BMI Vietnam Business Forecast Report Q2 2014

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Business Forecast report

Q2 2014www.businessmonitor.com

VietnaMincludes 10-year forecast to 2023

Economy Poised For Further Strength

issn 1745-0764published by Business Monitor international Ltd.

copy Deadline: 14 february 2014

2 Business Monitor International Ltdwww.businessmonitor.com

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executive summary ................................................................................................................................. 5core Views ......................................................................................................................................................................................5Major Forecast changes ................................................................................................................................................................5Key risks to outlook ....................................................................................................................................................................5

chapter 1: political outlook .................................................................................................................... 7sWot analysis .......................................................................................................................................................... 7BMi political risk ratings ........................................................................................................................................ 7Foreign policy ........................................................................................................................................................... 8

We believe that China's growing military presence in the region will continue to dominate Vietnam's foreign policy agenda over the coming years. Vietnam is likely to continue to fall further behind in an arms race with China due to the latter's wide technological lead with regards to its military capabilities and stronger financial position. Nonetheless, we expect Hanoi to maintain a sizeable defence budget over the coming years.

taBle: Political oVerView .............................................................................................................................................................................. 8

Long-term political outlook .................................................................................................................................... 9Key political challenges over the coming Decade ...................................................................................................................9

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.

chapter 2: economic outlook ............................................................................................................... 13sWot analysis ........................................................................................................................................................ 13BMi economic risk ratings ................................................................................................................................... 13economic activity ................................................................................................................................................... 14starting 2014 on a Firm Footing ................................................................................................................................................14

Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% y-o-y in Q413, has reaffirmed our conviction that the Vietnamese economy will begin 2014 on a strong note. Not only are we witnessing more evidence of a sustained pick-up in production activity and employment in the manufacturing sector, but we also expect foreign direct investment (FDI) inflows to accelerate as the economic recovery gathers pace over the coming quarters. We forecast real GDP growth to come in at 5.9 % in 2014, versus Bloomberg consensus of 5.5%.

taBle: econoMic actiVity .............................................................................................................................................................................. 14

Monetary policy ...................................................................................................................................................... 15new credit Growth target suggests Monetary policy to Be Kept on Hold ..........................................................................15

We see limited scope for the State Bank of Vietnam (SBV) to adjust its monetary policy over the coming quarters. While monetary tightening could risk undermining the nascent economic recovery, further easing by the SBV is also likely to have very little impact on economic growth as banks remain saddled with debt. We reiterate our view that the SBV will keep its benchmark refinancing rate on hold at 7.00% throughout 2014.

taBle: Monetary Policy.................................................................................................................................................................................15

Balance of payments ............................................................................................................................................. 17De-Dollarisation efforts Bearing Fruit ........................................................................................................................................17

The Vietnamese dong has remained stable within a narrow range of VND20,815/US$-VND21,238/US$ since the beginning of 2012, and we expect this trend to continue as we head into 2014. Furthermore, there is increasing evidence that the economy is evolving rapidly to become less reliant on the US dollar. We believe that Vietnam's improving macroeconomic fundamentals (benign inflation, robust current account dynamics) will continue to play a major role in supporting the SBV's de-dollarisation efforts over the years. 17

taBle: current account ............................................................................................................................................................................... 17

Fiscal policy ............................................................................................................................................................ 19Bearish sentiment to turn in Light of progress on Fiscal reforms .....................................................................................19

We continue to see room for sentiment towards the country's sovereign credit ratings to improve. We view recent moves by the Vietnamese government to liberalise fuel and electricity price controls as a positive sign that further reforms may be forthcoming. Furthermore, we believe that private sector driven economic growth over the coming years should bode well for tax revenue growth.

3Business Monitor International Ltd www.businessmonitor.com

contents

Good progress on fiscal reforms will see Vietnam 's budget deficit narrow from a projected 5.1% of GDP in 2013 to 4.0 % of GDP by 2015. 19

taBle: fiscal Policy ........................................................................................................................................................................................19

chapter 3: 10-Year Forecast .................................................................................................................. 21the Vietnamese economy to 2023......................................................................................................................... 21

Vietnam's growth prospects over the next decade remain positive in our view, as reflected by our bullish forecasts for real GDP growth to average 6.2% over 2014-2023. We foresee a more stable economic environment, with inflation averaging a benign 5.8% and a relatively balanced current account through 2014, before witnessing a mild surplus averaging 1.9% of GDP from 2015-2023.

taBle: lonG-terM MacroeconoMic forecasts .................................................................................................................................... 21

chapter 4: Business environment ........................................................................................................ 25sWot analysis ........................................................................................................................................................ 25BMi Business environment risk ratings ............................................................................................................. 25Business environment outlook ............................................................................................................................. 26taBle: BMi Business and oPeration risk ratinGs ................................................................................................................................ 26

taBle: BMi leGal fraMework ratinG ........................................................................................................................................................ 27

TABLE: LABOUr FOrCE QUALITy ...................................................................................................................................................................... 29taBle: asia annual fdi inflows ................................................................................................................................................................... 30

taBle: trade and inVestMent ratinGs .................................................................................................................................................... 32

chapter 5: Key sectors .......................................................................................................................... 35autos ........................................................................................................................................................................ 35TABLE: AUTOS SALES, 2011-2018 (VAMA MEMBErS) ...................................................................................................................................... 36taBle: autos Production, 2011-2018 ......................................................................................................................................................... 36

taBle: autos trade, 2011-2018 ...................................................................................................................................................................... 37

Food and Drink.........................................................................................................................................................38TABLE: FOOD CONSUMPTION INDICATOrS HISTOrICAL DATA & FOrECASTS, 2010-2017 .................................................................... 38TABLE: ALCOHOLIC DrINkS VOLUME/VALUE SALES HISTOrICAL DATA & FOrECASTS, 2010-2017 .................................................... 39TABLE: MASS GrOCEry rETAIL SALES By FOrMAT HISTOrICAL DATA & FOrECASTS, 2010-2017 .................................................... 40

other Key sectors ................................................................................................................................................... 49TABLE: FrEIGHT kEy INDICATOrS .................................................................................................................................................................... 49TABLE: OIL & GAS SECTOr kEy INDICATOrS .................................................................................................................................................. 49TABLE: PHArMA SECTOr kEy INDICATOrS .................................................................................................................................................... 49taBle: telecoMs sector key indicators ................................................................................................................................................ 50

taBle: defence and security sector key indicators ....................................................................................................................... 50

taBle: infrastructure sector key indicators ................................................................................................................................... 50

chapter 6: BMi Global assumptions .................................................................................................... 51Global outlook ......................................................................................................................................................... 51Fairly Benign prognosis... With risks ........................................................................................................................................51taBle: GloBal assuMPtions.......................................................................................................................................................................... 51

TABLE: DEVELOPED STATES, rEAL GDP GrOWTH, % ................................................................................................................................... 52TABLE: BMI VErSUS BLOOMBErG CONSENSUS rEAL GDP GrOWTH FOrECASTS, % ............................................................................ 52TABLE: EMErGING MArkETS, rEAL GDP GrOWTH, % .................................................................................................................................. 53


vietnam Q2 2014

core Views Evidence of improving macroeconomic fundamentals in Vietnam, a

strong real GDP growth reading of 6.0% year-on-year (y-o-y) in Q413,

accelerating foreign direct investment inflows, robust remittances

and merchandise trade exports, have all reaffirmed our conviction

that the Vietnamese economy will begin 2014 on a strong note.

We forecast real GDP growth to come in at 5.9% in 2014, versus

Bloomberg consensus of 5.5%.

We expect benign inflation, improving current account dynamics, and

the Vietnamese governments stance on prioritising macroeconomic

stability over rapid growth, to continue to underpin the stability of the

Vietnamese dong over the coming months. Over the medium term,

we see scope for the currency to appreciate to around VND20,560/

US$ by the end of 2014, supported by a robust outlook for foreign

direct investment (FDI) inflows and remittances.

We believe that private sector driven economic growth over the

coming years should bode well for tax revenue growth and bolster

Vietnams fiscal position. Good progress on fiscal reforms will see

Vietnams budget deficit narrow from a projected 5.1% of GDP in

2013 to 4.0% of GDP by 2015.

Major Forecast changes We have revised down our average 2014 headline consumer price

inflation forecast from 6.8% to 5.8% to reflect recent data indicating

benign inflationary pressures.

Key risks to outlook Downside Growth risks From rising commodity prices: should

commodity prices witness a strong rebound in 2014, we could see

the central bank adopting a more hawkish stance on monetary policy.

The risk of having to hike interest rates aggressively would present

significant downside risks to economic growth.

Further Deterioration in external Demand: Vietnams trade

account has been holding up well and has recorded surpluses in

recent months. However, should we see a deterioration in the trade

balance, we would not be surprised to see the Vietnamese dong

coming under further selling pressures.


executive summary

Brief Methodology

7Business Monitor International Ltd www.businessmonitor.com 7Business Monitor International Ltd www.businessmonitor.com

sWot analysis

strengths The Communist Party of Vietnam remains committed to market-

oriented reforms and we do not expect major shifts in policy direction

over the next five years. The one-party system is generally conducive

to short-term political stability.

relations with the US have witnessed a marked improvement, and

Washington sees Hanoi as a potential geopolitical ally in South East

Asia.

Weaknesses Corruption among government officials poses a major threat to the

legitimacy of the ruling Communist Party.

There is increasing (albeit still limited) public dissatisfaction with the

leaderships tight control over political dissent.

opportunities The government recognises the threat corruption poses to its legiti-

macy, and has acted to clamp down on graft among party officials.

Vietnam has allowed legislators to become more vocal in criticis-

ing government policies. This is opening up opportunities for more

checks and balances within the one-party system.

threats Macroeconomic instabilities continue to weigh on public acceptance of

the one-party system, and street demonstrations to protest economic

conditions could develop into a full-on challenge of undemocractic

rule.

Although strong domestic control will ensure little change to Viet-

nams 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

Beijings more assertive stance over disputed islands in the South

China Sea and domestic criticism of a large Chinese investment

into a bauxite mining project in the central highlands, which could

potentially cause wide-scale environmental damage.

BMi political risk ratingsVietnams short-term political risk rating of 79.0 reflects a largely stable

political system, kept in place by the ruling Communist Party of Vietnams

monopoly on power. While public expressions of discontent have so far

been limited, slower growth and high inflation pose a threat to stability in

the near term. We view one-party rule as inherently unsustainable in the

longer term, and thus accord Vietnam a rating of 57.7 in our long-term

political risk ratings, due mainly to a score of 29.0 in the 'characteristics

of polity rating.

Chapter 1: political outlook

s-t political rank trendsingapore 94.8 1 =Brunei Darussalam 90.6 2 =Hong kong 84.8 3 =taiwan 83.3 4 =Laos 80.4 5 =Vietnam 79.0 6 =south korea 77.7 7 =china 77.3 8 =sri lanka 77.1 9 =Malaysia 76.9 10 =Philippines 71.2 11 =Mongolia 70.4 12 =north korea 69.8 13 =Indonesia 68.8 14 =cambodia 62.7 15 -thailand 62.5 16 =india 62.3 17 =Bangladesh 62.1 18 =Bhutan 61.0 19 =Myanmar 56.9 20 =Pakistan 51.7 21 =Papua new Guinea 45.2 22 =Regional ave 72.2 / Global ave 64.4 / Emerging markets ave 61.9

L-t political rank trendsouth korea 84.2 1 =singapore 80.6 2 =taiwan 75.4 3 =Hong kong 72.9 4 =Mongolia 67.7 5 =Malaysia 67.2 6 =india 65.7 7 =Brunei Darussalam 65.6 8 =china 62.9 9 =Philippines 62.8 10 =Bangladesh 62.6 11 =thailand 61.8 12 =sri lanka 60.2 13 =Indonesia 60.0 14 =cambodia 59.3 15 =Vietnam 57.7 16 =north korea 55.2 17 =Papua new Guinea 54.8 18 =Pakistan 53.7 19 =Bhutan 51.0 20 =Laos 46.9 21 =Myanmar 40.9 22 =Regional ave 62.8 / Global ave 62.6 / Emerging markets ave 59.0

Foreign policy

china to Dominate Foreign policy agenda

BMi VieWWe believe that China's growing military presence in the region will

continue to dominate Vietnam's foreign policy agenda over the com-

ing years. Vietnam is likely to continue to fall further behind in an arms

race with China due to the latter's wide technological lead with regards

to its military capabilities and stronger financial position. Nonetheless,

we expect Hanoi to maintain a sizeable defence budget over the com-

ing years.

There is evidence to suggest that escalating concerns over

China's growing military presence in the region will continue

to dominate Vietnam's foreign policy agenda over the coming

years. Despite an agreement by Hanoi and Beijing in mid-2013

to establish a naval emergency hotline to improve communica-

tions between the two navies, which has helped to calm bilateral

tensions over territorial disputes in the South China Sea, we

believe that the broader picture remains largely unchanged. We

believe that Vietnam will maintain its present stance of trying

to engage China, by playing catch-up in the form of an arms

race to boost the former's military capabilities. Meanwhile, we

expect Hanoi to continue to deepen ties with the US and mem-

bers of the Association of South East Asian Nations (ASEAN)

as a counterbalance against China's growing military presence

and political clout in the region.

Falling Behind in the arms race With chinaAccording to a report published by the Australian government's

Defence Intelligence Organisation (DIO), China's defence budget

has averaged annual growth of around 10% over the last decade.

China's military spending increased by 8.7% (in real terms) from

2011 to US$106bn in 2012, dwarfing Vietnam's defence budget

of US$3.3bn in 2012, although it is expanding at a more rapid

pace of 16.9%. Given the wide technological lead that China

has over Vietnam in terms of the modernisation of the two

countries' military, and that China is in a much better position to

be able to finance further investment in its military, we believe

that Vietnam is likely to fall further behind in the arms race.

Indeed, the Vietnamese government's efforts on the economic

front to address the country's fiscal imbalances and reduce the

budget deficit (which stood at an estimated 5.1% of GDP in

2013), will limit the amount of resources that can be further


vietnam Q2 2014

taBLe: poLiticaL oVerVieWSystem 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 second five-year term)

Last Election Parliamentary May 2011

Presidential July 2011

Composition Of Current Government Communist Party of Vietnam

key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the CPV. Its most important members are: Party General Secretary Nguyen Phu Trong, State President Truong Tan Sang, Prime Minister Nguyen Tan Dung, and Minister of Public Security Tran Dai Quang.

Other key Posts National Assembly Chariman Nguyen Sinh Hung, Minister of National Defence Phung Quang Thanh, Minister of Planning and Investment Bui Quang Vinh, Vice President Nguyen Thi Doan, central Bank Governor nguyen Van Binh.

Main Political Parties (number of seats in parliament) Communist Party of Vietnam (CPV): Founded in Hong kong in 1930, the CPV has been in power in North Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions exist within the party between a younger, more reform-minded faction originat-ing from Southern Vietnam and an older generation, originating from the North, more aligned to traditionally communist ideology.

next election Presidential and Parliamentary May 2016

Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South china sea

key relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council

BMI Short-Term Political risk rating 79

BMI Structural Political risk rating 57.7

Source: BMI

allocated towards military spending over the coming years.

Leveraging on anti-chinese sentimentNonetheless, we believe that Hanoi will maintain a sizeable

defence budget as a means to assure the Vietnamese public that

the government will respond seriously to any move by Beijing

that would be viewed as a threat to the country's sovereignty

and territorial claims in the South China Sea.

We note that anti-Chinese sentiment in Vietnam has grown

rapidly as a result of the increasing frequency at which the two

countries have engaged in territorial disputes in the South China

Sea in recent years. Thus, adopting an aggressive stance against

Beijing could also prove to be an effective strategy in boosting

political support for the ruling Communist Party of Vietnam

(CPV), which is in line with the party's efforts in recent years

to ease public dissent towards the government mainly due to

rampant corruption and lack of progress on democratic reforms.

Long-term political outlook

Key political challenges over the coming Decade

BMi VieWVietnam's biggest political question over the coming decade is whether

one-party rule under the Communist Party of Vietnam (CPV) will face

growing calls for democratisation, as was the case in other major South

East Asian countries. While our core scenario envisages the CPV

transforming itself into a technocratic administration, it faces major

economic challenges which if mismanaged could lead to widespread

unrest. On the foreign policy front, we expect an increasingly powerful

China to drive Vietnam further into the camp of Asian nations with close

relations with the US.

Although Vietnam is a politically stable country, we view the

ruling Communist Party of Vietnam (CPV)'s monopoly on politi-

cal power as unsustainable over the long term. One of the CPV's

biggest challenges will be managing Vietnam's transformation

into a more pluralistic society over the coming decade and be-

yond. Indeed, the CPV's strict control of the media and political

opinion is already cracking, with a growing number of internet

bloggers becoming increasingly critical of government policy.

challenges and threats to stabilityInflation And Devaluation As Drivers Of Discontent: As

in neighbouring China, economic growth has brought sizeable

material gains for the majority of the population. However, the

Vietnamese government's loose fiscal and monetary policies

have led to high levels of inflation and repeated devaluations

of the dong in recent years, which have eroded the real value of

wages and savings. A failure to contain inflation at a reasonable

level and uphold the real value of the dong could undermine

confidence in the regime.

Divisions Within The Communist Party: High inflation and

devaluation have opened schisms within the CPV leadership

between proponents of continued economic reform and a more

conservative wing which believes that a deceleration or even re-

versal of reform policies would benefit macroeconomic stability.

Ethnic And Regional Tensions: Vietnam is relatively homoge-


political outlook

aggressive stance towards china could Boost Domestic support

Short-Term Political risk ratings

Source: BMI

social stability still a concernShort-Term Political risk ratings

Source: BMI

neous, with ethnic Viet comprising almost 90% of the popula-

tion. Ethnic minorities in the Central Highlands have previously

objected to government policies promoting migration of ethnic

Viet into the highland region. While protests have died down, they

could emerge in future. A potential spark could be the Chinese-

financed bauxite mining project in Lam Dong and Dak Nong

provinces, which is currently causing widespread environmental

damage and raising ire among the local population.

There are also continued cultural differences between the

population of the Red River Delta around the capital Hanoi in

the north and the population of the Mekong Delta in the south,

where Ho Chi Minh City (formerly Saigon, the ex-capital of

South Vietnam) remains the commercial capital. While the

general perception is that northerners are more supportive

of socialist rule and the southerners more inclined to support

continued economic reform, a strong concept of national unity

nevertheless exists in both parts of the country.

Demands For Increased Religious Rights: One of the most

concerted challenges against the CPV in recent years has come

from Catholics wishing for a stronger recognition of their right

to worship in what is still a nominally atheist country. Hanoi

has ceded to pressure from the US to allow a higher degree of

religious freedom, but is wary of the Catholic Church becom-

ing a rallying point of political opposition, as was the case in

Communist Poland and the Philippines during the Marcos dic-

tatorship. The Vietnamese government has thus slapped heavy

sentences on Catholic activists who have extended their fight

to encompass increased political freedom.

Relations With China: Relations with China have become

increasingly strained in recent years as Beijing has expanded its

economic, political and military influence southwards. The main

point of contention is the conflicting territorial claims for the

Paracel and Spratly Islands in the South China Sea. Vietnam's

relations with China have also been strained by the large bilateral

trade deficit it runs with its northern neighbour, which amounts

to more than 10% of GDP, and criticism of a Chinese-financed

bauxite mining project in the central highlands.

That said, the regimes in Beijing and Hanoi share the same

ideological base and political system, and contacts between

their respective politburos have decreased tension between

them. Nonetheless, we believe Vietnam will seek increasingly

close relations with the US and potentially India and Japan

in the defence sphere, as a hedge against China's rising power

in the region.

Vietnam's long-term political risk rating of 57.7/100 is weighed

down by a score of 29.0 in the 'characteristics of polity' sub-

component. This is due to the limited independence of the

judiciary, the ban on political parties other than the CPV and

severe limitations on the media and civil society. While these

factors may presage stability in the short term, the experience

of other South East Asian nations shows that rising wealth and

development later lead to calls for political liberalisation. We

have thus drawn up three scenarios for Vietnam's political future:

scenarios For political changeCore Scenario: CPV Turns Into A Technocratic Regime: Our

core scenario is for the CPV to shift increasingly towards a

technocratic form of government aimed at maintaining high

economic growth levels and an acceptable distribution of wealth

across the population. Ambitious young Vietnamese are already


vietnam Q2 2014

Lagging Behind the regionLong-Term Political risk ratings

Source: BMI

policy continuity not a concern For investorsComponents of Long-Term Political risk ratings

Source: BMI

joining the CPV as a career path and as a means to serve their

country rather than because of ideological convictions. We

thus foresee a continuation of economic reforms in spite of the

criticism emanating from older more traditionally minded party

members. However, intermittent periods of harsh repression

against pro-democracy activists and other government critics are

a strong indication that political liberalisation is not in the offing.

Best-Case Scenario: Gradual Political Liberalisation: Our best-

case scenario is the above scenario combined with a gradual

move towards political liberalisation involving an expanded role

for the National Assembly, greater scope for differing opinion

within the CPV, increased political competition at elections, and

greater media freedom. This scenario would see Vietnam moving

from a one-party system towards a dominant-party system of the

kind seen in neighbouring Cambodia, Malaysia and Singapore,

where elections are held, but where only the ruling party has a

realistic chance of winning them. Looking even further beyond

the horizon, the experiences of South Korea, Taiwan and Japan

have shown that even dominant-party systems eventually give

way to opposition rule. However, in Vietnam's case this may

be more than a decade away.

Worst-Case Scenario: Mass Unrest And Violent Suppression:

Our worst-case scenario involves severe policy missteps that

lead to a period of prolonged economic upheaval with high

unemployment and rapid inflation eroding wealth. This would

significantly strengthen the case for regime change, as advocated

by the pro-democracy movement. Faced with widespread street

protests and an all-out challenge to one-party rule, we believe

at least part of the CPV leadership would support a crackdown

on demonstrators by security forces in order to stay in power.

A violent suppression of street protests as seen in Beijing in

1989 and in Myanmar in 2007 could easily result in a number

of deaths and the imposition of sanctions by the international

community. If so, Vietnam would likely face not only diplomatic

isolation but also economic weakness as exports and foreign

direct investment tumble.


political outlook


sWot analysis

strengths Vietnam has been one of the fastest-growing economies in Asia in

recent years, with GDP growth averaging 7.1% annually between

2000 and 2012.

The economic boom has lifted many Vietnamese out of poverty,

with the official poverty rate in the country falling from 58% in 1993

to 20.7% in 2012.

Weaknesses Vietnam still suffers from substantial trade and fiscal deficits, leaving

the economy vulnerable to global economic uncertainties. The fiscal

deficit is dominated by substantial spending on social subsidies that

could be difficult to withdraw.

The heavily-managed and weak currency reduces incentives to

improve quality of exports, and also keeps import costs high, con-

tributing to inflationary pressures.

opportunities WTO membership and the upcoming ASEAN AEC in 2015 should

give Vietnam greater access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased

competition.

The government will in spite of the current macroeconomic woes,

continue to move forward with market reforms, including privatisation

of state-owned enterprises, and liberalising the banking sector.

Urbanisation will continue to be a long-term growth driver. The UN

forecasts the urban population rising from 29% of the population to

more than 50% by the early 2040s.

threats Inflation and deficit concerns have caused some investors to re-assess

their hitherto upbeat view of Vietnam. If the government focuses too

much on stimulating growth and fails to root out inflationary pressure,

it risks prolonging macroeconomic instability, which could lead to a

potential crisis.

Prolonged macroeconomic instability could prompt the authorities

to put reforms on hold as they struggle to stabilise the economy.

BMi economic risk ratingsVietnams short-term economic risk rating of 70.6 reflects the lack of

progress on banking sector reforms as local banks remain laden with

bad debt and are reluctant to extent loans to small and medium-sized

enterprises. Vietnams chronic fiscal deficits also weigh down our long-

term economic risk ratings, where the fiscal and financial components

score 40.0 and 45.8 out of 100 respectively. However, this is partly

offset by a robust score of 83.3 in the growth component, reflecting a

strong potential for rapid economic expansion and bringing the overall

rating to 70.6.

Chapter 2: economic outlook

s-t economy rank trendsingapore 90.4 1 =south korea 89.4 2 =taiwan 86.9 3 =china 86.0 4 =Malaysia 77.9 5 =Hong kong 76.0 6 =Philippines 73.5 7 =thailand 72.1 8 =Vietnam 70.6 9 =Indonesia 68.1 10 =india 62.1 11 =Bangladesh 57.5 12 =Brunei Darussalam 56.9 13 =sri lanka 52.3 14 =cambodia 49.6 15 +Mongolia 48.5 16 -Papua new Guinea 47.9 17 =Pakistan 46.9 18 =Myanmar 46.0 19 =Laos 45.4 20 =Bhutan 26.9 21 =north korea - -Regional ave 63.7 / Global ave 54.5 / Emerging markets ave 52.6

L-t economy rank trendsouth korea 81.5 1 =singapore 81.2 2 =Malaysia 77.5 3 =china 76.6 4 =Hong kong 74.3 5 =taiwan 74.1 6 =thailand 71.9 7 =Philippines 65.8 8 =Indonesia 63.4 9 =Vietnam 62.7 10 =Bangladesh 57.5 11 =Brunei Darussalam 56.0 12 =india 55.6 13 =sri lanka 52.3 14 =Pakistan 49.8 15 =Laos 43.8 16 =cambodia 42.4 17 +Mongolia 41.6 18 -Papua new Guinea 41.4 19 -Myanmar 40.9 20 =Bhutan 33.8 21 =north korea - -Regional ave 59.5 / Global ave 53.5 / Emerging markets ave 51.1

economic activity

starting 2014 on a Firm Footing

BMi VieWVietnam's latest real GDP reading, which showed that the economy

expanded by 6.0% y-o-y in Q413, has reaffirmed our conviction that the

Vietnamese economy will begin 2014 on a strong note. Not only are we

witnessing more evidence of a sustained pick-up in production activ-

ity and employment in the manufacturing sector, but we also expect

foreign direct investment (FDI) inflows to accelerate as the economic

recovery gathers pace over the coming quarters. We forecast real GDP

growth to come in at 5.9 % in 2014, versus Bloomberg consensus of

5.5%.

In line with our view that the Vietnamese economy would accel-

erate forcefully into the final months of the year (see 'Economy

Picking Up Pace', October 4 2013), latest data released by

the General Statistics Office (GSO) showed that the economy

expanded by 6.0% y-o-y in Q413. This translates into full-year

growth of 5.4% for 2013, just slightly above our forecast of

5.3%. The latest GDP reading, combined with the strong set of

economic data we have seen in recent weeks (accelerating foreign

direct investment inflows, remittances, and merchandise trade

exports), have reaffirmed our conviction that the Vietnamese

economy will begin 2014 on a strong note.

signs of improvementDespite the lack of progress with regards to banking sector

reforms and efforts to ease lending conditions (credit growth is

estimated to have expanded by around 9% in 2013, well under

the State Bank of Vietnam's initial target of 12%), the economy

appears to be holding up well. Not only are we witnessing

more evidence of a sustained pick-up in production activity

and employment in the manufacturing sector (see 'Strong PMI

Reading Reinforces Outlook On Growth', November 5 2013),

but we also expect foreign direct investment (FDI) inflows into

the export sector to accelerate as the economic recovery gathers

pace over the coming quarters.

private sector investment to Drive recoveryAccording to figures published by GSO, FDI-related exports

made up an estimated 67% of the country's total exports for

the first 11 months of the year. Thus, although increased FDI

inflows could potentially result in a temporary deterioration

in the country's trade and current account dynamics due to a

burst of capital goods imports in the near term, we believe that

this is a long-term positive for the economy. Furthermore, we

view FDI inflows as a crucial source of economic growth over

the coming quarters given that the Vietnamese government is

struggling to unlock domestic lending. We forecast real gross

fixed capital formation (GFCF) growth to come in at around

10% in 2014, contributing around 2.7 percentage points (pp)

to our real GDP growth forecast of 5.9%.'

expenditure BreakdownPrivate Consumption: We expect private consumption to grow


vietnam Q2 2014

taBLe: econoMic actiVitY 2012 2013 2014f 2015f 2016f 2017f 2018f

nominal GdP, Vndbn [3] 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3

nominal GdP, us$bn [3] 155.6 170.6 195.1 221.1 249.0 280.8 316.6

real GdP growth, % y-o-y [3] 5.2 5.4 5.9 6.4 6.6 6.4 6.4

GdP per capita, us$ [3] 1,713 1,860 2,108 2,368 2,643 2,957 3,309

Population, mn [4] 90.8 91.7 92.5 93.4 94.2 95.0 95.7

Industrial production, % y-o-y, ave [1,5] 7.0 5.9 7.7 8.4 8.6 8.6 8.5

Unemployment, % of labour force, eop [2,6] 3.2 3.7 3.5 3.5 3.6 3.5 3.5

Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.

Looking at a strong start For 2014real GDP Growth, % (LHS) & Contribution By GFCF & Private Con-

sumption, pp (rHS)

e/f = BMI estimates/forecasts. Source: BMI, General Statistics Office.

at a relatively resilient pace of 6.5% in 2014. However, we note

that the risk of further bankruptcies among SMEs could poten-

tially lead to widespread job losses, especially in export-driven

sectors. Uncertainties over the outlook for employment could,

in turn, prompt households to cut back on spending.

Gross Fixed Capital Formation: We foresee a pickup in private

sector investment growth in 2014, partly led by increased foreign

direct investment inflows. We believe lending rates will gradually

ease over the coming months as the effect of rate cuts in 2013

by the SBV begins to kick in. We are also seeing evidence that

credit conditions are improving. Accordingly, we expect gross

fixed capital formation growth to accelerate substantially from

4.1% in 2013 to 10.0% in 2014.

Public Spending: We expect total public spending to remain

relatively resilient in 2014, expanding at a respectable pace of

6.5%. However, there is limited room for the government to

increase spending further owing to concerns over the need to

finance a potential bailout of ailing state-owned commercial

banks.

Net Exports: Net exports remain the biggest downside risk to

our outlook for the Vietnamese economy, although we expect

external demand to pick up in 2014. Vietnam's trade account

has fallen back into deficits in recent months, but we see the

case for a substantial pickup in external demand on the back

of a rebound in regional growth over the coming quarters. Ac-

cordingly, we still expect exports to expand at a moderate pace

of 5.6% in 2014.

Monetary policy

new credit Growth target suggests Monetary policy to Be Kept on Hold

BMi VieWWe see limited scope for the State Bank of Vietnam (SBV) to adjust its

monetary policy over the coming quarters. While monetary tightening

could risk undermining the nascent economic recovery, further easing

by the SBV is also likely to have very little impact on economic growth as

banks remain saddled with debt. We reiterate our view that the SBV will

keep its benchmark refinancing rate on hold at 7.00% throughout 2014.

The State Bank of Vietnam (SBV) looks set to maintain its

loose monetary policy stance throughout 2014 after the central

bank reiterated its credit growth target of 12-14%. This is in

line with our view that difficulties in reigniting credit growth


economic outlook

taBLe: MonetarY poLicY 2012 2013e 2014f 2015f 2016f 2017f 2018f

Consumer price inflation, % y-o-y, eop [1,3] 6.8 6.0 5.5 5.0 5.0 4.9 4.9

Consumer price inflation, % y-o-y, ave [1,3] 9.3 6.6 5.8 5.2 5.0 4.9 4.9

Producer price inflation, % y-o-y, eop [1,3] 9.3 0.6 5.0 5.2 4.9 4.9 4.9

M1, Vndbn [4] 748,555.0 838,381.6 930,603.6 1,023,663.9 1,126,030.3 1,227,373.1 1,337,836.6

M1, % y-o-y [4] 6.0 12.0 11.0 10.0 10.0 9.0 9.0

M2, Vndbn [4] 3,519,375.0 3,906,506.2 4,297,156.9 4,683,901.0 5,105,452.1 5,513,888.2 5,954,999.3

M2, % y-o-y [4] 12.6 11.0 10.0 9.0 9.0 8.0 8.0

central Bank policy rate, % eop [4] 9.00 7.00 7.00 6.00 6.00 6.00 6.00

lending rate, %, ave [5] 12.7 9.0 8.0 7.0 7.0 7.0 7.0

real lending rate, %, ave [2,6] 3.4 2.4 2.2 1.8 2.0 2.1 2.1

Notes: e BMI estimates. f BMI forecasts. 1 Base year 2000; 2 Real rate strips out the effects of inflation. Sources: 3 General Statistics Office; 4 State Bank of Vietnam; 5 IMF; 6 IMF/BMI; 7 BMI.

not a concern For the sBV Headline Consumer Price Inflation & Components, % chg y-o-y

Source: BMI, General Statistics Office

due to the build-up of bad debt across state-owned banks and

the lack of progress with regards to banking sector reforms are

likely to keep monetary normalisation off the SBV's agenda for

an extended period of time.

According to a press statement by the SBV's Head of Monetary

Policy Department Nyugen Thi Hong, total banking sector credit

grew by just 8.8% in the first 11 months of 2013, missing the

central bank's initial target of 12% by a considerable margin.

Although we expect credit growth to pick up as the economic

recovery begins to gather pace in H214 led by robust foreign

direct investment (FDI) inflows and domestic private sector

investment we believe that calls for pre-emptive monetary

tightening to ward against the risk of asset bubbles and infla-

tionary pressures are largely unwarranted.

Inflationary Pressures To Be Kept In checkWe contend that real estate and stock market valuations are still

relatively cheap compared to the region as well as by histori-

cal standards. Furthermore, we believe that headline consumer

price inflation (CPI) will average a benign 6.3% in 2014 as price

pressures are likely to be capped by low and stable commodity

prices in particular grain prices, which represent a significant

portion of the CPI basket. Increasing evidence of a favourable

summer monsoon in India as highlighted by our commodities

team also suggests a bumper rice harvest in 2014 (see 'Favour-

able Monsoon Keeps Away Export Restrictions', June 19 2013).

This, in our view, should help to keep food price inflation in

check until at least end-2014.

Limited scope For adjustmentsOverall, we see limited scope for adjusting monetary policy

over the coming quarters. While monetary tightening could

risk undermining the nascent economic recovery, further easing

by the SBV is also likely to have very little positive impact on

economic growth. Vietnamese banks remain saddled with bad

debt, while progress on government efforts to restructure the

banking sector has been slow. Thus, we believe that domestic

banks are likely to remain highly cautious towards extending

new credit to small businesses. Consequently, we reiterate our

view that the SBV will keep its benchmark refinancing rate on

hold at 7.00% throughout 2014.

De-dollarisation efforts undertaken by the SBV over the years

have also yielded conclusive results in stabilising the exchange

rate and reinstalling confidence in the domestic currency. This

should help to reduce pressure on the central bank to initiate

policy rate hikes as a means to prop up the currency.

In terms of our growth outlook, we expect Vietnam's economic

growth to pick up strongly in 2014 on the back of robust foreign

direct investment inflows and evidence of a recovery in the

manufacturing sector (see 'Economy Picking Up Pace', October

4 2013). Latest data released by the General Statistics Office

(GSO) showed that the economy expanded by 6.0% y-o-y in

Q413. This translates into full-year growth of 5.4% for 2013, just

slightly above our forecast of 5.3%. The strong GDP reading,

combined with the strong set of economic data we have seen in

recent weeks (accelerating foreign direct investment inflows,

remittances, and merchandise trade exports), have reaffirmed

our conviction that the Vietnamese economy will begin 2014

on a strong note.


vietnam Q2 2014

Missing the targetOutstanding Credit, VNDbn (LHS) & % chg y-o-y (rHS)

Source: BMI, IMF/IFS, State Bank of Vietnam

policy rate on Hold through 2014Headline CPI, % chg m-o-m (LHS) & SBV Policy rate, % (rHS)

Source: BMI, General Statistics Office, SBV

Balance of payments

De-Dollarisation efforts Bearing Fruit

BMi VieWThe Vietnamese dong has remained stable within a narrow range of

VND20,815/US$-VND21,238/US$ since the beginning of 2012, and

we expect this trend to continue as we head into 2014. Furthermore,

there is increasing evidence that the economy is evolving rapidly to

become less reliant on the US dollar. We believe that Vietnam's im-

proving macroeconomic fundamentals (benign inflation, robust current

account dynamics) will continue to play a major role in supporting the

SBV's de-dollarisation efforts over the years.

De-dollarisation efforts undertaken by the State Bank of Viet-

nam (SBV) over the years have yielded conclusive results in

stabilising the exchange rate and reinstalling confidence in the

domestic currency. Not only has the Vietnamese dong remained

stable within a narrow range of VND20,815/US$-VND21,238/

US$ since the beginning of 2012, but we also see increasing

evidence that the economy is evolving rapidly to become less

reliant on the US dollar. According to figures published by the

SBV, banking system credit in Vietnamese dong grew by 11.0%

y-o-y in October, while credit in US dollars declined by 13.6%.

Meanwhile, the ratio of foreign currency deposits over broad

money supply has fallen sharply from around 30% in the 1990s

to 16% by late-2011 and just 12% as of August 2013.

seasonal selling pressure DissipatesThe seasonal surge in demand for US dollars as businesses rush

to meet their short-term US dollar-denominated debt obliga-

tions towards the end of the year, has also started to dissipate.

Indeed, selling pressure on the Vietnamese dong, which tends

to escalate during the final quarter of the year, appears to be

relatively mild as we approach the end of 2013. Following the

surprise announcement by the SBV in November that it will

refrain from devaluing the currency amid the recent sell-off

across emerging Asia FX, the spread between the 12-month

non-deliverable forward (NDF) on the Vietnamese dong and

the spot rate narrowed by as much as 752 points (see chart).

This vindicated our view that the discount that is being priced

into the 12-month NDF to reflect investor expectations of a

devaluation and/or the risk premium that investors demand for

holding the Vietnamese dong, would continue to narrow going


economic outlook

taBLe: current account2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Goods imports, US$bn [3] 77.3 97.4 104.7 118.3 134.5 152.2 171.5 192.9 216.5

Goods imports, % of GDP [3] 68.6 72.3 67.3 69.4 69.0 68.9 68.9 68.7 68.4

Goods exports, US$bn [3] 72.2 96.9 114.6 127.2 142.1 158.2 176.4 197.3 221.1

Goods exports, % of GDP [3] 64.0 72.0 73.6 74.6 72.8 71.6 70.9 70.3 69.8

Goods exports, % of imports [3] 93.3 99.5 109.4 107.5 105.6 103.9 102.9 102.3 102.1

Balance of trade in goods, US$bn [3] -5.1 -0.4 9.9 8.9 7.6 6.0 4.9 4.4 4.6

Balance of trade in goods, % of GDP [3] -4.6 -0.3 6.4 5.2 3.9 2.7 2.0 1.6 1.4

Services imports, US$bn [3] 13.7 17.3 12.5 15.6 16.4 17.4 18.6 19.8 21.2

Services imports, % of GDP [3]] 12.2 12.8 8.0 9.2 8.4 7.9 7.5 7.1 6.7

Services exports, US$bn [3] 7.9 9.3 9.6 8.2 8.6 9.1 9.7 10.3 11.1

Services exports, % of GDP [3] 7.0 6.9 6.2 4.8 4.4 4.1 3.9 3.7 3.5

Goods and services exports, US$bn [1,3] 80.1 106.2 124.2 135.4 150.7 167.3 186.1 207.7 232.1

Goods and services exports, % of GDP [1,3] 71.0 78.9 79.8 79.4 77.2 75.7 74.8 73.9 73.3

Balance of trade in goods and services, US$bn [1,3] -11.0 -8.5 7.0 1.4 -0.3 -2.3 -3.9 -5.1 -5.6

Balance of trade in goods and services, % of GDP [3] -9.7 -6.3 4.5 0.8 -0.2 -1.1 -1.6 -1.8 -1.8

income account balance, us$bn [3] 21.6 26.6 22.1 23.8 25.0 26.5 28.2 30.2 32.3

Income account balance, % of GDP [3] 19.2 19.7 14.2 14.0 12.8 12.0 11.3 10.8 10.2

Net transfers, US$bn [3] 7.9 8.7 8.2 7.0 7.4 7.9 8.6 9.3 10.3

Net transfers, % of GDP [3] 7.0 6.5 5.3 4.1 3.8 3.6 3.4 3.3 3.2

current account balance, us$bn [3] -4.3 0.2 8.3 8.4 7.1 5.6 4.6 4.3 4.7

Current account balance, % of GDP [3] -3.8 0.2 5.4 4.9 3.6 2.5 1.9 1.5 1.5

Openness to international trade, % [2,3] 132.6 144.3 140.9 144.0 141.8 140.4 139.8 138.9 138.2

Notes: e/f = BMI estimates/forecasts. 1 Figures Include Investment Income flows, as reported by ADB; 2 Imports plus exports, % of GDP. Sources: 3 Asian Development Bank.

forward (see 'VND: Stable Outlook Still In Play, But Apprecia-

tory Pressures Are Building', March 13 2013).

underpinned By improving FundamentalsWe believe that Vietnam's improving macroeconomic funda-

mentals have played a major role in supporting the SBV's de-

dollarisation efforts over the years, and we expect this trend to

continue throughout 2014. We expect benign inflation, improving

current account dynamics, and the Vietnamese government's

stance on prioritising macroeconomic stability over rapid growth,

to continue to underpin the stability of the Vietnamese dong.

We have mentioned before that high inflation in the past has been

a major contributing factor for Vietnam's exchange rate policy

woes. Recent evidence of a gradual pickup in credit growth as

the economic rebound begins to gather pace has raised concerns

among investors that inflationary pressures could resurface as

we head into 2014. From our perspective, however, we believe

that credit growth is unlikely to return to the high double-digit

rates seen over the past decade (credit growth averaged 27%

annually from 2002 to 2011). We expect headline CPI to aver-

age a benign 5.8% in 2014, and this should help to underpin

confidence in the Vietnamese dong.

The country's strengthened foreign reserve stock should also

allow the State Bank of Vietnam (SBV) to intervene, if neces-

sary, to shield the currency against speculative selling pressure.

According to figures published by the Asian Development Bank,

the country's foreign reserves stood at US$20bn at the end of

September, which is equivalent to around 2.4 months worth of

import cover (the highest level since 2009). Accordingly, we

maintain our view that the exchange rate will remain stable at

around the current level of VND21,100/US$ over the coming

months. In H214, we see scope for the currency to appreciate

to around VND20,560/US$ by the end of 2014, supported by

a robust outlook for foreign direct investment (FDI) inflows

and remittances.


vietnam Q2 2014

closing the GapExchange rate VND/US$, 12-Month VND/US$ NDF Outright &

spread

Source: BMI, Bloomberg

investors to Become Less BearishExchange rate VND/US$, 12-Month VND/US$ NDF Outright &

spread

Source: BMI, Bloomberg

Keeping investors at easeHeadline Consumer Price Inflation & Components, % chg y-o-y


Fiscal policy

Bearish sentiment to turn in Light of progress on Fiscal reforms

BMi VieWWe continue to see room for sentiment towards the country's sovereign

credit ratings to improve. We view recent moves by the Vietnamese

government to liberalise fuel and electricity price controls as a posi-

tive sign that further reforms may be forthcoming. Furthermore, we

believe that private sector driven economic growth over the coming

years should bode well for tax revenue growth. Good progress on fiscal

reforms will see Vietnam's budget deficit narrow from a projected 4.7%

of GDP in 2013 to 2.9 % of GDP by 2015.

Moody's Investors Service and Fitch Ratings have both issued

a broadly positive outlook for Vietnam's sovereign credit rat-

ing in recent weeks, citing firmer macroeconomic stability as

a key factor for the optimism. This is closely in line with our

long-held view that improving macroeconomic conditions in

Vietnam should help to alleviate investor concerns towards the

build-up of bad debt across the banking sector. We continue to

see room for sentiment to improve with regards to Vietnam's

sovereign credit ratings, which we believe already fully reflects

the risks of a large-scale bailout of state-owned banks by the

government (see 'Fiscal Outlook On Track To Improve In 2014',

October 24 2013 and Fiscal Woes Approaching A Turning

Point, May 15 2013).

positive signals For reformsTo be sure, we are fully aware that it will require a great deal

of effort by policymakers to push ahead with ambitious fiscal

reforms over the coming years in order to address Vietnam's

structural fiscal imbalances. We believe that this process will

involve an extended period of adjustments to the economy before

the country will achieve a balanced fiscal budget. Having said

that, we view recent moves by the Vietnamese government to

liberalise fuel and electricity price controls as a positive sign

that further reforms may be forthcoming, which should help

to bring the fiscal accounts back into balance (see 'Fuel Price

Hikes To Boost Progress On Fiscal Reforms', July 23 2013).

tax revenues to Be Boosted By private sector Driven GrowthFurthermore, we continue to see evidence supporting our view

that the Vietnamese economy is in the early stages of a robust

recovery and that we should see a rebound in private sector

investment in 2014. This will be partly driven by the recent

surge in foreign direct investment (FDI) inflows into the country,

which we believe will create new investment opportunities for


economic outlook

taBLe: FiscaL poLicY 2012 2013e 2014f 2015f 2016f 2017f 2018f

Fiscal revenue, VNDbn [1] 740,500.0 790,800.0 859,403.6 937,209.3 1,021,612.8 1,103,497.0 1,180,996.9

revenue, % of GDP [1] 22.8 22.1 21.4 20.9 20.3 19.6 18.8

Fiscal expenditure, VNDbn [1] 852,760.0 930,730.0 1,011,407.0 1,068,628.7 1,129,243.5 1,182,171.4 1,234,992.3

Expenditure, % of GDP [1] 26.3 26.0 25.2 23.8 22.4 21.0 19.7

current expenditure, Vndbn [1] 651,060.0 729,175.0 789,696.5 829,181.4 870,640.4 905,466.0 941,684.7

Current expenditure, % of total expenditure [1] 76.3 78.3 78.1 77.6 77.1 76.6 76.3

Current expenditure, % of GDP [1] 20.1 20.3 19.7 18.4 17.3 16.1 15.0

capital expenditure, Vndbn [1] 180,000.0 201,555.0 221,710.5 239,447.3 258,603.1 276,705.3 293,307.7

Capital expenditure, % of total expenditure [1] 21.1 21.7 21.9 22.4 22.9 23.4 23.7

Capital expenditure, % of GDP [1] 5.5 5.6 5.5 5.3 5.1 4.9 4.7

Budget balance, Vndbn [1] -146,370.0 -167,280.0 -152,003.4 -131,419.4 -107,630.8 -78,674.4 -53,995.5

Budget balance, % of GDP [1] -4.5 -4.7 -3.8 -2.9 -2.1 -1.4 -0.9

Notes: e BMI estimates. f BMI forecasts. Sources: 1 Ministry of Finance.

private sector investment to Lead the Wayreal GDP Growth, % (LHS) & GFCF, % Of GDP (rHS)


both foreign and local enterprises.

According to the Foreign Investment Agency (FIA), the total

value of new FDI reached US$21.6bn in 2013, which translates

into a stellar 54.5% increase from 2012. We note that this figure,

however, has yet to account for newly committed investment

by British firm Technostar at the Vung Ro petrochemical and

oil refinery complex in the central province of Phu Yen. The

company's latest announcement that it will further raise its

investment to US$3.2bn from US$1.7bn, means that total new

FDI commitments in 2013 will have reached US$23bn. We

believe that private sector driven economic growth over the

coming years should bode well for tax revenue growth and

bolster Vietnam's fiscal position.

Tax revenues as a share of GDP have risen steadily over the past

decade from 19.8% in 2002 to around 21% in 2012. We note that

this has been largely due to the surge in private sector participa-

tion as a share of the economy following Vietnam's ascension as

a member of the World Trade Organisation in 2007.

We expect efforts to speed up the privatisation of SOEs and

the resulting influx of foreign companies into Vietnam over

the coming years to amplify the impact of reforms aimed at

boosting tax revenues over the long term. Good progress on

fiscal reforms will see Vietnam's budget deficit narrow from

an estimated 4.7% of GDP in 2013 to 3.8% and 2.9% by 2014

and 2015, respectively.


vietnam Q2 2014

Getting a Boost From corporate tax revenueShare of Total Budget revenue, % (2012)

Source: BMI, Ministry of Finance

the Vietnamese economy to 2023

2013-2022: a new Focus on Quality Growth

BMi VieWVietnam's growth prospects over the next decade remain positive in

our view, as reflected by our bullish forecasts for real GDP growth to

average 6.2% over 2014-2023. We foresee a more stable economic

environment, with inflation averaging a benign 5.8% and a relatively

balanced current account through 2014, before witnessing a mild sur-

plus averaging 1.9% of GDP from 2015-2023.

Vietnam's growth story over the past decade has been marked

by tumultuous periods of high inflation, multiple currency

devaluations, and widespread economic wastage as a result of

inefficient state-owned enterprises (SOE) that continue to hold

a dominating presence in key economic sectors. From our per-

spective, however, we believe that 2013 marked a major turning

point for the economy. While structural factors underpinning

Vietnam's potential for long-term growth (including favour-

able demographics, proximity to China, and low cost of labour

relative to the region) remain largely unchanged, we highlight

recent developments that reinforce our bullish outlook on the

economy over the next decade.

Firstly, we foresee a more stable economic environment in Viet-

nam, brought upon by a decisive shift in the government's focus

towards policies aimed at maintaining price stability, coupled

with ongoing efforts to further address macroeconomic imbal-

ances in the economy. In this respect, the government has made

significant progress in recent years, by reversing the country's

stubborn trade deficits into a mild surplus towards the end of

2012. Looking ahead, we expect Vietnam to run a relatively

balanced current account through 2014, before witnessing a

mild surplus averaging 1.9% of GDP from 2015-2023.

Meanwhile, inflation has also been brought down from a double-

digit high of 23% in mid-2011 to a more benign rate of 7% by

end-2012. High inflation has been a major contributing factor for


Chapter 3: 10-Year Forecast

taBLe: LonG-terM MacroeconoMic Forecasts2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f

nominal GdP, us$bn [2] 249.0 280.8 316.6 356.3 399.5 446.0 497.6 554.3

real GdP growth, % y-o-y [2] 6.6 6.4 6.4 6.3 6.2 6.1 6.0 5.9

Population, mn [3] 94.2 95.0 95.7 96.4 97.1 97.7 98.3 98.8

GdP per capita, us$ [2] 2,643 2,957 3,309 3,697 4,116 4,566 5,064 5,609

Consumer price inflation, % y-o-y, ave [1,4] 5.0 4.9 4.9 4.8 4.8 4.7 4.7 4.6

Current account balance, % of GDP [5] 1.9 1.5 1.5 1.7 1.9 2.1 2.3 2.5

exchange rate Vnd/us$, ave [6] 20,215.00 20,000.00 19,800.00 19,600.00 19,450.00 19,350.00 19,250.00 19,150.00

Notes: f BMI forecasts. 1 Base year 2000. Sources: 2 Asian Development Bank, General Statistics Office; 3 World Bank/UN/BMI; 4 General Statistics Office; 5 Asian Development Bank; 6 BMI.

a More Moderate Growth Modelreal GDP Growth, % (LHS) & GFCF, % Of GDP (rHS)

Source: BMI, General Statistics Office (f = forecasts)

Vietnam's exchange rate policy woes, and recent evidence of a

pickup in credit growth has reignited concerns that inflationary

pressures could resurface as the economic recovery begins to

gather pace in 2013.

However, we believe that credit growth is unlikely to return

to the high double-digit rates seen over the past decade (credit

growth averaged 27% annually from 2002 to 2011). Indeed,

we see encouraging evidence that the State Bank of Vietnam

(SBV) remains fully committed towards its fresh mandate of

maintaining price stability.

The SBV has also been tasked to push ahead with banking sector

reforms to improve risk management and improve credit quality

over the coming years. We believe that these efforts should help

to drive credit growth down towards an average of 9.3% over

the coming decade. Accordingly, we expect headline consumer

price inflation to average a benign 5.3% annually over the same

period, and we view this as a positive for the Vietnamese dong

over the longer term.

We believe that the government's stance on maintaining macro-

economic stability, coupled with a renewed impetus to speed up

economic reforms to enhance long-term growth, will play a crucial

role in attracting foreign direct investment (FDI) into Vietnam.

Plans to speed up privatisation of SOEs to allow the private

sector to assume a greater role in driving economic growth, is

in line with our view that gross fixed capital formation (GFCF)

growth will average a robust 5.6% over the next decade.

Widely viewed as one of the few markets in the region that

remains largely untapped by foreign companies, multinational

companies (MNCs) have expressed optimism over plans by the

Vietnamese government to gradually lift restrictions on foreign

participation in the banking industry (and other sectors that are

tightly regulated and closely supervised by the state). As the

economy gradually shifts towards a more market-oriented system

by allowing for increased foreign competition, we believe that

this will open up opportunities for MNCs seeking to penetrate

the Vietnamese market. Increased foreign participation in sectors

that are presently dominated by SOEs should also contribute

towards an overall improvement in the efficiency of the economy

going forward. We believe that this will provide support to real

GDP growth, which we expect to average at a robust 6.2% over

the coming decade.

Although timely intervention by the SBV appears to have helped

reinstall confidence and fend off a banking crisis for now, we

believe that the build-up of bad debt due to poor lending practices

and a lack of regulatory oversight over the years will remain

a daunting task for the government to tackle going forward.

Indeed, we expect banks that are unable to compete effectively

to be absorbed eventually by the larger state-owned banks

under a directive from the SBV, or gradually exit the industry

altogether. On the whole, we see this necessary adjustment as

an effective way of eliminating uncompetitive banks in the

economy and we are encouraged by the SBV's aggressive stance

towards addressing the banking sector's weaknesses. The SBV

has announced plans to restructure ailing banks. Furthermore,

plans to establish a debt management agency in 2013 will help

to strengthen risk management practices and address the high

non-performing loans (NPL) ratios among local banks over the

long run. We believe that such efforts should play a significant


vietnam Q2 2014

Moderating population GrowthPopulation, mn (LHS) & Growth, % (rHS)

Source: BMI, World Bank (forecasts from 2011 onwards)

in need of reformsGlobal Competitiveness Index Component rankings

Source: BMI

role in boosting Vietnam's competitiveness and economic growth

over the longer term.

Vietnam's robust demographics, which present considerable

scope for policymakers to unlock gains in labour productivity,

underscore the potential for labour market reforms as a powerful

policy tool to drive economic growth over the long term. Indeed,

we believe that Vietnam's superior demographics relative to the

region will remain a key distinguishing factor that makes the

country one of the most attractive investment destinations for

MNCs going forward.

Having said that, we point out that Vietnam is lagging behind

its regional peers in terms of investment in education and pro-

ductivity-enhancing technologies. While countries across South

East Asia are focusing on efforts to move up the manufacturing

value chain by investing heavily in education, training, and new

technology, the Vietnamese government have maintained its

focus on attracting foreign investment in its existing industries.

We believe that efforts to boost labour productivity in Vietnam

are severely lacking, given our view that room for further gains

in productivity through rural-urban migration will be limited

going forward. On a more positive note, should we see a move

by the government to redirect public spending towards a greater

emphasis on investment in education and infrastructure, we are

optimistic that Vietnam would be capable of capturing even

more impressive growth over the long term.


10-YEAR foREcAst

BMis 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.

room For improvementGlobal Competitiveness Index Component Scores

Source: BMI


sWot analysis

strengths Vietnam has a large, skilled and low-cost workforce, which has made

the country attractive to foreign investors.

Vietnams 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 Vietnams infrastructure is still weak. roads, railways and ports are

inadequate to cope with the countrys economic growth and links

with the outside world.

Vietnam remains one of the worlds most corrupt countries. According

to Transparency Internationals 2012 Corruption Perceptions Index,

Vietnam ranks 123 out of 176 countries.

opportunities Vietnam is increasingly attracting investment from key Asian

economies, such as Japan, South korea and Taiwan. This offers

the possibility of the transfer of high-tech skills and know-how.

Vietnam is pressing ahead with the privatisation of state-owned

enterprises and the liberalisation of the banking sector. This should

offer foreign investors new entry points.

threats Ongoing trade disputes with the US, and the general threat of

American protectionism, which will remain a concern.

Labour unrest remains a lingering threat. A failure by the authorities

to boost skills levels could leave Vietnam a second-rate economy

for an indefinite period.

BMi Business environment risk ratingsVietnams business environment rating of 53.1 is constrained by an

infrastructure rating of 58.2, as massive bombing by the US during the

Vietnam War put the countrys road and rail network decades behind peer

nations. Moreover, the institution score of 38.9 reflects the vestiges of

a planned economy still present in many government bodies and state-

owned enterprises in spite of the ongoing economic reform process.

Indeed, the winds of change are noticeable in the market openness

score of 62.2, which reflects an increasing degree of trade and financial

market integration with the outside world.

Chapter 4: Business environment

Business environment rank trendsingapore 80.0 1 =Hong kong 78.7 2 =south korea 71.1 3 =Malaysia 68.6 4 =taiwan 61.9 5 =thailand 61.7 6 =china 59.4 7 =Brunei Darussalam 57.8 8 =Vietnam 53.1 9 =sri lanka 51.3 10 =Philippines 48.5 11 =Mongolia 47.9 12 =india 46.0 13 =cambodia 40.4 14 =Indonesia 40.2 15 =Papua new Guinea 40.0 16 =Bangladesh 38.3 17 =Pakistan 37.2 18 =Laos 34.4 19 =Bhutan 33.7 20 =north korea 18.7 21 =Myanmar - -Regional ave 49.4 / Global ave 48.3 / Emerging markets ave 45.0

Business environment outlook

introductionVietnam'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 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.

institutions

Legal FrameworkVietnam 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 and 2006. Despite some progress in protecting intellectual

property rights, the overall legal system in Vietnam is regarded

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