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production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Q2 2012 www.businessmonitor.com VIETNAM BUSINESS FORECAST REPORT INCLUDES 10-YEAR FORECAST TO 2021 Published by BUSINESS MONITOR INTERNATIONAL LTD Includes 10-year forecasts to end-2017 Macro Stability Going Forward ISSN 1745-0764 Published by Business Monitor International Ltd Copy Deadline: 10 February 2012 86.7 1,357 976 5.9 Nominal GDP, EURbn [3] GDP per capita, US$ [3] GDP per capita, EUR [3] Real GDP, % chg y-o-y [3] 6.5 6.4 www.businessmonitor.com 19.6 Foreign reserves ex gold, US$bn [13] 2.6 21.2 -4.8 -6.6 -12.6 -17.0 114.6 97.5 -3.4 -4.6 27,135.15 21,035.00 11.0 13.0 8.5 5.0 89.7 5.1 35.0 5.0 6.5 5.7 66.8 5.8 1,172 1,512 105.2 2,854,800 135.7 2012f 2.6 23.5 -4.1 -6.3 -11.6 -17.8 127.6 109.8 -2.7 -4.2 26,000.00 20,800.00 9.0 11.0 5.0 5.0 90.7 5.4 34.6 5.0 6.4 5.8 66.3 6.5 1,356 1,694 122.9 3,195,190 153.6 2013f 2.7 26.9 -3.3 -5.8 -10.5 -18.5 142.2 123.7 -2.5 -4.3 25,706.25 20,565.00 8.0 10.0 5.5 5.0 91.6 6.0 34.2 5.0 6.2 6.0 65.5 7.3 1,537 1,921 140.7 3,617,838 175.9 2014f 2.8 31.3 -2.6 -5.2 -9.5 -19.1 158.4 139.3 -2.2 -4.3 25,412.50 20,330.00 7.0 9.0 5.0 5.0 92.4 6.0 33.8 5.0 6.1 6.0 64.7 7.3 1,736 2,170 160.5 4,077,805 200.6 2015f 3.0 37.1 -1.9 -4.3 -8.6 -19.6 176.5 156.8 -1.9 -4.4 25,125.00 20,100.00 7.0 8.0 5.0 5.0 93.3 6.0 33.3 5.0 6.0 6.0 63.9 7.4 1,961 2,452 183.0 4,597,168 228.7 2016f 3.3 44.4 -1.2 -3.1 -7.7 -20.0 196.6 176.6 -1.7 -4.4 25,000.00 20,000.00 7.0 8.0 5.0 5.0 94.1 6.0 32.9 5.0 5.8 6.0 63.0 7.4 2,203 2,754 207.3 5,183,695 259.2 2017f 3.6 53.7 -0.6 -1.6 -6.9 -20.2 219.1 198.9 -1.7 -4.8 25,000.00 20,000.00 7.0 8.0 5.0 5.0 94.9 6.0 32.5 5.0 5.7 6.0 62.2 7.4 2,464 3,080 233.8 5,846,181 292.3 2018f 3.9 65.3 0.1 0.3 -6.1 -20.2 244.1 224.0 -1.6 -5.3 25,000.00 20,000.00 7.0 8.0 5.0 5.0 95.6 6.0 32.1 5.0 5.6 6.0 61.4 7.4 2,758 3,447 263.8 6,594,585 329.7 2019f 4.3 79.6 0.7 2.6 -5.3 -19.9 272.0 252.2 -1.6 -5.9 25,000.00 20,000.00 7.0 8.0 5.0 5.0 96.4 6.0 31.6 5.0 5.5 6.0 60.6 7.5 3,089 3,861 297.6 7,440,183 372.0 2020f 4.7 97.4 1.3 5.5 -4.6 -19.2 303.2 284.0 -1.4 -5.7 25,000.00 20,000.00 7.0 8.0 5.0 5.0 97.0 6.0 31.2 5.0 5.3 6.0 59.7 7.5 3,461 4,326 335.8 8,395,743 419.8 2021f Notes: e BMI estimates f BMI forecasts Base year 2000; Includes Investment Income flows up until 2004; Sources: Asian Development Bank, General Statistics Office World Bank/UN/BMI; General Statistics Office; IMF; State Bank of Vietnam; BMI; Ministry of Finance; 10 Asian Development Bank, General Statistics Office from 2010; 11 Asian Development Bank, General Statistics Office from 2015; 12 Asian Development Bank, General Statistics Office from 2020; 13 Asian Development Bank 2.7 -4.7 Current account, % of GDP [13] Import cover, months g&s [13] -5.7 Current account, US$bn [13] -12.6 102.9 Goods and services imports, US$bn [2,11] Balance of trade in goods and services, % of GDP [13] 87.7 Goods and services exports, US$bn [2,10] -9.3 -2.6 Budget balance, % of GDP [9] Balance of trade in goods and services, US$bn [2,12] -3.1 Budget balance, US$bn [9] 28,708.10 Exchange rate VND/EUR, ave [8] 15.0 Central Bank policy rate, % eop [7] 20,653.31 19.5 Lending rate, %, ave [6] Exchange rate VND/US$, ave [8] 18.6 5.0 88.8 4.9 Consumer prices, % y-o-y, ave [1,5] Unemployment, % of labour force, eop [5] Population, mn [4] Fixed capital formation, VND real growth % y-o-y [3] 35.2 Government final consumption, VND real growth % y-o-y [3] Fixed capital formation, % total GDP [3] 5.9 Government final consumption, % of GDP [3] Private final consumption, VND real growth % y-o-y [3] 66.8 2,487,631 Nominal GDP, VNDbn [3] Private consumption, % of GDP [3] 120.4 2011e Nominal GDP, US$bn [3] VIETNAM – MACROECONOMIC INDICATORS VIETNAM Q2 2012 Business Monitor International Ltd Contents Executive Summary Core Views Major Forecast Changes Key Risks To Outlook Chapter 1: Political Outlook SWOT Analysis BMI Political Risk Ratings Domestic Politics Further Reforms Crucial In Reinforcing Confidence In The CPV .8 Despite growing concerns that recent political uprisings in the Middle East would spread towards other authoritarian regimes including Vietnam, we believe that the risk of a major political upheaval in Vietnam remains remote in the medium term We note that there has been a decisive shift in the Communist Party of Vietnam (CPV)'s direction towards allowing for democratic reforms and addressing rampant corruption We believe that further reforms will be crucial in reinforcing confidence in the CPV's leadership over the coming years TABLE: VIETNAM POLITICAL OVERVIEW Long-Term Political Outlook 10 Key Political Challenges Over The Coming Decade 10 Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US Scenarios For Political Change 11 Chapter 2: Economic Outlook 13 SWOT Analysis 13 BMI Economic Risk Ratings 13 Economic Activity 14 Global Headwinds To Depress Real GDP Growth 14 Vietnam's real GDP growth is expected to remain subdued at 5.8% in 2012, in line with our view that external demand will cool over the coming months We expect net exports to remain a major drag on growth before we see a recovery in external demand in late 2012 The threat of a severe credit squeeze due to growing risk aversion towards heavily indebted emerging markets places further downside risk to our outlook on Vietnam's economic growth TABLE: ECONOMIC ACTIVITY 14 Surge In Headline CPI Transitory, View On Rate Cuts Holds 16 The latest surge in month-on-month headline consumer price inflation (CPI) from 0.5% in December to 1.0% in January should prove to be transitory, in our view TABLE: MONETARY POLICY 16 Balance Of Payments 17 Global Economic Headwinds Cloud Outlook For BoP 17 Vietnam's balance of payments position remains vulnerable to global economic headwinds in 2012 While the trade deficit has narrowed significantly in recent months, our conviction that external demand will continue to cool in 2012 means that we see a widening of the current account deficit Meanwhile, risks of a hard landing in China and a credit squeeze from European banks continue to cloud the outlook for the financial account TABLE: CURRENT ACCOUNT 18 Fiscal Position To Deteriorate On Economic Headwinds .19 Stubborn global economic headwinds are expected to undermine the Vietnamese government's efforts to reduce the country's persistent budget deficit in the near term We expect the budget deficit to widen from an expected 2.6% of GDP in 2011 to 3.4% in 2012 before seeing an improvement to 2.8% in 2013 Over the longer term, a lack of commitment by the government to reduce welfare subsidies means that we remain skeptical towards the government's plan to achieve a balanced budget by 2020 TABLE: FISCAL POLICY 20 Business Monitor International Ltd www.businessmonitor.com VIETNAM Q2 2012 Chapter 3: 10-Year Forecast 23 The Vietnamese Economy To 2021 23 Rebalancing Needed To Maintain High Growth 23 We remain positive about Vietnam's growth prospects over the next 10 years, as seen in our firm growth projections, averaging 7.1% over 2012-2021 This is because we expect a shift in government policy to accommodate the effects of a less conducive global environment and a need to avoid overheating tendencies such as high inflation and a large trade deficit, which have characterised the Vietnamese economy in recent years TABLE: LONG-TERM MACROECONOMIC FORECASTS 23 Chapter 4: Business Environment 25 SWOT Analysis 25 BMI Business Environment Risk Ratings 25 Business Environment Outlook 26 Inroduction 26 Institutions 26 TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26 TABLE: BMI LEGAL FRAMEWORK RATING 27 TABLE: LABOUR FORCE QUALITY 28 Infrastructure 29 TABLE: TRADE AND INVESTMENT RATINGS 29 TABLE: VIETNAM TOP EXPORT DESTINATIONS 30 Market Orientation Foreign 31 Tax Regime 32 Operational Risk 33 Chapter 5: Key Sectors 35 Autos 35 Executive Summary 35 TABLE: VIETNAM AUTOS SECTOR – HISTORICAL DATA AND FORECASTS 36 Industry Forecast 36 Food & Drink 37 Executive Summary 37 Industry Forecast – Food 38 TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS 39 TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES HISTORICAL DATA & FORECASTS 40 Industry Forecast – Drink 40 TABLE: MASS GROCERY RETAIL VALUE SALES BY FORMAT – HISTORICAL DATA & FORECASTS 42 Other Key Sectors 44 TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 44 TABLE: OIL AND GAS SECTOR KEY INDICATORS 44 TABLE: PHARMA SECTOR KEY INDICATORS 44 TABLE: TELECOMS SECTOR KEY INDICATORS 45 TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 45 TABLE: FREIGHT KEY INDICATORS 45 Chapter 6: BMI Global Assumptions 47 Global Outlook 47 Still Holding Together 47 TABLE: GLOBAL ASSUMPTIONS 47 TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST 48 TABLE: REAL GDP GROWTH CONSENSUS FORECASTS 48 TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 49 www.businessmonitor.com Business Monitor International Ltd Executive Summary Core Views Vietnam's real GDP growth is expected to remain subdued at 5.8% Major Forecast Changes in 2012 before we see a recovery in external demand, which is We have downgraded our real GDP growth forecast from 6.3% to expected to come only in late 2012 The threat of a severe credit 5.9% for 2011 and we expect a further slowdown in growth to 5.8% squeeze due to growing risk aversion towards heavily indebted in 2012 emerging markets places further downside risk to our outlook on Vietnam's economic growth Key Risks To Outlook Downside Growth Risks From Rising Commodity Prices: Should The recent surge in month-on-month headline consumer price commodity prices continue to trend higher in 2012, we could see inflation (CPI) from 0.5% in December to 1.0% in January should the central bank adopting a more hawkish stance on monetary prove to be transitory, in our view We are convinced that headline policy Delays in normalising interest rates would present significant CPI will resume its downward trajectory over the coming months, downside risks to economic growth given the fact that fundamentals with regards to money supply and commodity prices remain unchanged Devaluation Risks From Persistent Trade Deficit: Despite multiple devaluations since late 2009, Vietnam's trade deficit has witnessed Despite encouraging evidence of a steady improvement in Vietnam's a steady improvement However, should we fail to see a sustained balance of payments position in recent months, we are keeping a improvement in the trade balance, we would not be surprised to see cautious stance on our outlook for 2012 Given that we are beginning the Vietnamese dong coming under further selling pressures to see signs of a hard landing for the Chinese economy in 2012, we see a potential decline in foreign direct investment inflows from China and Hong Kong Business Monitor International Ltd www.businessmonitor.com Chapter 1: Brief Methodology Political Outlook SWOT Analysis Strengths BMI Political Risk Ratings The Communist Party of Vietnam remains committed to market- Vietnam's short-term political risk rating of 76.9 reflects a largely stable oriented reforms and we not expect major shifts in policy direction political system, kept in place by the ruling Communist Party of Vietnam's over the next five years T he one-party system is generally conducive monopoly on power While public expressions of discontent have so far to short-term political stability been limited, slower growth and high inflation pose a threat to stability Relations with the US have witnessed a marked improvement, and in the near term However, we see one-party rule as inherently unsus- Washington sees Hanoi as a potential geopolitical ally in South East tainable in the longer term, and thus accord Vietnam a rating of 52.8 in Asia our long-term political risk ratings, due mainly to a score of 27.6 in the Weaknesses 'characteristics of polity' rating S-T Political Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent Opportunities The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system Threats Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands Business Monitor International Ltd Rank Trend Singapore 95.4 Brunei Darussalam 90.6 Hong Kong 86.0 Taiwan 83.3 Laos 80.4 Malaysia 79.0 China 78.5 Sri Lanka 78.3 South Korea 77.7 Vietnam 76.9 10 Indonesia 73.5 11 North Korea 72.7 12 Philippines 67.9 13 Cambodia 67.3 14 Bangladesh 67.1 15 Thailand 65.4 16 India 64.0 17 Bhutan 61.0 18 Myanmar 56.5 19 Papua New Guinea 51.9 20 Pakistan 45.2 21 Regional ave 73.1 / Global ave 65.7 / Emerging markets ave 63.3 L-T Political Rank South Korea 84.2 Singapore 80.6 Taiwan 75.4 Hong Kong 72.9 China 67.4 Malaysia 67.2 India 67.1 Brunei Darussalam 65.6 Philippines 62.8 Bangladesh 62.6 10 Sri Lanka 60.2 11 Indonesia 59.0 12 Cambodia 58.9 13 Thailand 58.8 14 Papua New Guinea 57.7 15 North Korea 55.2 16 Vietnam 52.8 17 Pakistan 52.7 18 Bhutan 51.0 19 Laos 44.5 20 Myanmar 33.7 21 Regional ave 62.0/ Global ave 63.3 / Emerging markets ave 59.7 www.businessmonitor.com = = = = = = = = = = = = = = = = = = = = = Trend = = = = = = = = = = = = = = = = = = = = = VIETNAM Q2 2012 Domestic Politics Further Reforms Crucial In Reinforcing Confidence In The CPV BMI VIEW: Despite growing concerns that recent political uprisings in the Mid- Libya and Egypt, could in turn, fuel political dissidents' desire for reforms in Vietnam Indeed, the threat of social instability, which is why we are keeping a score of 57.5 (out of a score of 100) for the 'Social Stability' subcomponent of our political risk rating This translates into a score of 76.9 for our overall short-term political risk rating for Vietnam However, we believe that concerns of a major political upheaval are unwarranted, at least for now dle East would spread towards other authoritarian regimes including Vietnam, we believe that the risk of a major political upheaval in Vietnam remains remote in the medium term We note that there has been No Imminent Risks Of Unrest Short-Term Political Risk Rating 100 STPR 95 a decisive shift in the Communist Party of Vietnam (CPV)'s direction 90 towards allowing for democratic reforms and addressing rampant cor- Regional Average 85 ruption We believe that further reforms will be crucial in reinforcing confidence in the CPV's leadership over the coming years 80 75 70 65 60 Myanmar Cambodia Thailand Philippines Indonesia Vietnam Laos Brunei 50 Malaysia 55 Singapore The need for political reforms has become increasingly crucial in reinforcing public confidence in Vietnam's single-party system of government, which the ruling Communist Party of Vietnam (CPV) has fervently tried to defend over the decades In light of the recent political turmoil in the Middle East and large-scale protests against authoritarian governments in countries such as China and Russia, international political observers are beginning to warn of a similar political uprising in Vietnam From our perspective, we believe that examples of successful uprisings in the Middle East, which have toppled authoritarian governments and paved the way for democratic reforms in the case of Source: BMI Conditions In Vietnam Are Starkly Different We note that several factors separate Vietnam from countries TABLE: VIETNAM POLITICAL OVERVIEW System of Government Single-Party Socialist Republic Head of State President Truong Tan Sang (serving first five-year term) Head of Government Prime Minister Nguyen Tan Dung (serving first five-year term) Last Election Parliamentary – May 2011 Presidential – July 2007 Composition Of Current Government Communist Party of Vietnam Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV Its most important members are: Party General Secretary Nong Duc Manh, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung 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 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 76.9 BMI Structural Political Risk Rating 52.8 Source: BMI www.businessmonitor.com Business Monitor International Ltd POLITICAL OUTLOOK that have experienced some form of major political uprising in recent years Firstly, in terms of the direction of the CPV's economic policies over the past decade, we have witnessed a great amount of effort from the government in ensuring that the lower-income population has been given a fair chance to participate in the country's growth Although the poverty rate in Vietnam remains relatively high, we have witnessed a significant improvement from 22.0% in 2005 to 9.5% in 2010 A Social Stability Remains A Concern Short-Term Political Risk Rating 100 95 90 85 80 75 70 65 60 Policy Continuity Security/External Threats Social Stability Policy-Making Process 55 50 government's agenda in 2012 Indeed, success in tackling corruption would represent a major step in reinforcing confidence in the CPV's leadership and this would, in turn, boost the CPV's credibility in pushing forward with further political reforms over the coming years A Decisive Shift Towards Further Reforms In recent years, we have witnessed a decisive shift in the CPV's policymaking process whereby senior conservative members within the politburo have taken a step back from economic policy decisions and more towards a supervisory role within the CPV The National Assembly – a 493-member unicameral body that is re-elected every five-years – has also been given more power in setting the direction of the country's economic policies We see these developments as a positive sign that the government will allow for more economic reforms while taking further steps in the direction of democratic reforms More importantly, we believe that these reforms will be crucial for the country in extending its economic footprint globally and we expect further progress on this front over the coming years Source: BMI large proportion of the lower-income groups have also benefited from the government's economic policies in recent years The agricultural sector, which employs a dominating share of the country's low-skilled workers, continues to enjoy considerable amount of financial support from the government in terms of preferential lending rates from state-owned banks Governmentled investment in the development of the agricultural sector has also helped to improve productivity and boost rural incomes Although such policies have contributed to Vietnam's deteriorating fiscal position, these subsidies have at least helped to mitigate unrest among the lower-income groups Secondly, we note that although land rights violations and corruption remain rampant in Vietnam and have been a key source of dissent against the government, we have at least witnessed a strong commitment by the CPV to address these problems in recent years According to the Transparency International 's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries, an encouraging improvement from the country's previous ranking of 116 out of 178 countries in 2010 The increase in incidents of public unrest globally is expected to put further pressure on the CPV to speed up efforts on this front and we believe that addressing corruption will remain on top of the Business Monitor International Ltd www.businessmonitor.com VIETNAM Q2 2012 sales were up by 40% over the first eight months of the year As of September 2011, GM Vietnam had sold 7,353 CBUs ytd with a market share of 9.1% This puts the company in third place in the Vietnamese market, behind Thaco and Toyota Vietnam The company's best-selling model is currently the compact Cruze, which has sold 2,009 CBUs in the year to September 2011 Industry Forecast Sales Vietnam's new vehicles market is characterised by fluctuating tariffs, which often make it hard to identify sales patterns Sales of domestically produced vehicles were affected by an increase in vehicle ownership tax in 2008 After the tax doubled to 10%, the Vietnam Automobile Manufacturers Association (VAMA) reported that average sales for the last four months of that year dropped by around half compared with the first eight months of 2008 The registration tax was raised again on January 2009 to 12% in Hanoi and 15% in Ho Chi Minh City Furthermore, the special consumption tax (SCT) was increased on April 1, bringing a return to the days of prohibitively high vehicle prices in the country New vehicle sales fell by 6% y-o-y in 2010 with VAMA attributing the decline to the ongoing effects of the economic crisis A further deterrent to sales was the country's ever-changing tariff regime New rules aimed at reducing the number of vehicles imported into Vietnam are likely to see many smaller unauthorised importers close down as the government looks to address the industry's trade deficit and promote local production Despite previous efforts by the government to curb vehicle imports, an underdeveloped production industry means that imports remained strong in the early months of 2011 The new regulation, which was due to come into effect on June 26, will require importers of cars with fewer than nine seats to provide documentation stating that they are authorised dealers for foreign carmakers They will also be required to operate customer service divisions for the imported models This will greatly reduce the number of importers, according to the director of car dealer Tradoco, Pham Huu Tam, who also said that only 11 joint ventures will meet the requirements Smaller dealers may be forced to become sales agents or close completely Vehicle imports in the first four months of 2011 rose 71% to 14,330 units, according to the Ministry of Industry and Commerce In value terms, growth was even more pronounced, up 88% to US$185mn BMI still believes that more needs to be done to encourage domestic production before attempting to slash imports Total production accounts for little under one-third of total sales, leaving the country well behind its regional peers in the Association of South Eeast Asian Nations (ASEAN), which can largely serve their domestic and export demand Industry policy in Vietnam tends to be more restrictive than other countries that have promoted production in certain vehicle segments either through investment or purchase incentives Production Vietnam's domestic autos production capability could be set for a considerable boost thanks to plans to create a national industry hub in the Chu Lai Economic Zone The aim of the project is to increase the scale of domestic production in order to make the sector more competitive when import tariffs are eliminated under the ASEAN Free Trade Agreement in 2018 Regardless of the agreement's impact, BMI believes the Vietnamese autos sector has been struggling to compete with its regional peers for some time and that such a move would have been necessary at some point to win investment In a positive development for the project, it has piqued the interest of major South Korean carmakers Hyundai Motor and Kia Motors Hyundai has already committed to an agreement with local company Truong Hai Automobile, which will act as the company's exclusive distributor in the country Hyundai will also set up an engine production plant with an annual production capacity of 10,000 engines for the domestic market in the initial phase, followed by an expansion to 50,000 to accommodate exports to China, after 2015 TABLE: VIETNAM AUTOS SECTOR – HISTORICAL DATA AND FORECASTS 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f Total Production, CBUs 33,689 37,199 40,322 43,872 48,170 52,805 57,789 63,252 Total Sales, CBUs 119,460 112,224 118,824 126,562 138,656 159,496 181,478 206,597 Total Imports, CBUs 76,300 53,100 47,790 49,988 52,338 54,798 57,428 60,184 Figures are for complete knocked-down kits/completely built units, f = forecast, * estimate Sources: VAMA 36 www.businessmonitor.com Business Monitor International Ltd KEY SECTORS Kia is in negotiations with the economic zone's management regarding a project to produce 100,000 cars a year from 2015 This would be a considerable boost to local production, as BMI expects total industry output will be just shy of 60,000 units by 2015 There will be requirements placed on Kia and any other carmakers planning similar projects Within the first year of operation, each company must achieve a local content rate of 47% and allocate at least 70% of output to export By the time the factory is running at full capacity, output should contain 60% local content Trade believes the country will need 70,000-100,000 passenger cars per year by 2016-2020 and if local factories cannot step up capacity to meet demand and become more competitive by the time tariffs are dropped in 2018, smaller companies will be out of business The government has set localisation rates before, which were not met by the industry due to a lack of new investment in the supplier segment A target of 25% local content was set for 2005, due to rise to 30% by 2007 However, the Ministry of Finance estimated that by 2004, the level of local content in vehicles was just 2-10% The State Bank of Vietnam's aggressive monetary tightening measures are expected to take the steam out of domestic demand over the coming quarters While inflationary pressures are continuing to moderate, we remain concerned about the lagged impact of monetary tightening on consumer spending However, given the positive dynamics of low unemployment and strong tourism growth, there is still considerable scope for optimism in the country's domestic demand picture in the near term Over the longer term, the domestic demand picture for Vietnam looks brighter A massive youthful population, sector immaturity and a plethora of macroeconomic driving factors make the Vietnamese consumer goods sector a high-growth prospect In particular, the mass grocery retail sector is forecast to experience strong growth as it continues to attract considerable attention from international retailers, despite the challenges involved in doing business in Vietnam Given that it has one of the highest mass grocery retail growth forecasts in the Asia Pacific region, it is not hard to see why This time, the government and the authorities of Quang Nam province, where the economic zone is based, are backing the industry with a package of investment incentives The Quang Nam authority has suggested exempting land for such projects from leasing fees for the lifespan of the project, although the Ministry of Finance has instead suggested an exemption for the construction period plus the following 11 years Quang Nam has also proposed a raft of tax breaks including an extension of the 10% corporate tax rate from the usual 15 years for companies in the economic zone to 30 years, as well as delaying import and luxury taxes for five years between 2015 and 2019 BMI believes such measures are necessary to show investors that the government and local authorities are serious about establishing a viable industry hub When tariffs are removed in accordance with the terms of AFTA in 2018, Vietnam will be competing with countries which have established and proven industry policies in place, such as Thailand, already dubbed 'the Detroit of Asia', as well as Indonesia and Malaysia, which are up-and-coming alternatives Although the government has tried to increase domestic production in the industry before, particularly by raising import tariffs on vehicles, there has been little in the way of rewards for companies which have chosen to invest This is reflected in the 'Rewards' section of BMI's Industry Risk/Reward Ratings for the autos sector in Asia, where Vietnam scores far below its neighbours in terms of the industry rewards on offer There is a sense of urgency now, as the Ministry of Industry and Business Monitor International Ltd Food & Drink Executive Summary Headline Industry Data 2011 food consumption growth = +11.2%; compound annual growth forecast to 2016 = +5.1% 2011 alcoholic drink value sales = +20.9%; compound annual growth forecast to 2016 = +10.5% 2011 soft drink volume sales = +7.4%; compound annual growth forecast to 2016 = +6.3% 2011 mass grocery retail sales = +15.1%; compound annual growth forecast to 2016 = +12.5% Key Industry Trends Coffee Potential Perking Up Sector Investments: Masan Consumer has launched a bid for a 50.1% stake, valued at around VND1.07trn (US$51mn), in the Vietnamese coffee producer Vinacafe Bien Hoa Joint-Stock Company By www.businessmonitor.com 37 VIETNAM Q2 2012 acquiring a controlling stake in Vinacafe, Masan clearly wants to put itself in a strong position to leverage on the exciting demand dynamics in the Vietnamese coffee sector According to the Vietnam Coffee and Cocoa Association, Vinacafe is the country's second largest coffee exporter, and Masan could tap into Vinacafe's expertise and brand name to grow its presence in the domestic coffee sector Reflecting Vinacafe's strength in the Vietnamese coffee sector, the coffee producer consistently grew its revenues over the past five years and recorded an impressive 30% compound annual average growth in its headline sales between 2006 and 2010 Also looking to capitalise on Vietnam's coffee potential, Nestlé plans to increase its coffee sourcing from local farmers in Vietnam and has committed to a new coffee factory in the country The US$270mn factory will be constructed in the south-east province of Dong Nai and will produce Nescafé-branded products for the domestic and international markets from 2013 Rural Market Potential Firmly In The Sights Of ConsumerFacing Players: Fast-growing rural sales at Masan Consumer have attracted the sights of global private equity firm Kohlberg Kravis Roberts & Co (KKR) KKR agreed to acquire a 10% stake in Masan Consumer in April 2011 for US$159mn In another example, Vietnamese spirits major Halico's expansions in the rural market caught the attention of UK spirits producer Diageo, which agreed to acquire a stake of around 24% in Halico for GBP33.0mn in March 2011 (US$53.9mn) These investments underline the fantastic fundamental long-term growth prospects in the Vietnamese rural market, which ties in nicely with our wider outlook on the country's domestic demand story Key Risks To Outlook Downside risks to our economic outlook for Vietnam, which includes a sputtering economic recovery in the US, sovereign debt concerns in the eurozone and a potential hard landing in China, have escalated significantly in recent months Our country risk team has recently downgraded our real GDP growth estimate from 6.3% to 5.9% for 2011 to reflect a deteriorating economic environment that we expect to persist through the coming months As weak economic momentum spills into 2012, this could weigh on consumer sentiment and domestic demand growth Industry Forecast – Food Food consumption is forecast to expand at a compound annual average growth rate of 5.1% between 2011 and 2016 Per capita food consumption is also forecast to increase robustly at a compound annual average rate of 4.3% through to 2016 38 www.businessmonitor.com Food consumption in Vietnam is forecast to experience strong growth of 5.1% on compound annual average terms between 2011 and 2016, at which point consumption is expected to reach VND538.4trn (US$29.5bn) Meanwhile, per capita food consumption is forecast to grow by an impressive 4.3% on a compound annual average basis over the same period, reaching a fairly modest VND5.8mn by 2016, reflecting the low starting base This impressive level of growth in food consumption could be attributed to two key factors: the rising affluence among Vietnamese consumers and an ongoing expansion of the mass grocery retail industry in the country Currently, income levels in Vietnam are a long way behind developed economies, and consumer purchases remain largely centred on food staples and daily necessities However, as incomes start to accelerate off a low base on the back of sturdy economic growth, consumer tastes and preferences are expected to calibrate towards the higher-value food and beverage segments, which should guarantee a receptive and growing audience for branded food and beverage products in the medium term This massive potential provided by the burgeoning size of the middle class in Vietnam is already attracting the sights of major consumer facing players in the country Private equity firm Kohlberg Kravis Roberts & Co's recent acquisition of a 10% stake in Masan Consumer, the largest producer of condiments including fish, soy and chilli sauce and the second biggest producer of instant noodles in Vietnam, underlines its confidence in the opportunities available in the mass-market segment As another case in point, according to Tran Vu Hoai, the head of corporate relations for Unilever Vietnam, Unilever's Vietnam sales have been growing at an annual average of 18.5% over the past decade to reach US$700mn in 2010, of which rural sales make up about 50%, bearing out strong growth prospects in the rural consumer market In particular, we expect functional food products to garner stronger appeal among Vietnamese consumers over the coming years Given the nutritional health benefits of functional foods, these products have witnessed strong demand in Vietnam over the past few years in line with a growing shift towards health awareness In 2000, the functional food market comprised only a dozen imported functional food products By 2005-2006, domestically produced functional foods accounted for 33% of the entire food market, and in 2008, this figure doubled, underlining the burgeoning demand for functional food products Business Monitor International Ltd KEY SECTORS The ongoing expansion of the mass grocery retail industry will also drive up per capita food consumption levels, provided goods sold through such outlets remain competitively priced Ultimately, food consumption growth will be driven by the government's ability to harness rural spending power and by modern retailers' ability to find a model that stirs consumer interest, without forgetting that price will remain the major purchasing determinant Canned Food Canned food value sales growth is expected to outpace canned food volume sales growth; value sales are forecast to increase at a compound annual average rate of 10.4%, outperforming volume sales growth of 4.3% between 2011 and 2016 Buoyed by ongoing urbanisation and increasing affluence among Vietnamese consumers, BMI is currently forecasting strong compound annual average growth of 10.4% in canned food sales, in value terms, to 2016, significantly overshadowing 4.3% compound annual average growth in canned food volume sales This stronger value growth in the canned food sub-sector reflects an acceleration of a premiumisation momentum, as demand for higher-value products such as canned food picks up strongly on the back of rising disposable incomes Vietnamese consumers are experiencing a growing awareness of hygiene concerns and food origin as their living standards improve and as numerous health scares beg their greater caution This will further encourage consumers to purchase processed foods over fresh produce, and strong investment in this sector from both domestic and international operators should help to fuel sales growth Meanwhile, city workers are increasingly cutting back on restaurant meals and opting for canned and processed foods in order to save money, with major retailers such as Saigon Co-op reporting a recent spike in sales Confectionery Confectionery value sales growth is forecast at 8.5% on compound annual average terms to 2016 The chocolate sub-sector will continue to outperform over the next five years, with value sales in the sector forecast to grow at a compound annual average rate of 10.3% to 2016 Vietnamese confectioners are facing increasingly positive headwinds over the coming quarters Prices across the global agricultural complex are moderating, which should provide some relief to the profitability of domestic confectionery players Over the longer term, dynamics such as rising purchasing power, a massive youthful population, growing health awareness and continued investments in the sector underpin a strong growth outlook for the Vietnamese confectionery sector The longer-term outlook for the Vietnamese confectionery market is also positive With factors such as rising purchasing power, favourable demographics, growing health awareness and continued investments in the sector supporting confectionery demand, we are forecasting a compound annual average growth of 8.5% in confectionery value sales in local currency terms to 2016 Rising Disposable Incomes: Rapid wealth accrual (GDP per capita is forecast to more than triple to reach US$4,444 by 2020) translates into a greater discretionary appetite for premium confectionery products As an increasing number of domestic confectioners expand their upmarket product ranges, this should bolster value sales growth over the coming years A Massive Youthful Population: 51.9% of the Vietnamese population is estimated to be younger than 30, and the maturation of this demographic group means that there are dynamic opportunities in the mass market Moreover, this demographic group is generally more receptive to Western cultures, which should give an impetus to confectionery demand Growing Health Awareness: Health awareness is prompting shifts of consumption habits towards functional and healthy confectionery products Capitalising on the growing trend, domestic confectioners such as Tan Tan Food & Foodstuff and Vina Mit are expanding their functional product offerings TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS 2010 2011f 2012f 2013f 2014f 2015f 2016f Food consumption, US$bn 18.69 19.30 22.10 24.28 26.02 27.61 29.50 Food consumption, VNDbn 357,538 397,546 450,240 480,762 500,915 517,774 538,431 Per capita food consumption, US$ 212.7 217.3 246.3 267.8 284.2 298.7 316.2 Per capita food consumption, VND 4,069,939 4,477,277 5,017,705 5,303,117 5,470,722 5,601,030 5,771,427 10.72 11.19 13.25 6.78 4.19 3.37 3.99 Food consumption growth, VND, % chg y-o-y NB Excludes beverage consumption f = BMI forecast Source: General Statistics Office of Vietnam, BMI Business Monitor International Ltd www.businessmonitor.com 39 VIETNAM Q2 2012 These products typically carry higher price tags, and their rising demand should translate into higher value sales in the sector ment efforts to improve local food production and agricultural industries This will boost output and make more produce available for export, as well as improve the quality competitiveness of local exports Continued Sector Investments: Sustained competition levels in the Vietnamese confectionery sector ensure that dynamism in the market is unlikely to cool off anytime soon Nabati Indonesia, a leading Indonesian biscuit producer, recently announced plans to start distributing its biscuit products in Vietnam – a testament to the attractiveness of the sector Meanwhile, domestic confectioners such as Kinh Do are expected to continue to invest in broadening its product ranges and expanding its distribution channels Over the long term, increasing urbanisation and continued exposure to Western influences are expected to generate growing import demand, and increasingly busy lifestyles and rising interest in branded produce will lead to growth in the processed-food industry In order to meet this demand, local manufacturers will be forced to import the necessary raw ingredients Beyond 2016, the government is likely to be hopeful that its investments and efforts to attract foreign investors will pay off, and that much of this new and specific type of demand will be able to be accommodated domestically Trade Export growth between 2011 and 2016 is forecast at a compound annual average rate of 8.6%, stronger than import growth of 8.1% Industry Forecast – Drink Alcoholic Drinks We see growing downside risks to our outlook for Vietnam's food and drink exports A sputtering economic recovery in the US, sovereign debt concerns in the eurozone and a potential hard landing in China are placing increasing pressure on our outlook With regard to imports, we are forecasting slower growth over the coming months on the back of moderating domestic demand and a slowdown in the broader economy For 2011, we are currently pencilling in a 7.7% growth in exports, outperforming a 6.5% growth rate expected for imports Alcoholic drink value sales are forecast to increase at a compound annual average growth rate of 10.5% between 2011 and 2016 The outlook for Vietnam's alcoholic drinks industry remains very strong, and it continues to attract considerable interest from foreign investors A number of industry majors such as Diageo, Asia Pacific Breweries (APB) and Carlsberg have been attracted by the alcoholic drinks sector's bright outlook, with rising consumption fuelled by strong economic growth, rising affluence and a fast-growing tourist industry Their continued investments in the sector will keep dynamism propped up to buoy alcoholic drink value sales Over the next five years, the outlook for Vietnam's food and drink trade balance is relatively stronger, as the country is forecast to maintain a healthy and growing trade balance While exports are forecast to experience growth of 8.6% on a compound annual average growth basis between 2011 and 2016, imports are forecast to experience compound annual average growth of 8.1% over the same period We are forecasting an increase of 7.5% in volume sales on a compound annual average growth basis between 2011 and 2016, while value sales are forecast to experience stronger growth of 10.5% on a compound annual average growth basis as consumers begin to trade up to higher-value drinks along with rising disposable incomes A major driver behind the growth in exports is sustained govern- TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES HISTORICAL DATA & FORECASTS 2010 2011f 2012f 2013f 2014f 2015f 2016f 33,233,049 40,206,455 46,460,583 52,030,494 58,479,751 65,724,576 73,389,368 Alcoholic sales growth, VND, % chg y-o-y 18.46 20.98 15.56 11.99 12.40 12.39 11.66 Alcoholic drinks sales, US$mn 1,737 1,952 2,280 2,628 3,038 3,505 4,021 Alcoholic drinks sales, mn litres 2,105 2,269 2,479 2,705 2,948 3,210 3,493 8.16 7.78 9.26 9.12 8.99 8.87 8.83 Beer sales, mn litres 2,089 2,251 2,461 2,685 2,927 3,186 3,468 Spirits sales, mn litres 16.30 17.45 18.52 19.85 21.52 23.44 25.49 Alcoholic drinks sales, VNDmn Alcoholic sales growth, litres, % chg y-o-y e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI 40 www.businessmonitor.com Business Monitor International Ltd KEY SECTORS Beer will continue to dominate the alcoholic drinks sector, accounting for the vast majority of volume sales, and will be the main contributor to value sales This is due to the strong interest the beer sector has been attracting from both local and international brewers, with volume sales expected to experience growth of 7.5% on a compound annual average growth basis to 2016 APB's recent investment in the Vietnamese beer industry is a strong testament to the sector's potential APB will invest SGD90mn in expanding production at its Ho Chi Minh brewing joint venture by 50% The company will increase output at the facility, which is a 60:40 joint venture with Saigon Trading, to 2.8mn hectolitres a year; add a second canning facility; and expand its warehouse space Coupled with expansions under way at its Danang and Hanoi sites, the brewer is expected to have expanded total Vietnamese output by 25% before the end of 2011 Volume sales growth in the wine and spirits industry is also expected to be robust over our forecast period to 2016, albeit developing from much lower bases Both are fairly immature industries which have been held back by an absence of multinational investment and their relatively higher price tags However, prolific wealth accrual among Vietnamese consumers is fuelling shifts in consumption habits towards higher-value alcoholic drink products, and this trend is particularly evident in the urban centres such as Ho Chi Minh City, Hanoi and Danang Exposure to Western cultures is also driving the local demand for spirits and wines The biggest consumers of wine and spirits in Vietnam used to be Western expatriates and tourists, but local consumers are developing a strong appetite for these products in line with rapidly growing affluence The spread of organised retail in the country acts as another impetus behind spirits and wine sales, facilitating consumer reach to a greater variety of brands in supermarkets, hypermarkets and local wine stores continue to fuel demand for higher value food and beverage products, such as coffee Vietnam's massive youth population, for whom visiting cafés and drinking coffee is a growing lifestyle choice, is another major positive behind our coffee forecast Moreover, as this group of young, aspirant consumers enters the workforce, the accordant rise in their level of incomes will serve to further buoy the demand for higher-value coffee products The tea sector is also set to experience strong growth over our five-year forecast period, buoyed by rising incomes and increasing domestic demand These dynamics will continue to attract the sights of multinational coffee producers, in turn imbuing the sector with greater dynamism over our forecast period As a case in point, Masan Consumer has launched a bid for a 50.1% stake, valued at around VND1.07trn (US$51mn), in the Vietnamese coffee producer Vinacafe Bien Hoa Joint-Stock Company By acquiring a controlling stake in Vinacafe, Masan clearly wants to put itself in a strong position to leverage on the exciting demand dynamics in the Vietnamese coffee sector According to the Vietnam Coffee and Cocoa Association, Vinacafe is the country's second-largest coffee exporter, and Masan could tap into Vinacafe's expertise and brand name to grow its presence in the domestic coffee sector Reflecting Vinacafe's strength in the Vietnamese coffee sector, the coffee producer consistently grew its revenues over the past five years and recorded an impressive 30% compound annual average growth in its headline sales between 2006 and 2010 Also looking to capitalise on Vietnam's coffee potential, Nestlé plans to increase its coffee sourcing from local farmers in Vietnam and has committed to a new coffee factory in the country The US$270mn factory will be constructed in the south-east province of Dong Nai and will produce Nescafé-branded products for the domestic and international markets from 2013 Soft Drinks Looking ahead, investments in the Vietnamese spirits and wine sub-sectors are expected to intensify as an increasing number of investors recognise the higher margin growth opportunities on offer in these sub-sectors, and this should instil further dynamism to drive volume sales We expect soft drink value sales to increase at a compound annual average growth rate of 8.2% to 2016, outperforming a 6.3% compound annual average growth in volume sales BMI is pencilling in a compound annual average growth of 9.4% and 7.0% in coffee and tea sales, in volume terms, respectively to 2016 We are forecasting growth of 8.2% in the Vietnamese soft drink sector, in value terms, between 2011 and 2016; over the same period, we expect volume sales to grow by 6.3%, both on a compound annual average growth basis Economic growth, increasing urbanisation, external investments and rising tourist numbers will all serve to drive this growth Vietnam's sturdy economic growth over the next few years will Although Vietnamese consumers will retain an interest in healthy Hot Drinks Business Monitor International Ltd www.businessmonitor.com 41 VIETNAM Q2 2012 living as Western influences pervade consumption habits, we would expect carbonated soft beverages to be the highest-growth sub-sector of the soft drinks industry to 2016, owing to their popularity among aspirational young Vietnamese consumers and their relative lower price tags when compared with energy drinks and premium fruit juices growth basis, with all modern formats present in the country – supermarkets, hypermarkets and convenience stores – contributing to this growth There are two primary drivers of this growth forecast One is Vietnam's economic development The country has proved successful at attracting multinational investment in spite of its often-restrictive foreign investment policies and underdeveloped infrastructure This investment has led to job creation, which in turn has led to the emergence of a new consumer class in the country – in major urban centres at least – which has an interest and can afford to participate in modern consumption methods such as mass grocery retailing Intensified rivalry between the country's major soft drinks players PepsiCo and The Coca-Cola Company is another key driver behind our bullish growth forecast for the sector PepsiCo has set aside an investment war chest of US$250mn for Vietnam over the next three years and will continue to invest in projects that include upping the manufacturing capacity of its Vietnam operations, strengthening existing brands and continuing product development through innovation We believe these investments will further strengthen PepsiCo's foothold in Vietnam, where it has already invested in two new manufacturing facilities, including a beverage plant in Can Tho Coca-Cola does not intend to rest on its laurels The company has invested more than US$280mn over the past decade and plans to invest an additional US$200mn in Vietnam by 2013 With Vietnam increasingly becoming one of South East Asia's top attractions, the country's increasing tourism levels will also assist the emergence of modern retail, particularly in the convenience sector Recent government data show that tourism levels increased by 15.5% y-o-y in September 2011, and this continued strength in the tourism sector is expected to provide a strong fillip to domestic retail sales Mass Grocery Retail The hypermarket sector is expected to witness the strongest growth among the MGR sub-sectors, recording a compound annual average growth rate of 12.2% between 2011 and 2016 Rapid inflows of sector investment also should bolster growth in domestic retail sales Japanese retailer AEON has plans to enter the Vietnamese market by 2013, while E-Mart recently inked an agreement with U&I Investment Corporation to establish a joint venture in Vietnam with an aim of setting up retail stores in the country These investments clearly underline the massive potential on offer in the Vietnamese retail sector Vietnam continues to be one of the most promising markets for MGR in the Asia Pacific region, and we are continuing to forecast very strong growth rates in what is considered one of the region's brightest new prospects Through to 2016, BMI is forecasting that value sales through modern retail outlets in Vietnam will increase by 11.1% on a compound annual average It should also be noted that while multinationals pose a serious threat to local enterprises operating in the attractive urban centres of Hanoi and Ho Chi Minh City, secondary and tertiary towns and cities in outlying provinces could reap considerable benefits from multinational investment In our view, multinational sector involvement will eventually lead to rapid crowding in Vietnam's Overall mass grocery retail (MGR) sales are forecast to increase at a compound annual average growth rate of 11.1% to 2016 TABLE: MASS GROCERY RETAIL VALUE SALES BY FORMAT – HISTORICAL DATA & FORECASTS 2010 2011f 2012f 2013f 2014f 2015f 2016f Supermarkets (VNDbn) 57,060 65,374 75,356 85,590 97,084 109,810 124,291 Hypermarkets (VNDbn) 22,804 26,270 32,054 36,747 41,523 46,691 52,494 Convenience stores (VNDbn) 17,962 19,828 21,992 24,355 26,811 29,631 32,740 Total mass grocery retail sector (VNDbn) 97,826 111,472 129,402 146,691 165,418 186,132 209,525 25.14 13.95 16.08 13.36 12.77 12.52 12.57 Supermarkets (US$bn) 2.98 3.17 3.70 4.32 5.04 5.86 6.81 Hypermarkets (US$bn) 1.19 1.28 1.57 1.86 2.16 2.49 2.88 Convenience stores (US$bn) 0.94 0.96 1.08 1.23 1.39 1.58 1.79 Total mass grocery retail sector (US$bn) 5.11 5.41 6.35 7.41 8.59 9.93 11.48 Total mass grocery retail sector growth, VND, (y-o-y) e/f = BMI estimate/forecast Source: Company information, Trade press, BMI 42 www.businessmonitor.com Business Monitor International Ltd KEY SECTORS major urban centres, forcing retailers to turn to unexplored regions in search of growth Sales through the convenience store format are forecast to experience the slowest growth rate, at 8.7% on compound annual average growth terms to 2016 The main reason behind this relatively modest growth is the format's low starting point, with the concept still very much in its infancy Accordingly, the demand for convenience, with the pay-off of higher prices, is not yet on the agenda for most consumers; they are still familiarising themselves with the modern format in general Nevertheless, this subsector can be expected to attract growing interest from retailers, with Japanese convenience retailer FamilyMart having recently opened its first outlet in Ho Chi Minh City The retailer plans to have 300 stores in five years as it looks to capitalise on the city's young and increasingly busy population low prices offered by discounters would be unlikely to attract buyers in rural communities, for whom self-sufficiency and wet markets remain the sole methods of consumption This point is, however, still a long way off Retailers will invest in Vietnam in line with their own need to expand, confident of the country's economic development and growing consumer base Vietnamese consumers are most familiar with the standard supermarket format, as well as with hypermarkets, owing to its popular combination of both food and non-food items Therefore, these two formats are set to witness the strongest levels of growth at 11.3% and 12.2%, on compound annual average growth terms, respectively over our forecast period to 2016 In addition, the supermarket and hypermarket formats are set to receive the most attention from new retail investors owing to their greater per-store profitability levels, which will be of vital importance in a market where foreign investment in store openings is still limited Singapore MGR operator NTUC Fairprice and Vietnam's Saigon Union of Trading Co-operatives are two recent examples of companies looking to exploit the high per-store profitability levels in the hypermarket sector The two companies have recently inked a joint venture agreement to establish a chain of hypermarkets in Vietnam Given Saigon's local expertise and NTUC's experience in operating hypermarket stores, this is clearly a formidable-looking partnership, and their expansionary activities are likely to place considerable upward pressure on our hypermarket growth forecast for Vietnam If there can be a downside in the case of such an impressive retail growth forecast, it comes in the form of Vietnam's majority rural population, which drags down food consumption levels in the market to unattractive levels The risk for retailers is that as soon as the country's major cities start to become saturated with business opportunities, few other communities exist that can currently support modern retail development Even the Business Monitor International Ltd www.businessmonitor.com 43 VIETNAM Q2 2012 Other Key Sectors Latest Forecast Data Below are the latest forecast tables for our other core key sectors: TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 2010 2011e 2012f 2013f 2014f 2015f 2016f 139,162.00 Construction industry value, VNDbn [1] 164,947.29 186,697.77 206,534.24 230,765.81 256,649.94 285,458.97 Construction industry value, US$bn [1] 7.3 8.9 10.2 12.0 13.5 15.1 -0.12 5.36 5.57 6.23 6.22 6.22 7.0 Construction industry value, % GDP [1] 8.0 10.06 Construction industry, real growth, % y-o-y [1] 6.6 6.6 6.5 6.4 6.3 6.2 Notes: e BMI estimates f BMI forecasts Sources: Vietnam General Statistics Office TABLE: OIL AND GAS SECTOR KEY INDICATORS 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f Proven oil reserves, bn barrels [1] 4.500 4.400 4.400 4.400 4.400 4.400 4.400 4.377 Oil production, 000b/d [1] 345.6 373.2 394.7 402.3 398.7 407.5 396.6 382.9 Oil consumption, 000b/d [1] 298.0 320.0 326.4 342.7 363.3 385.1 408.2 430.6 Oil refinery capacity, 000b/d [1] 130.0 130.0 130.0 130.0 130.0 130.0 230.0 400.0 1.1 1.5 2.7 1.9 1.4 0.5 - - Oil exports, US$mn [1] Oil imports, US$mn [1] Petroleum exports, US$mn [1] Import of refined products, 000b/d [1] - - - - - - 0.0 1.2 1.06 1.53 2.69 1.98 2.08 2.61 2.22 1.73 207.0 203.0 206.8 223.1 243.7 265.5 196.6 62.6 682,000.0 617,000.0 620,000.0 620,000.0 620,000.0 620,000.0 620,000.0 615,000.0 Gas production, bcm [1] 7.1 8.3 9.0 10.7 14.0 19.0 21.0 24.0 Gas consumption, bcm [1] 7.1 8.2 9.0 10.5 12.6 14.4 16.2 17.8 Proven gas reserves, bcm [1] Notes: e BMI estimates f BMI forecasts Sources: EIA/BMI TABLE: PHARMA SECTOR KEY INDICATORS 2011e Pharmaceuticals sales, US$bn [1,3] Pharmaceutical sales, US$bn, % y-o-y [1,3] Pharmaceutical sales, VNDbn [1,3] 2012f 2013f 2014f 2015f 2016f 1.889 2.238 2.669 3.169 3.674 4.166 10.3 18.5 19.3 18.7 15.9 13.4 39,002.796 45,597.121 52,844.810 61,003.026 69,625.917 78,527.885 Pharmaceutical sales, VNDbn, % y-o-y [1,3] 19.0 16.9 15.9 15.4 14.1 12.8 Health expenditure, US$bn [1,4] 8.60 10.07 11.77 13.70 15.60 17.42 8.5 17.0 16.9 16.4 13.8 11.7 177,678.25 205,146.85 233,125.82 263,818.20 295,644.38 328,356.61 Health expenditure, US$bn, % y-o-y [1,4] Health expenditure, VNDbn [1,4] Health expenditure, VND bn, % y-o-y [1,4] 17.1 15.5 13.6 13.2 12.1 11.1 Communicable, maternal, perinatal and nutritional conditions, DALYs [2,5] 3,361,708 3,366,403 3,371,021 3,375,564 3,380,031 3,384,421 Non-communicable diseases, DALYs [2,5] 6,884,944 6,928,101 6,970,172 7,011,157 7,051,054 7,089,862 Notes: e BMI estimates f BMI forecasts Last Updated: 13/01/2012; Data is DALYS, disability-adjusted life years; Sources: Drug Administration of Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press, BMI World Health Organization (WHO), BMI; WHO, World Bank, IMF, BMI research 44 www.businessmonitor.com Business Monitor International Ltd KEY SECTORS TABLE: TELECOMS SECTOR KEY INDICATORS 2011e 2012f 2013f 2014f 2015f 2016f 13,655.7 Number of Main Telephone Lines in Service ('000) [1] 13,109.5 12,585.1 12,207.6 11,841.3 11,604.5 Number of Main Telephone Lines in Service, % chg y-o-y [1] -5.0 -4.0 -4.0 -3.0 -3.0 -2.0 Number of Main Telephone Lines/100 Inhabitants [1] 15.4 14.6 13.9 13.3 12.8 12.4 118,822.3 124,763.4 128,506.3 131,076.4 133,697.9 135,034.9 Number of Cellular Mobile Phone Subscribers ('000) [1] Number of Cellular Mobile Phone Subscribers, % chg y-o-y [1] 6.5 5.0 3.0 2.0 2.0 1.0 Number of Mobile Phone Subscribers/100 Inhabitants [1] 133.8 139.0 141.8 143.2 144.6 144.7 Number of Mobile Phone Subscribers/100 Inhabitants [1] 133.8 139.0 141.8 143.2 144.6 144.7 Number of Mobile Phone Subscribers/100 Inhabitants, % chg y-o-y [1] Number of Internet Users ('000) [1] 5.4 3.9 1.9 1.0 1.0 0.1 31,093.1 33,580.5 35,259.5 36,317.3 37,225.2 37,969.7 Number of Internet Users, % chg y-o-y [1] 16.1 8.0 5.0 3.0 2.5 2.0 Number of Internet Users/100 Inhabitants [1] 35.0 37.4 38.9 39.7 40.3 40.7 Number of Internet Users/100 Inhabitants, % chg y-o-y [1] 14.9 6.9 3.9 2.0 1.5 1.1 4,081.3 4,489.4 4,848.6 5,188.0 5,499.2 5,774.2 12.0 10.0 8.0 7.0 6.0 5.0 Number of Broadband Internet Subscribers ('000) [1] Number of Broadband Internet Subscribers, % chg y-o-y [1] Notes: e BMI estimates f BMI forecasts Sources: World Bank (International Telecommunications Union (ITU)), BMI research TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 2011e Defence expenditure, VNDmn [1] Defence expenditure, VND, % chg y-o-y [1] Defence expenditure, % of GDP [2] Defence expenditure, VND per capita of population [2] Defence expenditure, US$mn, constant prices [1] Defence expenditure, US$, constant prices % chg y-o-y [1] Defence expenditure, constant US$ per capita of population [1] 2012f 2013f 2014f 2015f 2016f 64,601,386.2 75,836,294.5 84,878,580.5 96,106,026.7 108,324,809 122,121,413 25.6 17.4 11.9 13.2 12.7 12.7 2.6 2.6 2.6 2.6 2.6 2.6 727,558.7 845,158.4 936,265.3 1,049,618.5 1,171,806.7 1,309,016.4 2,699,353.0 3,101,410.9 3,385,925.9 3,774,045.5 4,132,513.6 4,476,933.8 -1.5 14.9 9.2 11.5 9.5 8.3 30,400.9 34,563.7 37,348.9 41,218.1 44,703.6 47,988.1 Notes: e BMI estimates f BMI forecasts Sources: SIPRI/BMI SIPRI, BMI calulation TABLE: FREIGHT KEY INDICATORS 2010 Port of Ho Chi Minh City container throughput, TEU Port of Ho Chi Minh City container throughput, TEU, % y-o-y Air Freight Tonnes (000) Air Freight Tonnes % chg y-o-y Rail Freight Tonnes (000) Rail Freight Tonnes % chg y-o-y Road Freight Tonnes (000) Road Freight Tonnes % chg y-o-y 2011e 2012f 2013f 2014f 2015f 2,850,000.0 2,973,972.8 3,116,250.5 3,278,614.9 3,452,792.5 3,749,495.5 17.19 4.35 4.78 5.21 5.31 8.59 186.00 195.76 206.96 219.51 232.90 248.23 33.24 5.25 5.72 6.06 6.10 6.58 7,809.9 8,187.3 8,620.2 9,105.1 9,622.9 10,199.1 -3.20 4.83 5.29 5.62 5.69 5.99 563,406.1 599,863.2 641,689.0 688,531.9 738,564.3 789,140.5 13.90 6.47 6.97 7.30 7.27 6.85 Source: BMI This report is abstracted from BMI's industry report series, which covers 22 sectors across global markets Every quarter, we will provide tables showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector If you would like to order a full report, or find out about BMI's other 1,113 industry reports, please contact subs@businessmonitor.com Business Monitor International Ltd www.businessmonitor.com 45 Chapter 6: BMI Global Assumptions Global Outlook Still Holding Together Our forecasts for global growth have edged down since the beginning of 2012, with the eurozone crisis simmering and the world's policymakers seeking ways to avert another economic slump We estimate real global GDP grew by 3.0% in 2011, and will grow by 2.7% in 2012 (from a previous forecast of 2.8%) and 3.4% in 2013 (previously 3.5%) In line with our view that China's economy faces a hard landing in 2012 – with the external sector hit by a slowdown in global demand and domestic investment due a decline – we have revised down our Chinese real GDP growth forecasts for 2012-2016 Our growth forecasts for Japan and the eurozone have also been revised down for 2012, as well as the longer-term growth profile for the eurozone With the US still posting decent growth, and many emerging market economies still expanding, the world is still set to avoid a full-blown recession However, the recovery is fragile and susceptible to shocks A eurozone break-up would almost certainly push the world into recession On the monetary policy front, the biggest revision to our forecasts comes in the wake of the Federal Reserve's adoption of an official inflation target and pledge to keep policy interest rates TABLE: GLOBAL ASSUMPTIONS 2010 2011e 2012f 2013f 2014f 2015f 2016f US 3.0 1.7 2.0 2.4 2.6 2.5 2.4 Eurozone 1.8 1.6 -0.5 1.3 1.8 1.9 1.8 Japan 6.6 -1.0 1.4 1.4 1.2 1.2 1.2 Real GDP Growth (%) China 10.0 9.1 7.5 7.1 6.0 6.0 6.0 World 4.5 3.0 2.7 3.4 3.5 3.5 3.5 Consumer Inflation (ave) US 1.6 3.0 2.1 2.0 2.0 2.2 2.2 Eurozone 1.3 1.8 1.8 1.7 1.8 1.8 1.8 Japan 0.0 0.3 0.1 0.4 0.8 1.3 1.8 China 3.3 5.6 3.0 3.2 2.9 2.8 2.7 World 2.9 4.0 3.4 3.3 3.2 3.2 3.2 Interest Rates (eop) Fed Funds Rate 0.00 0.00 0.00 0.00 0.75 2.00 3.50 ECB Refinancing Rate 1.00 1.00 0.50 0.50 1.25 2.50 3.50 Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.25 Exchange Rates (ave) US$/EUR 1.33 1.39 1.29 1.25 1.25 1.25 1.25 JPY/US$ 87.76 79.74 78.00 80.00 82.00 82.25 84.75 CNY/US$ 6.77 6.46 6.40 6.40 6.40 6.40 6.40 OPEC Basket (US$/bbl) 77.39 107.52 99.38 97.23 93.23 93.23 93.23 Brent Crude (US$/bbl) 80.26 111.05 102.00 100.00 96.00 96.00 96.00 Oil Prices (ave) Real GDP growth and inflation Weighted by nominal US$ GDP Source: BMI Business Monitor International Ltd www.businessmonitor.com 47 VIETNAM Q2 2012 near zero until late 2014 We have revised down our end-2014 Fed funds rate forecast to 0.75% from 2.50% accordingly, and believe that, on balance, the biggest risk to that projection is rate hikes not beginning until 2015 fallen to 1.0% from 1.1%, while the 2013 projection remains steady at 1.9% With downward revisions to Belgium, Finland, Portugal and Spain, our eurozone forecast has fallen to -0.5% from -0.3% for 2012 Owing to the structural growth problems in the periphery, we have revised down our 2013-2016 eurozone real GDP growth forecasts by around 0.1 to 0.2 percentage points a year, resulting in a long-term trend growth rate below 2.0% Our 2012 real GDP growth forecast for Japan has been lowered to 1.4% from 1.8%, while we have not changed our US growth forecasts We have made two changes to our major currency forecasts We now forecast the euro averaging US$1.29/EUR in 2012 (previously US$1.34/EUR) and US$1.25/EUR in 2013 (previously US$1.28/EUR) And instead of gradual appreciation for the Chinese yuan, we now expect a re-pegging at CNY6.40/ US$, owing to pressure on the Chinese authorities to maintain export competitiveness Emerging Markets Our aggregate forecasts for emerging markets' real GDP growth are 5.0% in 2012 (downwardly revised from 5.2% previously) and 5.3% in 2013 (down from 5.4%) The biggest change is to our China growth forecasts, as we now see a just 7.5% real GDP Developed States Our forecast for developed states' real GDP growth in 2012 has TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST 2010 2011e 2012f 2013f Developed States Aggregate Growth 3.1 1.3 1.0 1.9 G7 3.4 1.3 1.2 1.9 Eurozone 1.8 1.6 -0.5 1.3 EU-27 2.0 1.7 -0.1 1.5 Australia 2.5 1.8 1.6 2.6 Austria 2.0 1.8 0.8 1.7 Belgium 2.2 2.5 0.5 1.7 Canada 3.2 2.4 2.0 2.5 Denmark 2.1 0.8 0.5 2.0 Finland 3.6 2.5 0.5 1.6 France 1.5 1.8 -0.2 1.1 Germany 3.7 3.0 0.3 2.1 Selected Developed States Ireland -1.0 1.3 -0.5 2.2 Italy 1.3 0.8 -1.4 0.1 Japan 6.6 -1.0 1.4 1.4 Netherlands 1.7 1.2 0.4 1.5 Norway 0.4 1.7 1.0 2.2 Portugal 1.3 -2.0 -3.6 -2.3 -0.1 0.7 -2.1 1.0 Sweden 5.7 4.5 1.6 2.2 Switzerland 2.7 1.9 0.6 1.8 UK 2.1 1.0 0.6 1.7 US 3.0 1.7 2.0 2.4 Spain Source: BMI TABLE: REAL GDP GROWTH CONSENSUS FORECASTS US 2011 Eurozone Japan Brazil China Russia India 1.8 1.5 -0.8 3.0 9.2 4.1 n/a BMI 1.7 1.6 -1.0 3.0 9.1 3.3 6.8 Bloomberg Consensus 2.3 -0.5 1.7 n/a n/a 3.5 n/a BMI 2012 Bloomberg Consensus 2.0 -0.5 1.4 3.9 7.5 3.2 7.3 Source: Bloomberg As Of January 27 2012 48 www.businessmonitor.com Business Monitor International Ltd BMI GLOBAL ASSUMPTIONS expansion in 2012, down from 8.1% previously; and 7.1% in 2013, down from 7.5% Though we believe that the numbers not tell the full story, this shift underlines our view for an economic hard landing in China For emerging Asia as a whole, we have revised down our forecasts to 6.2% in 2012 (from 6.7%) and 6.5% in 2013 (from 6.7%) The only region revised favourably is Latin America, where we now see a 3.8% expansion in 2012 (from 3.7% previously), though we have modestly revised down our 2013 forecast to 3.4% in 2013 (from 3.5%) We have bumped up our expectation for growth in Mexico, where we now project an expansion of 3.4% in 2012 (up from 3.1% previously) In emerging Europe, we are forecasting growth of 2.6% in 2012 (down slightly from 2.7%) on the back of downgrades for Hungary (to -1.5% from -0.5%) and Ukraine (to 2.5% from 4.1%) For 2013, we see growth of 4.1% for the region (down from 4.2%), with slight downgrades for the Czech Republic and Ukraine Sub-Saharan Africa's 2012 forecast has fallen slightly to 5.9% from 6.0%, with 2013's projection bumped up slightly to 6.0% from 5.9% For the Middle East and North Africa our 2012 and 2013 forecasts are slightly lower, at 4.3% (from 4.4%) and 4.5% (from 4.7%) respectively TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 2010 2011e 2012f 2013f Emerging Markets Aggregate Growth 6.8 5.5 5.0 5.3 Latin America 6.0 4.0 3.8 3.4 Argentina 9.2 7.0 4.1 4.2 Brazil 7.5 3.0 3.9 3.7 Mexico 5.4 4.2 3.4 2.7 Middle East and North Africa 3.9 3.4 4.3 4.5 Saudi Arabia 4.1 7.2 4.0 3.7 UAE 1.4 3.3 3.0 3.2 Egypt 5.1 1.8 2.0 4.9 Sub-Saharan Africa 5.0 4.2 5.9 6.0 South Africa 2.9 3.1 2.7 3.1 Nigeria 7.9 7.3 7.6 7.6 Emerging Asia 8.8 7.2 6.2 6.5 China 10.0 9.1 7.5 7.1 Hong Kong 7.0 5.0 3.0 3.5 India* 8.3 6.8 7.3 7.8 Indonesia 6.1 6.1 5.8 6.2 Malaysia 7.2 4.5 3.2 4.6 14.5 4.8 2.6 3.6 5.6 3.7 1.9 4.6 10.9 3.6 2.4 5.0 Thailand 7.8 1.5 4.0 4.2 Emerging Europe 4.5 4.0 2.6 4.1 Russia 4.0 3.3 3.2 4.2 Turkey 8.9 7.0 1.8 5.4 Czech Republic 2.7 1.9 0.8 1.5 Hungary 1.1 1.6 -1.5 2.0 Poland 3.8 4.0 2.6 3.2 Singapore South Korea Taiwan *Fiscal Years Ending March 31 (2010 = 2009/10) Source: BMI Business Monitor International Ltd www.businessmonitor.com 49 Business Monitor International Limited, 85 Queen Victoria Street, London, EC4V 4AB, UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 Email: subs@businessmonitor.com Website: www.businessmonitor.com ©2012 Business Monitor International All rights reserved Analyst: Andrew Wood Editor: Stuart Allsopp Sub-Editor: Kerry Lambeth Subscriptions Manager: Mandeep Sahote Marketing Manager: Joanna Ashton Production: Neil Murphy Publishers: Richard Londesborough, Jonathan Feroze 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 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 .. .Q2 2012 www.businessmonitor.com VIETNAM BUSINESS FORECAST REPORT INCLUDES 10-YEAR FORECAST TO 2021 Published by BUSINESS MONITOR INTERNATIONAL LTD Includes 10-year forecasts to end-2017... Excludes beverage consumption f = BMI forecast Source: General Statistics Office of Vietnam, BMI Business Monitor International Ltd www.businessmonitor.com 39 VIETNAM Q2 2012 These products typically... could leave Vietnam a second-rate economy for an indefinite period Business Monitor International Ltd www.businessmonitor.com 25 VIETNAM Q2 2012 Business Environment Outlook Inroduction Vietnam'' s