growth predicted, with the port sector in third place with 6.03%. Inland waterways and rail freight will both also enjoy healthy average increases between 2012 and 2016, of 5.73% and 5.33% respectively.
However, we caution that in order for the country to fully realise its potential, there must be an onus placed on investment over the mid and long term, otherwise Vietnam could suffer from overcapacity. Aside from this, the country's existing infrastruc-ture is sadly lacking and needs a considerable financial injection.
With the macroeconomic picture across the globe looking bleak for 2012, Vietnam's main export partners - the US, China and Japan - are all set to suffer slowdowns during 2012, which could go on to pose some serious headaches for Vietnam.
Headline Industry Data
• 2012 rail freight tonnage is set to increase by 5.29% to 8.62mn tonnes.
• 2012 air freight tonnage is forecast to rise by 5.72% to 206,960 tonnes.
• Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.96% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%.
• 2012 road freight tonnage is forecast to grow by 6.97%.
• 2012 total trade is forecast to rise by 8.45%
Key Industry Trends
Van Phong Port To Resume Work In 2012 At Best Vietnam National Shipping Lines (Vinalines) signed a deal with Netherlands-based Rotterdam Port to construct the US$3.6bn Van Phong port, it was reported in October 2011. We believe that the international sea port project is likely to resume construction in 2012 at the earliest, given the need for further negotiations with Rotterdam Port, Vinalines' lack of financing and the unresolved disputes with previous developers of the projects.
Cat Lai Port Denies Any Involvement In Reefer Explosions Saigon Newport, a container terminal operator at the Vietnamese Port of Cat Lai, denied any involvement in the faulty repairs or maintenance of reefer containers which resulted in fatal explo-sions at four ports in Asia and South America in November 2011. Pham Thi Thuy Van, of Saigon Newport's marketing department, said neither the port nor the terminal operator should be blamed for the explosions, as the maintenance and servicing of the reefers is handled either by third party vendors, or by the shipping lines' own vendors.
New Vietnamese Container Rail Service Provides Upside
Risk To Forecasts: The Vietnamese press reported at the end of 2011 that the Vietnam Railway Corporation (VRC) was seek-ing to introduce a container train service connecting the Port of Hai Phong with Hanoi and Lao Cai Province, with rail freight volumes set to increase as a result. The new service could also reduce the number of lorries on Vietnam's roads, potentially leading to a drop in road haulage in the South East Asian country.
Key Risks To Outlook
There should be no doubt that Vietnam's biggest obstacle go-ing forward will be overcapacity, and how the country plans to traverse this will be the difference between fulfilling potential or fading into the wilderness behind regional competitors. With demand for Vietnamese freight high, the offshoot is of course being able to cater for this demand. If provisions are made to combat overcapacity, then this will undoubtedly provide risks to the upside in terms of our mid and long term forecasts.
On the downside, Vietnam is certainly not immune to the stub-born global economic headwinds that threaten to blow many an economy of course in 2012. Despite the Vietnamese government's attempts to reduce the country's persistent budget deficit, we expect to see a cooling of the economy over the coming quarters,
with real GDP growth slipping slightly from 5.9% last year to 5.8%. With most other economies set to suffer far worse than Vietnam in 2012, including key export partners, the freight sector may well take a hit in 2012 as the belt tightening commences.
Market Oveview
BMI has downwardly revised its GDP growth forecast for 2012 due to the fears that a global economic downturn may be just around the corner. Although we stated last quarter that we were 'optimistic that we could see a pickup in GDP growth to reach 6.5% in 2012, after estimated growth of 6% in 2011', we have dropped both figures, to 5.8% and 5.9% respectively. Economic headwinds in the US and eurozone should continue to act as a dampener on external demand, allied to the fact that China, Vietnam's largest export partner, is set to see a cooling of GDP growth in both2012 and 2013. This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with negative effects for the freight transport industry.Domestically, we expect to see welfare subsidies rise as cool-ing 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 slight improvement in the budget deficit to 2.8% in 2013. Retail sales have moderated considerably since November 2010, when the State Bank of Vietnam (SBV) initiated its monetary tightening cycle. Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the meas-ures have dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports. However, public spending cuts and a subdued outlook on gross fixed capital
formation (GFCF) growth due to high lending rates would lead to continued moderation in domestic demand throughout the year.
Road Freight Remains The Dominant Force: Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market, and there are many small, family owned road freight companies operating informally.Vietnam has a national road network of 171,392 kilometres (km). BMI believes the sector requires substantial investment. The quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 countries surveyed in its Global Competitiveness Report 2011-2012.
Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,347km. The network is of mixed-gauge, comprising 2,169km of 1.000m gauge and 178km of 1.435m gauge. Railway infrastructure in Vietnam was ranked 101 out of 123 by the WEF.
Vietnam's port infrastructure is poor by international standards. The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional underperformer.
Investment And Development Outlook
According to our key infrastructure projects database, there are US$171bn worth of infrastructure projects planned, or cur-rently under way, in Vietnam's transport sector. One of the most expensive of these is a US$3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construc-tion of two deep water ports in Dam Mon that will be able to ac-commodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site.
The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for100mn passengers a year. A tender for investment consultancy work was under development as of December 2011.
Industry Forecast
Vietnam Will Not Escape Global Headwinds Although Vietnam is set to enjoy relatively good GDP year-on-year (y-o-y) growth in 2012 of 5.8%, this represents not only an ever so slight slowdown from 2011, but a downward revision from the end of 2011. We expect to witness a deterioration in the
country's fiscal position in 2012, due to the prevailing global economic headwinds. As no country can exist in a vacuum, Vietnam will find itself suffering as a result of larger downturns in other economies over the next 12 months. Vietnam's two big-gest export partners, China and Japan, are expected to encounter differing growth patterns in 2012. China's rapid growth will cool somewhat to 8.1% in 2012, down from 9.2% in 2011, and this is set to slip again in 2013. Meanwhile, although Japan will avoid the contraction it saw in 2011, it will still only post 1.8% growth in 2012, which we also forecast will fall in 2013. This will impinge on Vietnam's freight industry, due to its exposure to these economies.Our forecasts for Vietnam's road freight sector suggest further strong growth over the medium term. For 2012 we expect y-o-y growth of 6.97%, up from an estimated 6.47% in 2011. In terms of medium-term annual growth, BMI sees an average of 7.14% to reach 846.83mn tonnes.The rail freight sector will safely put the twin contractions of 2009 and 2010 out of sight with 2012 and beyond set to reflect 2011's steady growth pattern. For 2012 we expect growth of
5.29%, with the average annual growth over the forecast period just beating this figure, at 5.33%, to reach 10.61mn tonnes in 2016, up from 2012's forecast 8.62mn tonnes.
In common with the sectors mentioned above, Vietnam's air freight sector will enjoy steady growth rates over the medium term. We see an annual average of 6.23% over our forecast pe-riod, with tonnage throughput increasing from 206,960 tonnes in 2012 to 264,780 tonnes by the end of 2016. In 2012 BMI
forecasts y-o-y growth of 5.72%, up slightly on 2011's 5.25%. However, the Vietnamese air freight sector is by far the country's smallest in terms of annual tonnage throughput.Ho Chi Minh Port's growth forecast for 2012 is set to reflect the slower GDP growth in Vietnam. We are sticking with last quarter's prediction that the port's container throughput will increase by 4.8% in 2012 to 3.1mn twenty-foot equivalent units (TEUs), a slowdown from the double-digit growth we saw in the years prior to 2011. We also stick to Q112's
tonnage throughput growth forecast of 8%, to reach 36.11mn tonnes.However, growth at the Port of Da Nang will not mirror that of Ho Chi Minh City, with 2012's forecast set to be 3.08%, albeit an increase on 2011's estimate. Over the medium term, the port is set to see average annual tonnage throughput of 3.83%, compared to the Port of Ho Chi Minh's 8.22%.Inland waterways will also enjoy the healthy growth we expect to see in other sectors over the medium term. In 2012 we forecast growth of 5.11%, a figure that will be surpassed by the predicted y-o-y average over the forecast period of 5.73%.
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