Vietnam Power Report Q1 2013

BMI View: Acceleration in real GDP growth in the second half of 2012 reinforces our belief thatelectricity consumption is poised for a stronger performance as we head into 2013. Similarly, we hold arelatively constructive view for the expansion of the country's power infrastructure on the back of theofficial launch of Vietnam's competitive generation market. Nonetheless, we reiterate that low tariffs,rising dependence on imported fuel (namely coal) and lack of regulatory clarity remain key downsiderisks

In previous quarter, we had highlighted that adverse domestic and global macroeconomic trends wouldhave likely resulted in weaker growth in electricity consumption over 2012 (especially as businesses andhouseholds cut back on spending and investment). Yet, we had maintained a more positive stance withregard to the longer term outlook; a position validated and strengthened by recent developments, whichsaw Vietnam's real GDP growth accelerating from 4.7% year-on-year (y-o-y) in Q212 to 5.4% in Q312and expectations for a decline in lending rates over the coming months creating scope for a robustrebound in private sector investment.

Our relatively bullish long-term outlook for Vietnam's power sector, predicated on our view that thecountry will see strong and prolonged economic growth, thus remains fully in place, and substantialrevisions in our historical data series and the availability of new information have actually prompted afurther upwards revision of our short and long term forecasts across the power sector. Hikes in powergenerating capacity and significant improvements in the transmission and distribution (T&D) segment area recognised necessity, with Vietnam's Master Plan VII predicting that the country will need 75,000MWof installed capacity by 2020. In addition, the launch of Vietnam's new competitive generation market(CGM) on July 1 2012 is certainly a step in the right direction, with an increasing number of internationalactors having showed interests in the market recently (as illustrated by the projects in the pipeline fordevelopment after 2015).

That said, a number of pertinent risks remain prominent, leading us to believe that a discrepancy willcertainly emerge between planned and realised capacity. Most notably:

Regulatory uncertainty remains high. For instance, the cancellations of nine small- to mediumcapacityhydropower plants in October 2012 highlighted an increasing lack of opportunities forsmall-scale hydropower generation, due to growing environmental concerns. However, webelieve that the cancellations also displayed a disparity between provincial and federal levelplanning.

Low tariffs and dependence on imported fuel (namely coal) as a key impediment to the powersector's growth potential, and news that theft of electricity is on the rise are certainly worrying.