states that foreign investors are allowed to buy 100% stakes in firms with a book value of less than VN15bn ($900,000) and own land in disadvantages areas, which normally attract scant interest from foreign investors. Moreover, the bill does not apply for SOEs in sectors included in Vietnam’s market access roadmap agreed during bilateral and multilateral trade negotiations. These included, among others, banking and telecoms. For firms in these sectors, foreign participation will continue to be restricted to holding up to 49% of shares in joint-ventures with Vietnamese partners, with further restrictions on unlisted and banking firms. This has impeded foreign investment, though FDI pledges, mainly into industrial and construction firms, nevertheless amounted to a massive US$59.3bn in January-October 2008. Business Monitor International Ltd
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vietnam Q1 2009
Eased Regulations On The Way? We believe that the rules on foreign investment into SOEs could indeed be eased, considering that the government is currently assessing what measures could be used to cushion an expected slowdown in growth in 2009. The government is currently targeting GDP growth of 6.5-7.0% in 2009, above BMI’s forecast of 5.0%, but has admitted that it might be hard to reach this target. We find it likely that the prospects of a rapid slowdown could become a catalyst for an easing of regulation on foreign investment. Given that the industrial and construction sectors are likely to suffer on lower global and domestic demand respectively, we believe Hanoi could soon move to allow more foreign investment into currently restricted sectors. Figures released by the Ministry of Planning and Investment reveal that 76.4% of the licensed FDI projects in the January-October period were wholly-owned enterprises, showing clearly that this is the preferred option of foreign investors. A first step towards easing restrictions on foreign investment would be to clarify the current rules as there remains a high degree of uncertainty about the legal and regulatory framework for investing in Vietnam. However, were the trade balance to deteriorate significantly in the coming year, renewing the threat of a balance of payments crisis and a rapid depreciation of the currency, we believe Hanoi could move swiftly to ease investment regulations in order to boost FDI inflows.
Banking Sector BMI View We view the Vietnamese banking sector as a veritable Shangri-la for early entrants as poorly-capitalised and inefficient domestic banks are ill-prepared for the opening of the banking market to foreign entrants as pledged in Vietnam’s accession to the WTO in January
Banking Sector Offers Ample Opportunities For Foreigners The entry of global banking players HSBC and Standard Chartered into Vietnam in early September has unnerved domestic banks, which fear that they will not be able to match the new entrants’ vast capital reserves, superior technology and experienced management. The two banks already have bank branches in Vietnam and stakes in joint-ventures with domestic players, but will be the first international banks to incorporate their operations in the country, thus radically altering the playing field of the Vietnamese banking market.
2007. With bank penetration at less than 10% and the Vietnamese economy forecast to grow by an average 7.8% annually over the next ten years, the growth opportunities are great for foreign players.
Market Overview Vietnam is obliged to open its banking sector to foreign players as part of its accession to the WTO in January 2007. This has prompted foreign banking groups to closely scrutinise the Vietnamese banking sector as a business opportunity in itself, but also as a test-run for the full opening of the much bigger Chinese banking market. Less than 10% of Vietnamese currently use banks for financial services, instead largely relying on extended families and neighbourhood associations for lending and saving. However, a rising number of younger Vietnamese are now using banks for financial services, opening up great expansion opportunities in retail banking. The Vietnamese banking market is currently dominated by the four major state-owned commercial banks (SOCBs), with 36 semi-private so-called joint stock commercial banks (JSCBs) gradually eating into their market share by better catering to the needs of small and
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medium-sized enterprises (SMEs) and retail clients. Years of lax monetary policy focused on supporting export-led GDP growth has flooded the banking system with money, pushing up credit growth to an annual average of 36.4% over the past five years (2003-2007), hitting a peak of 54.9% last year according to World Bank figures. High liquidity and a scramble for market share have resulted in a degree of aggressive lending, in particular to investments in the real estate and stock markets, which both experienced rapid downturns in 2007 and early 2008. Faced with rapidly rising inflation and faltering confidence in the value of the dong, the State Bank of Vietnam (SBV) radically tightened monetary policy in May and June 2008, raising the discount rate by 525bps from 8.75% to 14.00% in less than a month. Fearing the effect of full market pricing, the SBV retained its caps on deposit and loan ratios (to 150% of the discount rate), thus severely straining domestic banks. The SBV started cutting interest rates in H208 (see Monetary Policy), but the banking sector remains under pressure.
Into Uncharted Waters?
Standard Chartered – Share Price (GBp) 1,900 1,700 1,500 1,300 1,100 900
Jul-08
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jul-03
Jan-04
Jul-02
500
Source: BMI
Joint-Stock Commercial Banks: The 37 JSCBs presently control roughly 15-25% of banking assets in Vietnam but are quickly eating into the market shares of the larger SOCBs by providing superior services to SMEs and retail savers.The JSCBs are generally better managed and more profitable than the SOCBs, but suffer from low capitalisation, which has made them vulnerable to Vietnam’s domestic ‘credit crunch’, prompted by the SBV’s rapid tightening of its monetary policy. Foreign Banks: HSBC and Standard Chartered and a number of other foreign banks are already present in the Vietnamese market through joint ventures with JSCBs. HSBC increased its stake in Techcombank to 20% in August and Standard Chartered raised its stake in Asia Commercial Bank (ACB) to 15% in May 2008, but foreign banks have been prevented from increasing their stakes by restrictions on foreign ownership of domestic banks. Vietnam currently limits the shareholding a foreign bank can take in a domestic counterpart to 20%, with the total foreign ownership limited to 30%.
Jan-03
Jul-01
Jan-02
State-Owned Banks: The five SOCBs – Agribank, Bank for Investment and Development (BIDV), Vietcombank, Vietinbank and Vietnam Development Bank – hold roughly two thirds of banking assets according to IMF sources. The SOCBs are still encumbered by their previous role as instruments for implementing government policy. Indeed, the strHong links between senior bank executives and the ruling Communist Party of Vietnam, and other state-owned enterprises (SOEs) have impeded much-needed corporate restructuring. Hence, SOEs still receive preferential treatment in loan allocation, resulting in the SOCBs running up high non-performing loan (NPL) ratios. The SOCBs are currently reporting NPL ratios of around 3%, but we are expecting this figure to rise to 5% before the end of 2008. However, we carry doubts about the reliability of official figures and suspect the real ratios could be significantly higher.
Jan-01
700
HSBC Goes to HCMC HSBC – Share Price (GBp)
Source: BMI
This is beccause the Vietnamese government and the State Bank of Vietnam have so far preferred a model where several foreign investors take a corner in a domestic bank, meaning that the individual stakes on offer are often in the range of 10-15%, given them a backseat position compared to domestic stockholders, with state-owned banks and enterprises often being the largest shareholders in JSCBs. Business Monitor International Ltd
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The ownership limits have discouraged foreign banks from transferring technology and know-how to their Vietnamese joint ventures, thus impeding the development of the Vietnamese banking sector. The World Bank recently accorded the Vietnam 0.47 points in its ranking of the banking system technology in the region, far below countries like Indonesia and Malaysia, illustrating the still rudimentary state of the Vietnamese banking sector. The refusal of the Vietnamese government to let foreign banks take sizeable stakes in domestic banks has prompted HSBC and Standard Chartered to opt for building up a presence in Vietnam from scratch, not an easy endeavour. The two banks are planning to open branches in Hanoi, Ho Chi Minh City, Danang and a few other larger cities, mainly in the Mekong Delta, as soon as possible. Going forward, HSBC is aiming to open at least ten more branches over the next two years, while Standard Chartered has stated that it plans to open as many as 20 to 30 new branches in Vietnam over the next three to four years. We believe the two banks may have difficulties in finding skilled staff with knowledge of the local market, but see no major obstacles for their expansion plans.
Current State Of The Market Tracking Index Down
Sacombank - Share Price (VND) 70,000
Rapid economic liberalisation and of monetary policy has treated the Vietnamese banking sector to a rollercoaster ride over the past ten years, leaving it with severe growth pains which may take years to address. The main problem is still the concentration of banking assets with the SOCBs and the low capitalisation of the private bank sector.
60,000 50,000 40,000 30,000
Source: BMI
Jul-08
Sep-08
May-08
Jan-08
Mar-08
Nov-07
Jul-07
Sep-07
May-07
Jan-07
Mar-07
Nov-06
Jul-06
Sep-06
20,000 10,000
We estimate that the larger JSCBs, such as ACB, Sacombank and Techcombank, are the best-run banks in Vietnam, mainly due to the influence exerted by their foreign stakeholders. However, the combined assets of the three banks amounts to VND225trn (US$13.5bn), with the total assets of the top ten JSCBs is a mere VND445trn (US$26.8bn), equal to about a third of GDP. Moreover, the registered equity capital of ACB, Sacombank and Techcombank amounts to VND9.6trn (US$570mn). This is far below the equity capital of even a minor Asian bank, making the entire banking sector vulnerable to the competition from foreign banks, as promised by Vietnam’s WTO obligations. Most JSCBs report non-performing loan (NPL) ratios in the region of 4-5%, far lower than the 15-20% estimated for the banking sector as a whole by the IMF. We give some credibility to the banks’ figures as the JSCBs have been more commercially-focused in their lending than the SOCBs. However, we see higher risks in the loan portfolios of smaller, more recently-established JSCBs which used aggressive lending to rapidly expand their market share, with some banks reporting credit growth in excess of 100% in 2007. Having stretched their capital bases to extremes, these banks were squeezed by the SBV increasing the reserve requirement ratio in February 2008 to 11% on short-term deposits, which set off a rapid increase in deposit rates in H108 as banks scrambled to raise capital. Low capitalisation has made a number of the smaller JSCBs reliant on interbank lending to cover their capital needs, a business model which has brought the downfall of a number of Western financial institutions in recent months.
Prospects For Banking Sector Going Forward The opaque lending practices of the SOCBs and the low capitalisation of smaller JSCBs
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have raised fears that Vietnam would be at risk of a banking crisis as the central bank raised interest rates to stamp out rapidly rising inflation. We acknowledge the weaknesses in the banking sector and do not preclude the possibility of failures among the smaller banks. However, the fact that commercial banks were reducing deposit and lending rates as well as interbank lending rates in late September 2008 indicate that capital shortages are now becoming less acute, although an improved inflation outlook and falling revenue due to slower lending growth are likely to have been factors in pushing down rates. We believe the SBV will soon move to cut the reserve requirement ratio from the present 11% in order to support lending, and overall economic, growth.
Risk Of Bank Failures As Non-Performing Loan Ratios Rise We view it as likely that we will see an increase in non-performing loan (NPL) ratios from the present 4-5% as an increasing number of companies and households default on their loans on the back of higher interest rates and slowing economic activity. A complicating factor in assessing the risk posed by deteriorating loan portfolios is that Vietnamese banks are currently applying a new system of internal credit rating schemes and debt classification systems in accordance with international standards. Implementation has so far been diverse between banks, making intra-sector comparisons a complicated business. Not As Easy As ACB
Vietnam – Asia Commercial Bank (VND)) 140,000 120,000 100,000 80,000 60,000
Aug-08
Apr-08
Jun-08
Feb-08
Oct-07
Dec-07
Aug-07
Apr-07
Jun-07
40,000
Feb-07
Consultancy Ernst & Young has estimated that the application of the new standards is likely to lead to an increase in disclosed NPL ratios of 2-3 times, i.e. to the IMF estimates of 15-20%. While the new standards will make the NPL figures more internationally comparable, the resulting increase in the ratios is likely to create uncertainty about the proportion which can be attributed to the new standards and how much is down to an actual deterioration of loan portfolios. We believe the uncertainty about NPL ratios and low capitalisation will prolong doubts about the banking sector, highlighted by ratings agency Standard & Poor’s, which on September 11 2008 labelled the Vietnamese banking sector as the most vulnerable in Asia to an economic slowdown.
20,000
Source: BMI
We are less worried than Standard & Poor’s, believing that the effects on the overall economy from possible bank failures can be contained by larger JSCBs taking over smaller banks pushed to the brink by loan defaults and low capitalisation. Nonetheless, we do not preclude the possibility that the government or central bank will need to intervene to force mergers between banks and possibly also recapitalise those in worst health. Such a bailout would bring additional risks to the budget deficit, which we estimate at VND76trn (US$4.6bn) in 2008, equal to roughly 5.1% of GDP.
Further Development Inhibited By Low Capital And Technology Consolidation should be a positive for the banking sector by decreasing excessive competition and increasing capitalisation levels. Nonetheless, we estimate that capital shortages, low technology and a shortage of skilled staff, especially at higher levels, will continue to inhibit the development of the banking sector. This will leave domestic banks exposed to the might of international banking giants such as HSBC and Standard Chartered, which are initially committing US$183mn and US$61mn respectively to their Vietnamese subsidiaries, placing them well in league with the larger JSCBs.
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Increased competition from foreign players will thus constitute a potent threat to domestic banks, which will be forced to improve services if they want to maintain their market share. Further expansion will need regulatory approval from the State Bank of Vietnam. The IMF has, in its annual review of the Vietnamese economy, set improvement of financial supervision as a prime task for the government in its reform agenda. We see the government raising the foreign ownership ratio to 25% for individual banks and 35% in total in 2009-2010 in order to maintain foreign banks’ interest in holding stakes in domestic players, thus assisting in technology transfer.
Uncertainty Reigns Over Disbursement Of Record FDI Pledges
With the current system in place we see a risk of a severe divide between better-capitalised, more technically advanced, and better-managed foreign banks and a still relatively undeveloped domestic sector suffering from both a shortage of capital and low efficiency. Vietnamese banks are still primarily focused on taking deposits and lending, and are thus completely inexperienced in asset management and other financial services tipped to be the main growth areas in the Vietnamese banking market going forward. Domestic players, in particular the larger SOCBs, may have an advantage through their established branch network and client base, but we expect this factor to be rapidly eroded as HSBC and Standard Chartered extend their operations.
Foreign Direct Investment (FDI) Pledges (US$bn) 70 60 50 40 30 20
2007
2008 (JanOct)
2006
2005
2004
2003
2002
2001
2000
10 0
Vietnam – Foreign Direct Investment (FDI) Pledges (US$bn)
The threat from foreign banks will be particularly potent for the SOCBs, where reform has been slow in spite of the government’s intention to place them foremost in the queue in the so-called ‘equitisation’ process of transferring SOEs to private hands. We find it unlikely that the government will find takers for its offers of 10-20% stakes in SOCBs for strategic foreign players if it does not radically review its privatisation procedures. The botched sales of stakes in insurer Bao Viet and Vietcombank in 2007 illustrate that the government’s current focus has been to exert as high a price as possible for its assets, thus disregarding the potential gains for the economy as a whole of improving efficiency in the banking sector through an inflow of foreign capital and know-how. With the state-owned banks constrained by politicised decision-making and the private banks suffering from a severe lack of capital, we believe HSBC, Standard Chartered and other regional players will gain the upper hand over time as their extensive experience, superior technology, and readier access to capital work in their favour. We do not see it as unlikely that foreign players will dominate the Vietnamese banking sector in 10-15 years time, with the larger JSCBs being majority-owned by foreigners and the role of the once-impressive SOCBs reduced to supporting inefficient state-owned companies and agricultural households.
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PoliticalForecast 10-Year Outlook
The Vietnam Economy To 2018 A Bumpy Road To Stardom
BMI View
Vietnam’s emergence as one of the most promising economies in Asia, if not the world, stems largely from the Communist Party of Vietnam’s (CPV) adoption of market reform policies in 1986. The gradual but steady shift from a largely agrarian country with a high degree of state ownership and government intervention, to a bustling market economy has stimulated the flow of foreign investment and domestic entrepreneurship, which are now the prime drivers of growth.
We remain positive about Vietnam’s growth prospects over the next ten years, believing that the macroeconomic woes of 2008 and 2009 will have been a useful exercise for a government still inexperienced in managing a market economy. Policymaking will continue to be crucial as the government strives to clear bottlenecks in
The attractions of Vietnam to foreign, as well as domestic, investors are clear: a large, and young population, eager to work hard to improve their lot and open to foreign influences after decades of ineffective ideological indoctrination. Vietnam has enjoyed a growing inflow of direct investment into its fledgling manufacturing sector in recent years as its accession to WTO in 2007, and low labour costs, have made it an attractive outsourcing destination for apparel manufacturers and electronics producers. The development of the foreign-owned manufacturing sector has been spearheaded by Japanese, South Korean and Taiwanese firms, which have become increasingly wary of rising costs of labour on the Chinese mainland, as well as the risks of becoming overly dependent on Beijing in their supply chains.
infrastructure without overheating the economy, a vital condition for our forecast that Vietnam will maintain GDP growth at approximately 8% annually over the next ten years.
Growth To Return To 8% Annual Real GDP Growth
Continued strong foreign investment into the manufacturing sector will remain the prime driver of growth over the next ten years, and we foresee Vietnam moving up the valueadded chains as the advantages of sourcing production in the country become apparent for a wider range of manufacturing firms. This is evident in the ascent of the Vietnamese electronics sector, which virtually doubled its overseas sales between January 2007 and June 2008. The sector is now emerging as a vital complement to textiles and apparel as primarily Taiwanese manufacturers are moving an increasing share of their operations to Vietnam. The manufacturing sector currently contributes around 25% of GDP, but we see this figure rising to 34% by 2013 and further towards 40% by 2018.
Source: BMI
table: VIETNAM Long-Term Macroeconomic Forecasts
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
129.48
160.48
186.16
215.95
250.50
290.58
337.07
391.00
8.8
8.2
8.0
8.0
8.0
8.0
8.0
8.0
Population, mn [5]
92.00
93.10
94.20
95.30
96.47
97.60
98.70
99.80
GDP per capita, US$ [3]
1,407
1,724
1,976
2,266
2,597
2,977
3,415
3,918
5.2
5.3
4.8
4.8
4.5
4.0
3.7
3.6
Nominal GDP, US$bn [3] Real GDP growth, % change y-o-y [1,4]
Consumer prices, % y-o-y, ave [2,6] Current account, % of GDP [3] Exchange rate VND/US$, ave [7]
-5.41
-3.12
1.61
2.32
3.59
4.82
5.04
5.12
16,500.00
15,500.00
14,000.00
13,500.00
13,000.00
12,000.00
11,000.00
10,000.00
Notes: f BMI forecasts. 1 Constant 1994 prices; 2 The Oxford Economic Forecasting model is used when generating certain forecasts.; Sources: 3 BMI calculation. 4 General Statistics Office, BMI calculation; 5 Asian Development Bank. As of July 1; 6 General Statistics Office; 7 IMF.
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XXXXXXXXXXX vietnam Q1 2009 QX 2009
The continued ascent of the manufacturing sector will bolster export growth over the coming ten-year forecast period, although at a slower pace than the 23.8% average annual expansion recorded between 2003 and 2007. We foresee export growth stabilising at around 15% annually in 2014-2018 as growing manufacturing exports offset the decline of the commodities sector, where opportunities for growth are constrained by dwindling oil reserves and a limitations to expanding coffee and rice production. Import growth, on the other hand, is likely to abate past 2010 as public infrastructure investment peaks and Vietnam sources a greater share of steel and other investment goods internally. Moreover, a larger proportion of imports will be of consumer goods and it will be vital for Vietnam to prove that it can cost-efficiently produce automobiles, mobile phones and other more capital-intensive consumer goods increasingly demanded by the population.
Vietnam To Enter 100 Million Club Population (mn)
120
We see annual import growth falling to around 10% beyond 2010, below the expansion of the export sector, which will be conducive to a turnaround in the trade account. We are currently forecasting Vietnam’s trade deficit to peak at US$24.3bn in 2011 before gradually diminishing and flipping to a surplus towards the end of our 10-year forecasting period. Meanwhile, we see remittances from Vietnamese expatriates, estimated at US$8bn in 2008 by the State Bank of Vietnam, stabilising at US$10-15bn annually over 201017, meaning that the Vietnamese dong will be under considerable pressure to appreciate towards 2015-2018.
110 100 90 80 70 60 50 2000
2005
2010
2015
2020
Source: UN World Population Prospects, 2006 Revision
We believe the Vietnamese authorities will have taken heed of the dangers of shackling monetary policy to managing the value of the dong and deliver on its pledges to move towards full convertibility of the dong. The Vietnamese government will, nevertheless, keep a close eye on the dong and only allow a gradual appreciation of the currency in order to balance the twin priorities of growth and inflation. We see the dong moving to VND14,000/US$ by 2012 and further to VND10,000/US$ by 2018. Central bank intervention to stem further dong appreciation will see Vietnam’s foreign-exchange reserves rising from the present US$20bn to US$70bn by 2018.
Key Risks: Inflation, Infrastructure and Education An appreciating currency will dampen inflationary pressures and we foresee consumer price inflation stabilising at around 5% annually from 2011 onwards, although this will be conditional on the government resolving bottlenecks in infrastructure and power supply. Vietnam’s limited road, rail and port capacity is still putting it at a disadvantage compared to China when it comes to foreign investment in export-focused manufacturing. Moreover, the rising divide between demand and supply of energy and resulting power cuts, is a key threat to both growth and inflation. Energy policy is an area that will have to be addressed with more resolve than at present, as the government has impaired investment in power generation by its reluctance to expose state-owned EVN to competition. Continued reform of the economy through the ongoing ‘equitisation’ process of raising efficiency at state-owned enterprises and transferring ownership to private hands will also be required to maintain annual GDP growth at 8%, as well as a concerted effort to improve standards at all levels of the education system. Skilled staff are become increasingly difficult
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10-Year Forecast
to find, resulting in upward pressure on wages and increased costs for firms, particularly in the fledgling financial sector. Vietnam will need to increase the number of high-standard university graduates in areas such as finance and science if it wants to avoid becoming trapped in low-value manufacturing.
BMI’s long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment, demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants, our forecasts also reflect analysts’ in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption, fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates, external account balances and interest rates.
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PoliticalReport Special Outlook
c chhaappt e t er r41
Why The US Can Remain World Superpower Wealth Is Shifting East...
BMI View
Much has been made of how world economic power is shifting away from the developed world (especially the US) to emerging nations (particularly China and India). Indeed, many economists have in recent years predicted that China and India will each overtake the US to become the world’s largest economies by the early 2040s. In addition, thanks to strong export growth and the recent commodity boom (which is now correcting sharply), several Asian countries, Russia and the Gulf states have acquired vast holdings of foreign currency reserves. This transfer of wealth eastwards is also reinforcing arguments that political power will follow.
The US’s current financial woes will not necessarily undermine its position as a global superpower. While economic power is shifting from the US and developed states to emerging markets, this will not automatically be accompanied by a shift in geopolitical power. Even as its share of global GDP declines, the US will continue to be the world’s sole superpower for at least another generation, since it has such a commanding lead in areas such economic strength, military power
...But Money Isn’t Sufficient In The Power Game
projection, international diplomacy,’soft’ power,
While these economic achievements are impressive, they will not automatically mean that geopolitical power will shift decisively to the emerging world. BMI has composed a subjective geopolitical power index encompassing six ‘dimensions’ of global power and influence to assess countries’ international strength, both present and future. For at least another generation we believe that the US will remain ahead of all other contenders in all six dimensions.
demographics and willingness to act globally. While key emerging states will gradually attain regional power status and be able to frustrate US policy, they will not acquire the superpower status that the US has enjoyed for decades.
Economic power: Absolute GDP size matters, since this determines a country’s ability to influence the global economy, and the amount of resources available for defence purposes. The US spends only around 4% of GDP on defence, but since its economy is so big, that 4% translates into US$600bn. Also essential is possession of an advanced industrial and technological base – i.e. an indigenous defence complex. Meanwhile, the US still exerts a high degree of control over many levers of global finance through multilateral organisations. In other words, the US remains the ‘rule setter’. Furthermore, the US dollar is still the world’s reserve currency, and is unlikely to lose this status soon. Finally, despite the current financial meltdown, the US’s entrepreneurial culture generally fosters innovation and competitiveness. While China is gaining clout, especially in its contribution to global Table: GEOPOLITICAL POWER INDEX Scores out of 5
US
China
India
Japan
Europe
Russia
Brazil
Iran
Korea
Economic Power
5
3
2
3
5
2
2
1
2
Military Power (force projection)
5
2
2
2
3
3
1
1
2
Diplomatic Influence
5
3
1
1
3
2
1
1
1
Soft Power
5
2
2
3
5
1
1
1
2
Demographic Outlook
4
4
5
1
3
1
3
1
1
Willingness to Act Globally TOTAL (Out of 30)
4
2
2
1
2
3
1
1
2
28
16
14
11
21
12
9
6
10
Source: BMI
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If You Want Peace, Prepare For War
growth and as a role model for emerging nations, its influence is weaker than that of the US. China also lacks multinational corporations with a truly global presence.
Defence Budget, US$bn (2007)
120 100
622.45
80 60 40 20
India
Brazil
South Korea
Russia
Germany
China
Japan
France
United Kingdom
United States
0
Source: IISS, Military Balance
The East Is Mighty... But So Is The US Total Active Troops (2007)
2,500,000 2,000,000 1,500,000 1,000,000
Japan
United Kingdom
Germany
France
Iran
Brazil
Russia
South Korea
North Korea
India
United States
0
China
500,000
Source: IISS, Military Balance
‘Chindia’ Dominates In Manpower Population In 2030 (mn)
1600.00 1400.00 1200.00
Military power: A basic measure of military power is the quantity and quality of troops, tanks, aircraft, ships, submarines and nuclear weapons. However, troop strength alone is not enough. North Korea has 1.1mn troops, the fourth-largest military in the world, but has very limited means to deploy them abroad. To qualify as a superpower or regional power, a country must be able to project power far beyond its borders. This requires foreign bases, a ‘blue water’ (i.e. ocean-going) navy and, ideally, aircraft carriers. Although Russia has one carrier, and China and India are developing their own, the US has 12 carrier battle groups and bases or facilities in dozens of countries around the world. No aspiring world power has this extensive overseas presence, which has been acquired by the US over many decades. Diplomatic influence: The US also pursues active diplomacy and is involved in many of the world’s international or intra-national disputes. Regardless of US motivations, there is a widespread perception that various conflicts are very difficult to resolve without US diplomacy. Some critics argue that American interference makes matters worse, but they do not dispute US influence. Diplomacy aside, the US is one of the few countries with a truly global intelligence network, allowing it to work behind the scenes. China is gradually increasing its international diplomacy and could conceivably portray itself as an ‘honest broker’ in regions where the US is distrusted (e.g. the Middle East). However, as China’s influence rises, it is likely to come under greater scrutiny and criticism. This was evident in the run-up to the Beijing Olympics, when everything from China’s role in supporting the governments of Sudan and Myanmar, to its supression of separatism in Tibet and Xinjiang, and even Beijing’s air quality, was criticised. Soft power: An aspiring world power must also appeal to others in its culture and values. This’soft power’ includes films, music, television, media, food, arts, language and religion. All these factors contribute to ‘lifestyle appeal’. Again, the US dominates in this area, and this ensures that despite rising anti-Americanism, the US continues to attract the best and the brightest (as well as the less fortunate) from around the world. Even in countries with significant anti-Americanism, there is still a strong demand for US films and fashion. Furthermore, the average American is still – and will remain – far wealthier than their average counterparts in emerging markets. While we see a risk that tighter visa restrictions in the wake of the 9/11 terror attacks and ongoing efforts to curb immigration will undermine America’s position as a talent whirlpool, and increase resentment abroad, it is far from clear whether China and India can attract the best and the brightest from around the world.
1000.00 800.00 600.00 400.00
United Kingdom
France
Korea*
Germany
Iran
Japan
Russia
Brazil
United States
India
0.00
China
200.00
Demographic outlook: In order to wield global economic and military influence, a country needs favourable demographics, meaning absolute population size, or at least absolute size of the working population (those aged 15-64), or those whose age makes them suitable for military service. The US, China, India and Brazil all have these advantages, but Japan and Russia’s shrinking population will reduce their ability to be global powers.
Source: UN World Population Prospects. *North & South Korea total.
Willingness to act globally: Finally, a regional power or superpower needs to have the willingness to act abroad to defend its interests. ‘Acting’ may entail taking a bold stand on
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a particular issue, involving oneself in a dispute, or deploying military forces, including initiating combat. ‘Willingness’ means not just the wishes of the elite, but also from the broader public. During the Vietnam War, the US military effort was hurt by public opposition to the conflict. During the Clinton era, the US displayed a high degree of intolerance for military casualties, perhaps suggesting to its enemies that it could not’stomach’ a fight. Going forward, the small family sizes in China, Japan and Korea mean that parents of soldiers will be reluctant to see their son or daughter go off to war in faraway places.
How The Nations Stack Up The US scores highly in all six dimensions, and this is unlikely to change dramatically. Other countries stack up as follows. China: China is the only country that can realistically challenge the US as a potential ‘peer competitor’. China’s main strength lies with its rising economic power, with some investment banks predicting that it can overtake the US in absolute GDP by the early 2040s. In time, China’s citizens will exert an increasingly powerful influence on global consumption patterns. While the average Chinese citizen will be far poorer than their US counterpart in 2040, China’s large GDP will give it the resources to build a powerful modern military and wield the levers of economic power. China is rapidly increasing defence spending, and its official defence budget of US$46.7bn is believed to greatly understate (possibly by a factor of five) the true figure, because of hidden spending and variation in purchasing power. China also aspires to have a blue-water navy and manned space programme. Meanwhile, it is already courting new allies by providing soft loans to countries in Asia and elsewhere. In recent years, US defence planners have expressed concern that Chinese economic assistance to Myanmar, Bangladesh, Sri Lanka and Pakistan is part of a broader’string of pearls’ strategy of establishing naval facilities to dominate the northern Indian Ocean and its key east-west trade routes. However, China also has several geopolitical constraints. For a start, China itself could experience an economic meltdown at some stage that would discredit its economic model and trigger mass unrest. The consequences of this could set back its geopolitical ambitions by years, as it grapples with domestic woes. Indeed, the fact that China has yet to move towards democracy means that it could undergo severe upheaval over the coming decades that could threaten its national unity. Secondly, while China’s demographic strength lies with its sheer numbers, its population is ageing rapidly. Meanwhile, because so many Chinese born after 1979 are single children (due to the one-child policy), their parents are unlikely to wish to see them go off to war in faraway places. This will probably limit China’s tolerance for military casualties in places that are not part of its national interest, and thus constrain the country’s willingness to act globally. It is true that China could have as many as 40mn’surplus males’ (as a result of a preference for male children) by 2020, but they will hardly be cannon fodder for China’s geopolitical ambitions, because of the ‘4-2-1’ problem – namely four ageing grandparents and two parents dependent on one child. China’s rise will probably see its soft power expand globally, and it will be able to cultivate support from an extensive diaspora in South East Asia, North America and even Africa. Business Monitor International Ltd
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It remains to be seen, however, whether it can capture the world’s imagination in the way that the US has for decades. Furthermore, the complexity of the Chinese language means that it is unlikely to replace English as the world’s lingua franca. India: With more than a billion people, it is natural to see India as a potential superpower. However, its economic development is years if not decades behind China, and for the foreseeable future India’s government will need to concentrate on raising domestic development. In addition, India’s severe budget deficit will check dramatic increases in military spending. Nonetheless, India is also boosting its military capabilities, and is currently working on its first domestically produced aircraft carrier, to be completed in 2010. In 2011, it hopes to take possession of an aircraft carrier purchased from Russia. India has nuclear weapons and a space programme, and it is moving to establish its first foreign base, in Tajikistan. However, India’s defence posture is overwhelmingly dominated by its rivalry with Pakistan. Until a durable peace with Pakistan is achieved, India’s rivals can continue to counterbalance New Delhi by supporting Pakistan. Beyond Pakistan, India increasingly sees the Indian Ocean as its main sphere of interest. In this regard, India is working to bolster its naval forces so that China does not dominate the region. In its favour, India has a more youthful demographic profile than China, and is already contributing 9,000 troops to UN peacekeeping missions, mainly in Africa. This suggests that India’s traditionally inward-looking rulers may pursue a more active international policy going forward. India may also emerge as a soft power. It has the world’s biggest film industry, which is already attracting attention abroad, and the popularity of its entertainment complex in the Near East, and its extensive diaspora in the US and UK, will raise its global profile. India’s use of the English language, although not as widespread as commonly believed, gives it an additional advantage. However, India is prone to serious intercommunal violence between Hindus and Muslims, and its caste system may limit its social progress. Japan: Japan will remain one of the world’s biggest economies for years to come, and it has a strong technological-industrial base that could be geared towards defence purposes should the need arise. Japan has quietly been upgrading its military in recent years and has one of the most modern armed forces in the world. However, Japanese governments restrict defence spending to 1% of GDP (although this is still a large number in absolute terms), and Japan’s high fiscal deficit and debt burden (150% of GDP, the highest in the developed world) may preclude a dramatic increase in military expenditures. Furthermore, in order to project military power, Japan would need foreign bases, but no Asian country would want to host them, because of Japan’s record of atrocities in World War II. Japan’s pacifist society and low birth rate mean that public support for foreign military activities will remain low. The government has found it controversial enough to send only 600 non-combat troops to Iraq (which have since redeployed in Kuwait and may be withdrawn by the end of 2008) and authorise logistical support for the US military in the Indian Ocean. A more militarily activist Japan would require a dramatic change of political and social conditions, which is unlikely to materialise.
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Japan has emerged as a major’soft power’ thanks to its films, music, graphic novels, books, computer games and food. However, despite the popularity of these products in Asia, its wartime record looms as a shadow over its achievements. While Japan’s prime minister spoke, in 1991, of transforming the country into a ‘lifestyle superpower’, the crowded nature of the country precludes it from attaining the spacious lifestyle of North America. Moreover, widespread opposition to immigration means that Japan will be unable to draw in the numbers of immigrants needed to top up its workforce. Europe: Although ‘Europe’ scores highly in our geopolitical power index, this is somewhat misleading, since it mainly reflects the power of its leading individual players, namely the UK, France and Germany. The former two are major military powers, with nuclear weapons and permanent seats on the UN Security Council. All three states also have globally active intelligence services – MI6, the DGSE and the BND. Although Europe has a single currency and central bank, it is not a truly unified economy. From the point of view of defence, the three main powers (and others) maintain separate national defence complexes, which compete with each other for export markets. In practice, ‘Europe’ does not exist as a united political entity, and outside powers can always count on Europe’s disunity to weaken its global influence. Harmonising foreign policy will continue to prove very difficult, because the UK, France and Germany have different perceptions of threats. This was evident by Europe’s failure to find a common stance on the Iraq War, which prompted then US defence secretary Donald Rumsfeld to speak of ‘old’ and ‘new’ Europe. The UK and France have extensive interests in Africa and the Middle East, and France is especially concerned about Islamic fundamentalism in North Africa. However, Germany’s orientation is much more geared towards Eastern Europe and Russia than the Mediterranean. In addition, France and Germany have tended to cultivate closer relations with Russia than Britain. There have been attempts by the major European powers to forge a ‘European Defence and Security Identity’ within NATO, and although they have sent troops to the Balkans and Afghanistan, there is nothing resembling a common European army with which to back European diplomatic clout. Thus, we expect the EU to continue to pursue a role as an alternative power centre to the US using’soft’ means. Indeed, Europe’s soft power will continue to ensure that it attracts immigrants. However, even though Europe is at risk of demographic decline, as most countries’ populations shrink between now and 2050, political opposition to immigration will continue to limit the continent’s demographic strength. Western Europe cannot rely indefinitely on Eastern European labour, because Eastern Europe itself is declining demographically. The main source of immigrants would thus have to be North Africa and the Middle East, yet this may result in a cultural shift that many Europeans would not be willing to tolerate. Russia: Russia’s main claim to superpower status stems from the military-industrial machine that it inherited from the Soviet Union. Russia has thousands of nuclear weapons and other offensive capabilities; and is the only country with the capacity to destroy the US. However, it is primarily a land power, and its navy is much smaller than America’s (Russia has one operational aircraft carrier, for example). As such, it lacks the ability to project power beyond the confines of Eurasia. While Russia’s invasion of Georgia in AuBusiness Monitor International Ltd
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gust 2008 was hailed by many as marking Russia’s geopolitical revival, this should not be over-hyped, given the small size of Georgia’s armed forces. Russia retains significant diplomatic influence around the world, and also maintains a global intelligence service. However, its inability to thwart the expansion of NATO from 1999, US troop deployments in Central Asia after September 11 2001, the Iraq War, US missile defence agreements with its individual allies, and ‘coloured’ revolutions in the former Soviet Union, demonstrates the limits of Russia’s power. There are two key reasons for remaining cautious towards Russia’s revival. The first is that the economic boom of recent years has largely been driven by oil exports, yet oil prices are dwindling rapidly. Secondly, Russia’s population is shrinking, and could conceivably fall below 100mn by 2050. This will reduce the ability of Russia to recruit soldiers, especially since health problems make many in the current cohort unfit for service. Finally, Russia lacks the’soft power’ that could make it attractive to other countries. Russia still has linguistic and cultural ties with many former Soviet republics and some orthodox Christian countries, but that is probably the limit of its cultural influence. Some intellectuals in Russia have spoken of promoting a ‘holy alliance’ uniting Russian orthodox Christians and its rapidly increasing Muslim population, and Russia may continue to receive residual support from anti-Americans, but this is insufficient to make it a soft power. Brazil: Brazil is the second-most populous country in the Western hemisphere. This gives it a good basis to become a major power. However, like China and India, Brazil needs to devote considerable resources to internal development. In addition, Brazil has shown only limited desire to become a global power. It is far from the main areas of great power rivalry, such as the Black Sea-Caucasus-Caspian Sea-Central Asia region, the Middle East and East Asia. As such, it is not clear what interests Brazil has globally, and this will constrain its ‘willingness to act’. In time, Brazil will probably seek to fashion itself as the ‘leader of the South’ and can cultivate ties with the Lusophone world, which in practice will mean several African nations. Iran: Iran is arguably the weakest of the countries we survey. Its population is relatively small and its economy rather limited in scope beyond oil and gas. As a repressive clerical state, it has virtually no soft power to speak of. In addition, Iran cannot hope to become the leader of the Islamic world, because its Shi’a creed encompasses only 10-15% of the world’s Muslims. Furthermore, as a Persian nation, it cannot, by definition, emerge as leader of the Arab world, which forms the core of the Muslim world. Iran’s weaknesses will limit its ability to expand militarily, even if it comes to possess nuclear weapons. Iran’s ability to maximise its potential will probably be impossible as long as the clerical administration remains in power. However, were the country to move away from theocracy, Iran could fashion itself as a major power in the Near East, potentially allied with the West, but equally likely acting independently. Korea: South Korea shares many characteristics with Japan, but has a much smaller economy and population. Nonetheless, its armed forces, at 687,000, are almost three times as large as Japan’s. Moreover, since it does not have constitutional constraints on the use of its military, Korea has shown a much higher degree of international activism, contribut-
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ing almost 400 troops to the UN’s peacekeeping mission in Lebanon. Most significantly, South Korea sent 3,600 troops to Iraq in 2004, making it the third-largest contributor of foreign forces after the US and UK. While this was a far cry from the 60,000 troops it sent to Vietnam in 1965-1973 in support of the US, it was still highly significant, for it showed that Seoul was willing to defend its Middle Eastern oil interests using military means. Although South Korea now plans to withdraw its 600 remaining troops in Iraq by the end of 2008, it is actively seeking to develop a blue-water navy, and is already looking beyond the threat posed by the North. In the event that the two Koreas were to reunify, Korea would initially have 1.8mn troops under arms, making it the second-largest military in the world. Of course, after reunification, both Koreas would cut troop numbers very sharply, most probably to a few hundred thousand in total, but this would still be substantial. South Korea would also stand to inherit a considerable arsenal from the North, potentially including nuclear weapons. While the costs of reconstructing the North would be a fiscal drain on the South, Seoul could potentially become one of the world’s top-tier powers. Its main constraint would be its low birth rate, which would probably make its society more risk averse. Other Powers: Aside from the above-mentioned countries, might other major powers emerge in the Middle East and Africa? BMI does not see a global Islamic power emerging, mainly because the Muslim world is too fragmented. Pakistan, with a population of more than 150mn, armed forces of 619,000 (the seventh-largest in the world) and a nuclear arsenal, would be one obvious candidate for Islamic leadership. However, it is underdeveloped economically, and could undergo a debt crisis in the near future. Egypt’s historic importance in the Arab world means that it could emerge as a regional leader. Meanwhile, Saudi Arabia’s oil wealth gives it the financial resources for a powerful military. However, Pakistan, Egypt and Saudi Arabia all have close defence ties with the US. In order for a new Islamic superpower to emerge, there would have to be radical political change in all three countries – something we view as unlikely. Moreover, even if that were to happen, forging a unified foreign policy would be still difficult. Turkey is, potentially, a great power, and has extensive historical and cultural ties with the Balkans, Caucasus and Central Asia – all areas of great importance to Europe’s energy needs. It is also a major emerging economy. However, it is unlikely ever to achieve leadership of the Islamic world, since its powerful secular establishment perceives its future as being with the West. It would take a dramatic change in political circumstances to steer the country decisively away from the West. Even if Ankara broke with the West, it would struggle to become an Islamic power, owing to Turkey’s significant historical differences with the Arab world. Turning to Africa, Nigeria and South Africa are the dominant economies and, in many ways, the obvious regional powers. However, their militaries are small, especially in relation to their populations. This will keep their geopolitical focuses on their immediate regions – West Africa and Southern Africa. Thus, we believe that many emerging nations have the ability to emerge as regional powers, but not as superpowers. Nonetheless, this will occasionally give them sufficient strength to curtail US influence in their region. Business Monitor International Ltd
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Possible ‘Game Changers’ There are several possible ‘game changers’ to watch out for, that could either strengthen the US, or weaken it substantially. Firstly, if the US were to experience a new terrorist attack, especially one that exceeds 9/11, it might embark on a new militarisation drive (including restoring conscription) and launch attacks against several key Islamic countries – such as Pakistan and Iran – that could strengthen its global military presence even further. Alternatively, the US could choose to retreat inwards into ‘Fortress America’, abandoning many of its global commitments in favour of hemispheric defence – essentially looking after only the Americas. Secondly, the US could enter a ‘lost decade’ following the current financial crisis that would undermine its prestige and necessitate dramatically reduced military spending. Indeed, the US$700bn bailout of its financial system is comparable to what it spends on defence each year. In addition, the US financial crisis has severely undermined its economic model, leading to accusations of hypocrisy in light of the fact that it is doing precisely what it told emerging markets in Asia and elsewhere not to do in such crises. Thus, US credibility is at risk. That said, emerging markets cannot be too gleeful about America’s woes, since their own growth will suffer. Thirdly, an extended US quagmire in Iraq and Afghanistan is already preventing the US’s ability to act elsewhere, thus essentially neutralising it in many potential conflicts. This was already evident during Russia’s invasion of Georgia in August 2008, and is probably a reason why the US has not attacked Iran. Would the US be able to come to South Korea’s, or Taiwan’s, defence in the event of a North Korean or Chinese attack? Fourthly, emerging nations may band together in anti-hegemonic coalitions that would severely test US power. For example, a China-Brazil alliance would undermine US power in its own hemisphere, or a Russia-Iran pact could complicate US efforts in the Gulf. Although many doubt that a Sino-Russian strategic partnership is sustainable, due to considerable rivalry between the two, the truth is that it does not have to be long-lasting. Even a limited Sino-Russian alliance could make a difference. Russia is exporting many of its latest-generation fighter planes to China, thus boosting China’s air force quality visà-vis the US. However, the US can build a coalition of its own, perhaps enlisting India and Japan against China. Fifthly, rising powers such as China and India, as well as Russia, are beset with significant internal weaknesses which, even without manipulation by hostile countries, could undermine their geopolitical ambitions. China has separatists in Tibet and Xinjiang, and India suffers from inter-communal violence, as well as limited separatism in some regions. Russia has contained separatism in Chechnya, but is at risk of further ethnic conflicts in the Caucasus. Furthermore, a possible financial meltdown in China (or India for that matter) in future could set back its development for many years, and could be accompanied by political upheaval, forcing the government to turn inward. Sixthly, a dramatic escalation of the drug-related violence plaguing Mexico could force the US to turn its geopolitical attentions closer to home, especially if the violence shows signs of spilling into the US.
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Finally, new technologies could emerge that would alter the strategic environment. Major military powers are already using unmanned aerial vehicles (UAVs) and developing unmanned combat aerial vehicles (UCAVs). Robotics is bound to gain prominence, and this could obviate the demographic disadvantage of countries such as Japan, allowing them to become global powers. Nanotechnology is also being studied for military purposes. Overall, while the US is likely to see its influence reduced, it will still be far more powerful than any single power, and most probably even a combination of two or three powers. Moreover, a weaker US would suggest a move to a bipolar or multi-polar world, rather than a world dominated by a new hegemony. Most probably, no country will acquire the sole superpower status that the US has enjoyed since the Soviet collapse in 1991.
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XXXXXXXXXXX vietnam Q1 2009 QX 2009
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PoliticalEnvironment Outlook c hc ahpatpetre 5r 1 Business
SWOT Analysis Strengths Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors. Vietnam’s location – its proximity to China and South East Asia, and its good sea links – makes it a good base for foreign companies to export to the rest of Asia, and beyond.
Weaknesses Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country’s economic growth and links with the outside world. Vietnam remains one of the world’s most corrupt countries. Its score in Transparency International’s 2007 Corruption Perceptions Index was 2.6, lower than the regional average of 4.6.
Opportunities Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and knowhow. Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points.
Threats Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period.
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BMI Business Environment Risk Ratings Although real interest rates are still in negative territory, many businesses are reluctant to borrow because they expect inflation and lending rates to fall in the coming months. According to a report by the State Bank of Vietnam (SBV) local banks are currently holding VND50,000bn (US$2.98bn) of surplus capital. There are also reports of businesses asking to repay debts ahead of schedule in the hope of securing new loans at more favourable rates. Lending rates were recently lowered to 16% following a cut to the central bank’s base rate from 14.00% to 13.00% on October 21 2008 and are liable to fall further as inflation slows. Singapore Hong Kong New Zealand South Korea Japan Australia Taiwan Malaysia Thailand China Philippines Vietnam Sri Lanka Indonesia India Pakistan Cambodia Bangladesh Laos Myanmar North Korea Regional average: 51.9
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Business Environment 83.8 82.2 79.0 73.4 72.6 71.8 65.2 61.5 59.5 52.5 44.9 42.0 40.6 40.2 39.8 37.7 36.7 36.2 35.2 16.0 11.5 Emerging markets average: 46.2
Rank Trend 1 = 3 = 6 = 10 = 12 = 15 = 24 = 33 = 38 = 55 = 79 = 86 = 89 = 90 = 92 = 100 = 106 = 109 = 113 = 133 = 134 = Global average: 49.7
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business environment
Business Environment Outlook Introduction Vietnam’s large and inexpensive workforce remains its largest attraction for foreign investors, although there is an increasing occurrence of foreign direct investment (FDI) projects aimed at tapping the country’s growing consumer market. There is still a large degree of state intervention in the economy, but the government has been gradually moving towards a market economy since 1986, with World Trade Organization (WTO) accession in 2007 being the greatest achievement so far. The country’s decrepit infrastructure continues to be an impediment for many foreign investors, but we see this as a diminishing problem because the government is investing heavily in new roads, railways and ports.
Latest Developments •
The Personal Income Tax bill passed by the National Assembly in late 2007 and coming into effect on January 2009 continues to vex investors. The main bone of TABLE: BMI BUSINESS AND OPERATIONALRISK RATINGS Infrastructure
Institutions
Market Orientation
Overall
Afghanistan
20.73
29.85
40.59
30.39
Bangladesh
35.05
25.89
47.74
36.23
Bhutan
20.29
58.26
35.63
38.06
Cambodia
19.69
26.83
63.69
36.74
China
68.01
42.73
46.75
52.50
East Timor
32.47
30.62
59.50
40.86
Hong Kong
75.06
80.76
90.72
82.18
India
50.37
40.21
28.77
39.79
Indonesia
32.65
22.48
65.53
40.22
Japan
88.03
81.02
48.74
72.59
Laos
23.90
31.49
50.17
35.18
Malaysia
65.71
59.42
59.29
61.47
Maldives
40.42
54.31
67.17
53.97
Myanmar
21.44
3.06
23.43
15.98
Nepal
42.67
36.69
54.09
44.49
North Korea
23.63
8.98
1.97
11.53
Pakistan
36.08
29.57
47.50
37.72
Philippines
40.12
37.12
57.64
44.96
Singapore
83.09
88.18
80.16
83.81
South Korea
82.92
67.88
69.35
73.39
Sri Lanka
35.57
48.85
37.49
40.64
Taiwan
69.49
61.38
64.61
65.16
Thailand
59.54
60.06
59.00
59.53
Vietnam
37.23
39.11
49.71
42.01
Australia
86.43
81.44
47.57
71.81
New Zealand
83.41
90.25
63.21
78.96
Global ave.
47.39
47.46
48.65
47.73
Region ave.
49.00
47.56
52.31
49.62
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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contention is the 5% tax imposed on share dividends, which some investors claim would amount to double taxation as company profits will already have been subject to the corporate tax. Under the new tax law, investors will have two options for paying tax on securities trading: either a 0.1% tax on each transaction or a 20% tax on net capital gains over the year. While the latter would be preferential, in particular in the current bear market, we are skeptical that the Vietnamese tax authorities have the necessary resources to monitor share transactions. •
The Vietnamese government has allowed foreign partners to take a stake in 13 power projects rejected by state-owned Electricity of Vietnam (EVN) due to a lack of financing. A Chinese and a Malaysian firm have already been assigned two of the projects while EVN has taken on two of the previously rejected power projects. Vietnam has previously struggled to attract foreign investment into the power generation sector due to EVN’s monopoly on power distribution. We believe the Vietnamese government could move to allow more foreign participation and competition in the power sector in 2009 as the growing discrepancy between demand and supply threatens to hamper growth and drive up inflation.
•
The National Assembly reviewed public infrastructure investments between 2005 and 2007 at a parliamentary session on November 6 2008, stating that complicated administrative procedures had led to low efficiency and wastefulness. Moreover, poor planning reportedly led to 3,100 projects being halted or cancelled altogether. The government has allowed increased foreign investor access into the country’s key economic sectors, such as port development, in an effort to address Vietnam’s infrastructure deficiencies, which threaten to depress Vietnam’s long-term growth rates.
•
Vietnam’s Ministry of Transport and Communications disclosed estimates that it will require close to US$60bn to 2020 to fund road infrastructure projects. The government is diverting many resources to the construction of roads – and especially expressways – but with weaker growth forecast for the next two years, efforts are rising to entice the private sector to fund the gap. Accordingly the Transport and Communications Ministry is reviewing a series of policies aimed at attracting more private investors, especially in the construction of new expressways.
•
Construction has begun on the Cai Mep-Thi Vai International Port Construction Project in Vietnam. The port will become one of Vietnam’s maritime hubs and thus ease congestion at existing ports in the southern economic zone. Located along the industrial heart of the Thi Vai River, 100km southeast of Ho Chi Minh (HCM) City – which is home to the largest and most heavily congested port in the country – the Cai Mep and Thi Vai deep-water ports will serve as a major transhipment point in the South China Sea. The Cai Mep container terminal will have a throughput capacity of 700,000 twenty-foot equivalent units (TEU), while the Thi Vai general cargo terminal will have capacity to handle between 1.6mn to 2mn tonnes per year. The main aim is to absorb some of the traffic from the Port of HCM City and to cater for an anticipated rise in trade volumes.
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business environment
Institutions Legal Framework Vietnam has a two-tier courts system, with courts of first instances and courts of appeal. The court system consists of the Supreme Court, the provincial People’s Courts and the district People’s Courts. The Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal framework for the conduct of business. Most of the legal documents in force relating to business were issued in the early 1990s under market-led reform programmes. However, Vietnam rewrote almost all of its laws and regulations affecting commercial activity and judicial procedures between 2002-2006. Despite some progress in protecting intellectual property rights, the overall legal system in Vietnam is regarded as excessively cumbersome. Vietnam’s judicial system lacks transparency and there are widespread concerns about the independence of the judiciary. Both local and foreign firms prefer to resort to arbitration or TABLE: BMI LEGAL FRAMEWORK RATINGS Investor Protection
Rule of Law Contract Enforceability
Corruption
Afghanistan
34.8
0.6
Bangladesh
61.1
25.1
8.0
3.3
Bhutan
25.6
75.4
57.0
82.0
Cambodia
51.2
13.8
38.9
6.0
China
17.4
23.3
7.8
50.3
54.7
54.7
East Timor
11.8
12.6
36.3
na
Hong Kong
62.5
89.8
87.5
92.7
India
38.0
62.9
8.9
54.7
Indonesia
22.3
25.7
26.5
18.0
Japan
58.3
89.2
90.5
91.3
Laos
44.8
19.8
28.7
28.7
Malaysia
53.8
72.5
47.8
75.3
Maldives
91.8
64.1
46.5
23.7
Myanmar
na
4.8
na
1.3
44.3
31.7
43.0
23.3
Nepal North Korea
na
9.0
na
na
Pakistan
56.2
26.9
17.5
8.7
Philippines
56.4
46.1
54.4
23.3
Singapore
64.5
94.6
75.9
98.7
South Korea
31.7
79.0
81.8
76.0
Sri Lanka
57.6
59.9
47.7
48.0
Taiwan
19.7
81.4
53.1
80.7
Thailand
19.5
60.5
60.1
62.0
Vietnam
22.8
49.7
45.6
28.7
Australia
27.9
94.0
89.2
95.3
New Zealand
66.9
97.0
82.4
100.0
Global ave.
36.8
48.8
49.9
40.2
Region ave.
43.0
51.4
50.0
50.0
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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other non-judicial means as a result of weaknesses in the judicial system – there is a general lack of confidence that the judiciary is capable of interpreting and enforcing the law. Vietnam’s legal system remains underdeveloped and, largely, biased against foreign entities. The court system provides inadequate redress for commercial disputes while contracts are difficult to enforce, particularly if a party is non-Vietnamese. Foreigners also see the commercial arbitration system as weak. When disputes arise, foreign investors tend to try to negotiate or include dispute resolution procedures in their contracts – however, even these are far from failsafe. Foreign and domestic arbitral awards are legally enforceable in Vietnam since it acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. Local courts must respect awards rendered by a recognised international arbitration institution. However, this provides no assurance that contracts will be honoured. Non-judicial means are therefore frequently used to enforce debt obligations. Firms generally avoid the judicial system because the process is lengthy and expensive, decisions are considered arbitrary and enforcement mechanisms are ineffective. Smaller companies rely on personal relationships while larger foreign companies may make use of their access to government to ensure contract enforcement.
Property Rights The 2006 Uniform Enterprise Law has allowed foreign investors to form any type of company instead of only limited liability companies. In general, foreign companies and the private sector are at a disadvantage compared to state-owned companies in terms of access to land, which is still viewed as the property of the ‘the people’. Legislation has, however, progressively enhanced the status of private investors in recent years. The 1992 constitution granted stronger land rights to individuals, including rights over commercial and personal property. Private land use rights (LURs) may now be granted for up to 50 years. Since July 1 2004, the Land Law has allowed local private companies with longterm LURs to lease land to foreign investors.
Intellectual Property Rights The enforcement of intellectual property rights (IPRs) is wholly inadequate, with widespread pirating of products, particularly software, music and videos. The requirements of WTO accession mean that the government will have to substantially beef up IPR protection. Consequently, in July 2006, a new Intellectual Property Law came into effect, designed to clarify the responsibility of government agencies charged with protecting IPRs, though doubts remain over the effectiveness of its implementation. The police service is generally slow to act on administrative orders where trademarks have been infringed. Often violators will seek to extract a payoff in compensation for ceasing the infringement. The US State Department has, therefore, despite significant improvements in the protection of IPR in 2006, kept Vietnam on its 2007 ‘special 301 Report’ watch-list of countries with inadequate protection of IPR.
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Corruption/Red Tape Investors see official corruption as one of the biggest hindrances to running a business in Vietnam. Joint ventures with state-owned enterprises are particularly prone to corruption and abuse, though surveys indicate that while corruption affecting businesses is quite prevalent, the amounts involved are usually quite small. However, rapid economic growth provides opportunities for graft to grow more quickly than government systems evolve. Vietnam scored 2.7 out of 10 in Transparency International’s 2008 Corruption Perceptions Index, placing it in 121st place among the 180 countries surveyed. One of the best tools in restricting opportunities for corruption has been the expansion of the ‘One-Stop Shop’ (OSS) network – single agencies that deal with applications for a range of activities, including construction permits, LUR certificates, business registrations and approvals for local and foreign investments. The Law on Corruption Prevention and Control was passed by the National Assembly in November 2005. A central anti-corruption steering committee was established in 2006, comprising representatives from the government, the National Assembly, state procurator, court and police. The committee is headed by the prime minister and has the authority to temporarily suspend ministers and chairs of people’s committees and people’s councils if suspected of wrongdoing. The committee discovered 584 cases of alleged corruption, involving close to 1,300 people, in 2007. Among the most noteworthy convictions of corrupt officials was that of former deputy trade minister Mai Van Dau, who was handed a 14-year prison term in March 2007 for accepting bribes in return for export licenses. The burden of red tape is amplified by the overlapping of government approvals. Vietnam ranks poorly in the length of time it takes to close a business. It can take about five years to close a business, compared to an average of 3.4 years in East Asia & Pacific, and 1.5 years in OECD states.
Infrastructure Physical Infrastructure Vietnam’s physical infrastructure rating is 59.1, placing the country in 78th place in our rankings. The country’s inadequate infrastructure has become a major grievance for foreign investors and may thus impair future FDI. Our communications ratings for Vietnam stands at 59.9, but is set to improve as the government, thanks to development assistance from international donors, is investing heavily in constructing new roads, railways, ports and power plants. These projects include the US$33bn 1,600km high-speed railway currently being constructed, thanks to Japanese funding, between Hanoi and Ho Chi Minh City, which will cut travel time to less than 10 hours when completed. As an example of progress already made, more than 90% of rural households now have electricity compared to just over 50% 10 years ago. Rapid industrialisation of the economy has, however, seen power demand increase by 15-17% per year and Vietnam is now struggling to expand its electricity production, which produced 59bn KWH in 2006, according Business Monitor International Ltd
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to the Asian Development Bank. It has been estimated that Vietnam needs to build 124 new power plants between 2006-2010, adding a total capacity of roughly 36,000MW, to satisfy demand. Several ongoing construction projects of power plants have been hit by delays – due to slow land clearance, delayed equipment supplies and poor contractor performance – and power blackouts and brownouts are therefore likely to remain a problem. Our electricity access rating for Vietnam stands at 58.3, placing Vietnam in 49th place in our rankings. Foreign direct investment has also helped to improve Vietnam’s telecommunications system, with foreign groups investing heavily in fanning out 3G telecom and broadband networks over the most populous parts of the country.
Labour Force Vietnam’s large, well-educated and inexpensive labour force remains one of the country’s chief attractions to foreign investors. The labour pool is increasing by up to 1.5mn a year, while wage costs are still low compared to other countries in the region, although wage growth has picked up pace in recent years. The Vietnamese General Statistics Office estimated the number of employed at 44mn in 2005, equivalent to 81.4% of people aged 15-64. The unemployment rate is expected to remain between 4-6% in 2009. Vietnam’s reform-driven economic growth has resulted in a restructuring of the labour market, with a shift away from agricultural employment to non-farm employment. The General Statistics Office estimated that farmers constituted 52% of the workforce in 2006 with close to 19% working in industry and construction, and just over 25% working in the service sector. Managerial talent and skilled workers are generally in short supply, which has the effect of raising costs. The expanding financial sector is particularly plagued by labour shortages and is said to be in need of tens of thousands of skilled personnel by 2010. Foreign companies are becoming increasingly troubled by an excessive turnover of qualified workers, which is driving up salaries for skilled personnel. Foreign companies have previously been the prime choice of Vietnamese professionals as they pay 14% more than domestic firms on average, according to a 2007 survey by human resources consultancy Navigos Group. Working for domestic firms is, however, becoming increasingly popular as they are currently closing the salary gap with foreign firms. Labour shortages and a sharply progressive income tax system have pushed up the costs for skilled personnel. Vietnam has, on the other hand, maintained its cost advantage in manufacturing wages. The Japan External Trade Organisation (JETRO) found in a survey in November 2006 that monthly salaries for ordinary workers ranged from US$87-198 around Hanoi in northern Vietnam and from US$122-216 in Ho Chi Minh City in the southern Mekong delta region. This can be compared with an average salary for workers in Thailand of US$164 per month and between US$134-446 in China’s Guangzhou province, the source of much of Chinese manufacturing output. Although wages are rising – by 19.5% between April 2007 and March 2008, according to Navigos – we believe Vietnamese labour is still very competitively priced, in particular after the imposition of the Chinese Labour Contract Law on January 1 2008, which is estimated to have raised
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labour costs in China by between 5-40% and which has prompted many South Korean and Taiwanese firms to consider moving factories to Vietnam. The regulatory burden in Vietnam’s labour market has traditionally been high, but is easing over time. In 2003, legislation was introduced that allowed foreign companies to recruit staff directly, as long as they provide government agencies with a list of recruited workers. However, the requirement to use employment service agencies continues to apply to branches and representative offices of foreign companies. One of the main regulatory burdens is the social protection system, which imposes a compulsory social insurance contribution scheme in which employers must pay in 15% of the salary, with employees proving 5%. Regulations for hiring workers are significantly more onerous than the East Asia & Pacific average. Whereas the hiring cost is 17% of the salary in Vietnam, it is only 5% in Thailand, for example. The imposition of the Chinese Labour Contract Law on January 1 2008 has, however, made many foreign companies view Vietnamese labour market regulation more favourably. Employers are required by law to establish labour unions within six months of setting up, and these must be members of the Vietnam General Confederation of Labour. While most factories have trade unions, many of these do not operate in practice. Trade unions are more active in the public sector and only one-third of foreign companies have collective agreements with their workforces. Vietnam does not have a bad industrial relations record. There were about 400 strikes in 2006, most of them at foreign-invested firms in the textiles and apparel sector, despite working condition often being better at these firms than at 400 SOEs. Most strikes have resulted from legal or contractual breaches, including failure to pay wages and benefits, failure to pay social insurance contributions, and failure to pay severance pay at termination. The sharp uptrend in consumer price inflation, especially of essential goods such as food, fuel and housing prompted increased labour unrest in late 2007 and early 2008 as workers demanded higher wages. The increasingly pressed economic conditions for labourers prompted tens of thousands of workers to go on strike in Ho Chi Minh City and Dong Nai province in January 2008. The Vietnamese government deciced on October 10 2008 to raise the minimum wage for basic work from VND1,000,000 to VND1,200,000 for workers in foreign-invested enterprises central Hanoi and Ho Chi Minh City. The mimumiun wage for workers in foreigninvested plants in other parts of Vietnam are arranged in three levels with the lowest lying at VND920,000. The equivalent wage tranches for workers in Vietnamese-owned plants range between VDN800,000 and VND650,000. The new minimum wage levels become effective on January 1 2009.
Market Orientation Foreign Investment Policy Increased FDI is an integral part of Vietnam’s ambitious economic expansion plans, and with ratings agencies pushing their grades higher, the country looks like a solid investment Business Monitor International Ltd
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destination, especially for manufacturing. FDI in 2008 has been estimated at US$62bnm more than triple the US$20.3bn recorded in 2007 and we believe it will remain at roughly the same level in 2008, in spite of the growing imbalances in the economy. The rising levels of official development assistance (ODA), which hit a record of US$5.4bn for 2008, pledged by multilateral donors are also important, but have been outpaced by inflows from foreign private sources over the last five years. However, as the country tries to transform from centralised to more market-oriented economy, the investment framework is still poorly developed in many areas, with bureaucracy and a lack of transparency cited among major problems. Despite ambitious targets for foreign investment as an important source of fuel for economic expansion plans, a number of barriers to investment remain. An opaque legal system, an inflexible financial system, corruption, a lack of regulatory transparency and consistency, a ponderous bureaucracy and complex land purchase rules are among areas criticised by foreign investors. The government has been introducing and amending legislation in an effort to remedy these perceived shortcomings. Key legislation includes: •
The Law on Foreign Investment (1989), which has been amended several times to make FDI more attractive.
•
Government decree 24 of 2000, which carries a pledge to avoid expropriation and guarantees the right to repatriate profits. It also outlines the government’s intention to treat private and state sectors equally.
•
A revised bankruptcy law and a Law on Competition, both passed by the National Assembly in 2004, in a bid to improve the FDI climate. Fully-owned foreign banks are now allowed to compete on an equal footing with domestic banks.
•
The Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal framework for the conduct of business. A new Common Investment Law and a Unified Enterprise Law came into effect in July 2006, as did a new Intellectual Property Law designed to clarify the responsibility of government agencies charged with protecting IPRs, but doubts remain over the effectiveness of its implementation.
The main forms of foreign investment are:
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•
Joint venture (JV) agreements, under which foreign and domestic firms share capital and profits.
•
Business Cooperation Contracts (BCC), which allow a foreign company to carry out business in cooperation with a Vietnamese firm through capital investment and revenue sharing, but without gaining right of establishment or ownership.
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•
Wholly Foreign-Owned Enterprises, are becoming more common, especially those involving industrial production for export.
•
Build-operate-transfer (BOT) agreements is the least common form of foreign direct investment, and has a reputation among foreign investors of providing regulatory and financing problems.
Foreign portfolio investment is only permitted in small quantities, with aggregate foreign ownership of listed companies capped at 49%. Foreign ownership of banks is capped at 10% per investor, and 30% in aggregate. Moreover, many of the shares listed on the Ho Chi Minh City Stock Exchange (HSCE) are too illiquid to attract foreign investors. Investments in export processing zones (EPZs), industrial zones (IZ) and high-technology zones (HTZs) attract tax and other incentives, and offer a ready made operational infrastructure, which may be difficult to arrange outside. EPZ investments carry 10-12% profit tax. The first established was the Tan Thuan zone near Ho Chi Minh City in 1991, where over a hundred manufacturers currently operate. A number of others have since been built, though they have not been as successful as hoped, partly because all produce from EPZs must be exported. IZs are for use by firms in construction, manufacturing, processing or assembly of industrial products, often food processing and textiles production. IZ firms pay a 10% profit tax and get refunds if profits are reinvested. IZ firms may produce for the domestic market as well as the export market Most FDI into Vietnam comes from North East Asia, notably Taiwan, South Korea, Japan and China/Hong Kong. Canada and the US are the largest non-Asian FDI sources. Leading sectors for FDI are manufacturing, other industry and oil and gas.
Table: Asia, FDI Annual Inflows 2006 Australia
2007
US$bn
Percapita
US$bn
Per capita
25.74
1,255.4
22.27
1,075.7
Bangladesh
0.79
5.7
0.67
4.7
Cambodia
0.48
34.2
0.87
60.3
China
72.72
55.3
83.52
62.5
Hong Kong
45.05
6,520.6
59.90
8,602.3
India
19.66
17.3
22.95
19.9
Indonesia
4.91
21.5
6.93
29.9
Malaysia
6.05
231.6
8.40
316.2
Pakistan
4.27
27.5
5.33
34.0
Philippines
2.92
33.9
2.93
33.3
Singapore
24.74
5,646.5
24.14
5,441.2
South Korea
4.88
101.6
2.63
54.6
Sri Lanka
0.48
24.0
0.53
26.0
Taiwan
7.42
324.0
8.16
354.8
Thailand
9.01
142.0
9.58
149.9
Vietnam
2.36
27.5
6.74
77.5
Source: UNCTAD, BMI.
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Foreign Trade Regime Although high tariffs, customs bureaucracy and legal inadequacies have provided significant trade barriers, the opening up of Vietnam’s economy has been accompanied by concrete measures to meet the requirements of the WTO and other international trade organisations. Vietnam has committed to bound tariff rates (or legal ceilings) on most products ranging from zero to 35%. Reductions in most bound rates from 17.4% on average in 2007 to 13.6% are to be phased in gradually. Vietnam became a member of the WTO in January 2007. A bilateral trade agreement with the US in effect since December 2001 has substantially lowered tariffs on US industrial and agricultural products, removed non-tariff barriers on US service providers and eliminated barriers to US exports in key areas such as pharmaceuticals and petroleum products. Vietnam is a member of the Association of South East Asian Nations (ASEAN) – with Brunei, Philippines, Indonesia, Laos, Myanmar, Malaysia, Singapore, Thailand, and Cambodia – as well as the linked ASEAN Free Trade Area (AFTA). Vietnam is thus party to negotiations on free trade agreements (FTAs) being conducted by ASEAN, such as talks with the European Union, China, Australia and New Zealand. In addition, Vietnam is in, or preparing for, talks over FTAs with Chile and Japan Import tariffs are high by regional standards, averaging 16.8% in 2006 according to the WTO. Vietnam will continue to dismantle tariffs in a bid to meet its WTO accession goals, although some key sectors remain protected. Vietnam has agreed to comply with ASEAN’s Common Effective Preferential Tariff (CEPT) scheme on manufactured goods within the ASEAN region, which calls for rates to be brought down to the 0%-5% range. The legislation providing the framework for the trade regime is 1998’s Law to Amend the Import and Export Tariffs Law. However, given the ASEAN and WTO requirements the tariff structure is in a constant state of flux at present. To reduce the rising costs of a range of products, Vietnam in October 2007 cut import tariffs by between 30% and 60% on many food and dairy products.
Table: TOP EXPORT DESTINATIONS United States
2000
2001
2002
2003
2004
2005
2006
2007
733
1,066
2,453
3,940
5024.8
5,924
7,845
10,089
Japan
2,575
2,510
2,437
2,909
3542.1
4,340
5,240
6,070
Australia
1,272
1,042
1,328
1,421
1884.7
2,723
3,745
3,557
China,P.R.: Mainland
1,536
1,417
1,518
1,883
2899.1
3,228
3,243
3,357
886
1,044
961
1,025
1485.3
1,917
1,812
2,202
14,483
15,020
16,705
20,144
26,485
32,447
39,826
48,561
48.4
47.1
52.1
55.5
56.0
55.9
54.9
52.0
Singapore Total exports Top 5, % of total Source: IMF, Direction of Trade Statistics.
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Tax Regime Since 2003, corporate tax has been charged at a unified rate for both domestic firms and foreign investors. From the start of 2005, a self-assessment regime has been in effect. The previous tax audit system has been superseded by a tax investigation system. Corporate tax: Main rate is 28% for domestic firms and those involving foreign investment, but the National Assembly was in May 2008 reviewing a proposal from the Ministry of Finance to slash this rate to 25% in order to boost competitiveness (see latest developments). Resident firms are taxed on global income. Non-resident firms are taxed only on Vietnamese-sourced income. A surtax of 10- 25% is charged progressively on income from land use rights. Individual tax: The National Assembly passed Vietnam’s first ever personal income tax bill on November 20 2007. The bill, to become effective on January 1 2009, replaces a previous system in which expatriates and domestics were taxed at different levels. The
BMI TRADE RATINGS Protectionism
Bureaucracy
Afghanistan
na
21.6
Bangladesh
0.7
22.9
Bhutan
4.2
18.3
Cambodia
7.5
25.4
China
51.7
52.9
East Timor
na
40.5
Hong Kong
100.0
98.6
India
12.9
23.0
Indonesia
54.4
44.3
Japan
76.9
81.5
Laos
19.7
6.7
Malaysia
64.6
50.9
Maldives
na
55.3
Myanmar
1.4
na
13.6
34.1
Nepal North Korea
4.2
2.3
Pakistan
16.3
42.9
Philippines
76.2
66.9
Singapore
100.0
88.9
South Korea
42.2
69.1
Sri Lanka
48.3
35.6
Taiwan
95.9
64.1
Thailand
55.8
37.6
Vietnam
11.6
44.0
Australia
70.7
80.3
New Zealand
72.1
76.3
Global ave.
47.1
45.2
Region ave.
43.5
47.4
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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new bill provides a common set of rules for individuals resident in Vietnam for 183 days or more in a 12-month period. However, the bill is also applicable to those having a permanent residence in Vietnam, a definition which includes a rented house. How this new legislation will be interpreted is still unclear, but it could extend tax liabilities to expatriates and locals who reside in Vietnam less than 183 days per year. The new bill stipulates that personal income is to be taxed at a rate between 5% and 35%, with a personal allowance of VND48mn (US$2,800) and an additional allowance of VND19mn (US$1,120) per dependent. As such, the new bill reduces the highest marginal tax level applicable to expatriates from 40% to 35%. Furthermore, a new feature in the bill compared to previous legislation is that it covers non-employment income such as interest, dividends, capital gains on real estate and securities investment. Indirect tax: Main VAT rate is 10%. A 5% rate is charged on some goods, including computers and accessories, construction, machinery, chemicals, coal and metallurgy products. The following attract a zero VAT rate: exported goods and software and services exported to firms in export processing zones. Registration is obligatory for businesses. VAT taxation is also subject to an ongoing revision by the National Assembly (see latest developments). Capital gains: Usually taxed as income at corporate rate. Gains by foreign investors on the transfer of an interest in a foreign or Vietnamese enterprise attract a 25% tax. Gains by individuals on the transfer of a home or on land-use rights are taxed progressively up to 60%.
Operational Risk Security Risk Vietnam is generally a very safe country for foreign residents and travellers. Petty street crime is rising in the major cities, but there have been very few serious offences against foreigners reported. Unexploded mines and ordnance are a continuing hazard, particularly in central Vietnam and along the Laos border. The poor standard of roads and other public infrastructure is also a safety risk, as is the poor level of driving which makes traffic accidents one of the most prominent health risks for both foreigners and nationals.
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c chhaappt e t er r61
Political Key Sectors Outlook
Telecoms Executive Summary BMI estimates that, by the end of June 2008, the number of mobile customers in Vietnam had risen to over 51.6mn. Our estimates are based on the latest data to be published by Vietnam’s Ministry of Information and Communications (MIC), which suggested that there were almost 50mn mobile subscribers in Vietnam at the beginning of June. According to MIC figures, Viettel, which is owned by the Vietnamese military, continued to lead the Vietnamese mobile market with a market share of around 38%. Viettel has a clear lead over the next largest mobile operators, MobiFone and VinaPhone, which had market shares of approximately 26% and 24%, respectively.
BMI View BMI continues to believe that broadband subscriber growth will be strong over the next five years. However, we now predict a lower rate of expansion for 2008, envisaging growth of no more than 100% for the year as a whole. By the end of 2008, we forecast a market of almost 2.57mn broadband subscribers (equivalent to a penetration rate of 2.9%).
We have made some further alterations to our forecast for mobile subscriber growth in Vietnam, in order to take account of much stronger growth in the first few months of 2008. We now envisage a growth rate of almost 80% for 2008. By the end of the year, we predict that the subscriber base will have risen to over 64mn, and that the mobile penetration rate will have reached 73%. It should be remembered that the figures for the number of Vietnamese mobile customers are based on the assumption that the market contains a large number of inactive prepaid users. Competition and growth in Vietnam’s mobile sector has been boosted by the recent wave of tariff cuts, which have been introduced by the various operators. Further cuts may follow in the near future, possibly resulting in a price war. Looking ahead, we now predict that Vietnam will surpass the 100% penetration threshold in 2010, instead of 2011 as previously predicted. By the end of 2012, we envisage almost 136mn customers and a penetration rate of almost 147%. Continued customer growth will be supported by a steadily expanding population, as well as the arrival of increased competition and new investment. Meanwhile, according to Vietnam’s Internet Network Information Centre (VNNIC), the number of broadband subscribers rose by 37% in the first eight months of 2008. By the end of August, broadband penetration in Vietnam had risen to 2%, up from 1.5% at the end of 2007. Recent months have seen accelerated efforts to increase the level of investment in broadband technologies and to encourage further take-up. In September 2008, incumbent operator VNPT launched a campaign to promote its ‘MegaVNN’ ADSL service to fixed-line users. The promotion, which runs from September 16 to October 30, offered free ADSL modem and registration fees for new MegaVNN users and customers who shifted their indirect internet services to MegaVNN on fixed phone lines. BMI continues to believe that broadband subscriber growth will be strong over the next five years. However, we now predict a lower rate of expansion for 2008, envisaging growth of no more than 100% for the year as a whole. By the end of 2008, we forecast a market of almost 2.57mn broadband subscribers (equivalent to a penetration rate of 2.9%). Business Monitor International Ltd
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Market Overview Mobile – Until mid-2003, the mobile market was nominally a duopoly. Both incumbent operators — MobiFone and VinaPhone — are indirect wholly-owned subsidiaries of VNPT. MobiFone introduced services at 900MHz in 1993, following a Business Co-operation Contracts (BCC) agreement with Comvik of Sweden, while VinaPhone launched its own GSM 900 network in 1996. During H203, Saigon Postel subsidiary S-Fone launched CDMA-based services, although it is only since the end of H104 that S-Fone has begun to acquire significant numbers of subscribers. Meanwhile, Ministry of Defence-run Viettel launched a very successful GSM network in 2004 and has already overtaken S-Fone to become the country’s second largest mobile operator (after the two VNPT-owned operators). Since then, Vietnam has also welcomed the entrance of newcomers EVN Telecom (which operates under the E Mobile brand) and latterly Hanoi Telecom (which operates under the HT Mobile brand). E-Mobile and HT Mobile, which began commercial operations in February 2006 and January 2007, respectively, both offer CDMA-based services (although from April 2008 HT Mobile started to shift its customers to a GSM network offering). With a penetration rate of just over 40%, Vietnam continues to move up the regional rankings, and is now ahead of China and Indonesia. Fixed Line – The provision of traditional PSTN-based telecoms services is still effectively under the monopoly of Vietnam’s state-owned operator VNPT, which became responsible for the country’s telecommunications services in 1995. Its fixed-line services are run through a network of 61 local push-to-talks (PTTs), while the country’s two mobile operators are both subsidiaries of VNPT’s telecommunications business, Vietnam Telecoms Services (GPC). Vietnam does not have an independent regulatory body — regulation and policy development now fall under the aegis of the MPT. BMI estimates that the Vietnam fixed-line user base grew by around 23% in 2007, compared with growth of 43.5% in 2006. There were thought to be over 11.4mn fixed-lines at the end of 2007, which is equal to a penetration rate of 13.2%. The country continues to have one of the lowest rates in the region, although ahead of Indonesia, Pakistan, the Philippines and India. Broadband – Vietnam’s internet user base more than doubled during 2003 and 2004 and, at the end of 2004, was estimated at nearly 5.87mn, representing penetration in excess of 7%. Indeed, during the course of the year Vietnam leapfrogged both the Philippines and China in terms of internet take-up. There are now nine licensed internet service providers (ISPs) in Vietnam and six internet exchange providers. By the end of 2007, internet user Table: Telecoms Sector — Mobile — Historical Data & Forecasts No. of Mobile Phone Subscribers (‘000) No. of Mobile Phone Subscribers/100 Inhabitants No. of Mobile Phone Subscribers/100 Fixed Line Subscribers No. of 3G Phone Subscribers (‘000) 3G Market As % Of Entire Mobile Market
2006
2007
2008e
2009f
2010f
2011f
2012f
18,980
35,805
64,109
87,533
107,974
123,580
135,793
22
41
73
98
120
135
147
204.1
313.0
492.1
626.6
729.7
791.1
834.5
0
0
100
700
1,360
2,100
3,050
0.0
0.0
0.2
0.8
1.3
1.7
2.2
e/f = BMI estimate/forecast. Source: International Telecommunications Union (ITU), BMI
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penetration had increased to 21.8%. In July 2003, VNPT subsidiary Vietnam Datacommunications Company (VDC) launched the country’s first ADSL service in Hanoi, Ho Chi Minh City and Haiphong. Broadband figures, according to the Vietnam Internet Network Information Centre (VNNIC), are thought to have surpassed 1.2mn subscribers by the end of 2007, which is equivalent to a penetration rate of 1.5%.
Industry Forecast Mobile – We have made some further alterations to our forecast for mobile subscriber growth in Vietnam, to take account of much stronger subscriber growth in the first few months of 2008. With over 51mn mobile customers at the end of June 2008 (reflecting a growth rate of over 44% for the first six months of the year), we now believe that, by the end of this year, the market will surpass our previous expectation of 56mn subscribers by a large margin. We now envisage a growth rate of almost 80% for 2008. By the end of the year, we predict that the subscriber base will have risen to over 64mn, and that the mobile penetration rate will have reached 73%. Competition and growth in 2008 has been boosted by the wave of tariff cuts, which have characterised recent operator strategies. Further cuts may follow in the near future, possibly resulting in a price war. Lower mobile service prices are expected to stimulate the growth of dual SIM ownership, as mobile users increasingly take advantage of special offers. Conversely, lower prices will also likely lead to increased customer churn and a higher number of inactive prepaid users. The investment in network expansion and improvement has also had a positive impact on service quality and coverage. Looking ahead, we now predict that Vietnam will surpass the 100% penetration threshold in 2010, instead of 2011 as previously predicted. By the end 2012, we envisage a market of almost 136mn customers and a penetration rate of almost 147%. Continued growth over the next few years will be supported by a steadily expanding population, as well as by the arrival of increased competition and new investment. A number of major international investors — including Japan’s NTT DoCoMo, Norway’s Telenor, SingTel and France Telecom — have all shown an interest in bidding for a stake in Vietnam’s second-largest mobile operator MobiFone. Furthermore, Russia’s VimpelCom is also expected to expand its presence in Vietnam, through its ‘GTel Mobile’ joint venture with the Vietnamese government. It should be remembered that the figures for the number of Vietnamese mobile customers are based on the assumption that the market contains a certain number of inactive prepaid users. Meanwhile, our forecast for Vietnamese 3G customer growth is based on the assumption that the first commercial deployments of 3G services will occur in 2008. In the early stages of 3G deployment, we do not expect consumer demand to be strong, and envisage just 100,000 subscribers by the end of 2008. The cost and availability of 3G-compatible handsets are expected to be the main obstacles to 3G growth in the early years of our forecast. However, the government has made 3G development a priority, and we believe that this will encourage stronger consumer demand in the latter years of our forecast. We predict over 3mn 3G customers at the end of 2012, which would equate to around 2.2% of Vietnam’s mobile user base. It should be noted that these figures are lower than those predicted in our previous update. Business Monitor International Ltd
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Fixed Line – Our current forecast for the growth of Vietnam’s fixed-line market over the next five years is based on an estimate of 11.44mn fixed-lines at the end of 2007. This figure, which is equivalent to a penetration rate of just over 13%, is based on data provided by the country’s Ministry of Posts and Telematics (MPT). In this update, we have not introduced any new changes to our forecast, which predicts that the market will expand by almost 14% during the year, helping to raise penetration to almost 15%. Continued fixed-line growth in Vietnam has been encouraged by the 15-20% tariff cuts, which were applied to fixed-line and public card phone charges in June 2007. The effects of these cuts are expected to continue being felt in the immediate future. However, towards the end of the decade, we predict a slowdown in fixed-line growth, as increased mobile substitution and the proliferation of VoIP services results in weaker demand for fixed-line services. The slowdown will partly reflect fixed-line saturation in urban areas of Vietnam, while rural parts of the country will be more inclined to take up mobile telephony. Vietnam’s fixed-line incumbent, Vietnam Posts and Telecommunications (VNPT), is expected to retain its dominant position in the market. Despite this, traditional PSTN fixed-line subscriptions account for only around 77% of the total market, with the remaining fixed-lines being based on fixed-wireless services. The proliferation of fixed-wireless services, especially in rural districts, should contribute to a loss of market share for VNPT. Our current five year forecast envisages a significant slowdown in the rate of fixed-line growth, particularly in the latter years of our forecast. We predict that fixed-line penetration will surpass 17% in 2011, and increase only marginally to 17.6% in 2012. Internet Line – Once again, we have made some minor alterations to our internet user and broadband subscriber forecasts for Vietnam. Our latest adjustments take account of new figures published by Vietnam’s Internet Network Information Centre (VNNIC). The VNNIC suggests that there were just over 18.5mn internet users in Vietnam at the end of 2007, which equated to 21.4% of the total population. By the end of August 2008, the VNNIC suggests that the number of internet users had surpassed 20.34mn. According to the VNNIC, the number of internet users increased by over 36% in 2007 and by 9.6% in the first eight months of 2008. Although we continue to believe that internet user growth in Vietnam will remain strong over the next five years, we have nevertheless lowered our growth expectations for 2008 overall. We now predict that the number of internet users will expand by around 15.5% in 2008 and will rise to over 21mn by the end of the year. By the end of our five-year forecast, we anticipate a market of around 28.3mn internet users, equivalent to over 30% of the population. Meanwhile, the VNNIC has said that the number of broadband subscribers rose by 37% in the first eight months of 2008, reaching 1.773mn. This new growth occurred on the back of the impressive 150% growth recorded in 2007. As with internet user growth, we continue to believe that broadband subscriber growth will be strong over the next five years. However, we now predict a lower rate of growth for 2008, envisaging growth of no more than 100% for the year as a whole. By the end of 2008, we forecast a market of almost 2.57mn broadband subscribers, which is equivalent to a penetration rate of 2.9%. Although growth in 2008 will be much lower than in 2007, we do not envisage such a steep decline in growth in 2009 and 2010. Indeed, for those two years, growth is expected to remain between 70% and 85%. By the end of our forecast in 2012, we anticipate a market of just
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over 18mn broadband customers; this is equivalent to a penetration rate of almost 20%. The strong broadband growth in the latter years of our forecast will be supported by a number of developments, not the least of which is the considerable investment which is currently occurring in the broadband sector. However, increased competition is also expected to increase the affordability of broadband services. The arrival of new broadband service providers, some of them international operators, will help to stimulate competition. Furthermore, the launch of commercial WiMAX services – expected sometime in the next few months – should also help to boost broadband take-up.
Power Executive Summary The new Vietnam Power Report from BMI forecasts that the country will account for 1.16% of Asia Pacific regional power generation by 2012, with an increasing generation surplus that provides a theoretical export capability. BMI’s Asia Pacific power generation estimate for 2007 is 6,865 terawatt hours (twh), representing an increase of 9.6% over the previous year. We are forecasting an increase in regional generation to 9,370twh by 2012, representing a rise of 36.5%.
BMI View Vietnam is ranked third ahead of Pakistan in BMI’s updated Power Business Environment rating, thanks largely to the growth potential of power consumption and energy demand, plus healthy scores in several other categories. The country is at little risk from Pakistan below it, and probably doesn’t have the potential to
Asia Pacific thermal power generation in 2007 is estimated by BMI at 5,431twh, accounting for 79.1% of the total electricity supplied in the region. Our forecast for 2012 is 7,104twh, implying 46.6% growth that reduces the market share of thermal generation to 75.8% — thanks partly to environmental concerns that should be promoting renewables, hydro-electricity and nuclear generation. Vietnam’s thermal generation in 2007 was 33.7twh, or 0.62% of the regional total. By 2012, the country is expected to account for 0.94% of thermal generation.
catch India above it.
For Vietnam oil is the dominant fuel, accounting for around 50% of primary energy demand (PED), followed by hydro-power at 20%, coal at 18% and gas with a 12% share of PED. Regional energy demand is forecast to reach 4,830mn tonnes of oil equivalent (toe) by 2012, representing 37.3% growth over the period. Vietnam’s 2007 market share of 0.45% is set to rise to 0.57% by 2012. Vietnam’s 25.6twh of hydro-electric demand in 2007 is forecast to reach 37.6twh by 2012, with its share of the Asia Pacific hydro market falling from 3.16% to 2.58% over the period. Vietnam is ranked third ahead of Pakistan in BMI’s updated Power Business Environment rating, thanks largely to the growth potential of power consumption and energy demand, plus healthy scores in several other categories. The country is at little risk from Pakistan below it, and probably doesn’t have the potential to catch India above it. BMI is forecasting Vietnamese real GDP growth averaging 8.03% per annum between 2007 and 2012, with the 2008 forecast being 7.00%. Population is expected to expand from 86.6mn to 92.7mn over the period, with GDP per capita and electricity consumption per capita forecast to increase significantly (by 130% and 26% respectively). The country’s
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power consumption is expected to increase from an estimated 53twh in 2007 to 72twh by the end of the forecast period, assuming 11.5% annual growth in generating capacity. Between 2007 and 2018, we are forecasting an increase in Vietnamese electricity generation of 156.9%, which is top of the range for the Asia Pacific region. This equates to 33.8% in the 2013-2018 period, down from 74.6% in 2007-2012. PED growth is set to decrease from 30.7% in 2007-2012 to 29.9%, representing 79.1% for the entire forecast period. Hydro generation is expected to rise by 47% between 2007 and 2018, with thermal power generation forecast to increase by 98% over the same period. More detail of the long-term BMI power forecasts can be found in the appendix of this report.
Industry Forecast BMI is forecasting Vietnamese real GDP growth averaging 8.03% per annum between 2007 and 2012, with the 2008 forecast being 7.00%. Population is expected to expand from 86.6mn to 92.7mn over the period, with GDP per capita and electricity consumption per capita forecast to increase significantly (by 130% and 26% respectively). The country’s power consumption is expected to increase from an estimated 53twh in 2007 to 72twh by the end of the forecast period, assuming 11.5% annual growth in generating capacity. According the Master Plan Development for the Power sector of Vietnam over the period 2006 to 2025, the electricity sector needs total investment of around US$79.9bn to 2025. Around US$52bn of this amount will be invested in power generation and the rest in the electricity transmission and distribution network. Vietnamese power generation in 2007 was an estimated 62twh, having grown 10% over the 2006 level. BMI is forecasting an average 11.5% annual increase to 108twh by 2012. Vietnam’s thermal generation in 2007 was 33.7twh, or 0.62% of the regional total. By 2012, the country is expected to account for 0.94% of thermal generation. Vietnam’s Deputy Prime Minister Hoang Trung Hai was forced to step in to hasten the development of two major electricity projects. The projects over-ran their scheduled completion date and aggravated Vietnam’s power crisis. The Deputy Prime Minister announced a deadline of May 1 2008 for the Nhon Trach 1 and Ca Mau 2 stations to be brought online. The US$305mn Nhon Trach 1 power plant was built in the Phouc Khanh Commune of the Nhon Trach District, Dong Nai Province. The facility is to be equipped with 450MW capacity combined-cycle technology and uses gas from the Nam Con Son oil field. The US$330mn Ca Mau 2 power plant has 750MW capacity and is also gas-fired. The stations were originally scheduled to be on line in time to ease power shortages during the November 2007- June 2008 dry season. Overall natural gas demand is forecast to rise from 7.7bcm in 2007 to 20.0bcm by 2012, with the proportion used in power generation rising to 40%. We are forecasting gas use in power generation climbing from an estimated 3.4bcm in 2007 to 8.0bcm, with gas-fired power generation climbing from 19twh to 50twh — representing 46% of total generation by the end of the forecast period. Oil will remain a relatively insignificant part of the Vietnamese power-generation mix,
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although its market share is unlikely to change dramatically during the forecast period. It currently accounts for around 1.6% of total generation, falling to a maximum of 1.1% by 2012, thanks to greater gas expansion. We believe there will be no more than 1.2twh of oil-fired power generation by the end of the forecast period. Coal-fired generation accounted for 16.8% of the country’s total generation in 2007, according to BMI estimates. We expect the fuel’s market share to be down to no more than 13.8% by 2012, firing an estimated 15twh at the end of the forecast period. Vietnamese coal consumption is forecast to increase from an estimated 7mn toe to 10mn by 2012. This equates to a rise in demand from 10.5mn to 15.0mn tonnes of hard coal. In the last several years, Vietnam has started to promote the construction of new coal-fired power plants to diversify energy sources and utilise domestic supplies. EVN has outlined plans to build 17 new coal-fired power stations by 2020. Itaco, Vietnam’s industrial park developer, has announced plans to invest US$7.8bn in a coal-fired power plant and port facility. In an interview with Reuters, Itaco’s President Dang Thi Hoang Yen said the plant and port would be located in the country’s southern province of Kien Giang. Construction on the project is scheduled to begin by Q409, with the plant expected to be operational in 2013. Funding for the project is currently being sought from financial organisations and banks, with Itaco planning to issue new shares and bonds to raise funds for the investment. Once operational, the plant will supply electricity to industrial users located at Itaco’s industrial parks, such as the Tan Tao Industrial Park in Ho Chi Minh City. Once these power needs are met, Itaco will sell any surplus power to EVN.
Table: Vietnam Power — Historic Data & Forecasts
2005
2006
2007
2008f
2009f
2010f
2011f
2012f
GDP, US$bn (BMI economics database)
53.1
61.0
71.4
85.2
101.2
121.1
146.9
175.6
Population, mn (BMI economics database)
84.2
85.4
86.6
87.8
89.0
90.2
91.4
92.7
GDP per capita, US$ (BMI economics database)
638
714
825
971
1138
1342
1607
1894
Real GDP growth, % (BMI economics database)
8.4
8.2
8.5
7.0
7.5
8.5
8.5
8.2
51.3
56.4
62.1
68.3
76.5
87.2
95.9
108.4
- growth, % y-o-y (BMI estimates)
16.1
10.0
10.0
10.0
12.0
14.0
10.0
13.0
Electricity consumption, twh (BMI estimates)
45.5
50.1
53.4
56.3
59.6
63.5
67.6
71.9
- growth, % y-o-y (BMI estimates)
6.5
6.3
6.6
5.4
5.8
6.6
6.6
6.3
Electricity imports/(exports), twh (BMI estimates)
(6)
(6)
(9)
(12)
(17)
(24)
(28)
(36)
- Electricity consumption per capita, mwh (BMI estimates)
0.5
0.6
0.6
0.6
0.7
0.7
0.7
0.8
- Regional electricity consumption per capita, mwh (BMI estimates)
1.8
2.0
2.1
2.2
2.3
2.5
2.6
2.7
8,276
9,040
10,032
11,008
11,950
12,926
13,790
14,610
Electricity generation, twh (BP Statistical Review of World Energy, June 2008; BMI forecasts)
- Regional GDP per capita, US$ (BMI estimates) - Electricity cost per capita, US$ (BMI estimates) Primary energy consumption, mn toe (BP Statistical Review of World Energy, June 2008; BMI forecasts)
23
28
31
43
43
44
46
48
13.2
14.8
16.6
18.7
20.8
23.1
25.1
27.6
Primary energy consumption per capita, toe (BMI estimates)
0.2
0.2
0.2
0.2
0.2
0.3
0.3
0.3
Regional energy consumption per capita, toe (BMI estimates)
1.05
1.11
1.15
1.19
1.24
1.30
1.35
1.41
Thermal power generation, twh (BMI estimates)
26.9
30.1
33.7
37.6
43.3
51.4
57.2
66.6
f = BMI forecast. Source: BMI
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Vietnam and Japan have signed an agreement whereby Japan will aid Vietnam in its quest for nuclear power. Japan joins a number of other countries that have already offered nuclear assistance to Vietnam. According to World Nuclear News, the agreement was signed in Hanoi by Do Huu Hao, Vietnam’s vice minister of industry and trade and Masashi Nakano, Japan’s vice minister of economy, trade and industry on May 15. Under the agreement Japan will help plan Vietnam’s nuclear power strategy, provide education and help formulate nuclear safety regulations. Vietnam has been planning to go nuclear since 2006, when the government announced plans to develop a 2GW nuclear power plant by 2020. The country’s nuclear power programme gained new impetus in April 2008, when the government decided to double the planned plants capacity to 4GW. Vietnam’s nuclear scheme comprises two nuclear power plants, with two units each. Construction on the facilities is scheduled to begin in 2015, with completion in 2020. The plants development is to be funded by soft loans and contributions from the contractor awarded the project. Feasibility studies are currently underway and Vuong Huu Tan, the head of the Vietnam Atomic Energy Institute, has announced that the plants could be located in the Ninh Phouc and Ninh Hai districts of Ninh Thuan province. The governments of Vietnam and Laos have signed an agreement on energy co-operation. Under this accord, Vietnam will import about 2GW of electricity from Laos. The governments of Vietnam and Cambodia have also signed an agreement on energy co-operation, through which Vietnam will supply 80-200MW of electricity to Cambodia via a 220 KV transmission line between 2007 and 2008. In the future, when Cambodia builds some hydro-power plants and starts participating in the regional electricity market, Vietnam will buy electricity from Cambodia. The substantial and increasing dependence on gas for power generation is the biggest risk associated with the Vietnamese electricity segment, given price trends and the country’s uncertain production outlook. Between 2007 and 2018, we are forecasting an increase in Vietnamese electricity generation of 156.9%, which is top of the range for the Asia Pacific region. This equates to 33.8% in the 2013-2018 period, down from 74.6% in 2007-2012. PED growth is set to decrease from 30.7% in 2007-2012 to 29.9%, representing 79.1% for the entire forecast period. Hydro generation is expected to rise by 47% between 2007 and 2018, with thermal power generation forecast to increase by 98% over the same period.
This report is abstracted from our latest Vietnam Telecoms and Power reports, which include in depth research on the sectors, full five-year forecasts and a thorough analysis of the competitive landscape. BMI currently covers 16 industries across 60 countries. For further information, or to order a report, please contact:
[email protected]
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t er r71 c chhaappt e
BMI Political BMI Global Global Outlook Assumptions Assumptions
Here, BMI analysts give their view of the state of the world economy and the main challenges faced. In this context, they outline their forecasts for growth, inflation, interest rates and the exchange rate in the US, the eurozone, Japan and China over the forecast period of the report (2008-2012). There are also separate sections on the oil price and commodities markets. The forecasts contained in these sections represent the basic assumptions that underpin the analysis in BMI’s country reports.
Global Feeling The Crunch The major global macroeconomic theme of 2009 will be the effects of the credit crunch on the real economy. While we had already been more pessimistic than most regarding the severity of the credit crunch, we are revising our global forecasts downward across the board. The deleveraging process, the restriction of credit, and global wealth destruction will continue to weigh on both business investment and consumer confidence. Deflation, not inflation, will be the primary concern, as everything from consumer goods to commodities experiences downward pricing pressure.
TABLE: GLOBAL ASSUMPTIONS Real GDP growth (%)
Consumer inflation (year-end)
Interest rates (year-end)
Exchange rates (year-end)
2006
2007
2008f
2009f
2010f
2011f
2012f
2013f
US
3.3
2.2
1.3
-0.2
2.4
3.0
2.8
2.8
Eurozone
2.7
2.6
1.3
0.2
1.6
1.9
1.9
1.9
Japan
2.4
2.1
1.0
1.0
2.1
2.1
2.1
2.1
China
11.1
11.9
10.1
9.7
9.5
9.2
8.8
8.5
World
5.1
4.9
3.8
2.2
3.4
4.2
4.2
4.1
US
2.5
4.1
4.2
2.1
2.3
2.1
2.1
2.3
Eurozone
2.2
2.9
3.6
2.0
1.7
2.0
2.0
2.0
Japan
0.3
0.1
1.5
0.7
0.8
0.9
1.0
1.0
Fed funds rate
5.25
4.25
1.50
1.50
3.00
4.25
4.25
4.25
ECB refinancing rate
3.50
4.00
4.25
3.25
3.75
4.00
4.00
4.00
Japan overnight call rate
0.25
0.50
0.50
0.50
0.75
1.00
1.25
1.25
US$/EUR
1.32
1.46
1.30
1.27
1.29
1.29
1.29
1.25
EUR/US$
0.76
0.68
0.77
0.79
0.78
0.78
0.78
0.80
JPY/US$
119.04
112.00
105.00
110.00
110.00
110.00
110.00
105.00
445.49
400.00
300.00
240.00
280.00
280.00
280.00
280.00
Goldman Sachs Commodity Index (year-end) Metals (GSIN) Agriculture (GSAL) Oil prices (average)
271.68
320.00
270.00
220.00
260.00
260.00
260.00
260.00
Opec basket, US$/bbl
60.87
69.00
101.50
71.50
81.50
81.50
81.50
81.50
Brent Crude, US$/bbl
66.80
72.50
105.00
75.00
85.00
85.00
85.00
85.00
f = BMI forecast, Source: BMI
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Given deteriorating macroeconomic conditions, we highlight the following revisions to our global assumptions. •
We now forecast the US economy to contract in 2009, with a recession having begun in 2008. Our growth forecast for 2008 is 1.3%, with our 2009 forecast at -0.2%. A recession in 2008 was our core scenario; a recovery in 2009 is all but ruled out by the collapse in the US financial system and growing concerns over the availability of credit. We are also forecasting the first consumer recession since 1990-1991, beginning in Q308. The recovery in 2010 is likely to be modest, at 2.4%, as it will take time for credit markets to level out.
•
The eurozone is now projected to eke out growth of 0.2% in 2009, with a slow recovery by 2010 to 1.6%. The European banking sector is proving vulnerable, and some eurozone members have already entered recession. The slowdown in the UK and US, the bloc’s major trading partners, will hurt eurozone exporters. We think that the US dollar will continue its comeback against the euro, finishing 2009 at US$1.27/EUR.
•
The major Asian economies will also weaken. We are forecasting 9.7% growth for China in 2009, down from 10.1% in 2008. Japan is set to see growth flatline to 1.0% in both 2008 and 2009.
•
Commodities will bear the brunt of declining global growth. Our 2009 average Brent crude oil price forecast has been slashed from US$95.00/bbl to US$75.00/bbl, and our commodities team believes that the risks are balanced to the downside. Likewise, metals and softs prices are projected to dip significantly from their recent highs.
•
These economic conditions, and declining inflation, will force the monetary authorities to lower interest rates. We continue to project a 1.50% Fed funds rate forecast by the end of 2008 from 2.00%, but now see rates remaining on hold through the end of 2009. Likewise, we believe that the European Central Bank will reduce its refi rate from 4.25% to 3.25% by the end of 2009. With rates already at a low 0.5%, the Bank of Japan will remain on hold. Economic recovery will see interest rates turn higher by 2010.
United States Heading Deeper Into Negative Territory US Industrial Production (% chg y-o-y, 3mma)
8.0
It is becoming increasingly clear that the US has entered recession, as we had expected. With the global credit crunch beginning to affect the real economy, there is a very real chance that the present economic downturn could be the worst that the US has experienced since the early 1980s. By the end of 2009 the US should be in better shape than its developed world counterparts, thanks to accommodative monetary policy and a more flexible economy, but the country will still have experienced a major economic slowdown. There are also risks that the economy will remain sluggish well into 2010.
6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0
Source: BMI
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Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
US Industrial Production (% Chg y-o-y) Mar-00
-8.0
The Recession Is Here
Our core view of a US recession in 2008 still holds, but the strong preliminary growth reading for Q208 (of 3.3% quarter-on-quarter [q-o-q] annualised) has reduced the likeliBusiness Monitor International Ltd
gLOBAL aSSUMPTIONS
hood that the US will experience two consecutive quarters of annualised growth in the calendar year. The surprise revision of Q407 growth into negative territory (-0.2% q-o-q annualised), however, makes possible a recession as defined by the National Bureau of Economic Research, which takes into account not just the technical definition, but also how far employment, industrial production and other factors fall from their cyclical peaks. Overall, we stand by our view that the US will post a positive growth figure in 2008, and we are fairly comfortable with our recently revised 1.3% outlook (previously, it was 0.9%, but the positive Q208 data needs to be taken into account). In 2009, however, we see weaker growth than we had previously envisaged, with real GDP shrinking by 0.2%. The negative growth forecast for 2009 is explained by our view that the US consumer and business investment are likely to be experiencing what might be called a ‘domestic recession’. The consumer is clearly rolling over, domestic investment is declining, and imports are falling. Another way of putting it is that the rest of the world, and to an extent the government, are providing the major growth factors – and the rest of the world is also in economic trouble. The biggest danger to any economic forecast is the credit crunch and the deleveraging that is accompanying it. The eventual effects are difficult to forecast using traditional methods, so we would rather discuss potential effects via three scenarios. Our baseline recession case has the credit crunch easing by mid-2009, improving the chances of an economic rebound, and assisted by the improving export sector – but the deleveraging process will hurt both consumer spending and business investment. We put an approximately 50% chance of this scenario occurring. If the effects of the credit crunch turn out to be milder, and the crunch itself shorter than we expect, the economy could grow by as much as 2.0% next year, as the US cruises by its foreign competitors. This benign scenario is compatible with our view that there will not be a global recession. We attribute approximately 20% probability to this scenario. However, if the credit crunch turns out to be severe, we would assume that three or more quarters of growth would be deeply negative going into 2009, putting downside pressure on our growth forecasts. This would include a continued deterioration of the housing market into 2010, as well as the failure of more major financial institutions. In any case, the good news for the US is that it has experienced the symptoms of the credit crunch earliest, and that policymakers and businesses alike have had a year or more to react. This contrasts with economies such as the eurozone, UK and Japan, all of which posted disappointing growth figures in Q208 and which now look to be on the precipice of a recession, if not there already.
Eurozone A House Divided The economic outlook for the eurozone is deteriorating. We believe that with inflation and growth beginning to come down, the European Central Bank (ECB) will have no choice but to cut interest rates. Unfortunately, the ECB is behind the rate-cutting curve compared with the US Federal Reserve, which means that relief is unlikely to come quickly enough Business Monitor International Ltd
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to avert a recession. Our 0.9% real GDP growth forecast for the eurozone in 2009 has been revised downward to 0.2%. The bloc’s economy contracted by 0.2% q-o-q in Q208 and, if anything, the outlook has darkened since then.
Losing Faith
Eurozone – Confidence Indices 10
Retail
Consumer
Industrial
5
Firstly, virtually every economic indicator looks weak. Whether you are looking at confidence, factory orders, or unemployment, the outlook is not bright. Compounding the danger is the deterioration of financial markets, which will restrict credit growth and hurt both investment and private consumption. Confidence indices for the eurozone – for retailers and industrial firms, as well as for consumers – peaked at the onset of the credit crunch in July 2007, and have been in freefall since then.
0 -5 -10 -15 -20
Apr-08
Apr-07
Apr-06
Apr-05
Apr-04
Apr-03
Apr-02
Apr-01
Apr-00
Apr-99
Apr-98
Apr-97
Apr-96
Apr-95
-25
Source: Eurostat
Secondly, the eurozone’s two main trading partners – the US and the UK – are clearly in trouble. In fact, we think that both may already be in recession, and it is clear that the consumer is economising in both countries. This is bad news for European exporters. Thirdly, as bad as the US Congress has been, the eurozone is showing signs of even greater political splintering when it comes to taking action on rescuing the economy. Further policy uncertainty is likely to hurt the economy.
Joblessness Heading Higher Eurozone – Unemployment Rate (%)
12.0
7.0 Eurozone Ireland, RHS
11.5
Spain
6.5
11.0
6.0
10.5
5.5
10.0 9.5
5.0
9.0
4.5
8.5
4.0
8.0
3.5
7.5 Jun-08
Feb-08
Oct-07
Jun-07
Feb-07
Oct-06
Jun-06
Feb-06
Oct-05
Jun-05
Feb-05
Oct-04
Jun-04
Feb-04
Oct-03
Jun-03
Feb-03
Oct-02
Jun-02
Oct-01
Feb-02
Feb-01
Oct-00
3.0 Jun-01
7.0
Fourthly, further divergences within the eurozone will complicate policy decisions. While German unemployment remains low, it has begun to skyrocket in Spain (up from a low of 8.0% in June 2007 to 11.3% in August 2008) and in Ireland (up from 4.6% to 6.2% over the same period). We also believe that overall eurozone unemployment has bottomed, and should continue to rise over the coming quarters. Fifthly, the European banking sector appears to be in trouble. With the short-term money markets cut off, banks depending on a borrow-short-lend-long business model are in peril. We thus believe further bank failures are ahead. Although the ECB has moved quickly to provide new short-term liquidity, monetary policy still seems to be tight. M1 money supply growth has been trending down since the end of 2005, and its current year-on-year (y-o-y) growth rate the lowest since the inception of the eurozone (0.2% y-o-y). With risks to the financial system mounting, M3 growth – which is looked at closely by the ECB – is likely to begin coming down as well.
Source: Eurostat
M3 Growth Set To Slow
Eurozone – Money Supply Growth (% chg y-o-y) 16 M1 Growth
M3 Growth
14 12 10 8 6 4 2
68
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jul-05
Jan-06
Jan-05
Jul-04
Jul-03
Jan-04
Jan-03
Jul-02
Jul-01
Source: Eurostat
Jan-02
Jan-01
Jul-00
Jul-99
Jan-00
Jan-99
0
The caveat to this otherwise negative outlook is that the eurozone has proved more resilient over the past two years than we have expected, and it may again prove us wrong over the next year or so. Inflation has probably peaked, which will allow the ECB to cut rates (we have pencilled in rate cuts to 3.25% by the end of 2009, from 4.25% as of October 2008). Our view that oil prices are heading lower will help eurozone Harmonised Index of Consumer Prices (HICP) inflation tremendously. Furthermore, high oil prices have contributed heavily to the decline in consumer and business confidence, and it stands to reason that consumers could feel less squeezed if and when oil prices drop. Owing to these factors, we are projecting that growth could recover to 1.5-2.0% by 2010.
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gLOBAL aSSUMPTIONS
Japan Japan In 2008 And 2009 Amid a weakening global economy, we are forecasting Japanese real GDP growth of only 1.0% in 2008 and 2009, compared with 2.1% in 2007. Indeed, Japan’s economy shrank by an annualised rate of 3.0% in Q208, potentially paving the way for a technical recession. While Japan’s exports – which have generally been the main driver of growth – should be cushioned by demand from China, a significant proportion of these shipments ultimately depend on demand from the US. This is because many Japanese firms have shifted assembly to China over the past decade. In October 2008, the Bank of Japan (BoJ)’s quarterly Tankan business survey showed that businesses were very gloomy, with the manufacturers’ sentiment index turning negative for the first time since 2003. In addition, domestic demand will remain subdued, with consumer confidence at its lowest level since current record began in 1982. The structural reason for this is that major companies have increasingly relied on ‘temporary’ workers (i.e., those on part-time, fixed-term or temp-agency contracts) on much lower pay to replace their higher-salaried ‘permanent’ employees who had been retired or laid off. More recently, however, rising energy prices have hurt sentiment, and Japan’s unemployment rate rose to 4.2% in August 2008, from 3.8% a year earlier.
Worst Performance In Years
Japan – Quarterly Real GDP (% chg, Annualised Rate) 8 6 4 2 0 -2
1-Apr-08
1-Apr-07
1-Oct-07
1-Apr-06
1-Oct-06
1-Apr-05
1-Oct-05
1-Apr-04
1-Oct-04
1-Apr-03
1-Oct-03
1-Apr-02
1-Oct-02
1-Apr-01
1-Oct-01
-4
1-Oct-00
As regards inflation, core CPI rose to a 10-year high of 2.4% y-o-y in July and August 2008, meaning that Japan finally appears to have extricated itself from a decade of deflation. However, this mainly reflected high energy prices, which are now falling rapidly. While the likelihood of an economic slowdown would appear to point towards an interest rate cut by the BoJ, we believe that the uncertain inflationary outlook would make this risky. We thus believe that the BoJ will keep the overnight call rate (currently 0.50%) on hold for the rest of 2008 and for the whole of 2009 – although we cannot completely preclude a rate cut, given the current weak macreoeconomic outlook.
-6
Source: BMI
A major unknown is whether Prime Minister Taro Aso will be replaced following the next general election, which must be called by September 2009, but which could emerge before the end of 2008. Even if the opposition Democratic Party were to win, Japan would probably have a shaky government, ill-positioned to enact the major reforms needed to reinvigorate Japan’s economy. Over the long term, Japan could raise its potential growth rate to above 2.0% by deregulating its economy, introducing greater competition and allowing more immigration. Nonetheless, Japan’s outlook is clouded by two main factors. One is the rising public debt-to-GDP ratio, which is now around 150%, the highest in the developed world. The new government appears to be backtracking from commitments to attain a primary surplus by FY11/12. Indeed, the higher consumption taxes and other levies necessary to achieve this could hurt growth. The second and bigger problem is Japan’s rapidly ageing and slowly declining population, which could fall below 90mn by 2055, according to the health ministry. Although the government is planning incentives to boost birth rates, the decline will be difficult to reverse, meaning that Japan will have to import millions of workers from abroad to keep its workforce young. However, immigration is politically unpopular, limiting this Business Monitor International Ltd
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as a viable solution. Japan will therefore have to maximise automation and technological innovation to maintain productivity amid a greying population.
China Cooling Down China’s red hot economy continues to gradually cool on the back of a weaker performance of exports and official monetary tightening efforts, with real GDP growth slowing for the fourth consecutive quarter in Q208 to 10.1% y-o-y – its weakest outturn since Q405. This has forced us to revise down our 2008 economic growth forecast for China, and we now expect full-year growth to come in at 10.1%, down from our original 10.7% prediction. Moreover, with economic growth now appearing to have peaked, marking an end to China’s most recent boom period, we have also revised down our average growth forecast over the next five years from 9.7% to 9.5%, with growth now expected to gradually slow to 8.8% by 2012.
Increasing Cause For Concern China – Real GDP (% chg y-o-y)
4.5 HICP
Core
Ex-Energy
4.0 3.5 3.0 2.5 2.0 1.5
While tighter lending conditions have continued to play their part in China’s measured economic slowdown, it appears that they have become resigned to being a supporting act, with the lead role played by net exports. The surging cost of imports pushed the country’s import bill higher by 32.4% y-o-y in Q208, accelerating from the previous quarter’s 28.7% expansion. Meanwhile, a stronger yuan and softer demand from overseas concomitantly continued to slow export growth, to 21.4% y-o-y from 22.3%. These factors combined to drag the overall trade surplus lower by 12.2% y-o-y, compounding the 10.9% narrowing witnessed in the first quarter of the year.
1.0
Jul-08
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Souce: National Bureau of Statistics
Jan-05
Jul-03
Jan-04
Jul-02
Jan-03
Jul-01
Jan-02
Jul-00
Jan-01
Jul-99
Jan-00
Jan-99
0.5 0.0
However, this is not to say that domestic economic activity is giving no cause for concern, as highlighted by the People’s Bank of China (PBoC) decision in September 2008 to cut interest rates for the first time since January 2002 and reduce reserve requirement ratios for banks for the first time since November 1999. Indeed, latest data revealed that industrial output growth slowed to 12.8% y-o-y in August, which – excluding the months of January and February, when factory closures for the Lunar New Year distort output statistics, making them very volatile – marked the lowest level since August 2002. The sharp fall from the 14.7% growth registered in July (which in itself represented a marked deceleration from the previous month’s 16.0% expansion) was blamed largely on the closure of factories for the Olympic Games, aimed at improving the air quality in Beijing, but the central bank’s most recent monetary easing has suggested that the slowdown may not be a temporary phenomenon, and could in fact be more structural in nature. If this is the case, it bodes ill for retail sales and fixed asset investment (both of which held up well in August, growing by 23.2% y-o-y and 27.4%, respectively), which in turn spells significant risks to headline GDP growth – especially given the uncertain outlook for exports. Yet, with headline consumer price inflation continuing to slow back towards the central bank’s 3.0% comfort level, policymakers could well be tempted to ease monetary conditions further in the coming months in order to bolster slowing economic growth, and thus we maintain our full-year real GDP growth forecasts of 10.1% for 2008 and 9.7% for 2009. However, we recognise that these may be subject to downward revision if growth momentum shows signs of slowing significantly.
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gLOBAL aSSUMPTIONS
Commodities Slowing Global Economy Will Drag Down Commodity Prices We have been bearish commodities since the middle of 2008, believing that slower global economic growth and a stronger US dollar would weigh heavily on the global commodity complex. This view continues to play out as a string of poor data emerges from both sides of the Atlantic, and the US dollar continues to strengthen. As such we have downwardly revised our end-2008 and end-2009 price estimates for the Standard & Poor’s-Goldman Sachs Agricultural and Industrial Metals indices. We now expect the metals index to decline to 300 by end-2008 and to 240 by end-2009. Similarly, we forecast the agricultural index to decline to 270 in 2008 and 220 in 2009. We do, however, believe that both indices will pick up in 2010.
Energy Global economic fundamentals have continued to deteriorate as the financial crisis spreads through to the real economy. This dynamic is expected to weigh on the global Brent To US$50.00/bbl?
Front-Month Brent Crude, US$/bbl 160 140 120 100 80 60 40 20
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
0 Jan-97
commodity complex with a particularly strong effect on oil, which we believe could head to US$50.00/bbl by Q309. Indeed, economic activity in both the G7 and emerging markets (EM) continues to disappoint as a US-led banking crisis, combined with aggressive EM monetary tightening in response to acute inflation pressures earlier in the year, feeds through to the general economy. Combined with an increase in OPEC and non-OPEC oil supplies projected for 2008 and 2009, weaker demand for oil should encourage a healthy buildup of reserves and thus a decline in the price of oil. This view is also supported by our assumptions for the US dollar, which we see strengthening to US$1.3000/EUR in 2008 and to US$1.2700/EUR by end-2009. Such a move would help weaken the price of the general commodity complex in the medium term. As such, we have downwardly revised the average price of Brent crude to US$105.00/bbl in 2008 (from US$110.00/bbl) and US$75.00/bbl in 2009 (from US$75.00/bbl).
Source: BMI
Metals Both precious and base metals have declined in recent months and we expect this trend to continue until the end of 2009. Slower economic growth, combined with weak housing markets globally, will weigh on precious and industrial metals alike. Gold may be poised for further losses over the coming months, and platinum and palladium have both seen incredibly sharp declines since their peak, partially on the back of a deteriorating global auto market. Industrial metals such as copper, aluminium, zinc, lead and nickel have all witnessed sharp declines in 2008, as global industrial production has declined. We expect this trend to remain in place and forecast the Standard & Poor’s-Goldman Sachs Industrial Metals index to decline to 300 by end-2008 and to 240 by end-2009.
Agriculture Grains and softs also look weak on both a technical and fundamental basis, although we believe they will hold up slightly better than metals. Indeed, global stock levels for the majority of these commodities have been drawn down in recent years on the back of strong Business Monitor International Ltd
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demand. Emerging market economies, as well as their populations, continue to grow at a rapid pace. That said, we expect weakening demand, higher yields, and larger harvests to help bring down the price of these commodities over the next two years. We project the Standard & Poor’s-Goldman Sachs Agricultural Index to decline to 270 by end-2008 and to 220 by end-2009 before picking up in 2010. Having said that, many soft commodities such as rice, cocoa and coffee are subject to government policy intervention, which could put further upside pressure on prices.
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