> Investment Digest Vietnam

COLLIERS INTERNATIONAL

November | 2013

The macroeconomic stability of Vietnam

continues to make gains. GDP growth continues

to accelerate quarter over quarter posting 5.5%

growth in Q3.

Inflation has slowed in October to 0.49% after

posting high gains in Aug and Sept. The official

exchange rate continues to remain stable at

21000. Forex reserves continue to grow at

$32b, provisioning against 12 weeks-worth of

imports.

Exports continue their torrid growth, primarily

fueled by FDI operations. Credit growth of

6.48%, while unlikely to reach 12% by EOY, has

been strong in recent months after contraction

in the first couple of months of the year. Banking

restructuring and consolidation continue to take

steps as smaller banks merge such as HD Bank

and Dai A Bank and PetroVietnam Finance Corp

and Western Bank in September.

*Arrows indicate monthly trends**Data is accurate as reported by the source on the indicated date

OverviewMarket Indicators30-Day Trend Indicator October September Date

10 year bond yield 9.15% 8.84% 10/30

Credit Market +7.18% ytd +6.48% 11/1

Deposit Rate 7% - 9% 7% 10/30

Deposits +13% - 16% +11.74% - 13.78% ytd 10/28

Enery Prices unchanged unchanged 10/30

Exp/Imp +13.4% / +17.6% yoy +15.7% / +15.5% yoy 10/29

FDI +65.5% yoy to $19.2b +36% yoy to $15b 10/30

FDI Disbursement +6.4% yoy to $9.6b +6.4% yoy 10/30

Fitch B+ B+ 11/2

GDP +5.5% Q3, +5.2% ytd +5.14% ytd 10/21

Inflation +5.14% ytd, 6.74% yoy +4.63% ytd, 7.5% yoy 10/24

Lending Rate 7-9% short, 9-11% long 7-9% short, 9-11% long 10/26

Moody’s B2 B2 11/2

Overnight Rate 3.71% 2.77% 10/29

PMI 51.5 49.4 11/1

Refinance Rate 7% 7% 10/30

Repurchase Rate 5.5% 5.5% 10/30

Retail Sales 12.6% yoy +13.7% yoy 11/1

Standard & Poors BB- BB- 11/2

VND-USD 21,098 21,117 11/1

VN-Index 497.41, +18.9% ytd 492.63, +17.7% ytd 10/31

1 Vietnam Investment Digest | November 2013 | Market Indicators COLLIERS INTERNATIONAL

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

5.14% GDP growth in the first three quarters over the same

period in 2012. However, Vietnam’s growth is dwarfed by

neighboring countries such as the Philippines (>7%) and

China (>7%). As you will see, domestic industrial output, retail

growth, and credit growth are showing slow gains. To make

the most of the current FDI interest, Vietnam must focus on areas of talent transfer, support industries, and oversight to

bring domestic industry up to world standard.

On the whole, 2013 has shown much progress over the

year before, but there is much work yet to be done. In this

environment, “distressed” assets are not yet internationally

accessible for most. I believe the opportunities lie in investing

with an eye on 2016-2020 in the mid-end residential and

commercial office space. Once domestic demand kicks in

early-to-mid next year, the limited office space in Vietnam

will fill quickly and flip the market to a seller’s orientation. In

the industrial and manufacturing space the government, with

support from FDI operations, has been making a strong push

to incentivize support industries and increase localization.

Many opportunities abound in Vietnam and can be uncovered

with the right focus.

Early numbers indicate a continued strengthening of the investment environment from both a macro and micro view.

Key indicators have continued their upward trend from Q2 into

the end of the year as displayed on page 1. There are three

things to watch as you consider investing in Vietnam.

In the banking and finance sector, continue to watch Vietnam

Asset Management Company (VAMC) and State Bank of

Vietnam’s (SBV) handling of non-performing loans (NPL).

The current mechanism serves only to add near-term liquidity

to a sector that is already awash with capital and continues

to struggle to lend in a market void of demand. Without a debt trading market or other similar market mechanism, these

NPLs will remain out of reach.

Secondly, keep an eye on the SBV’s handling of the currency.

According to various industry insiders and others looking

in, the VND is still over-valued and will be a source of

additional volatility. While Vietnam’s forex reserves are now

approximately $32 billion, a quick devaluation can still wipe

this out. Additionally, Vietnam is looking to increase its fiscal

deficit to pay for an increase in public spending in target

sectors and infrastructure to stimulate domestic demand.

Finally, pay attention to the lackluster growth of domestic demand. The tremendous growth and health of the FDI sector

has overshadowed a troubling stagnation of domestic demand.

While Vietnam is by no means struggling, as indicated by a

Investment Manager’s Letter

KYNAM DOANInvestment Manager

kynam.doan@colliers.com+84 1223 128 032

2 Vietnam Investment Digest | November 2013 | Investment Manager’s Letter COLLIERS INTERNATIONAL 3 Vietnam Investment Digest | November 2013 | Investment News

Investment NewsVAMCThe VAMC has purchased VND 11.1 trillion of bad debts from 14 banks by the end of October according to VAMC’s VP Mr. Nguyen Quoc Hung. Approximately 67% of these bad debts are secured by real estate and 22% are in manufacturing. The VAMC purchases these debts with special 5-year, zero-coupon bonds and require the

seller to provision 20% of the value of the debt annually.

However, as mentioned previously, the current mechanism only serves to buy lenders a little time while further locking up the underlying asset. Currently, there is no clear procedure or legal framework for the VAMC and other lenders to list their bad debts and for investors to find, assess, and bid for these assets. Until a mechanism that can approximate a debt trading market is set up,

these bad debts will remain out of reach.

Additionally, while banks can refinance up to 70% of the value of these bonds, no banks have yet done so – indicating healthy liquidity

among Vietnam’s lenders.

RETAIL

WORLD BANK – VIETNAM RANKS 99TH IN EASE OF DOING BUSINESWhile Vietnam has improved its business environment slightly, it still dropped 1 spot to 99th from 98th. The marginal improvement of 69 basis points to 61.13% in 2014 over 2013 lags behind the region. The subcategory, “Protecting Investors,” gained the most, jumping 12 spots to 157 (out of 189) and “Paying Taxes” lost the most, falling 4 spots to 149. Vietnam has increased employers’ social security contribution rate, contributing to the 4-spot drop in that category.

Vietnam’s total retail sales and service revenues were estimated to have increased by 12.6% year over year to VND 2,159 trillion ($100.21 billion) in the first 10 months of 2013, the General Statistics Office

(GSO) said on its website.

The trade sector contributed 76.8% of the country’s total retail sales and service turnovers with VND 1,657.8 trillion, increasing 12.1% year over year. Hotel, restaurant sector accounted for 12.1% of the country's total with VND260.2 trillion, rising 14.9% year over year. Service sector accounted for 10.2% with VND 220.2 trillion, rising 14.8% year over year. Tourism sector contributed 0.9% or VND 20.3

trillion, up 3.1% year over year.

However, If price hike is excluded, the retail growth rate would be 5.5% which is lower than the rise by 6.8% (price hike excluded) in the same period last year. This slow recovery is troubling and casts

a shadow over much of the other positive growth data.

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

CURRENCYFollowing the 1% devaluation of the VND in June, the SBV plans to further devalue the currency by 2% before the end of the year,

according to PM Nguyen Tan Dung.

Several forces may be depressing the value of the VND including the strengthening economy of economies that have traditionally invested heavily in Vietnam like Japan, America, Australia, Singapore, and

member-states of Europe.

Low interest rates coupled with double-digit deposit growth and the imperative to increase credit by 12% in FY13 may lead to higher-than-expected inflation once domestic demand returns, which would

then depress the dong further.

INDUSTRIAL GROWTHIndustrial production has seen significant progress in the third quarter of this year compared to the two previous quarters. These achievements resulted from the development of the processing and manufacturing sector with high manufacturing and consumption of

export products.

Industrial Production index year to date has increased 5.4% year over year. Of the ten months’ 5.4% general growth rate, the manufacturing

contributed 4.9%.

Among the highest growth in manufacturing are textile industry with the year to date increase of 19.9% year over year, leather and related products with the increase of 16.3% year over year, prefabricated metal products and motored vehicles with the rise of 13.7% year over

year and 12.9% year over year.

Industrial investment is focused on Ho Chi Minh City, Dong Nai, Ba Ria-Vung Tau, Hanoi, Binh Duong and Bac Ninh. These six localities are making up nearly 70 percent of total industrial production value of the country.

COLLIERS INTERNATIONAL 3 Vietnam Investment Digest | November 2013 | Investment News COLLIERS INTERNATIONAL

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

RESIDENTIAL REAL ESTATE INVENTORY AT $4.85 BILLION, DOWN 20% FROM APRILAccording to the Ministry of Construction, the value of real estate inventory fell $200 million to $4.85 billion in September from Aug (a 4% drop) and $1.23 billion from April (a 20% drop) with low-income housing leading the way. Inventories in the two largest markets, Ho Chi Minh City and Hanoi, have dropped by 16.1% and 15% to $1.05 billion and $0.69 billion respectively in September compared to

August.

Four major factors are thawing the residential sector:

1. Real demand is returning and home buyer sentiment has improved. It is consensus that residential prices are near or at the bottom

with certain products returning to the level of seven years ago.

2. The government has additionally helped push the affordable market

with preferential 6% loans to both home buyers and developers.

3. Developers have reduced prices sufficiently to meet market demand. Prices have fallen 10%-30% across the industry and even as much as 50% in the case of Novaland’s Sunrise City.

4. Developers have also added flexibility and other incentives, such as Osaka Garden’s offer of free foundations for land lot purchases, Estella’s extended payment terms of 50% down and zero-interest payments over two years, and Vingroup’s offer of free management service in Royal City, Times City, and Vincom Village.

M&A » Seafood companies Hung Vuong Corp and Minh Phu – Hau Giang

Seafood Processing Company have sold $42.3 million and $12.5

million in shares to foreign partners.

» Viettel purchased 70% of Cam Pha Cement, worth approximately

$6.7 million.

» REE Corp increased their investment in Pha Lai Heat and Thu Duc

Water of $1.9 million and $1.2 million.

» Thien Minh Group acquired 89% of Hai Au Airline for approximately

$2.5 million

4 Vietnam Investment Digest | November 2013 | Investment News COLLIERS INTERNATIONAL

OCTOBER’S PMI OF 51.5 POINTS MEETS EXPECTATIONHSBC’s Vietnam Manufacturing Purchasing Managers’ Index (PMI) has risen two months in a row to 51.5 after four months of decline earlier this year and is the best reading since April 2011, the first month PMI was recorded. According to HSBC, this is a strong indication that demand has returned and the manufacturing sector has returned to output growth. Payrolls have continued to expand and companies are anticipating further production growth.

New work has increased for the second month in a row and has led to a rise in production. Additionally, faced with increasing average input costs, manufacturers have increased their charges for the first time since March.

OTHER NOTES » Metro line 1 is being further delayed because nearly 100

households in Thu Duc and Di An have yet to hand over their sites. This will cost the city up to USD$119,000 (VND 2.5b) per day. Line No. 1 was initially estimated to cost USD$1.09 billion, but has now ballooned to USD$2.07 billion.

» In the January-September period, tax collection from the State sector was 2% lower year on year, while tax payments from the foreign direct investment sector rose 30%, and that from the local, non-State sector increased 18%.

» PM Dung signed Decision 61/2003/QD-TTg on October 25 approving the release of 6 types of national data needed to rate the country’s credit.

» Vietnam’s Ho Chi Minh City Stock Exchange (HOSE) became an official member of the World Federation of Exchanges on October 29.

» China’s Manufacturing PMI (CPMINDX) climbs to 51.4, Non-Manufacturing PMI (CPMINMAN) jumps to 56.3 and continues its steep climb from Aug (53.9) and Oct (55.4). South Korea’s PMI Increased to 50.2 in Oct from a local min of 47.2 in July. Taiwan’s PMI increased to 53 in Oct from 52 and Japan’s PMI Increased to

54.2 in Oct from 52.5.

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

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Major Economic IndicatorsFDIFDI has been accelerating quickly over Q3 and into Q4. Total FDI stands at $19.2 billion, a rise of 65.5%, while disbursed FDI stands at $9.6 billion, a rise of 6.4%. This total far outstrips the government’s target of $13-$14 billion.

GDP10M/2013 GDP stands at 5.14%, higher than last year’s 5.1%. GDP grew 5.54% in Q3, 5% in Q2, and 4.76% in Q1. Analysts expect a GDP growth of approximately 5.6%-5.7% in Q4, increasing 2013’s growth to 5.2%-5.3%. The manufacturing sector is leading the way, improving 8.6% yoy in Q3.

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

TRADEExports have reached $107.97 billion and imports, $108.16 billion. Both represent an increase of 15.2% over the same period last year. While overall exports continue to grow strongly, domestic-based exports increased only 3% to $35.9 billion – underperforming inflation.

INFLATIONIndustrial production has seen significant progress in the third Inflation in October slowed to an estimated 0.49% month-over-month after increasing sharply in September by 1.06% and August by 0.83% according to the GSO. In the first 10 months of the year, inflation is 5.14%, well within range of the target of 7.05%. Topping gains were food by 0.91%, education by 0.53% and housing and construction materials by 0.50%.

VN-INDEXOctober ended the month at 497.41, up slightly from September’s close of 492.63. Foreigners continued to be net buyers two months in a row propping the index near 500 due to indications that the US will continue its quantitative easing due to lackluster employment data.

CREDIT GROWTH TARGET OF 12% OUT OF REACHLenders are awash in capital, but are struggling to maintain lending standards while attempting to attain year-end credit growth goals. Because of the lack of credit demand by domestic business, banks would have to significantly lower their risk standards to reach 12% by year end.

BUDGET DEFICIT CAP TO 5.3%The National Assembly is also preparing to vote on raising the budget deficit cap to 5.3% by issuing $8.1 billion in bonds. They are hoping to raise capital to further invest in infrastructure.

FOREX RESERVESVietnam’s foreign exchange reserves are estimated at $32 billion, or 12 weeks of imports. This figure is 60% higher than the $20 billion in reserves at the end of December 2012. SBVs focus on shoring up the forex reserves will help mitigate inflationary pressures and foreign withdrawal when the US begins to slow its quantitative easing of $85 billion per month. The Fed has indicated that they would continue with this level of QE given recent lackluster employment numbers and GDP growth.

Korea and Singapore lead all other countries with pledged investments of $3.6 billion and $2.7 billion respectively. Manufacturing and processing lead all categories with $14.9 billion, or 78% of the total pledged.

In October, there were two major investments of $2 billion by China Southern Power Grid Company and China Power International Holdings in a 1,200MW thermal power plant and $1.2 billion by Samsung.

COLLIERS INTERNATIONAL 5 Vietnam Investment Digest | November 2013 | Investment News COLLIERS INTERNATIONAL

Legal BriefCIRCULAR NO. 141/2013/TT-BTCA new circular by the Minister of Finance guiding Decree No. 92/2013/ND-CP, which guided the Law on Corporate Income Tax and Law on Value-added Tax amendments, was issued on 16 October 2013 and will take effect from 30 November 2013. Accordingly, from 1 July 2013, the VAT rate applied for the sale, lease, hire or purchase of social houses will only be 5%. Notably, from 1 July 2013 until 30 June 2014, the sale, lease or lease for purchase of commercial houses with a floor area of under 70m2 and a sale price of less than VND 15 million/m2 will attract a 50% reduced rate of VAT to 10%.

DECREE NO. 121/2013/ND-CPFrom 30 November 2013, Decree No. 121/2013/ND-CP will take effect and replace Decree No. 23/2009/ND-CP on administrative sanctions in the activities of construction, real estate business, exploiting, manufacturing and trading of building materials, infrastructure management, development and management of houses and offices. In these fields, the maximum level of fines is VND 300,000,000. Furthermore, the statute of limitations for handling administrative violations on real estate business, manufacturing and trading of building materials and infrastructure management is 1 year.

FOREIGN INVESTORS MAY HAVE THE RIGHT TO SUB-LEASE REAL ESTATEThe abovementioned is referred to in the draft amendments to the Law on Real Estate Business, which will be submitted to the Government. The proposed law, if passed, will expand the rights of foreign investors to sub-lease real estate. This will be a significant improvement from the current law, which permits foreign investors to only invest in new projects for sale or leasing.

MONTHLY INVESTMENT DIGESTThis brief is published monthly by Colliers Vietnam Investment Services, led by

Peter Dinning and KyNam Doan, with the assistance of our legal partner, LNT-

Partners. We advise an asset portfolio that focuses on appropriate returns to

match diverse risk-return profiles. Our portfolio tracks a wide range of assets

including land, developments, and income-producing properties across all market

sectors - commercial, hotel, industrial, residential, and retail. Contact us to learn

more.

General DirectorPeter.Dinning@colliers.com

Investment Manager | HCMCKyNam.Doan@colliers.com

Investment Manager | HanoiTung.Nguyen@colliers.com

6 Vietnam Investment Digest | November 2013 | Legal Brief

COLLIERS INTERNATIONAL VN

LNT & PARTNERS is a leading full-service independently ranked local law firm in

Vietnam with offices in Ho Chi Minh City, Hanoi, Hong Kong, and San Francisco.

The firm is among Vietnam’s most prominent, representing a wide range of

multinational and domestic clients, including Fortune Global 500 companies as

well as well-known Vietnamese listed companies on a variety of business and

investment matters.

LNT & PARTNERSPartnerBinh.Tran@LNT-Partners.com

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investment community. To contribute to Colliers’ Investment Digest,

contact kynam.doan@colliers.com

VIETNAM INVESTMENT DIGEST | NOVEMBER 2013

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