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Vietnam 2014Will the Tiger roar again?

October 2013

Sumit Dutta

Chief Executive Officer

HSBC Vietnam

• Young, educated, and hardworking

population.

• 63% of the population under 35, median

age of 27. Below China (35) and Thailand

(34).

• 94% literacy rate. Ahead of Indonesia

and Malaysia.

• Official poverty rate reduced from 58%

(1993) to single digits today

• Trend towards urbanisation with 30% of

the population now live in cities.

Expected to grow to 40% by 2020.

• Young banking industry – opened up only

since 1995.

A young country with significant upside potential

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Vietnam labour cost

% of population with access to banking system

How Vietnam has progressed over the years

• GDP growth consistently over 5%

• Exports has grown from USD72B in 2010 to USD114B in 2012 and reached USD 96B in 3Q13.

• Trade balance reasonable and on an improving trend

• FEX reserves grew 200% over a two year period

• VND was stable against the USD

• 3 month VNIBOR decreased from double digit of over 13% to c.5% in 2013.

Vietnam 2010 2011 2012 Q3 2013

GDP (%) 6.8 5.9 5.03 5.1

CPI (y-o-y,%) 9.1 18.6 6.8 6.3

Exports (%) 26.4 33.3 18.3 15.7

Imports (%) 21.2 24.7 7.1 15.5

Trade balance (USD bln)

-12.6 -9.5 0.3 -0.1

FEX reserves (USD bln)

12.9 11.5 20 30

Key data

Vietnam’s progression over the years

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Not much to cheer about in 2013

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• Credit growth between 35%-55% per annum from 2007-2001

• Much of which went into speculative industries

• Real estate bubble

• Volatility in gold and the stock market

• High inflation

• Excessive interest rates leading to companies going bust

The fallout is still being experienced today

The ramifications of unbridled growth

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• Drop in customer confidence

• Decreased domestic consumption

• Reduction in investment

• Interest rates low but corporates reluctant to borrow

• Bad debts in the banking system

• Not much progress on SOE reform

The recent environment

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Credit growth on a downward trend

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• Vietnam’s growth historically driven by credit• Credit growth in 2013 at 6.5% versus target at 12% (2012: 9%)

Source: KPMG Vietnam Banking Survey 2013

NPLs on the rise

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• True picture could be worse• Causes include lack of corporate governance, transparency and poor credit models

Source: KPMG Vietnam Banking Survey 2013; SBV’s Official Data

2.9%

3.2%3.0%

2.0%

3.5%

2.2%

2.6%

3.4%

4.08%

4.67%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

Dec2004

Dec2005

Dec2006

Dec2007

Dec2008

Dec2009

Dec2010

Dec2011

Dec2012

Apr 2013

NPL Rate

Vietnam real estate – an example of condominiums

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• Average selling prices for condos in HCMC and Hanoi on downward trend• New launches have slowed significantly since 2010

Source: CBRE

Ho Chi Minh City

Hanoi

Average selling price (USD/sqm) Condominium Launch, HCMC

Secondary Price Change New Launch Supply (Units)

Vietnam stock market 2009-2013

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• Still below September 2009 high• Improvement seen during the last nine months

Source: Bloomberg

Consumer confidence dropped in 2012 – major concerns are the economy, inflation, job security, and health

Source: AC Nielsen 2013

2010-2012 Vietnam Consumer Confidence Index Major concerns over the next six months

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What are consumers spending their money on?

Source: AC Nielsen 2013 PUBLIC

How to utilize spare cash after covering essential living expenses (as of Q4 2012)

30% 29% 28% 27%24%

15%

6% 5%

11%

0%

10%

20%

30%

40%

50%

60%

70%

60%

But Vietnam looks rosier from afar<

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VND stability vis a vis USD

20,200

20,400

20,600

20,800

21,000

21,200

21,400

22-Aug-11 22-Nov-11 22-Feb-12 22-May-12 22-Aug-12 22-Nov-12 22-Feb-13 22-May-13 22-Aug-13

Official Floor Ceiling Market

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Third best performing currency in Asia (YTD August 2013)

CountryBest Performing Currency vs USD YTD

August 2013

China 1.79%

Hong Kong -0.07%

Vietnam -1.5%

Taiwan -3.22%

Korea -4.71%

Singapore -4.81%

Thailand -5.43%

New Zealand -6.27%

Philippines -7.92%

Malaysia -8.83%

Japan -11.17%

Indonesia -12.68%

Australia -14.50%

India -15.47%

Source: Bloomberg PUBLIC

Other positive macroeconomic trendsI

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Inflation is expected to stay contained in the

next 3 monthsFalling interest rates (3 month VNIBOR)

Source: HSBC, Markit

Vietnam five year CDS at all-time low

PUBLICSource: Reuters

FDI – Strong and sustainable flows to Vietnam

PUBLICSource: HSBC, Markit

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Top 10 active FDI by business sector (Over last 4 years)

Source: Foreign Investment Agency

Manufacturing56%

Real Estate17%

Acommodation & Food Service

2%

Construction4%

Electricity, Gas, and AC Supply

8%Others13%

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(USD bio)

Top FDI by country (Over last 4 years)

Source: Foreign Investment Agency

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Japan Singapore SouthKorea

HongKong

BVI Taiwan China US Malaysia Others

Competitive and attractive to overseas investors

PUBLICSource: Internet

In Vietnam’s current development stage who is thriving?

Source: AC Nielsen 2013 PUBLIC

• Beverages

• Favorable demographic shifts and rising affluence provide significant scope for growth

• Alcoholic drinks value sales CAGR, 2012 to 2017: +13.5%.

• Soft drinks value sales CAGR, 2012 to 2017: +13.7%.

• Pharmaceutical

• Local market valued at US$2.4bn in 2011

• Expected to grow to US$5.4bn by 2016, equating to a compound annual growth rate (CAGR) of 17%

• Education

• Rapid growth of private, technical, linguistic and secondary education

• Number of students has risen 95% from 2006-2011 and per capita spending has increased 33%

Who is thriving?

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• Agriculture and commodity

• Coffee production growth to 2016/17: 28% to 29.1mn bags

• Poultry production growth to 2016/17: 27% to 954,000 tonnes

• Milk production growth to 2015/16: 24% to 398,000 tonnes

• Personal Care

• Consumers, especially those living in urban areas, are gaining exposure and have increasing demand for beauty and personal care products. Value growth and product availability are both expected to be strong.

• Segment growth of 60% from 2006-2010

Who is thriving?

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25PUBLIC

Top export locations

2010 USDb 2011 USDb% Growth

(YoY) 2012 USDb % Growth (YoY)

1 US 14.2 US 16.7 17.5 EU 20.3 22.5

2 EU 11.3 EU 16.5 45.4 US 19.6 15.6

3 ASEAN 9.1 ASEAN 13.6 31.5 ASEAN 17.3 27.2

4 JAPAN 7.7 CHINA 10.8 47.6 JAPAN 13.1 21.4

5 CHINA 7.3 JAPAN 10.6 37.8 CHINA 12.2 10

Top import locations

2010 USDb 2011 USDb% Growth

(YoY) 2012 USDb % Growth (YoY)

1 CHINA 17.9 CHINA 24.6 37.4 CHINA 28.9 17.6

2 ASEAN 14.5 ASEAN 20.9 44.1 ASEAN 21.0 0.3

3 KOREA 8.7 KOREA 13 49.4 KOREA 15.6 18.4

4 JAPAN 8.1 JAPAN 10.2 25.9 JAPAN 11.7 12.2

5 EU 5.5 EU 7.5 36.36 EU 8.8 13.3

Top trade partners

ASEAN Economic Community (AEC)

PUBLICSource: AC Nielsen 2013, ASEAN Org.

• Accelerate regional economic integration by 2015

• Nine countries include: Brunei, Cambodia, Indonesia, Laos, Philippines, Malaysia, Myanmar, Singapore, Thailand, and Vietnam

• Objectives:

• A. Single Market and Production Base

• Competitive Economic Region

• Equitable Economic Development

• Integration into the Global Economy

“The AEC will transform ASEAN into a

region with free movement of goods,

services, investment, skilled labour, and

freer flow of capital”

-ASEAN Organization

• ASEAN seen as a regional/single market of c.600 million people

• Increased investment and funds from within ASEAN

• Enhanced focus on SMEs

• Greater tourism opportunities

• Hard and soft infrastructure development are priorities

• Businesses may pursue sales opportunities across the region

• Focus on cost efficiencies by integrating/centralizing operations

• M&A activity within SEA – e.g. Siam Cement Group, CP Group acquiring businesses in Vietnam

IMPACTS OF AEC

PUBLICSource: Business in Asia

Trans-Pacific Strategic Economic Partnership (TPP)

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• Proposed regional FTA under negotiation between US and 10 other countries

• So far 11 countries included: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, US, and Vietnam

• Objectives:

• A. Achieving a comprehensive and high standard regional FTA that eliminates/reduced trade barriers and increases opportunities for US trade and investment

• B. Allowing US to play a role in developing a broader platform for trade liberalization in Asia-Pac

• C. Providing US with an opportunity to establish new rules on emerging trade issues

“Vietnam, given its significant population

and quickly growing economy, may hold the

greatest potential for increasing economic

relations with the US moving forward”

-US Congressional Research Service

Source: US Congressional Research Service

IMPACTS OF TPP

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• Contribute to Vietnam’s GDP growth

• Strong trade with US

• Capturing greater exports in manufacturing industries where China’s comparative advantage in fading

• Overall boost to exports

• Higher income enabling reinvestment and more rapid growth

Source: Amcham Vietnam, The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment

Peter A. Petri, Michael G. Plummer, and Fan Zhai

HSBC Forecast for 2014

PUBLICSource: Business in Asia

HSBC's key Vietnam Economic Forecast 2013F 2014F

GDP (%) 5.2 5.4

GDP per capital (USD) 1,750 1,971

CPI (end year, %) 6.7 8.3

Trade balance (USD bn) +0.6 -0.7

Int’l FX reserves (USD bn) 30 35

USD/VND (end of period) 21,250 21,500

Policy rate (OMO, end year, %) 6.0 7.0

The way forward – what does this mean to me?

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• SOEs will continue to be a drag on growth

• Banking system’s NPLs will take time to resolve

• Real estate market will improve slowly

• Inflation is expected to remain contained

• VND expected to remain stable though small devaluations might happen

• FDI inflows should continue

• Exports expected to flourish and grow

Key issue is customer confidence – if sentiment improves, the recovery will be quicker.

Do not expect miracles in 2014

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• Liquidity is key – there could be opportunities for cash rich companies

• Continue to grow market share – when the tiger wakes up, you need to be ready!

• Review your business model and be flexible to cope with changing trends

• Great opportunity to restructure to become better/stronger

• Actively managing market (fex and interest rates) and counterparty risks

• Choose the right banking partners

Surviving and thriving in 2014

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