Spanish Cutback Highlights Risks To Project Financing
The Spanish government has announced that it would only provide 40% of the financing it had initially promised for an urban railway project in Ho Chi Minh (HCM) City. BMI believes that this reduction in financing from Spain for the Metro Line No.5 project supports our view that Vietnam's reliance on European banks to finance its infrastructure and residential development is a key downside risk to the growth potential of Vietnam's construction sector
During a meeting in HCM City in late-November 2012, a representative of the Spanish government informed HCM City officials that his country would only provide the Metro Line No.5 project with EUR200mn (US$261mn), as opposed to the EUR500mn initially agreed upon. However, the Spanish representative said that Spain would aid HCM City in securing financing from other sources such as European banks. At present, the technical study for the US$1.85bn Metro Line No.5 project has been completed by Spanish company Idom Ingenieria Consultoria, with the first phase of the project running from Bay Hien Intersection in Tan Binh District to Saigon Bridge.
|Vietnam - Foreign Claims From European Banks, US$mn And % chg y-o-y|
This reduction in financing from Spain for the Metro Line No.5 project supports our view that Vietnam's reliance on European banks to finance its infrastructure and residential development is a key downside risk to the growth potential of Vietnam's construction sector ( see our online service, October 8 2012, 'Construction Sector: Recovery To Take A Little Longer'). According to data from the Bank Of International Settlements, foreign claims (or lending) from European banks to Vietnam surged to US$11.3bn in Q311, more than 10 times the amount seen a decade ago. However, European banks are set to face stricter capital controls and anemic economic growth over the coming years, and 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. To be sure, lending growth from European banks to Vietnam has been on the downtrend, falling from a near-term high of 36.5% y-o-y in Q211 to 6.8% y-o-y in Q411.
|Financing An Issue|
|Vietnam - Construction Industry Value Forecasts|
This reduction in the availability of foreign financing could mean that Vietnam's construction sector may not be able to realise its growth potential over the coming years. Vietnam is heavily reliant on foreign financing to fund its future infrastructure needs as it does not have the fiscal capacity to do so internally. For example, the capital demand for transport infrastructure development in HCM City is estimated to be US$3-4bn per annum between now and 2020, while the city's budget can only provide US$500mn per annum, according to a statement by the HCM City government in July 2012. Meanwhile, Vietnam's Ministry of Transport announced in March 2012 that Vietnam needs about US$40bn to develop key transport projects between now and 2015, but would only be able to provide less than a quarter of the funds needed. At present, we are forecasting real growth for Vietnam's construction sector to average 6.5% per annum between 2013 and 2017.