Sajal Kishore

Việt Nam is in dire need of capital to develop the country’s infrastructure and the Government expects private investors, especially foreign ones, to take part as the State budget cannot afford the investment costs.

Sajal Kishore, Head of Asia-Pacific Infrastructure and Project Finance at Fitch Ratings, talk with Việt Nam News reporter Thu Hà about the country’s outlook for luring foreign funding in the sector

What do you think about the Vietnamese Government’s policies in infrastructure development?

Việt Nam’s infrastructure spend share as a percentage of GDP is amongst the highest in ASEAN and this is likely to stay elevated over the long term. We note that the Government has sought to liberalise various industries and also develop a public private partnership framework to promote infrastructure investment in the country. This has helped facilitate the strong growth in infrastructure spend but the growth still remains largely reliant on Government funding or support.

The Government lacks the fiscal capacity to meet financing requirements for large infrastructure projects on its own. Improving conditions for foreign capital investment is critical for the sustainable development of Việt Nam’s infrastructure.

Which sources of funding should the country have access to?

Often State-owned enterprises have relied upon Government funding or on assistance from bilateral and multi-lateral agencies. High reliance on State financing, including from State-owned banks, often takes the form of direct funding for projects and direct guarantees for State-owned enterprises and major infrastructure projects.

These sources of funding are, however, limited. Infrastructure projects benefit from access to long term capital, for which the projects need access to capital markets. Longer-term lending capability from banks is usually limited (around five years). While banks do play an important role during the construction phase, once the project is operational and thus de-risked, long-term refinancing through capital markets is the more natural financing choice. 

To meet Việt Nam’s capital demand for infrastructure development, the country will need to leverage on domestic and international capital markets and attract foreign direct investment. Increasingly, the Government has also sought equitisation and divestment as a means to manage to the challenges of infrastructure financing. Private financing, through Public Private Partnership (PPP) schemes, is another channel that is being promoted for infrastructure development in Việt Nam.

How attractive is Việt Nam’s infrastructure sector to private investors, especially foreign ones? Which sectors will be the most attractive?

All transportation sectors, namely airports, seaports, toll roads and railways, would be attractive to foreign investors in a general sense. There are favourable drivers at play – at both macro (economy) and micro (asset) levels – supporting demand for these assets.

Việt Nam remains one of the fastest-growing economies in the Asia-Pacific, with this growth benefiting from strong foreign direct investment into the manufacturing sector as well as expansion in the services and agriculture sectors. Private investment has been and will continue to be an important resource in the future, given the limited Government budget for public investment. The country also has the highest share of infrastructure spend as a percentage of GDP across the ASEAN countries.

Demand for transportation assets benefits from strong GDP growth due to a rapidly growing middle class, increasing urbanisation and improving connectivity in Việt Nam, with future growth rates expected to outstrip GDP growth. Road and rail network investment will be key to drive infrastructure investment across other sectors in Việt Nam. Demand for these assets reflects strong traffic and freight volumes supported by strong and sustained economic growth as well as increasing connectivity and improving logistics.

With increasing household incomes and the emergence of low-cost carriers, more people in Việt Nam can now afford to travel and this is increasing their propensity to fly and will continue to drive air traffic growth. Increasing containerisation across developing Asia, including Việt Nam, and globalisation will drive continued investment in port capacities. Demand for the ports will also benefit from continued investment in improving logistics and export-oriented facilities in the country.

What should the government do to better attract foreign investment in the sector?

Fitch does not provide advice or recommendations when it comes to matters such as reforms. However, in a more general sense, continued improvement in regulatory, investment and capital market frameworks, which provides visibility and stability across a longer term, will help attract foreign investment inflows into infrastructure.

The development of a bankable and investable PPP project pipeline will also facilitate stronger growth in foreign inflows in infrastructure. Việt Nam has done well to develop a PPP framework to attract private capital in infrastructure, although the pace of such inflows remains inadequate to meet the financing gap and is also restricted to a few sectors such as electricity infrastructure.

What is the outlook of Việt Nam’s infrastructure sector in 2019 and in the next few years?

Fitch's has a stable sector 2019 Outlook for Asia-Pacific infrastructure, covering both transportation and energy and renewable project issuers.

The Asia-Pacific transportation infrastructure sector is likely to benefit from steady traffic and revenue growth in 2019, supported by the region's continued economic development. However, anticipation of robust growth has driven strong debt-funded capex, which could increase the vulnerability of some issuers to potential demand shocks or tighter refinancing conditions. A rising-rate environment could put pressure on issuers that have exposure to floating interest rates or refinancing risk.

The outlook for air passenger volumes remains particularly upbeat, as rising incomes continue to lift Asian consumers' propensity to fly, especially in developing economies. Annual air passenger numbers rose by almost 60 per cent across the region in the five years to 2018, led by China, but with Việt Nam, Korea and India also recording double-digit average annual growth rates. High air traffic growth has led to frequent airport expansion and construction of new airports across the region, which is adding to leverage as well as rising competitive pressures. The Vietnamese Government-owned Airports Corporation of Vietnam, for example, has an estimated requirement of over US$5 billion to fund new capacity and upgrades at existing airports.

Meanwhile, the recovery in global trade volumes over the last two years has driven faster growth in throughput at ports across the Asia-Pacific. The US-China trade dispute creates some uncertainty over the outlook, but we expect most intra-regional routes to be far less affected than trans-Pacific trade. Volumes could even increase on some routes to the extent that manufacturers shift production from China to other Asian countries, including Việt Nam. 
For the energy infrastructure and renewable energy issuers in Asia, the stable outlook reflects our expectation of continued high energy needs underpinning the rapidly growing Asian economies and to meet regional governments’ long-term electrification targets. All of Fitch’s rated project-financed transactions are on a stable outlook; ratings movement is likely to be minimal, mainly as issuers benefit from the take-or-pay obligation with the State-owned utilities under long-term power purchase agreements, immune from market or demand risks. Most of these transactions also benefit from steady cash flows and fully amortising debt structures. — VNS