Construction Recovery Continues Amidst Tenuous Times
BMI View: Latest data has confirmed our beliefs that Vietnam's construction sector is in an upward cyclical phase, with construction real growth in Q412 in double-digit figures. We expect this recovery in Vietnam's construction sector to last well into 2013 - real growth for the sector forecast to come in at 5.2% for 2013 - as monetary conditions remain conducive for construction. However, Vietnam's construction and infrastructure sectors are far from maximizing their growth potential due to poor trade activity, a housing oversupply and difficulties in securing project financing within the infrastructure sector.
Vietnam's construction activity in Q412 was in line with our views. In our October 2012 analysis of Vietnam's construction sector, we had stated that a robust recovery was just around the corner for Vietnam's construction sector (the sector had experienced three consecutive quarters of negative growth), with construction real growth expected to reach double-digit levels in Q412. This has taken place, with the latest data from the Vietnam General Statistics Office showing that real growth for the construction sector grew by 12.2% year-on-year (y-o-y) in Q412. With this surge in activity, Vietnam's construction real growth in 2012 is estimated to reach 2.1%.
|On The Path To Recovery|
|Vietnam - Construction Real Industry Value Data (At 1994 Constant Prices), By Quarters, VNDbn And % chg y-o-y|
2013: In Recovery Mode
We believe that this recovery in Vietnam's construction sector will last well into 2013, with real growth for the sector forecast to come in at 5.2% for 2013. This relatively optimistic outlook for Vietnam's construction sector is driven primarily by the country's conducive monetary conditions. The government is seeking to boost economic growth in 2013 and recently cut its policy rate by 100 basis points from 10.00% to 9.00%, the lowest policy rate in 11 months. This should be favorable for construction activity as not only would Vietnamese companies benefit from a lower cost of capital, making them more inclined to take up new projects or carry out capital-intensive construction works , but municipal and provincial governments could also find the necessary financing for their infrastructure plans.
|Monetary Conditions Conducive|
|Vietnam - Policy Rate, % & Headline CPI - Housing & Construction Materials, % y-o-y|
However, this construction growth of 5.2% is a downward revision from our previous forecast of 7.1% in October 2012, and nowhere near the double-digit growth seen in the previous years. Besides base effects from 2011, there are currently several issues that dampen the demand for residential/non-residential buildings and infrastructure.
|Vietnam - Construction (And Sum-Components) Industry Value Real Growth Forecasts|
Residential/Non-Residential Sector: We are forecasting real growth for the residential and non-residential buildings sector in Vietnam to reach 6.0% in 2013 (previously 8.2%). This decline is because we expect non-residential building activity to be dampened by the lack of trade activity. Feeble external demand continues to undermine Vietnam's manufacturing sector, with the latest reading on the HSBC Purchasing Managers' Index showing that Vietnam's manufacturing sector has fallen back into contractionary territory (see our online service, January 4 2013, 'PMI Signals Challenging Road To Recovery'). With global economic activity set to remain weak over the coming years, we do not expect a major recovery in demand to boost non-residential building activity in 2013.
|Export Activity Weak|
|Vietnam - Purchasing Managers' Index|
Meanwhile, the residential sector is suffering from significant oversupply. In November 2012, Vietnam's construction minister Trinh Dinh Dung said that there are around US$2bn worth of unsold property products in Vietnam. Although there is still significant demand for low-cost housing, supply in the high-end housing market has greatly outstripped demand. This has created a challenging market for developers to sell their completed properties, making it unlikely for them to take on new residential projects. Indeed, several of these local developers are in the red and this is deterring foreign investors and Vietnamese banks from releasing credit to them.
Infrastructure Sector: We are forecasting real growth for the infrastructure sector in Vietnam to reach 4.5% in 2013 (previously 5.9%). This decline is primarily due to difficulties in securing financing. We continue to see evidence of infrastructure projects being delayed by financing shortages. The Vietnam Ministry of Transport revealed at the end of November 2012 that its original targets for highway construction between 2012 and 2020 - 2,000km of expressways completed and 3,000km under construction by 2020 - were not possible due to the government's limited budget for roads and the lack of financing from the private sector. These financing shortages are not confined to the transport sector. Vietnam's state utility EVN reported in late-June that they faced a funding gap of around VND185trn (US$8.9bn) for power plant projects between 2011 and 2015.
|Limited By Debt|
|Vietnam - Capital Investment By State Budget, VNDbn And % chg y-o-y|
We continue to believe that these financing issues within the infrastructure sector will not be resolved anytime soon. In our October 2012 analysis of Vietnam's construction sector, we highlighted three factors for this view:
The Vietnamese government is heavily burdened by the debts of its state-owned enterprises (SOEs), and the need to repay this debt is limiting the government's ability to finance infrastructure projects.
We believe that weak global economic conditions and the lack of financial viability seen in many existing infrastructure in Vietnam will dampen the demand for riskier assets such as infrastructure projects in Vietnam.
With European banks - a major source of finance for Vietnamese infrastructure - set to face difficult economic conditions and stricter capital controls over the coming years, funds from these European sources could decline as European banks look to strengthen their capital ratios by calling back higher-risk loans and imposing curbs on issuing new loans. This has already transpired, with the Spanish government announcing in late-November 2012 that it would only provide 40% of the financing it had initially promised for an urban railway project in Ho Chi Minh City.
|Vietnam - Foreign Claims From European Banks, US$mn And % chg y-o-y|
Long-Term Still Positive
Looking beyond 2013, we believe that the construction and infrastructure sectors in Vietnam should register decent growth rates, though not at the levels seen in previous years. We are forecasting real growth for the construction and infrastructure sectors to average 6.1% and 4.9% per annum between 2014 and 2017 respectively.
The Vietnamese government is currently in the process of privatising several SOEs and raising electricity prices to improve the financial position of EVN - it had already allowed the utility to hike electricity prices by 5% in December 2012. These measures could alleviate some of the government's debt issues and provide financing for construction and infrastructure projects.
Meanwhile, we expect Vietnam's economy to grow relatively robustly over the long-term - we are forecasting real growth for Vietnam's economy to average 7.1% between 2013 and 2017 - and this should also drive construction activity in the country. Growing industrialisation will put demand-side pressure on the electricity supply and transportation systems, while rising incomes among Vietnamese consumers will drive demand for housing and commercial construction projects such as malls and hotel development. The robust economic activity should also boost the financial viability of existing infrastructure, making it more attractive for investors to finance new projects.
|Positive Macroeconomic Picture|
|Vietnam - GDP Per Capita, US$ And Real GDP growth, % y-o-y|
The Vietnamese government is also trying to seek funds from non-banking sources such as project bonds and sovereign wealth funds, and if properly developed, could be sufficient to cover the decline in credit from European banks.
Lastly, Vietnam continues to exhibit significant potential for growth in construction and infrastructure - a youthful population, large consumption base, large unexploited deposits of bauxite and high infrastructure deficit are supportive factors that spring to mind.