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Vietnam Economic Outlook 2012 - 2013

October 2012
Lam Phi Yen Head of Corporate Sales HCM Global Markets, Vietnam yenphilam@hsbc.com.vn +84-8-3520 4113

Agenda

Vietnam Economic Update Reform Doing business in Vietnam Q&A

Vietnam Economic Update

Vietnam at a glance
Key data
Vietnam GDP (USD bln) 2011 123.6

Macro-economic performance

GDP per head (USD 000)

1.4

Population (m)

86.9

CPI (%) Trade balance (USD bln) International reserves (USD bln)

18.1 -9.8 11.5

Average GDP growth rate in the past 10 years: 7.3% Demographic: 87 million people, with 70% of the population in working age (from 15 to 65 years old) Savings and investment rates are 29.2% and 34.2% in 2011 Average domestic credit growth of 33.7% far exceed average annual nominal GDP growth of 21.3% and average annual real GDP growth of 6.6% in the past 5 years Average inflation in the past 10 years: 7.8% The dong lost 30% of its value versus the greenback in the past 5 years Heavily dollarised economy

Year to date Sep: key economic indicators


GDP growth : Inflation : Trade balance : Export growth : Import growth : Retails sales : + 4.73% (versus 6% target) + 6.48% (versus one-digit target) + $0.03bio + 18.9% ($83.79bio) + 6.6% ($83.76bio) + 17.15%

Industrial production growth(y-y): + 9.7% FDI disbursement : FDI pledges : Credit growth : FEX reserve : Stock market : - 1.2% ($8.1bio) - 27.9% ($9.5bio) + 2.2% + 100% ($23bio) + 11%

Source: CEIC, HSBC

Whats Behind Vietnams Growth?


Private consumption makes up about 68% of GDP in Vietnam Government consumption usually constitutes around 7% of GDP Investment represents about 39% of GDP Exports make up around 70% of GDP (in 2010 it was 77.5% of GDP) Credit expansion Labor force
45.00

Contribution to GDP has changed


%

Agriculture, 16%

40.00 35.00

Service, 42%

30.00 25.00 20.00

Industry, 42%

15.00 1985 1990 1995 2000 2005 2010


Year

Agriculture
Source: CEIC, HSBC

Industry

Service

Average growth rate in working age population (% y-o-y)

3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 AU CH HK IN ID JP 1990s SK MY 2000s NZ 2010s PH 2020s SG SL TW TH VN

Source: UNPD, HSBC


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The economy is reliant on credit growth

9 50 45 40 35 30 25 20 15 10 2003 2004 2005 2006 2007 2008 2009 2010 GDP grow th 2011 2012f 2013f 8.5 8 7.5 7 6.5 6 5.5 5

Credit grow th

Source: CEIC, HSBC


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Growth is affected by low demand, both internal and external

HSBC PMI 60 55 50 45 40 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 New Orders New Ex port Orders

Though contracted, the pace of contraction of both new orders and new export orders has been much slower than previous month Externally, growth is affected by Euro zone crisis, sluggish US recovery process and slowing China growth. The prospect for exports in coming months is not really positive

Retail sales still hold up, boosting the service sector

75 65 55 45 35 25 15 Apr-08 Feb-09 Dec-09 Oct-10 Aug-11 Retail Sales (% y --o-y ) Retail Sales (%3m/3m sa RHS)

23 18 13 8 3 -2 -7 Jun-12

Source: HSBC, CEIC

Investment by sector

Investment by value

State makes up 51% of total investment (average figure of the last 10 years) Contributes about 40% GDP Inefficient but requires continued support to exist

55 45 35 25 15 1995 1997 1999 2001 2003 2005 2007 2009 2011 State Non State Foreign Inv ested Sector

Service sector recovers and leads the growth, followed by the industry

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A closer look at the industry

Construction sector contracted, little recovery seen but still remains in negative zone

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Inflation slowed to single digits but would accelerate slowly

27 22 17 12 7 2 Nov -07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May -13 Headline CPI (% y -o-y )
Source: HSBC, CEIC

HSBC Forecasts

Core CPI (% y -o-y )

But the outlook may be less optimistic

Input price is rising

The trend is turning on inflation

Source: CEIC, HSBC


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FDI is so far impacted by the economic slowdown


12.00

8.00

4.00

0.00 2007 -4.00 2008 2009 2010 2011 2012f

-8.00

-12.00 Net FDI (USDbio) Current account balance (USDbn) Current account balance plus FDI (% GDP)

FDI registration as of Sep reaches $9.53 billion, equivalent to 72.10% vs last year. Disbursement: $8.1billion, contracted by 1.2% vs last year FDI by sector: Manufacturing 65.5%, real estate: 19% The largest sources of FDI pledges were: Japan (60.9%), Korea (7.1%), Hongkong (7.1%), Singapore (7.0%)
Source: CEIC, HSBC, GSO

But capital flow picture remains healthy

FDI keeps basic balance positive


USDbn, 3mma 3 2 1 0 -1 -2 -3 Jan-09 Oct-09 FDI Jul-10 Apr-11 Jan-12 Net

Equity flows have shown some upside too


2.85 2.80 2.75 2.70 2.65 2.60 2.55 Jan-11 Jul-11 Jan-12 Jul-12 USDbn

Trade bal

VN foreign equity flow s, cumulativ e

Trade deficit turns surplus

Trade deficit 20 18 16 14 bio US D 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (e) Year Trade deficit (bio USD)

YTD Sep trade balance is USD 30m surplus Robust export performance Import number is steady

Source: CEIC, HSBC

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Vietnams top trade partners


Top export locations
2010 USDb 1 2 US 14.2 EU 11.3 2011 USDb US 16.7 EU 16.5 % Growth (YoY) 17.5 45.4 31.5 47.6 37.8 H1-2012 USDb US EU ASEAN JAPAN CHINA 9.3 9.1 7.7 6.4 6.3 % Growth (YoY) 19.8 22.4 22.8 42.3 31.9

3 ASEAN 4 5 JAPAN CHINA

9.1 ASEAN 13.6 7.7 7.3 CHINA 10.8 JAPAN 10.6

Top import locations


2010 USDb 1 2 4 5 CHINA 17.9 ASEAN 14.5 JAPAN EU 8.1 5.5 2011 USDb CHINA 24.6 ASEAN 20.9 13 7.5 JAPAN 10.2 EU % Growth (YoY) 37.4 44.1 49.4 25.9 36.36 H1-2012 USDb CHINA ASEAN KOREA JAPAN EU 13.2 10.4 7.2 5.3 3.8 % Growth (YoY) 16.9 0 18.1 12.7 6
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3 KOREA

8.7 KOREA

Near-term outlook, stabilization of activity

Av erage Grow th Rate = 7% 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 GDP (% y -o-y ) HSBC forecasts

Source: Markit, HSBC

Medium-term outlook, the debt burden will weigh on the economy

5 4 3 2 1 0 2010 2011 2012 y td Non performing loan ratio

Reform?

Stress

Vietnam has broken the booming period Heavily-debted SOEs Banking system weakness Real estate market is frozen Slowing GDP growth with higher inflation has been hurting our workers and farmers Last but not least, the whole market is lack of TRUST

Hmmmm!!!

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What has been going on here?


Banking system and SOE reforms Growth with stability Inflation has been whipped, markets are stable and the currency restores Some local banks have been forced to merge; and more to come SOEs are requested to restructure their businesses TRUST is being building up slowly; yet a lot of things MUST be done more People are still reluctant to spend Companies are still waiting for a clearer picture to expand their business Sharply wider budget deficit in the first nine months

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Step by step starting with Phase 1


Policy discipline is required, and this is a challenge because reform likely needs two phases Phase 1: sorting out macro problemsmay be the easier part Phase 2: solving these problems, especially in banking system and SOEs regimemay be much more difficult

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Phase 2
The Government has made significant progress in consolidating banks and SOEs, but that is not enough Real number on NPLs: ?% on $135bn of outstanding loans The SBV has a reasonable work-out program involving bank consolidations, bad debts reduction The shortfall of recoverable collateral against loans is estimated at $5bio How to resolve?

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Vietnam Economics Reform : Will History Repeat ?

2500

'000 tons

trn VND

140

1986 Economics Reform Focusing on Argriculture


2000

1999 Economics Reform Enterprise Law

2011 Economics Reform SOEs, Financial Sectors

120

100 1500

1000

Barely have enough food to avoid famine

80

500

Rice Export (LHS)

Private Sector Industrial Production

60

???
40

0 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

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Doing business in Vietnam

Beverage industry ???

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Other good businesses


Vietnam ranks the first in consuming beer in ASEAN and the fourth globally Vietnam is among top 10 cigarette consumption; around 80 bio cigarettes per annum Vietnam ranks No.4 in consuming instant noodle Vietnam ranks No.4 in consuming motor bikes in the world Vietnamese always love physical GOLDstay at position No.8 globally Vietnamese young generation adore high-tech products

And what will follow these appetites and habits ??? Retails sales industry Healthcare service

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Key economic forecasts


HSBC's key Vietnam Economic Forecast
GDP (%) GDP per capital (USD) Industrial production (%) CPI (year end, %) Export, value (% y-o-y) Import, value (% y-o-y) Trade deficit (USD bn) International FX reserves (USD bn) USD/VND (end of period)

2010
6.8 1,156 14 11.8 26.4 21.2 -12.6 12.9 19,498

2011
5.9 1,382 14.7 18.58 33.3 24.7 -9.8 11.5 21,036

2012F
5.0 1,546 14 9.2 15.5 6.5 -2.0 18 21,500

2013F
5.8 1,751 N/A 10.7 28.5 28.8 -4.5 18 21,500

Source: HSBC
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HSBC Vietnam Extending Vietnam presence and growing network


Largest foreign bank in terms of investments, staff and network
Long-term commitment
Established in 1870 One of the first foreign banks to locally incorporate in 2009

Fast-growing presence
18 outlets in key cities 150 ATMs Over 1,600 deposit outlets via Vietnam Post Over PCM 1,145 cash collection points