IMPORTANT NOTICE:

The information in this PDF file is subject to Business Monitor International’s full copyright
and entitlements as defined and protected by international law. The contents of the file are for the
sole use of the addressee. All content in this file is owned and operated by Business Monitor
International, and the copying or distribution of this file, internally or externally, is strictly prohibited
without the prior written permission and consent of Business Monitor International Ltd.
If you wish to distribute the file, please email the Subscriptions Department at
subs@businessmonitor.com, providing details of your subscription and the number of recipients
you wish to forward or distribute this information to.

DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to
be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or
mechanical error, either at source or during production, Business Monitor International 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
2
VIETNAM – MACROECONOMIC INDICATORS
2011e 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
Nominal GDP, US$bn [3] 120.4 135.7 153.6 175.9 200.6 228.7 259.2 292.3 329.7 372.0 419.8

Nominal GDP, VNDbn [3] 2,487,631 2,854,800 3,195,190 3,617,838 4,077,805 4,597,168 5,183,695 5,846,181 6,594,585 7,440,183 8,395,743
VIETNAM Q2 2012

Nominal GDP, EURbn [3] 86.7 105.2 122.9 140.7 160.5 183.0 207.3 233.8 263.8 297.6 335.8

GDP per capita, US$ [3] 1,357 1,512 1,694 1,921 2,170 2,452 2,754 3,080 3,447 3,861 4,326

GDP per capita, EUR [3] 976 1,172 1,356 1,537 1,736 1,961 2,203 2,464 2,758 3,089 3,461

Real GDP, % chg y-o-y [3] 5.9 5.8 6.5 7.3 7.3 7.4 7.4 7.4 7.4 7.5 7.5

Private consumption, % of GDP [3] 66.8 66.8 66.3 65.5 64.7 63.9 63.0 62.2 61.4 60.6 59.7

Private final consumption, VND real growth % y-o-y [3] 6.4 5.7 5.8 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Government final consumption, % of GDP [3] 6.5 6.5 6.4 6.2 6.1 6.0 5.8 5.7 5.6 5.5 5.3

Government final consumption, VND real growth % y-o-y [3] 5.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Fixed capital formation, % total GDP [3] 35.2 35.0 34.6 34.2 33.8 33.3 32.9 32.5 32.1 31.6 31.2

Fixed capital formation, VND real growth % y-o-y [3] 4.9 5.1 5.4 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Population, mn [4] 88.8 89.7 90.7 91.6 92.4 93.3 94.1 94.9 95.6 96.4 97.0

Unemployment, % of labour force, eop [5] 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0

www.businessmonitor.com
Consumer prices, % y-o-y, ave [1,5] 18.6 8.5 5.0 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Lending rate, %, ave [6] 19.5 13.0 11.0 10.0 9.0 8.0 8.0 8.0 8.0 8.0 8.0

Central Bank policy rate, % eop [7] 15.0 11.0 9.0 8.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0
Exchange rate VND/US$, ave [8] 20,653.31 21,035.00 20,800.00 20,565.00 20,330.00 20,100.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00

Exchange rate VND/EUR, ave [8] 28,708.10 27,135.15 26,000.00 25,706.25 25,412.50 25,125.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00

Budget balance, US$bn [9] -3.1 -4.6 -4.2 -4.3 -4.3 -4.4 -4.4 -4.8 -5.3 -5.9 -5.7

Budget balance, % of GDP [9] -2.6 -3.4 -2.7 -2.5 -2.2 -1.9 -1.7 -1.7 -1.6 -1.6 -1.4

Goods and services exports, US$bn [2,10] 87.7 97.5 109.8 123.7 139.3 156.8 176.6 198.9 224.0 252.2 284.0

Goods and services imports, US$bn [2,11] 102.9 114.6 127.6 142.2 158.4 176.5 196.6 219.1 244.1 272.0 303.2

Balance of trade in goods and services, US$bn [2,12] -9.3 -17.0 -17.8 -18.5 -19.1 -19.6 -20.0 -20.2 -20.2 -19.9 -19.2

Balance of trade in goods and services, % of GDP [13] -12.6 -12.6 -11.6 -10.5 -9.5 -8.6 -7.7 -6.9 -6.1 -5.3 -4.6

Current account, US$bn [13] -5.7 -6.6 -6.3 -5.8 -5.2 -4.3 -3.1 -1.6 0.3 2.6 5.5

Current account, % of GDP [13] -4.7 -4.8 -4.1 -3.3 -2.6 -1.9 -1.2 -0.6 0.1 0.7 1.3

Foreign reserves ex gold, US$bn [13] 19.6 21.2 23.5 26.9 31.3 37.1 44.4 53.7 65.3 79.6 97.4

Import cover, months g&s [13] 2.7 2.6 2.6 2.7 2.8 3.0 3.3 3.6 3.9 4.3 4.7

Notes: e BMI estimates. f BMI forecasts. 1 Base year 2000; 2 Includes Investment Income flows up until 2004; Sources: 3 Asian Development Bank, General Statistics Office. 4 World Bank/UN/BMI; 5 General
Statistics Office; 6 IMF; 7 State Bank of Vietnam; 8 BMI; 9 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.

Business Monitor International Ltd

 Contents

Executive Summary.................................................................................................................................. 5
Core Views ......................................................................................................................................................................................5
Major Forecast Changes ................................................................................................................................................................5
Key Risks To Outlook ....................................................................................................................................................................5

Chapter 1: Political Outlook..................................................................................................................... 7

SWOT Analysis................................................................................................................................................................................7
BMI Political Risk Ratings ........................................................................................................................................ 7
Domestic Politics....................................................................................................................................................... 8
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............................................................................................................................................................. 8
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 3

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

4 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 5

 Chapter 1:
Brief Methodology
Political Outlook

SWOT Analysis BMI Political Risk Ratings

Strengths
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 do 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.
Corruption among government officials poses a major threat to the S-T Political Rank Trend
Singapore 95.4 1 =
legitimacy of the ruling Communist Party. Brunei Darussalam 90.6 2 =
There is increasing (albeit still limited) public dissatisfaction with the Hong Kong 86.0 3 =
Taiwan 83.3 4 =
leadership's tight control over political dissent. Laos 80.4 5 =
Malaysia 79.0 6 =
Opportunities China 78.5 7 =
Sri Lanka 78.3 8 =
The government recognises the threat corruption poses to its legiti- South Korea 77.7 8 =
Vietnam 76.9 10 =
macy, and has acted to clamp down on graft among party officials. Indonesia 73.5 11 =
North Korea 72.7 12 =
Vietnam has allowed legislators to become more vocal in criticis-
Philippines 67.9 13 =
ing government policies. This is opening up opportunities for more Cambodia 67.3 14 =
Bangladesh 67.1 15 =
checks and balances within the one-party system. Thailand 65.4 16 =
India 64.0 17 =
Threats Bhutan 61.0 18 =
Myanmar 56.5 19 =
Macroeconomic instabilities in 2012 are likely to weigh on public Papua New Guinea 51.9 20 =
Pakistan 45.2 21 =
acceptance of the one-party system, and street demonstrations to
Regional ave 73.1 / Global ave 65.7 / Emerging markets ave 63.3
protest economic conditions could develop into a full-on challenge
L-T Political Rank Trend
of undemocractic rule. South Korea 84.2 1 =
Singapore 80.6 2 =
Although strong domestic control will ensure little change to Viet- Taiwan 75.4 3 =
nam's political scene in the next few years, over the longer term, Hong Kong 72.9 4 =
China 67.4 5 =
the one-party-state will probably be unsustainable. Malaysia 67.2 6 =
India 67.1 7 =
Relations with China have deteriorated over recent years due Brunei Darussalam 65.6 8 =
Philippines 62.8 9 =
to Beijing's more assertive stance over disputed islands in the Bangladesh 62.6 10 =
Sri Lanka 60.2 11 =
South China Sea and domestic criticism of a large Chinese in- Indonesia 59.0 12 =
Cambodia 58.9 13 =
vestment into a bauxite mining project in the central highlands.
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

Business Monitor International Ltd www.businessmonitor.com 7

VIETNAM Q2 2012

Libya and Egypt, could in turn, fuel political dissidents' desire

Domestic Politics 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
Further Reforms Crucial In of 100) for the 'Social Stability' subcomponent of our political
Reinforcing Confidence In The CPV risk rating. This translates into a score of 76.9 for our overall
short-term political risk rating for Vietnam. However, we believe
BMI VIEW: that concerns of a major political upheaval are unwarranted, at
Despite growing concerns that recent political uprisings in the Mid- least for now.
dle East would spread towards other authoritarian regimes including
No Imminent Risks Of Unrest
Vietnam, we believe that the risk of a major political upheaval in Viet- Short-Term Political Risk Rating
100
nam remains remote in the medium term. We note that there has been 95
STPR Regional Average

a decisive shift in the Communist Party of Vietnam (CPV)'s direction 90

towards allowing for democratic reforms and addressing rampant cor- 85
80
ruption. We believe that further reforms will be crucial in reinforcing
75
confidence in the CPV's leadership over the coming years.
70
65
The need for political reforms has become increasingly crucial in 60

reinforcing public confidence in Vietnam's single-party system 55

50
of government, which the ruling Communist Party of Vietnam

Cambodia

Myanmar
Malaysia

Indonesia

Thailand
Philippines
Brunei

Vietnam
Singapore

Laos
(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 Source: BMI
to warn of a similar political uprising in Vietnam. From our
perspective, we believe that examples of successful uprisings Conditions In Vietnam Are Starkly
in the Middle East, which have toppled authoritarian govern- Different
ments and paved the way for democratic reforms in the case of 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 Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North
parliament) 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

8 www.businessmonitor.com Business Monitor International Ltd

 POLITICAL OUTLOOK

that have experienced some form of major political uprising government's agenda in 2012. Indeed, success in tackling cor-
in recent years. Firstly, in terms of the direction of the CPV's ruption would represent a major step in reinforcing confidence
economic policies over the past decade, we have witnessed a in the CPV's leadership and this would, in turn, boost the CPV's
great amount of effort from the government in ensuring that credibility in pushing forward with further political reforms
the lower-income population has been given a fair chance to over the coming years.
participate in the country's growth. Although the poverty rate
in Vietnam remains relatively high, we have witnessed a sig- A Decisive Shift Towards Further
nificant improvement from 22.0% in 2005 to 9.5% in 2010. A Reforms
In recent years, we have witnessed a decisive shift in the CPV's
Social Stability Remains A Concern
Short-Term Political Risk Rating policymaking process whereby senior conservative members
100 within the politburo have taken a step back from economic
95 policy decisions and more towards a supervisory role within
90
the CPV. The National Assembly – a 493-member unicameral
85
body that is re-elected every five-years – has also been given
80
75 more power in setting the direction of the country's economic
70 policies. We see these developments as a positive sign that the
65 government will allow for more economic reforms while tak-
60
ing further steps in the direction of democratic reforms. More
55
50 importantly, we believe that these reforms will be crucial for
Policy-Making

Policy Continuity
Security/External
Social Stability

the country in extending its economic footprint globally and

Process

Threats

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. Government-
led 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 deterio-
rating 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 cor-

ruption 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 in-
crease 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 9

VIETNAM Q2 2012
Long-Term Political Outlook
Key Political Challenges Over The
Coming Decade
BMI VIEW:
Vietnam's biggest political question over the coming decade is whether
one-party rule under the Communist Party of Vietnam (CPV) will face
growing calls for democratisation, as was the case in other major South
East Asian countries. While our core scenario envisages the CPV
transforming itself into a technocratic administration, it faces major
economic challenges which if mismanaged could lead to widespread
unrest. On the foreign policy front, we expect an increasingly powerful
China to drive Vietnam further into the camp of Asian nations with close
relations with the US.
Although Vietnam is a politically stable country, we view the
ruling Communist Party of Vietnam's (CPV) 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 Stability
Inflation and devaluation as drivers of discontent: As in
neighbouring China, economic growth has brought sizeable
material gains for the majority of the population. However, the
Vietnamese government's loose fiscal and monetary policies
have led to high levels of inflation and repeated devaluations
of the dong in recent years, which have eroded the real value of
wages and savings. 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 homogene-
ous, with ethnic Viet comprising almost 90% of the population.
Ethnic minorities in the Central Highlands have previously
objected to government policies promoting migration of ethnic
Viet into the highland region. While protests have died down,
10 www.businessmonitor.com
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 envi-
ronmental 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 in-
creasingly 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 53.8/100 is weighed
down by a score of 27.6 in the 'characteristics of polity' sub-
component. This is due to the limited independence of the
Business Monitor International Ltd
 POLITICAL OUTLOOK

judiciary, the ban on political parties other than the CPV and a crackdown on demonstrators by security forces in order to
severe limitations on the media and civil society. While these stay in power. A violent suppression of street protests as seen
factors may presage stability in the short term, the experience in Beijing in 1989 and in Myanmar in 2007 could easily result
of other South East Asian nations shows that rising wealth and in a number of deaths and the imposition of sanctions by the
development later lead to calls for political liberalisation. We international community. If so, Vietnam would likely face not
have thus drawn up three scenarios for Vietnam's political future: only diplomatic isolation but also economic weakness as exports
and foreign direct investment tumble.
Scenarios For Political Change
Core Scenario: CPV Turns Into A
Technocratic Regime
Our core scenario is for the Communist Party of Vietnam
(CPV) to shift increasingly towards a technocratic form of
government aimed at maintaining high economic growth levels
and an acceptable distribution of wealth across the population.
Ambitious young Vietnamese are already joining the CPV as
a career path and as a means to serve their country rather than
because of ideological convictions. We thus foresee a continu-
ation 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 dif-
fering 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 domi-
nant-party system of the kind seen in neighbouring Cambodia,
Malaysia and Singapore, where elections are held but only the
ruling party has a realistic chance of winning them. Looking
even further beyond the horizon, the experiences of South Ko-
rea, 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 advo-
cated by the pro-democracy movement. Faced with widespread
street protests and an all-out challenge to one-party rule, we
believe that at least part of the CPV leadership would support

Business Monitor International Ltd www.businessmonitor.com 11

 Chapter 2:
Economic Outlook

SWOT Analysis BMI Economic Risk Ratings

Vietnam's short-term economic risk rating of 56.2 reflects a deteriora-
Strengths tion of external conditions and problems that have risen as a result of
Vietnam has been one of the fastest-growing economies in Asia in the government's previous measures to supplant a sharp reduction
recent years, with GDP growth averaging 7.1% annually between in external demand with fiscal stimulus. Vietnam's chronic fiscal and
2000 and 2011. current account deficits also weigh down our long-term economic risk
An economic boom has lifted many Vietnamese out of poverty, with ratings, where the fiscal and external components score 45.0 and 33.3
the official poverty rate in the country falling from 58% in 1993 to out of 100 respectively. However, this is partly offset by a robust score
9.5% in 2010. of 75.0 in the growth component, reflecting a strong potential for rapid
economic expansion and bringing the overall rating to 55.5.
Weaknesses
S-T Economy Rank Trend
Vietnam still suffers from substantial trade, current account and
Singapore 89.8 1 =
fiscal deficits, leaving the economy vulnerable to global economic South Korea 88.8 2 =
Taiwan 84.8 3 +
uncertainties in 2012. The fiscal deficit is dominated by substantial China 83.1 4 =
Hong Kong 82.3 5 =
spending on social subsidies that could be difficult to withdraw. Malaysia 75.8 6 =
Indonesia 73.1 7 +
The heavily-managed and weak currency reduces incentives to Thailand 73.1 7 =
improve quality of exports, and also keeps import costs high, con- Philippines 70.0 9 =
India 60.0 10 =
tributing to inflationary pressures. Brunei Darussalam 57.7 11 =
Vietnam 56.2 12 =
Bangladesh 53.3 13 =
Sri Lanka 51.9 14 =
Opportunities Myanmar 51.0 15 =
Papua New Guinea 47.3 16 =
WTO membership has given Vietnam access to both foreign markets Pakistan 47.1 17 =
and capital, while making Vietnamese enterprises stronger through Cambodia 43.8 18 +
Bhutan 37.7 19 =
increased competition. Laos 36.5 20 =
North Korea – – –
The government will in spite of the current macroeconomic woes, Regional ave 62.3/ Global ave 55.1 / Emerging markets ave 53.5
continue to move forward with market reforms, including privatisation L-T Economy Rank Trend
of state-owned enterprises, and liberalising the banking sector. South Korea 82.5 1 =
Singapore 80.7 2 =
Urbanisation will continue to be a long-term growth driver. The UN Hong Kong 78.4 3 =
Malaysia 76.8 4 +
forecasts the urban population rising from 29% of the population to Taiwan 75.5 5 =
China 75.2 6 =
more than 50% by the early 2040s. Thailand 73.6 7 =
Indonesia 64.5 8 =
Philippines 64.0 9 =
Threats India
Brunei Darussalam
58.5
57.9
10
11
=
=
Inflation and deficit concerns have caused some investors to re-assess Bangladesh 56.4 12 =
Vietnam 55.5 13 =
their hitherto upbeat view of Vietnam. If the government focuses too Sri Lanka 50.5 14 =
Myanmar 47.5 15 =
much on stimulating growth and fails to root out inflationary pressure, Pakistan 47.5 15 -
Papua New Guinea 44.9 17 =
it risks prolonging macroeconomic instability, which could lead to a
Cambodia 40.4 18 =
potential crisis. Laos 37.0 19 +
Bhutan 32.6 20 =
Prolonged macroeconomic instability could prompt the authorities North Korea – – -
Regional ave 59.6 / Global ave 53.8 / Emerging markets ave 51.3
to put reforms on hold as they struggle to stabilise the economy.

Business Monitor International Ltd www.businessmonitor.com 13

VIETNAM Q2 2012

in external demand, which is expected to come only in late 2012.

Economic Activity Manufacturing sector growth is expected to experience a significant
slowdown, potentially resulting in higher unemployment, while
Global Headwinds To Depress Real falling crop prices are also having a negative impact on rural
GDP Growth incomes. We believe these factors will translate into a slowdown
in private consumption growth in 2012.
BMI VIEW
Exports To Remain A Drag On Growth
Vietnam's real GDP growth is expected to remain subdued at 5.8% in Contribution To Real GDP Growth, pp
8
2012, in line with our view that external demand will cool over the com-
ing months. We expect net exports to remain a major drag on growth 6
before we see a recovery in external demand in late 2012. The threat of
4
a severe credit squeeze due to growing risk aversion towards heavily
indebted emerging markets places further downside risk to our outlook 2
on Vietnam's economic growth.
0
Stellar Performance
Vietnam – Real GDP Growth, % -2

10 -4
2008

2009

2010

2011f

2012f

2013f

2014f
8
Public Spending Private Consumption
Gross Fixed Capital Formation Net Exports

6 Source: General Statistics Office, BMI

Given that Vietnam remains heavily reliant on foreign capital

4
inflows to fuel investment, we are increasingly concerned that
growing risk aversion towards heavily indebted emerging
2
markets could be detrimental to Vietnam's short-term economic
0 growth. However, we are seeing positive signs of a shift in the
2005

2006

2007

2008

2009

2010

2011e

Vietnamese government's traditional pro-growth stance towards

2012f

2013f

a more balanced and sustainable growth model. This supports

Source: BMI our view that policymakers will avoid introducing aggressive
public spending programs to boost growth. While this suggests
Preliminary figures published by the General Statistics Office 2012 growth will miss the government's target, we see this as a
showed that Vietnam's real GDP growth is expected to come in positive for the long-term outlook.
at around 5.9% in 2011, in line with our estimate. We believe
real GDP growth will remain subdued at 5.8% in 2012 (compared
with the government's target of 7.0%) before we see a recovery

TABLE: ECONOMIC ACTIVITY

2011e 2012f 2013f 2014f 2015f 2016f
Nominal GDP, VNDbn [2] 2,487,631.9 2,854,800.0 3,195,190.0 3,617,838.8 4,077,805.6 4,597,168.3
Nominal GDP, US$bn [2] 120.4 135.7 153.6 175.9 200.6 228.7
Real GDP growth, % chg y-o-y [2] 5.9 5.8 6.5 7.3 7.3 7.4
GDP per capita, US$ [2] 1,357 1,512 1,694 1,921 2,170 2,452
Population, mn [3] 88.8 89.7 90.7 91.6 92.4 93.3
Industrial production index, % y-o-y, ave [1,4] 14.0 9.0 16.0 14.0 13.0 12.0
Unemployment, % of labour force, eop [4] 5.0 5.0 5.0 5.0 5.0 5.0
Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; Sources: 2 Asian Development Bank, General Statistics Office. 3 World Bank/UN/BMI; 4
General Statistics Office.

14 www.businessmonitor.com Business Monitor International Ltd

 ECONOMIC OUTLOOK

crisis – was becoming a serious threat to trade and economic

Private Consumption Unlikely To Avert
Slowdown
Our view that manufacturing sector growth will continue to cool
in 2012 will be negative for private consumption growth. We
note that the manufacturing sector makes up 19.4% of GDP and
remains a key driver of the economy, contributing 2.1 percentage
points (pp) to real GDP growth of 5.9% in 2011. Furthermore,
the industrial sector – which includes the manufacturing and
constructions sub-sectors – presently employs an estimated
22.4% of the labour force. Given that the US, eurozone and
China remain the largest export destinations for Vietnam and
that our global team expects growth to remain depressed in
these markets, we are skeptical that the manufacturing sector
will be able to avert a slowdown over the coming months. Thus,
we see an increasing likelihood that a slowdown in external
demand could eventually result in higher unemployment in the
manufacturing sector.
Improving But Still In Deficit
Goods Exports & Imports, US$mn (LHS) & Trade Balance,
US$mn (RHS)
12,000
Trade Balance
10,000
8,000
6,000
4,000
2,000
0 -4,000
Nov-05
growth in the region (see our online service, December 20 2011,
'Credit Squeeze A Destabilising Risk In The Region'). With the
Vietnamese economy being heavily reliant on European bank
funding, we warn that difficulties in obtaining financing would
force businesses to delay investment projects. Furthermore,
growing risk aversion suggests foreign direct investment in-
flows could also shrink as multi-national companies attempt
to strengthen their balance sheets and reduce their portfolio
exposure to emerging markets.
Having said that, we are expecting 400 basis points of rate cuts
this year (taking the central bank's policy rate from 15.00% to
11.00% by end-2012) and this could perhaps cushion the impact
of a credit squeeze coming from European banks. Nonetheless,
foreign capital inflows have played a key role in driving gross
fixed capital formation (GFCF) growth in recent years and we
believe that the above factors will keep GFCF growth depressed
over the coming months. Unless we see a recovery in investor
sentiment (not our core view), we are keeping our forecasts for
GFCF growth to remain subdued at 5.1% in 2012.
3,000
Exports Imports
2,000 Growing Fiscal Debt Burden To Keep
1,000
Public Spending In Check
The unfolding sovereign debt crisis in the eurozone has severely
0
undermined foreign investors' confidence in heavily indebted
-1,000 countries. We believe that this will, to a certain extent, help
deter Vietnamese policymakers from taking on further debt to
-2,000
fund public spending programs to boost growth. Indeed, we
-3,000 are beginning to witness a shift in the government's traditional
pro-growth stance, with Prime Minister Nguyen Tan Dung re-
iterating the government's resolve in maintaining a more stable

Nov-10
Jan-05
Jun-05

Jan-10
Jun-10
Jul-07

May-08
Feb-07

Mar-09

Feb-12
Apr-06

Oct-08

Apr-11
Sep-06

Dec-07

Aug-09

Sep-11

and sustainable growth model. Although we expect welfare

Source: General Statistics Office, BMI subsidies to remain large in light of a challenging economic
environment in 2012 and our view that rural incomes could
In terms of the agricultural sector, which remains the largest decline as a result of falling crop prices, we believe spending
source of employment in Vietnam (40.0% of the labour force), cuts will come from government-funded investment projects.
we believe falling crop prices will have a negative impact on The Vietnamese government's resolve to bring down inflation
rural incomes. This presents further downside risks to our outlook even at the expense of slower economic growth in 2012, sug-
for private consumption growth. On the whole, our view that gests that public spending will be kept in check. Accordingly,
external demand will only see a recovery in late 2012 compels we expect public spending growth to ease from 5.9% in 2011
us to pencil in a subdued private consumption growth of 5.7% to 5.0% in 2012.
in 2012, compared with 6.4% in 2011.
Trade Deficit Set To Stay
Credit Squeeze To Delay Investment As the accompanying chart shows, an 8.5% devaluation in the
Projects Vietnamese dong in the beginning of 2011 has helped to reduce
In December, we mentioned that the growing risk of a credit Vietnam's trade deficit from US$12.1bn in 2010 to US$9.3bn
squeeze in Asia – largely a result of the unfolding eurozone debt in 2011. However, we warn that external demand may turn out

Business Monitor International Ltd www.businessmonitor.com 15

VIETNAM Q2 2012

to be weaker than we initially expected. Thus, it is possible to
see the trade deficit widen in 2012. As mentioned before, as
our global team is pencilling in a bleak outlook for eurozone,
US and China growth, we in turn expect Vietnamese export
growth to ease from an expected 15.0% in 2011 to 8.9% in 2012.
Consequently, we continue to see net exports as a key drag on
growth and we are happy to maintain our forecast for real GDP
growth to come in at 5.8% in 2012, down from 5.9% in 2011.
the year (see chart below). We are convinced headline CPI will
soon resume its downward trajectory over the coming months,
given the fact that fundamentals with regards to money supply
and commodity prices remain unchanged. Accordingly, we are
maintaining our forecast for headline CPI to average a comfort-
able 8.5% in 2012. We continue to see 400 basis points (bps)
worth of rate cuts by the State Bank of Vietnam (SBV), bringing
the policy rate from 15.00% to 11.00% by the end of the year.

A Seasonal Phenomenon
Headline CPI, % chg m-o-m
4.0

Monetary Policy 3.5

3.0

Surge In Headline CPI Transitory, View 2.5

On Rate Cuts Holds 2.0

1.5

BMI VIEW 1.0

The latest surge in month-on-month headline consumer price inflation 0.5

(CPI) from 0.5% in December to 1.0% in January should prove to be 0.0

transitory, in our view. In terms of the fundamentals behind the outlook -0.5

for inflation, namely money supply growth and commodity prices, we -1.0
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09

Jul-09
Oct-09
Jan-10

Jul-10
Oct-10
Jan-11

Jul-11

Oct-11
Jan-12
Apr-07

Apr-08

Apr-09

Apr-10

remained convinced that we will see a sustained slowdown in headline
CPI to average a comfortable 8.5% in 2012. Accordingly, we continue
to see 400 basis points worth of rate cuts by the State Bank of Vietnam,
bringing the policy rate from 15.00% to 11.00% by the end of the year.
In line with our expectation that inflationary pressures would
resurface during the Tet holiday season (Vietnamese lunar new
year), latest figures showed that headline consumer price infla-
tion (CPI) accelerated from 0.5% month-on-month (m-o-m) in
December to 1.0% in January (see our online service, January
20, 'Near Term Upside For VNI, But Bonds Over Equities View
Holds For 2012'). From our perspective, this surge in inflation,
which has broken the trend of a steady decline in month-on-month
inflation in Q411, will be transitory as indicated by historical
data. Looking at monthly data on inflation over the past five
years (2007-2011), we note that there is clear evidence of a
tendency for headline CPI to accelerate in the first two months of
Apr-11
Source: General Statistics Office, BMI
Weak Money Supply Growth To Keep
Inflation In Check
According to figures published by the SBV, M2 money supply
growth is expected to come in at 10.0% in 2011 while the central
bank is targeting M2 growth of 14.0-16.0% in 2012. This, in
comparison to M2 growth rates that averaged 32.5% over the
past five years (2006-2010) reinforces our view that inflation-
ary pressures will be kept in check. We also expect demand for
credit to cool, in line with our view that growth in export-related
industries will continue to slow over the coming months.
Since early 2011, the SBV has been consistent in its hawkish
rhetoric on bringing inflation down to the single-digit levels.
We believe that this has contributed significantly towards an-

TABLE: MONETARY POLICY

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Exchange rate VND/US$, ave [3] 17,800.79 19,133.98 20,653.31 21,035.00 20,800.00 20,565.00 20,330.00 20,100.00
Consumer prices, % y-o-y, ave [1,4] 7.0 9.2 18.6 8.5 5.0 5.5 5.0 5.0
Central Bank policy rate, % eop [5] 9.00 9.00 15.00 11.00 9.00 8.00 7.00 7.00
Lending rate, %, ave [6] 10.1 14.0 19.5 13.0 11.0 10.0 9.0 8.0
Real lending rate, %, ave [2,7] 3.1 4.8 0.9 4.5 6.0 4.5 4.0 3.0
Notes: e BMI estimates. f BMI forecasts. 1 Base year 2000; 2 Real rate strips out the effects of inflation; Sources: 3 BMI. 4 General Statistics Office; 5
State Bank of Vietnam; 6 IMF; 7 IMF/BMI.

16 www.businessmonitor.com Business Monitor International Ltd

 ECONOMIC OUTLOOK

choring inflation expectations and investor confidence in the
Vietnamese dong. Clearly, the government recognises that the
central bank's credibility in fighting inflation is a crucial element
in supporting ongoing efforts to de-dollarise the economy and
address the structural imbalances that have contributed to the
macroeconomic instability in recent years. Having witnessed a
decisive shift in the government's agenda towards accepting a
more sustainable model of growth for the economy, we are op-
timistic that policymakers will stick to their promise to maintain
price stability even at the expense of weaker economic growth.
Consequently, we believe the SBV will continue to stick to
its inflation and money supply targets for 2012, which should
translate into a sustained slowdown in headline CPI.
Back To Single-Digits
Headline Consumer Price Inflation
40
towards the downside. Should the global economy deteriorate
further over the coming months, we would consider revising our
growth forecasts downward. If such a scenario were to transpire,
this would prompt the SBV to take a more dovish stance on
monetary policy, raising the possibility of additional rate cuts.
Balance Of Payments
Global Economic Headwinds Cloud
Outlook For BoP
BMI VIEW
Vietnam's balance of payments position remains vulnerable to global
economic headwinds in 2012. While the trade deficit has narrowed sig-

35 nificantly in recent months, our conviction that external demand will

30 continue to cool in 2012 means that we see a widening of the current

25 account deficit. Meanwhile, risks of a hard landing in China and a credit

20 squeeze from European banks continue to cloud the outlook for the

15
financial account.

10

5
Despite encouraging evidence of a steady improvement in
Vietnam's balance of payments position in recent months, we
0
Headline CPI, % chg y-o-y are keeping a cautious stance on our outlook for 2012. Our
-5
Annualised m-o-m 3mma, %
core view that global economic headwinds will continue to
-10
drag on external demand and investor sentiment, suggests that
Jan-06

Jul-06
Oct-06
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09

Jul-09
Oct-09
Jan-10

Jul-10
Oct-10
Jan-11

Jul-11
Oct-11
Jan-12

Jul-12
Oct-12
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Vietnam's balance of payments position will remain vulnerable

Source: General Statistics Office, BMI. (Feb-12 onwards = forecasts)
to significant downside risks ahead.
Sustained Improvement Needed
Expecting Single-Digit Inflation Goods Exports & Imports, US$mn (LHS) & Trade Balance,
US$mn (RHS)
According to SBV governor Nguyen Van Binh, the central bank
10,000 3,000
is expecting headline CPI to come in at around 12.0% under a
9,000
pessimistic scenario and 8.5% under more optimistic assump- 2,000
8,000
tions for 2012. Our forecast indicates that we favour the SBV's 7,000 1,000

more optimistic scenario of 8.5% headline CPI to play out 6,000

0
over the coming quarters. We expect this to be the case given 5,000
-1,000
4,000
that we believe Vietnam's real GDP growth will be below the
3,000 -2,000
government's full year target of 6.0-6.5%, which means that
2,000
demand pull inflationary pressures will be much more benign 1,000
-3,000

compared to 2011. Furthermore, we argue that commodity 0 -4,000

Jan-05
May-05

Jan-06
May-06

Jan-07
May-07

Jan-08
May-08

Jan-09
May-09

Jan-10
May-10

Jan-11
May-11

Jan-12
Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

price pressures have eased considerably in recent months given

the deteriorating outlook for global economic growth in 2012.
Thus, cost-push inflationary pressures will be less of a concern Trade Balance Exports Imports

in the medium term. Source: General Statistics Office, BMI

We are pencilling in real GDP growth of 5.8% for Vietnam in Vietnam's persistent trade deficits remain a major concern for
2012 and we caution that the risks to our outlook remain skewed policymakers as the country remains heavily reliant on remit-

Business Monitor International Ltd www.businessmonitor.com 17

VIETNAM Q2 2012

tances and foreign direct investment (FDI) inflows to offset Not Counting On A Trade Surplus
its trade shortfall. This over-reliance on remittances and FDI Looking at the latest trade figures, we have witnessed a steady
inflows inevitably means that Vietnam's balance of payments improvement in the trade deficit since the SBV devalued the
position is highly vulnerable to global economic downturns. Vietnamese dong by 8.5% in February 2011. We should point
As demonstrated during the 2008-09 global financial crisis, a out, however, that this improvement in the trade deficit was
simultaneous decline in exports, remittances and FDI inflows, not entirely a result of a weaker dong against the US dollar.
prompted the State Bank of Vietnam (SBV) to draw down Indeed, the impact of the devaluation was further amplified by
foreign reserves in an attempt to defend its fixed exchange an appreciation in regional currencies across-the-board, result-
ing in a significant boost in the competitiveness of Vietnamese
A Precarious Position
Foreign Reserves Excluding Gold, US$mn exports to Asia. Accordingly, we see the Vietnamese dong's
30,000 performance relative to its regional peers as an important factor
to consider in determining the outlook for exports. Given that
25,000
we are expecting a challenging economic environment ahead for
20,000 export-reliant economies, we see increasing risk of a competitive
devaluation in the region as policymakers attempt to prop up
15,000
economic growth. Indeed, should Vietnam's key trading part-
10,000 ners decide to depreciate their currencies against the US dollar
and by extension, the Vietnamese dong, this would reduce the
5,000
attractiveness of Vietnamese exports in the region. In line with
0 our conviction that external demand will continue to cool on
Jan-02
May-02

Jan-03
May-03

Jan-04
May-04

Jan-05
May-05

Jan-06
May-06

Jan-07
May-07

Jan-08
May-08

Jan-09
May-09

Jan-10
May-10

Jan-11
May-11
Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

the back of a slowdown in global economic growth, we expect

the current account deficit to widen in 2012.
Foreign Reserves Excluding Gold, US$mn

Source: IMF/IFS, BMI

Little Support From The Financial

rate regime. Having depleted the country's foreign reserves to
less than a few weeks worth of import cover, the central bank
was eventually forced to devalue the currency by a cumulative
18.7% over a span of three years (2008-2010). Unless we see a
sustained improvement in the trade balance, and by extension,
the current account over the coming months, we remain cautious
on Vietnam's balance of payments outlook in 2012.
Account
Turning to the financial account, we note that foreign direct
investment (FDI) inflows have remained resilient despite the
macroeconomic instabilities in Vietnam. Although FDI inflows
into Vietnam witnessed a significant decline during the 2008-
09 global financial crisis, the country remains among one of
the top 10 countries in Asia in attracting foreign investment

TABLE: CURRENT ACCOUNT

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Goods and services exports, US$bn [1,2] 63.6 80.1 87.7 97.5 109.8 123.7 139.3 156.8
Goods and services imports, US$bn [1,3] 76.1 93.0 102.9 114.6 127.6 142.2 158.4 176.5
Balance of trade in goods and services, US$bn [1,4] -12.5 -12.9 -15.2 -17.0 -17.8 -18.5 -19.1 -19.6
Balance of trade in goods and services, % of GDP [5] -13.4 -12.5 -12.6 -12.6 -11.6 -10.5 -9.5 -8.6
Net income, US$bn [5] 17.2 21.6 24.6 28.0 31.7 36.0 40.9 46.4
Income account balance, % of GDP [5] 18.5 20.9 20.5 20.6 20.7 20.5 20.4 20.3
Net transfers, US$bn [5] 6.5 8.7 9.5 10.5 11.5 12.7 13.9 15.3
Net transfers, % of GDP [5] 7.0 8.4 7.9 7.7 7.5 7.2 7.0 6.7
Current account, US$bn [5] -6.0 -4.3 -5.7 -6.6 -6.3 -5.8 -5.2 -4.3
Current account, % of GDP [5] -6.5 -4.1 -4.7 -4.8 -4.1 -3.3 -2.6 -1.9
Notes: e BMI estimates. f BMI forecasts. 1 Includes Investment Income flows up until 2004; Sources: 2 Asian Development Bank, General Statistics
Office from 2010. 3 Asian Development Bank, General Statistics Office from 2015; 4 Asian Development Bank, General Statistics Office from 2020; 5
Asian Development Bank.

18 www.businessmonitor.com Business Monitor International Ltd

 ECONOMIC OUTLOOK

(see our online service, August 2 2011, 'Indonesia Shines As Overall, we are beginning to see positive evidence that a decisive
A Regional Favourite For FDI'). According to a statement shift in the Vietnamese government's stance towards ironing out
from the Ministry of Planning and Investment, FDI inflows the macroeconomic imbalances in the economy has helped to
are estimated to have surged by 34.1% from US$8.2bn in 2010 stabilise Vietnam's balance of payments position. However, as
to US$11bn in 2011. Looking ahead, we expect FDI inflows mentioned above, stubborn global economic headwinds continue
to grow at a much slower pace in 2012. According to a report to present significant downside risks to the economy, which
published by the UN Conference On Trade And Development, compels us to take a cautious stance on the country's balance
Hong Kong is the largest investor in Vietnam with committed of payments outlook in 2012.
FDI of US$2.9bn, followed by Singapore (US$1.4bn), Japan
(US$0.9bn), China (US$0.6bn) and South Korea (US$0.5bn) Sizeable European Exposure
Foreign Claims From European Banks, US$mn & % chg y-o-y
in 2011. More importantly, we note that FDI inflows coming
from China and Hong Kong combined, amounted to US$3.5bn 14,000 140

or 31.8% of total FDI inflows in 2011. Given that we are begin- 12,000 120

ning to see signs of a hard landing for the Chinese economy 10,000 100

in 2012, we see a potential decline in FDI inflows from China 8,000 80

and Hong Kong. 6,000 60

4,000 40
Keeping A Close Eye On FDI Inflows
Foreign Direct Investment Inflows, US$mn (LHS) & 2,000 20
% chg q-o-q (RHS) 0 0
3,200 250
-2,000 -20
2,700 200
-4,000 -40
Q101
Q301
Q102
Q302
Q103
Q303
Q104
Q304
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
Q311
2,200 150

1,700 100 Foreign Claims, US$mn % chg y-o-y

1,200 50 Source: Bank For International Settlements, BMI

700 0

200 -50

-300 -100
Q102
Q302
Q103
Q303
Q104
Q304
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111

Fiscal Policy
FDI Inflow s, US$mn %chg q-o-q

Source: IMF/IFS, BMI Fiscal Position To Deteriorate On

Economic Headwinds
Credit Squeeze From European Banks
To Drag On FDI Inflows BMI VIEW
Back in December 2011, we highlighted evidence of a credit Stubborn global economic headwinds are expected to undermine the
squeeze in the region as European banks attempt to strengthen Vietnamese government's efforts to reduce the country's persistent
their capital ratios by calling back higher-risk loans and impos- budget deficit in the near term. We expect the budget deficit to widen
ing curbs on issuing new loans to emerging markets (see 'Credit from an expected 2.6% of GDP in 2011 to 3.4% in 2012 before seeing
Squeeze A Destabilising Risk In The Region', December 20 an improvement to 2.7% in 2013. Over the longer term, a lack of com-
2011). We believe this credit squeeze as a result of the unfolding mitment by the government to reduce welfare subsidies means that we
sovereign debt crisis in the eurozone, will drag on FDI inflows remain sceptical towards the government's plan to achieve a balanced
into Vietnam. According to data from the Bank For International budget by 2020.
Settlements, foreign claims (or lending) from European banks
in Vietnam have surged to US$11.3bn in the third quarter of In line with our view that the Vietnamese economy will con-
2011 more than ten times the amount seen a decade ago. Should tinue to cool over the coming quarters (we are pencilling in a
the eurozone crisis takes a turn for the worse, funds from these slowdown in real GDP growth from 5.9% in 2011 to 5.8% in
European sources could decline. 2012), we expect a deterioration in the country's fiscal posi-

Business Monitor International Ltd www.businessmonitor.com 19

VIETNAM Q2 2012

tion in 2012. Despite aggressive measures introduced by the
Vietnamese government to cut public spending and address
growing concerns over the country's persistent budget deficit, we
believe that stubborn global economic headwinds will continue
to undermine progress on this front. Welfare subsidies are set
to increase as cooling external demand translates into higher
unemployment for the manufacturing sector. Furthermore, we
expect tax revenue growth to slow significantly as a result of
cooling private sector income growth. Accordingly, we expect
the budget deficit to widen from an expected 2.6% of GDP in
2011 to 3.4% in 2012. However, given that we see a potential
recovery in external demand in late 2012, we are pencilling a
significantly from 37.4% in 2010 to 45.5% in 2011. We see this
as a positive move by the government to boost the productivity
and quality of Vietnam's labour force, which should help sup-
port the country's long-term economic growth. However, there
was a negligible reduction in the share of welfare subsidies as
a total of social expenditure from 32.7% in 2010 to 31.3% in
2011. This reinforces our view that the government is unlikely
to implement any credible plans to reduce welfare subsidies
within the short-to-medium term.
Welfare Subsidies To Inflate Budget Deficit
Share Of Total Social Expenditure, %
Others

slight improvement in the budget deficit to 2.7% in 2013.

Not In A Good Shape

Fiscal Accounts, VNDbn (LHS) & Budget Balance, % Of GDP
1,000,000 2 Social Subsidies

900,000 1 Education
0
800,000
-1
700,000
-2
600,000
-3
500,000
-4 Science &
400,000 Technology
-5
300,000 -6 Health
200,000 -7
2005

2006

2007

2008

2009

2010

2011e

Source: Ministry of Finance, BMI

2012f

2013f

Total Revenue
Total Expenditure
Budget Deficit, % of GDP RHS
f = BMI forecasts. Source: Ministry of Finance, BMI
Increase In Education Spending
Positive, But Subsidies Remain High
Back in February 2011, we highlighted the structural weaknesses
in the allocation of the fiscal budget and the resulting imbalances
in the Vietnamese economy (see our online service, February 1
2011, 'Fiscal Balance Not So Easy'). Looking at the latest figures
published by the Ministry of Finance, we note that education
subsidies as a share of total social expenditure have increased
Our global team expects growth to remain depressed in the US
and is pencilling a mild recession in the eurozone for 2012.
Meanwhile, the Chinese economy is increasingly at risk of a
hard landing. Given that these economies remain the largest
export destinations for Vietnam's manufactured goods, we see
an increasing risk that a slowdown in external demand could
eventually result in higher unemployment in the manufactur-
ing sector. This would trigger the need for additional welfare
subsidies by the Vietnamese government, further weighing on
the country's already weak fiscal position.

TABLE: FISCAL POLICY

2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Fiscal revenue, VNDbn [1] 442,340.0 559,170.0 674,500.0 715,977.2 823,034.6 922,265.9 1,023,752.7 1,126,297.5
Revenue, % of GDP [1] 26.7 28.2 27.1 25.1 25.8 25.5 25.1 24.5
Fiscal expenditure, VNDbn [1] 527,342.0 605,640.0 710,160.0 813,285.6 910,879.9 1,011,076.7 1,112,184.3 1,214,913.4
Expenditure, % of GDP [1] 31.8 30.6 28.5 28.5 28.5 27.9 27.3 26.4
Budget balance, VNDbn [1] -108,722.0 -87,725.0 -64,300.0 -97,308.4 -87,845.3 -88,810.7 -88,431.7 -88,615.9
Budget balance, % of GDP [1] -6.6 -4.4 -2.6 -3.4 -2.7 -2.5 -2.2 -1.9
Notes: f BMI forecasts. Sources: 1 Ministry of Finance.

20 www.businessmonitor.com Business Monitor International Ltd

 ECONOMIC OUTLOOK

Defence Spending Set To Rise Steadily

On China's Growing Military Presence
China's growing military presence in the South China Sea has
contributed to several small-scale conflicts between China and
neighbouring countries including Vietnam in recent years. More
importantly, the threat of Beijing's growing military power in
the region has put tremendous pressure on Hanoi to increase
spending on defence and security in recent years. Defence and
security spending grew 11.7% from VND74trn (US$3.6bn) in
2010 to VND82.7trn in 2011. Given that bilateral tensions are
expected to remain delicate in the South China Sea, we expect
defence spending to increase steadily over the coming years.
Playing A Lesser Role In The Economy
Fiscal Revenue & Expenditure, % chg y-o-y
35

30

25

20

15

10

0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011e
2012f
2013f
2014f
2015f

Total Revenue Total Expenditure

f = BMI forecasts. Source: Ministry of Finance, BMI

Reduction In Welfare Subsidies Key To

Achieving Fiscal Balance By 2020
From our perspective, bringing the budget deficit back into
balance will require further spending cuts by the government,
especially a gradual reduction in welfare subsidies, over the
coming years. However, we have yet to see evidence of a strong
commitment by the government to reduce welfare subsidies. This
should not come as a surprise given that public dissent against
the government has increased as a result of rampant corruption
in recent years. We note that a reduction in welfare subsidies
is seen as an unpopular policy that could potentially fuel wide-
spread public unrest, ultimately undermining the stability of
Vietnam's single-party system of government. Thus, plans to
reduce welfare subsidies are expected to take a back seat before
economic conditions become more favourable. Consequently,
we remain skeptical that the government's plan to achieve a
balanced budget by 2020 will be achievable. We are happy to
maintain our forecasts for the fiscal budget to improve gradually
but remain in deficit over the coming decade.

Business Monitor International Ltd www.businessmonitor.com 21

 Chapter 3:
10-Year Forecast

enjoyed a growing inflow of direct investment into its fledgling

The Vietnamese Economy To
2021
Rebalancing Needed To Maintain High
Growth
BMI VIEW
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.
manufacturing sector in recent years as its accession to the
WTO in 2007 and low labour costs have made it an attractive
outsourcing destination for apparel manufacturers and electronics
producers. The development of the foreign-owned manufactur-
ing sector has been spearheaded by Japanese, South Korean and
Taiwanese firms, which have become increasingly wary of rising
costs of labour on the Chinese mainland, as well as the risks of
becoming overly dependent on Beijing in their supply chains.
Vietnam To Enter 100 Million Club
Population, mn
120
110
100

Vietnam's emergence as one of the most promising economies 90

in Asia, if not the world, stems largely from the Communist

80
Party of Vietnam (CPV)'s adoption of market reform policies
in 1986. The gradual but steady shift from a largely agrarian 70

country with a high degree of state ownership and government

60
intervention to a bustling market economy has stimulated foreign
investment and domestic entrepreneurship, which are now the 50
2000 2005 2010 2015 2020
prime drivers of growth.
Source: UN World Population Prospects, 2006 Revision

The attractions of Vietnam to foreign, as well as domestic, in-

vestors are clear: a large and young population, eager to work We expect foreign investment into the manufacturing sector to
hard to improve their lot and open to foreign influences after continue to drive growth over the next 10 years, and to help Viet-
decades of ineffective ideological indoctrination. Vietnam has nam move up the value-added chain as the advantages of sourcing

TABLE: LONG-TERM MACROECONOMIC FORECASTS

2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
Nominal GDP, US$bn [2] 175.9 200.6 228.7 259.2 292.3 329.7 372.0 419.8
Real GDP growth, % chg y-o-y [2] 7.3 7.3 7.4 7.4 7.4 7.4 7.4 7.5
Population, mn [3] 91.6 92.4 93.3 94.1 94.9 95.6 96.4 97.0
GDP per capita, US$ [2] 1,921 2,170 2,452 2,754 3,080 3,447 3,861 4,326
Consumer prices, % y-o-y, ave [1,4] 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Current account, % of GDP [5] -3.3 -2.6 -1.9 -1.2 -0.6 0.1 0.7 1.3
Exchange rate VND/US$, ave [6] 20,565.00 20,330.00 20,100.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00
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.

Business Monitor International Ltd www.businessmonitor.com 23

VIETNAM Q2 2012

production in the country become apparent for a wider range of
manufacturing firms. However, we believe the global environment
will be less conducive to external demand-driven economies in
the years to come, meaning Vietnam will not be able to reach
real GDP growth rates above 8.0% as seen in 2004-2007. Indeed,
the near-exclusive focus of the government on meeting highly
set growth targets through accommodative fiscal and monetary
policy has led to serious macroeconomic imbalances in the form
of high inflation and ballooning trade and fiscal deficits over 2007
and 2009. We believe steps will need to be taken going forward
to curb overheating tendencies, including currency appreciation.
This would inevitably come at the cost of lower growth in the
medium term, and we expect the government to start targeting
annual real GDP growth of 7.0-7.5% over 2012-2016, instead of
8.0-8.5% as it has been previously.
We do not foresee this constituting a turning point in the Viet-
namese growth story, merely adjusting growth rates to lower
more sustainable trajectories. The main effect will be to de-
crease the share of net exports from a massive -15.2% of GDP
(in nominal terms) in 2008 towards -9.2% in 2013 and -3.6%
in 2020 as export growth starts outpacing import growth after
private consumption and fixed gross capital formation settle at
more sustainable levels. A decreasing trade deficit combined
with continued growth, albeit at a slower pace, of remittances
and foreign direct investment should mean that upside pressure
on the dong should resume once the government has tightened its
fiscal and monetary policy to curb the stimulus-driven increase
in domestic demand in 2009. We thus expect the dong to start
to appreciate beyond the initial depreciation needed in 2010
and 2011. We are currently envisaging a mild 1.1% apprecia-
tion in 2012 to be followed by an average 2.8% appreciation
over 2013-2020.
Key Risks: Competition With China,
Inflation, Infrastructure and Education
While a shift in economic policy is needed, it is far from guar-
anteed. Less accommodative fiscal and monetary policy is likely
to lead to the elimination of less efficient firms and layoffs, an
unappealing prospect for the political leadership. Vietnamese
firms are still less efficient than their Chinese counterparts, as
evidenced by the large amount of cheap Chinese goods flood-
ing the Vietnamese market and the six point advantage (51.7
compared with 45.2) China enjoys over Vietnam in our business
environment ratings. The massive US$11.1bn bilateral trade
deficit in China's favour in 2008 means that the Vietnamese
government will be averse to taking any steps that will impair
the relative cost- competitiveness of domestic firms.
An appreciating currency would dampen inflationary pressures,
and we foresee consumer price inflation stabilising at around
5% annually from 2013 onwards. However, this is conditional
on the government resolving bottlenecks in infrastructure and
power supply. Vietnam's limited road, rail and port capacity is
still putting it at a disadvantage compared with China when it
comes to foreign investment in export-focused manufacturing.
Moreover, the continued divide between demand and supply of
energy and resulting power cuts is a key threat to both growth
and inflation. Energy policy is an area that will have to be ad-
dressed with more resolve than at present, as the government
has impaired investment in power generation by its reluctance
to expose state-owned EVN to competition.
Continued reform of the economy through the ongoing 'equitisa-
tion' process of raising efficiency at state-owned enterprises and
transferring ownership to private hands will also be required
to reach annual GDP growth of 7%, as well as a concerted ef-
fort to improve standards at all levels of the education system.
Skilled staff are becoming increasingly difficult to find, result-
ing in upward pressure on wages and increased costs for firms,
particularly in the fledgling financial sector. Vietnam will need
to increase the number of high-standard university graduates in
areas such as finance and science if it wants to avoid becoming
trapped in low-value manufacturing.

BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.

24 www.businessmonitor.com Business Monitor International Ltd

 Chapter 4:
Business Environment

SWOT Analysis BMI Business Environment

Risk Ratings
Strengths
Vietnam has a large, skilled and low-cost workforce, which has made Vietnam's business environment rating of 45.2 is constrained by an
the country attractive to foreign investors. infrastructure rating of 47.8, as massive bombing by the US during the
Vietnam's proximity to China and South East Asia and its good sea Vietnam War put the country's road and rail network decades behind peer
links make it a good base for foreign companies to export to the rest nations. Moreover, the institution score of 36.7 reflects the vestiges of
of Asia, and beyond. a planned economy still present in many government bodies and state-
owned enterprises in spite of the ongoing economic reform process.
Weaknesses Indeed, the winds of change are noticeable in the market openness
Vietnam's infrastructure is still weak. Roads, railways and ports are score of 51.0, which reflects an increasing degree of trade and financial
inadequate to cope with the country's economic growth and links market integration with the outside world.
with the outside world.
Perceptions of corruption in Vietnam remain high. According to
Business Environment Rank Trend
Transparency International's 2011 Corruption Perceptions Index, Singapore 80.8 1 =
Hong Kong 78.6 2 =
Vietnam ranks 112 out of 183 countries. Malaysia 63.4 3 =
Taiwan 62.7 4 =
Thailand 62.2 5 =
Opportunities South Korea
China
60.6
51.8
6
7
=
=
Vietnam is increasingly attracting investment from key Asian Philippines 49.9 8 =
Vietnam 45.2 9 =
economies, such as Japan, South Korea and Taiwan. This offers India 44.1 10 =
Sri Lanka 42.7 11 =
the possibility of the transfer of high-tech skills and know-how. Brunei Darussalam 41.0 12 =
Indonesia 40.2 13 =
Vietnam is pressing ahead with the privatisation of state-owned Papua New Guinea 39.4 14 =
enterprises and the liberalisation of the banking sector. This should Pakistan 36.7 15 =
Cambodia 35.5 16 =
offer foreign investors new entry points. Bhutan 32.0 17 =
Bangladesh 30.9 18 =
Laos 26.4 19 =
Regional ave 45.1 / Global ave 44.7/ Emerging markets ave 40.3
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.

Business Monitor International Ltd www.businessmonitor.com 25

VIETNAM Q2 2012

business to be conducted under.

Business Environment Outlook
Inroduction
Vietnam's large and inexpensive workforce remains its largest
attraction for foreign investors, although there is an increasing
occurrence of foreign direct investment (FDI) projects aimed
at tapping the country's growing consumer market. There is
still a large degree of state intervention in the economy, but
the government has been gradually moving towards a market
economy since 1986, with 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 Framework
Vietnam has a two-tier courts system, with courts of first instances
and courts of appeal. The court system consists of the Supreme
Court, the provincial People's Courts and the district People's
Courts. The Vietnamese legal code is currently in a state of flux,
and the authorities are drafting a unified legal framework for
Most of the legal documents in force relating to business were
issued in the early 1990s under market-led reform programmes.
However, Vietnam rewrote almost all of its laws and regulations
affecting commercial activity and judicial procedures between
2002-2006. Despite some progress in protecting intellectual
property rights, the overall legal system in Vietnam is regarded
as excessively cumbersome.
Vietnam's judicial system lacks transparency, and there are
widespread concerns about the independence of the judiciary.
Both local and foreign firms prefer to resort to arbitration or
other non-judicial means as a result of weaknesses in the judicial
system – there is a general lack of confidence that the judiciary
is capable of interpreting and enforcing the law.
Vietnam's legal system remains underdeveloped and, largely,
biased against foreign entities. The court system provides in-
adequate redress for commercial disputes while contracts are
difficult to enforce, particularly if a party is non-Vietnamese.
Foreigners also see the commercial arbitration system as weak.
When disputes arise, foreign investors tend to try to negotiate

TABLE: BMI BUSINESS AND OPERATION RISK RATINGS

Infrastructure Rating Institutions Rating Market Orientation Rating Business Environment
Afghanistan 26.6 24.7 20.5 23.9
Bangladesh 41.6 21.8 29.3 30.9
Bhutan 23.0 48.5 24.4 32.0
Cambodia 31.4 24.2 50.9 35.5
China 56.3 52.4 46.6 51.8
Hong Kong 70.0 80.7 85.2 78.6
India 47.4 42.0 42.9 44.1
Indonesia 37.1 31.2 52.3 40.2
Japan 78.3 80.1 55.9 71.4
Laos 36.8 22.6 19.8 26.4
Malaysia 55.3 66.9 67.9 63.4
Maldives 40.3 52.5 30.7 41.2
Nepal 28.1 32.6 23.2 27.9
Pakistan 35.5 32.9 41.7 36.7
Philippines 50.7 39.0 60.0 49.9
Singapore 79.0 83.9 79.4 80.8
South Korea 71.2 52.7 53.5 60.6
Sri Lanka 45.7 42.5 40.0 42.7
Taiwan 60.6 67.0 60.4 62.7
Thailand 59.5 59.3 67.8 62.2
Vietnam 47.8 36.7 51.0 45.2
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

26 www.businessmonitor.com Business Monitor International Ltd

 BUSINESS ENVIRONMENT

or include dispute resolution procedures in their contracts –
however, even these are far from fail-safe.
Foreign and domestic arbitral awards are legally enforceable in
Vietnam since it acceded to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards in
1995. Local courts must respect awards rendered by a recognised
international arbitration institution. However, this provides no
assurance that contracts will be honoured. Non-judicial means
are therefore frequently used to enforce debt obligations.
Firms generally avoid the judicial system because the process
is lengthy and expensive, decisions are considered arbitrary and
enforcement mechanisms are ineffective. Smaller companies rely
on personal relationships while larger foreign companies may make
use of their access to government to ensure contract enforcement.
Property Rights
The 2006 Uniform Enterprise Law has allowed foreign investors
to form any type of company instead of only limited liability
companies. In general, foreign companies and the private sector
are at a disadvantage compared with state-owned companies in
terms of access to land, which is still viewed as the property of
'the people'. Legislation has, however, progressively enhanced
the status of private investors in recent years. The 1992 constitu-
tion granted stronger land rights to individuals, including rights
over commercial and personal property. Private land use rights
(LURs) may now be granted for up to 50 years. Since July 1
2004, the Land Law has allowed local private companies with
long-term LURs to lease land to foreign investors.
Intellectual Property Rights: The enforcement of intellectual
property rights (IPR) is wholly inadequate, with widespread
pirating of products, particularly software, music and videos.
The requirements of WTO accession mean that the government
will have to beef up IPR protection substantially. In July 2006,
a new Intellectual Property Law came into effect, designed to
clarify the responsibility of government agencies charged with
protecting IPRs, though doubts remain over the effectiveness of
its implementation. The police service is generally slow to act
on administrative orders where trademarks have been infringed.
Often violators will seek to extract a pay-off in compensation
for ceasing the infringement. Despite improvements in the en-
forcement of IPRs in 2010, the US State Department has kept
Vietnam on its 2010 'Special 301 Report' watch-list of countries
with inadequate protection of IPRs.

TABLE: BMI LEGAL FRAMEWORK RATING

Investor Protection Score Rule Of Law Score Contract Enforceability Corruption Score
Score
Afghanistan 1.2 13.7 29.2 6.3
Bangladesh 33.0 28.5 4.6 25.4
Bhutan 12.7 52.9 99.1 65.6
Cambodia 16.7 14.8 40.4 21.3
China 58.5 26.8 86.4 29.3
Hong Kong 90.5 44.9 84.5 81.8
India 64.2 65.4 11.3 45.3
Indonesia 34.7 37.3 23.3 37.8
Japan 82.5 82.1 75.9 90.0
Laos 1.2 11.1 50.6 6.2
Malaysia 76.9 56.5 43.9 45.8
Maldives 40.1 41.7 57.7 46.4
Nepal 44.5 27.0 35.8 25.7
Pakistan 46.5 15.1 35.7 14.1
Philippines 38.7 48.5 33.9 25.1
Singapore 95.6 72.6 76.7 60.1
South Korea 11.1 77.0 40.3 68.4
Sri Lanka 51.4 52.3 35.3 26.1
Taiwan 64.2 72.4 70.2 72.5
Thailand 63.9 37.7 79.3 38.0
Vietnam 31.9 24.7 66.9 17.4
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

Business Monitor International Ltd www.businessmonitor.com 27

VIETNAM Q2 2012

Corruption/Red Tape
Investors see official corruption as one of the biggest hindrances
to running a business in Vietnam. Joint ventures with state-owned
enterprises are particularly prone to corruption and abuse, though
surveys indicate that while corruption affecting businesses is
quite prevalent the amounts involved are usually quite small.
However, rapid economic growth provides opportunities for
graft to grow more quickly than government systems evolve.
Vietnam scored 2.7 out of 10 in Transparency International's
2010 Corruption Perceptions Index , placing it in joint 120th
place among the 180 countries surveyed.
One of the best tools in restricting opportunities for corruption
has been the expansion of the 'One-Stop Shop' network – single
agencies that deal with applications for a range of activities,
including construction permits, LUR certificates, business
registrations and approvals for local and foreign investments.
The Law on Corruption Prevention and Control was passed by the
National Assembly in November 2005. A central anti-corruption
steering committee was established in 2006, comprising repre-
sentatives from the government, the National Assembly, state
procurator, court and police. The committee is headed by the
prime minister, and has the authority to suspend ministers and
chairs of people's committees and people's councils if suspected
of wrongdoing. The committee discovered 584 cases of alleged
corruption, involving close to 1,300 people, in 2007. Among
the most noteworthy convictions of corrupt officials was that
of former deputy trade minister Mai Van Dau, who was handed
a 14-year prison term in March 2007 for accepting bribes in
return for export licences.
Japan and Vietnam have established a joint committee for fighting
corruption concerning the use of Japan's official development
assistance in Vietnam, after two Ho Chi Minh City officials were
convicted of accepting bribes from a Japanese firm in September
2009. Japan and Vietnam have also worked on a joint initiative
to improve regulations on bidding, purchase and implementation
of all official development assistance projects.
The burden of red tape is amplified by the overlapping of gov-
ernment approvals. Vietnam ranks poorly in the length of time
it takes to close a business. It can take about five years to close
a business, compared with an average of 3.4 years in East Asia
& Pacific and 1.5 years in OECD states.

TABLE: LABOUR FORCE QUALITY

Literacy Rate,% Labour Market Rigidity Score Female Labour Participation, %
Afghanistan 28.1 20.0 n/a
Bangladesh 47.9 28.0 39.8
Bhutan 47.0 7.0 31.7
Cambodia 73.6 36.0 48.8
China 90.9 31.0 45.9
Hong Kong 93.5 0.0 46.1
India 61.0 30.0 28.3
Indonesia 90.4 40.0 37.0
Japan 99.0 16.0 41.6
Laos 68.7 20.0 50.7
Malaysia 88.7 10.0 35.2
Maldives 96.3 18.0 41.1
Nepal 48.6 46.0 45.0
Pakistan 49.9 43.0 18.7
Philippines 92.6 29.0 38.3
Singapore 92.5 0.0 41.3
South Korea 97.9 10.0 41.3
Sri Lanka 90.7 20.0 39.8
Taiwan 96.1 46.0 20.9
Thailand 92.6 11.0 46.3
Vietnam 90.3 21.0 n/a
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score

28 www.businessmonitor.com Business Monitor International Ltd

 BUSINESS ENVIRONMENT

Infrastructure land clearance, delayed equipment supplies and poor contractor

Physical Infrastructure
Vietnam's infrastructure rating is 47.8, placing the country in 68th
place in our rankings. The country's inadequate infrastructure
has become a major grievance for foreign investors and may
thus impair future FDI. Our transport infrastructure rating for
Vietnam stands at 69.1, but are set to improve as the government,
thanks to development assistance from international donors,
is investing heavily in constructing new roads, railways, ports
and power plants. These projects include the US$33bn 1,600km
high-speed railway currently being planned, thanks to Japanese
funding, between Hanoi and Ho Chi Minh City, which will cut
travel time to less than 10 hours when completed.
As an example of progress already made, more than 90% of
rural households now have electricity, compared with just over
50% 10 years ago. Rapid industrialisation of the economy has,
however, seen power demand increase by 15-17% per year,
outpacing the expansion of capacity. Vietnam is estimated to
have produced 69.7bn kilowatt hours of electricity in the first
10 months of 2009, up 12.3% from a year earlier, according
to the General Statistics Office. Several ongoing construction
projects of power plants have been hit by delays – due to slow
performance – and power blackouts and brownouts are therefore
likely to remain a problem. Our technological infrastructure rat-
ing for Vietnam stands at 25.0, placing Vietnam in 85th place
in our rankings.
Foreign direct investment has also helped to improve Vietnam's
telecommunications system, with foreign groups investing heav-
ily in fanning out 3G telecom and broadband networks over the
most populous parts of the country.
Labour Force
Vietnam's large, well-educated and inexpensive labour force
remains one of the country's chief attractions to foreign investors.
The labour pool is increasing by up to 1.5mn a year, while wage
costs are still low compared with other countries in the region,
although wage growth has picked up pace in recent years. The
General Statistics Office estimated the number of employed at
45.0mn in 2008. The unemployment rate is expected to remain
between 5-6% in 2010.
Vietnam's reform-driven economic growth has resulted in a
restructuring of the labour market, with a shift away from ag-

TABLE: TRADE AND INVESTMENT RATINGS

Openness To Investment Score Openness To Trade Score
Afghanistan 34.7 6.2
Bangladesh 13.8 34.3
Bhutan 33.7 24.6
Cambodia 82.6 81.6
China 39.9 65.5
Hong Kong 96.8 97.7
India 36.8 38.9
Indonesia 39.4 60.0
Japan 5.6 34.4
Laos 35.9 17.7
Malaysia 47.5 97.2
Maldives 27.5 43.0
Nepal 46.8 20.9
Pakistan 59.6 51.4
Philippines 59.5 62.1
Singapore 67.9 99.6
South Korea 4.9 77.5
Sri Lanka 22.3 57.3
Taiwan 0.0 87.0
Thailand 54.8 89.0
Vietnam 80.7 86.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

Business Monitor International Ltd www.businessmonitor.com 29

VIETNAM Q2 2012

ricultural employment to non-farm employment. The General
Statistics Office estimated that farmers constituted 52% of the
workforce in 2008, with close to 21% working in industry and
construction, and close to 27% working in the service sector.
Managerial talent and skilled workers are generally in short
supply, which has the effect of raising costs. The expanding
financial sector is particularly plagued by labour shortages and
is said to be in need of tens of thousands of skilled personnel by
2010. Foreign companies are becoming increasingly troubled
by an excessive turnover of qualified workers, which is driv-
ing up salaries for skilled personnel. Foreign companies have
previously been the prime choice of Vietnamese professionals
as they pay 14% more than domestic firms on average, accord-
ing to a 2007 survey by human resources consultancy Navigos
Group. Working for domestic firms is, however, becoming
increasingly popular as they are currently closing the salary
gap with foreign firms.
Labour shortages and a sharply progressive income tax system
have pushed up the costs for skilled personnel. Vietnam has, on
the other hand, maintained its cost advantage in manufacturing
wages. We believe Vietnamese labour is still very competitively
priced, in particular after the imposition of the Chinese Labour
Contract Law on January 1 2008, which is estimated to have
raised labour costs in China by 5%-40% and which has prompted
many South Korean and Taiwanese firms to consider moving
factories to Vietnam.
The regulatory burden in Vietnam's labour market has tradi-
tionally been high, but is easing over time. In 2003, legislation
was introduced that allowed foreign companies to recruit staff
directly, as long as they provide government agencies with a
list of recruited workers. However, the requirement to use em-
ployment service agencies continues to apply to branches and
representative offices of foreign companies.
One of the main regulatory burdens is the social protection
system, which imposes a compulsory social insurance contribu-
tion scheme in which employers must pay in 15% of the salary,
with employees proving 5%. Regulations for hiring workers are
significantly more onerous than the East Asia & Pacific aver-
age. Whereas the hiring cost is 17% of the salary in Vietnam,
it is only 5% in Thailand, for example. The imposition of the
Chinese Labour Contract Law on January 1 2008 has, however,
made many foreign companies view Vietnamese labour market
regulation more favourably. Employers are required by law to
establish labour unions within six months of setting up, and
these must be members of the Vietnam General Confederation
of Labour. While most factories have trade unions, many of
these do not operate in practice. Trade unions are more active
in the public sector, and only one-third of foreign companies
have collective agreements with their workforces.
Vietnam does not have a bad industrial relations record. Most
strikes were at foreign-invested firms in the textiles and apparel
sector, despite working conditions often being better at these
firms than at state-owned enterprises. Most strikes have resulted
from legal or contractual breaches, including failure to pay wages
and benefits, failure to pay social insurance contributions, and
failure to pay severance pay at termination.
The government raised the monthly minimum wage rate for work-
ers at foreign-invested enterprises from VND920,000-1,200,000
(US$51-67), dependent on economic zone, to VND1,000,000-
1,340,000 (US$55-74) from January 1 2010. The 13-15%
imposed increases were lower than the 20-38% increase in the
minimum wage rate for state- and domestic-employed workers
to VND730,000-980,000 (US$40-55). This follows the govern-
ment's roadmap to introduce a universal minimum pay rate for
all enterprises by 2012.

TABLE: VIETNAM TOP EXPORT DESTINATIONS

2002 2003 2004 2005 2006 2007 2008 2009
US 2,453.20 3,939.60 5,024.80 5,924.00 7,845.10 10,104.50 11,868.50 11,355.80
Japan 2,437.00 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.80
China 1,518.30 1,883.10 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.00
Switzerland 66.7 74.7 120.2 103.9 155.7 236.9 516.9 2,486.50
Australia 1,328.30 1,420.90 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.70
Total 32,346.50 39,327.60 51,145.60 62,489.30 77,568.10 94,633.40 119,125.20 110,610.20
Top 5 23,179.10 28,947.90 37,570.20 45,322.30 56,089.20 68,390.50 88,144.10 82,139.40
% from top 5 trade partners 71.7 73.6 73.5 72.5 72.3 72.3 74 74.3
Source: IMF, Direction of Trade Statistics.

30 www.businessmonitor.com Business Monitor International Ltd


Market Orientation
Foreign Investment Policy
Increased foreign direct investment (FDI) is an integral part
of Vietnam's ambitious economic expansion plans; and, with
ratings agencies pushing their grades higher, the country looks
like a solid investment destination, especially for manufacturing.
FDI pledges amounted to US$5.6bn in January-April 20, 2010,
down 25.7% compared with the same period in 2009. Actual FDI
disbursements were estimated at US$4.6bn in the same period.
The rising levels of official development assistance pledged by
multilateral donors are also important, but have been outpaced
by inflows from foreign private sources over the last five years.
But, as the country tries to transform from a centralised to a
more market-oriented economy, the investment framework is
still poorly developed in many areas, with bureaucracy and a
lack of transparency cited among major problems.
Despite ambitious targets for foreign investment as an important
source of fuel for economic expansion plans, a number of barriers
to investment remains. An opaque legal system, an inflexible
financial system, corruption, a lack of regulatory transparency
and consistency, a ponderous bureaucracy, and complex land
purchase rules are among areas criticised by foreign investors.
The government has been introducing and amending legislation
in an effort to remedy these perceived shortcomings.
Key legislation includes:
The Law on Foreign Investment (1989), which has been amended
several times to make FDI more attractive.
Government decree 24 of 2000, which carries a pledge to avoid
expropriation, and guarantees the right to repatriate profits. It
also outlines the government's intention to treat private and
state sectors equally.
A revised bankruptcy law and a Law on Competition, both
passed by the National Assembly in 2004, in a bid to improve
the FDI climate. Fully owned foreign banks are now allowed
to compete on an equal footing with domestic banks.
The Vietnamese legal code is currently in a state of flux, and
the authorities are drafting a unified legal framework for the
conduct of business. A new Common Investment Law and a
Unified Enterprise Law came into effect in July 2006, as did a
new Intellectual Property Law designed to clarify the respon-
Business Monitor International Ltd
BUSINESS ENVIRONMENT
sibility of government agencies charged with protecting IPRs,
but doubts remain over the effectiveness of its implementation.
The main forms of foreign investment are:
Joint venture agreements, under which foreign and domestic
firms share capital and profits.
Business Cooperation Contracts, which allow a foreign company
to carry out business in cooperation with a Vietnamese firm
through capital investment and revenue sharing, but without
gaining right of establishment or ownership.
Wholly foreign-owned enterprises are becoming more common,
especially those involving industrial production for export.
Build-operate-transfer agreements are the least common form of
foreign direct investment, and have a reputation among foreign
investors of causing regulatory and financing problems.
Foreign portfolio investment is permitted only in small quantities,
with aggregate foreign ownership of listed companies capped at
49%. Foreign ownership of banks is capped at 10% per investor,
and 30% in aggregate. Moreover, many of the shares listed on
the Ho Chi Minh City Stock Exchange are too illiquid to at-
tract foreign investors. Investments in export processing zones
(EPZs), industrial zones (IZs) and high-technology zones attract
tax and other incentives, and offer a ready-made operational
infrastructure that may be difficult to arrange outside.
EPZ investments carry 10-12% profit tax. The first established
was the Tan Thuan zone near Ho Chi Minh City in 1991, where
more than 100 manufacturers currently operate. A number of
others have since been built, though they have not been as suc-
cessful as hoped, partly because all produce from EPZs must
be exported.
IZs are for use by firms in construction, manufacturing, process-
ing or assembly of industrial products, often food processing
and textiles production. IZ firms pay a 10% profit tax and get
refunds if profits are reinvested. IZ firms may produce for the
domestic market as well as for the export market. Most FDI into
Vietnam comes from North East Asia, notably Taiwan, South
Korea, Japan and China/Hong Kong. Canada and the US are
the largest non-Asian FDI sources. Leading sectors for FDI are
manufacturing, other industry and oil and gas.
www.businessmonitor.com 31
VIETNAM Q2 2012
Foreign Trade Regime
Although high tariffs, customs bureaucracy and legal inadequa-
cies have provided significant trade barriers, the opening up of
Vietnam's economy has been accompanied by concrete measures
to meet the requirements of the WTO and other international
trade organisations. Vietnam has committed to bound tariff
rates (or legal ceilings) on most products ranging from zero to
35%. Reductions in most bound rates from 17.4% on average
in 2007 to 13.6% are to be phased in gradually.
Vietnam became a member of the WTO in January 2007. A
bilateral trade agreement with the US in effect since December
2001 has substantially lowered tariffs on US industrial and ag-
ricultural products, removed non-tariff barriers on US service
providers and eliminated barriers to US exports in key areas
such as pharmaceuticals and petroleum products.
The Vietnam-Japan Economic Partnership Agreement came
into effect on July 1 2009 and has already aided an increase in
garment exports to Japan. Moreover, the completion of a free
trade agreement with the EU should help to strengthen Vietnam's
share in European markets.
Vietnam is a member of the Association of South East Asian
Nations (ASEAN) – with Brunei, the Philippines, Indonesia,
Laos, Myanmar, Malaysia, Singapore, Thailand and Cambodia
– as well as of the linked ASEAN Free Trade Area. Vietnam
is thus party to negotiations on free trade agreements being
conducted by ASEAN, such as talks with the European Union,
China, Australia and New Zealand. Vietnam will continue to
dismantle tariffs in a bid to meet its WTO commitments. Fur-
thermore, the government is expected to allow greater foreign
participation in the banking sector.
The legislation providing the framework for the trade regime
is 1998's Law to Amend the Import and Export Tariffs Law.
However, given the ASEAN and WTO requirements, the tariff
structure is in a constant state of flux. To reduce the rising costs
of a range of products, Vietnam in October 2007 cut import tariffs
by between 30% and 60% on many food and dairy products.
Tax Regime
Since 2003, corporate tax has been charged at a unified rate for
both domestic firms and foreign investors. From the start of 2005,
a self-assessment regime has been in effect. The previous tax
audit system has been superseded by a tax investigation system.
Corporate tax: The main corporate tax rate is 25%, but firms
32 www.businessmonitor.com
involved in prospecting, exploration and mining of petroleum,
gas and other rare and precious natural resources are subject
to rates from 32% to 50%. Resident firms are taxed on global
income. Non-resident firms are taxed only on Vietnamese-
sourced income. A surtax of 10- 25% is charged progressively
on income from land use rights.
Individual tax: The National Assembly passed Vietnam's first-
ever personal income tax bill on November 20 2007. The bill,
which became effective on January 1 2009, replaces a previous
system in which expatriates and domestics were taxed at different
levels. The new bill provides a common set of rules for individuals
resident in Vietnam for 183 days or more in a 12-month period.
However, the bill is also applicable to those having a permanent
residence in Vietnam, a definition that includes a rented house.
How this paragraph will be interpreted is still unclear, but could
extend tax liabilities to expatriates and locals who reside in Vi-
etnam for fewer than 183 days per year. The new bill stipulates
that personal income is to be taxed at a rate between 5% and
35%, with a personal allowance of VND48mn (US$2,800) and
an additional allowance of VND19mn (US$1,120) per depend-
ent. As such, the new bill reduces the highest marginal tax level
applicable to expatriates from 40% to 35%. A new feature in
the bill compared with previous legislation is that it covers non-
employment income such as interest, dividends, capital gains
on real estate and securities investment.
Indirect tax: Main VAT rate is 10%. A 5% rate is charged on
some goods, including computers and accessories, construction,
machinery, chemicals, coal and metallurgy products. The fol-
lowing attract a zero VAT rate: exported goods and software and
services exported to firms in export processing zones. Registra-
tion is obligatory for businesses. VAT taxation is also subject
to an ongoing revision by the National Assembly.
Capital gains:Usually taxed as income at corporate rate. Gains
by foreign investors on the transfer of an interest in a foreign
or Vietnamese enterprise attract a 25% tax. Gains by individu-
als on the transfer of a home or on land-use rights are taxed
progressively up to 60%.
Operational Risk
Security Risk
Vietnam is generally a very safe country for foreign residents
and travellers. Petty street crime is rising in the major cities,
but there have been very few serious offences against foreign-
ers reported. Unexploded mines and ordnance are a continuing
hazard, particularly in central Vietnam and along the Laos border.
Business Monitor International Ltd
 BUSINESS ENVIRONMENT

The poor standard of roads and other public infrastructure is

also a safety risk, as is the poor level of driving which makes
traffic accidents one of the most prominent health risks for both
foreigners and nationals. Vietnam has agreed to comply with
ASEAN's Common Effective Preferential Tariff (CEPT) scheme
on manufactured goods within the ASEAN region, which calls
for rates to be brought down to the 0-5% range.

Business Monitor International Ltd www.businessmonitor.com 33

 Chapter 5:
Key Sectors
Autos
Executive Summary
New vehicle sales in Vietnam rose by 2% year-on-year (y-o-y)
over the first eight months of 2011 to reach 70,650 units, ac-
cording to data from the Vietnam Automobile Manufacturers
Association (VAMA). This figure includes both domestically
produced vehicles plus those imported into the country by VAMA
members. On the import side, the number of completely built
units (CBUs) imported into the country over the Jan-Aug period
rose by 30% y-o-y to reach 42,000, according to a September
2011 report on the AutomotiveWorld website. The value of im-
ported cars increased by 32% y-o-y to US$782mn. This comes
despite efforts by the government to curb imports in favour of
developing the domestic industry.
Looking at the monthly data, new vehicles sales reached 9,518
units in August 2011, up 9.8% y-o-y, compared with 8,671
units in August 2010, according to the VAMA. During the same
month, passenger car sales increased by 54% y-o-y to 4,201
units, which helped to overturn a negative month-on-month
trend from the past several months. Commercial vehicle sales
were down 24% y-o-y to 3,164 units in August.
There has been something of a slowdown in the monthly growth
rate in sales figures for the entire new vehicle sector. As of May
2011, new vehicle sales were up by 11% y-o-y. By August, they
slowed to 2% y-o-y. Against this backdrop, BMI is happy to
maintain its 2011 new vehicle sales forecast of 118,824 units
for now, but we caution that there may be slight downside risks
to this forecast should the downward trend in month-on-month
sales resume.
The country is still dogged by high inflation, with the CPI at
18% as of September 2011, and a weak currency, which may
act as a demand suppressant over the rest of the year. Moreover,
the car industry remains heavily taxed, with taxes reportedly
accounting for some 60% of the value of a new car in Vietnam
at present. One glimmer of hope for the autos industry was a
report in the Vietnam Investment Review magazine during
August 2011 that the Ministry of Finance is considering plans
Business Monitor International Ltd
to revise the special consumption tax levied on vehicles, a move
which may see certain types of vehicles exempted from taxa-
tion in the future. No concrete proposals had been tabled as this
report was being compiled in October 2011.
Among local producers, the leading domestic automaker remains
Truong Hai Auto Joint Stock Co (Thaco), which sold 2,677
cars in September. The company has sold a total of 23,413 cars
over the Jan-Sep 2011 period, with a market share of almost
29% of new vehicle sales in the year to date (ytd). In second
place is Toyota Vietnam, which has sold 22,106 vehicles ytd,
with a market share of 27.4%
In May 2011, the Vietnam Today website reported that the head of
Thaco, Tran Ba Duong, stated that constant changes to domestic
tax policy continue to cause problems for local automakers. As
part of discussions with Deputy Prime Minister Hoang Trung
Hai, Tran called for consistency in tax levels, which would allow
carmakers to invest for the future and prepare for the onset of
competition following the slashing of import tariffs to zero by
2018. Tran also called for further government support to help
develop the burgeoning local spare parts industry.
For his part, Hoang praised Thaco's recent work, addingthat
the government would be looking favourably on Quang Nam
province's proposal to develop a new autos manufacturing centre
within the Chu Lai open economic zone.
Name change for Vidamco
In September 2011, General Motors Company (GM) an-
nounced that it would be changing the name of its Vietnamese
operation from Vidamco to GM Vietnam. At the same time,
the company announced that it would now be selling all of its
cars under the Chevrolet brand, with production and sales of
Daewoo branded cars to stop immediately. The company will
continue to provide after-sales care and spare parts for owners
of Daewoo cars.
GM Vietnam plans to launch three new Chevrolet models in
Vietnam before the end of the year and to upgrade its dealer net-
work and service centres. According to the company, Chevrolet
www.businessmonitor.com 35
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 1 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 attrib-
uting 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
TABLE: VIETNAM AUTOS SECTOR – HISTORICAL DATA AND FORECASTS
2009 2010 2011e
Total Production, CBUs 33,689 37,199 40,322
Total Sales, CBUs 119,460 112,224 118,824
Total Imports, CBUs 76,300 53,100 47,790
Figures are for complete knocked-down kits/completely built units, f = forecast, * estimate. Sources: VAMA
36 www.businessmonitor.com
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 Com-
merce. 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 As-
sociation 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 inter-
est 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.
2012f 2013f 2014f 2015f 2016f
43,872 48,170 52,805 57,789 63,252
126,562 138,656 159,496 181,478 206,597
49,988 52,338 54,798 57,428 60,184
Business Monitor International Ltd

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.
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%.
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 es-
tablishing 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 pro-
duction 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
KEY SECTORS
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.
Food & Drink
Executive Summary
The State Bank of Vietnam's aggressive monetary tightening
measures are expected to take the steam out of domestic de-
mand 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 consider-
able 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.
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 im-
pressive 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 Consumer-
Facing 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, reach-
ing 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 in-
comes 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 seg-
ments, 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 ma-
jor 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 pro-
ducer 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, do-
mestically 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 com-
pound annual average terms to 2016.
TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS
2010
Food consumption, US$bn 18.69
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 matura-
tion 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.
2011f 2012f 2013f 2014f 2015f 2016f
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
Food consumption growth, VND, % chg y-o-y 10.72 11.19 13.25 6.78 4.19 3.37 3.99
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.
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 con-
fectioners such as Kinh Do are expected to continue to invest
in broadening its product ranges and expanding its distribution
channels.
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%.
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 cur-
rently pencilling in a 7.7% growth in exports, outperforming a
6.5% growth rate expected for imports.
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 an-
nual average growth basis between 2011 and 2016, imports
are forecast to experience compound annual average growth
of 8.1% over the same period.
A major driver behind the growth in exports is sustained govern-
ment efforts to improve local food production and agricultural
industries. This will boost output and make more produce avail-
able for export, as well as improve the quality competitiveness
of local exports.
Over the long term, increasing urbanisation and continued ex-
posure 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.
Industry Forecast – Drink
Alcoholic Drinks
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.
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 consum-
ers begin to trade up to higher-value drinks along with rising
disposable incomes.

TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES -- HISTORICAL DATA & FORECASTS

2010 2011f 2012f 2013f 2014f 2015f 2016f
Alcoholic drinks sales, VNDmn 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
Alcoholic sales growth, litres, % chg y-o-y 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
e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, Trade press, BMI

40 www.businessmonitor.com Business Monitor International Ltd


Beer will continue to dominate the alcoholic drinks sector, ac-
counting 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 interna-
tional 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 mul-
tinational 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.
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 dy-
namism to drive volume sales.
Hot Drinks
BMI is pencilling in a compound annual average growth of
9.4% and 7.0% in coffee and tea sales, in volume terms, re-
spectively to 2016.
Vietnam's sturdy economic growth over the next few years will
Business Monitor International Ltd
KEY SECTORS
continue to fuel demand for higher value food and beverage
products, such as coffee. Vietnam's massive youth popula-
tion, 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 multina-
tional 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 con-
trolling 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
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.
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.
Although Vietnamese consumers will retain an interest in healthy
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.
Intensified rivalry between the country's major soft drinks play-
ers 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.
growth basis, with all modern formats present in the country
– supermarkets, hypermarkets and convenience stores – con-
tributing 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.
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
Overall mass grocery retail (MGR) sales are forecast to increase
at a compound annual average growth rate of 11.1% to 2016.
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

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
Total mass grocery retail sector growth, VND, (y-o-y) 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
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 low prices offered by discounters would be unlikely to attract
regions in search of growth. buyers in rural communities, for whom self-sufficiency and wet
markets remain the sole methods of consumption. This point is,
Sales through the convenience store format are forecast to however, still a long way off. Retailers will invest in Vietnam
experience the slowest growth rate, at 8.7% on compound an- in line with their own need to expand, confident of the country's
nual average growth terms to 2016. The main reason behind economic development and growing consumer base.
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.

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. There-
fore, 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 Sai-

gon 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 expansion-
ary 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
Construction industry value, VNDbn [1] 139,162.00 164,947.29 186,697.77 206,534.24 230,765.81 256,649.94 285,458.97
Construction industry value, US$bn [1] 7.3 8.0 8.9 10.2 12.0 13.5 15.1
Construction industry, real growth, % y-o-y [1] 10.06 -0.12 5.36 5.57 6.23 6.22 6.22
Construction industry value, % GDP [1] 7.0 6.6 6.6 6.5 6.4 6.3 6.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 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
Oil exports, US$mn [1] 1.1 1.5 2.7 1.9 1.4 0.5 - -
Oil imports, US$mn [1] - - - - - - 0.0 1.2
Petroleum exports, US$mn [1] 1.06 1.53 2.69 1.98 2.08 2.61 2.22 1.73
Import of refined products, 000b/d [1] 207.0 203.0 206.8 223.1 243.7 265.5 196.6 62.6
Proven gas reserves, bcm [1] 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
Notes: e BMI estimates. f BMI forecasts. Sources: 1 EIA/BMI.

TABLE: PHARMA SECTOR KEY INDICATORS

2011e 2012f 2013f 2014f 2015f 2016f
Pharmaceuticals sales, US$bn [1,3] 1.889 2.238 2.669 3.169 3.674 4.166
Pharmaceutical sales, US$bn, % y-o-y [1,3] 10.3 18.5 19.3 18.7 15.9 13.4
Pharmaceutical sales, VNDbn [1,3] 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$bn [1,4] 8.60 10.07 11.77 13.70 15.60 17.42
Health expenditure, US$bn, % y-o-y [1,4] 8.5 17.0 16.9 16.4 13.8 11.7
Health expenditure, VNDbn [1,4] 177,678.25 205,146.85 233,125.82 263,818.20 295,644.38 328,356.61
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 3,361,708 3,366,403 3,371,021 3,375,564 3,380,031 3,384,421
nutritional conditions, DALYs [2,5]
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. 1 Last Updated: 13/01/2012; 2 Data is DALYS, disability-adjusted life years; Sources: 3 Drug Administration of
Vietnam (DAV), Vietnam Ministry of Health, domestic companies, local press, BMI. 4 World Health Organization (WHO), BMI; 5 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
Number of Main Telephone Lines in Service ('000) [1] 13,655.7 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
Number of Cellular Mobile Phone Subscribers ('000) [1] 118,822.3 124,763.4 128,506.3 131,076.4 133,697.9 135,034.9
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] 5.4 3.9 1.9 1.0 1.0 0.1
Number of Internet Users ('000) [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
Number of Broadband Internet Subscribers ('000) [1] 4,081.3 4,489.4 4,848.6 5,188.0 5,499.2 5,774.2
Number of Broadband Internet Subscribers, % chg y-o-y [1] 12.0 10.0 8.0 7.0 6.0 5.0
Notes: e BMI estimates. f BMI forecasts. Sources: 1 World Bank (International Telecommunications Union (ITU)), BMI research.

TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS

2011e 2012f 2013f 2014f 2015f 2016f
Defence expenditure, VNDmn [1] 64,601,386.2 75,836,294.5 84,878,580.5 96,106,026.7 108,324,809 122,121,413
Defence expenditure, VND, % chg y-o-y [1] 25.6 17.4 11.9 13.2 12.7 12.7
Defence expenditure, % of GDP [2] 2.6 2.6 2.6 2.6 2.6 2.6
Defence expenditure, VND per capita of population [2] 727,558.7 845,158.4 936,265.3 1,049,618.5 1,171,806.7 1,309,016.4
Defence expenditure, US$mn, constant prices [1] 2,699,353.0 3,101,410.9 3,385,925.9 3,774,045.5 4,132,513.6 4,476,933.8
Defence expenditure, US$, constant prices % chg y-o-y [1] -1.5 14.9 9.2 11.5 9.5 8.3
Defence expenditure, constant US$ per capita of population [1] 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: 1 SIPRI/BMI. 2 SIPRI, BMI calulation.

TABLE: FREIGHT KEY INDICATORS

2010 2011e 2012f 2013f 2014f 2015f
Port of Ho Chi Minh City container throughput, TEU 2,850,000.0 2,973,972.8 3,116,250.5 3,278,614.9 3,452,792.5 3,749,495.5
Port of Ho Chi Minh City container throughput, TEU, % y-o-y 17.19 4.35 4.78 5.21 5.31 8.59
Air Freight Tonnes (000) 186.00 195.76 206.96 219.51 232.90 248.23
Air Freight Tonnes % chg y-o-y 33.24 5.25 5.72 6.06 6.10 6.58
Rail Freight Tonnes (000) 7,809.9 8,187.3 8,620.2 9,105.1 9,622.9 10,199.1
Rail Freight Tonnes % chg y-o-y -3.20 4.83 5.29 5.62 5.69 5.99
Road Freight Tonnes (000) 563,406.1 599,863.2 641,689.0 688,531.9 738,564.3 789,140.5
Road Freight Tonnes % chg y-o-y 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 fore-
casts 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
Real GDP Growth (%)
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
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

Oil Prices (ave)

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
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.
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 (previ-
ously 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.
Developed States
Our forecast for developed states' real GDP growth in 2012 has
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.
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

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

Selected Developed States

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
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
Spain -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
Source: BMI

TABLE: REAL GDP GROWTH CONSENSUS FORECASTS

US Eurozone Japan Brazil China Russia India
2011 Bloomberg Consensus 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
2012 Bloomberg Consensus 2.3 -0.5 1.7 n/a n/a 3.5 n/a
BMI 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
do 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
Singapore 14.5 4.8 2.6 3.6
South Korea 5.6 3.7 1.9 4.6
Taiwan 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
*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.

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).
Analyst: Andrew Wood All such content is copyrighted in the name of Business Monitor International, and as such no part of this
Editor: Stuart Allsopp content may be reproduced, repackaged, copied or redistributed without the express consent of Business
Sub-Editor: Kerry Lambeth Monitor International Ltd.
Subscriptions Manager: Mandeep Sahote All content, including forecasts, analysis and opinion, has been based on information and sources
Marketing Manager: Joanna Ashton believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes
Production: Neil Murphy
no representation of warranty of any kind as to the accuracy or completeness of any information provided,
Publishers: Richard Londesborough, Jonathan Feroze
and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or
omissions affecting any part of the content.