A safe port in a stormy market

Published: 29 July 2008

Investment in export infrastructure guides Vietnam through
the slowdown

International trade merges economies and fuses markets. The shipping business is a primary vehicle in the global economic rollercoaster ride.

Shipping activity has always been a barometer of economic progress and development. The coming and going of boats heavy with the nation's local products can only be viewed as a positive indicator.

Export plays a significant role in the eight per cent average economic growth of Vietnam. And with the current dynamics of the country's economy - worries over inflation and the recent outlook downgrade - along with the projected closure of existing terminal facilities, a Dubai-owned USD200 million port project may just be what the country needs.

HSBC Global Banking and Markets helps facilitate this unification of these emerging markets.

A deal of firsts

The Saigon Premier Container Terminal (SPCT) is a joint venture between Dubai's DP World and Tan Thuan Industrial Promotion Company (IPC), a state-owned entity developing the Ho Chi Minh industrial area.

Conveniently located close to the city and inside the up-and-coming Hiep Phuoc Industrial Zone, SPCT is a modern 950-metre long terminal facility using only state-of-the-art technology and the latest equipment. Upon completion of the first phase on the first quarter of 2009, SPCT is projected to reach 900,000 20-foot equivalent units (TEU) capacity and is expected, together with the other ports projects currently under development in the area, to gradually replace most of the downtown container handling operations.

Construction had been ongoing for about a year before SPCT approached the banks in May 2007. "The sponsors actually prepared a comprehensive information package and detailed financing structure before they invited the banks to bid," says Alexandre Broggi, Associate Director, Project and Export Finance. "The financing process and most of the construction activities are coordinated by DP World, while IPC helps facilitate all the discussions with the government."

HSBC acted as mandated lead arranger, modelling bank and account bank for the USD108 million debt financing of the project. Within six months of mandate, the deal was closed. The completion of this project financing deal marks significant 'firsts' for Vietnam: this is the first project financing since 2003, the first without political insurance, and the first in the country with full market risk taken by the banks.

"Ports projects are export businesses; these are relatively less affected by the political situation. SPCT will actually rely more on the outlook of the international market, rather than domestic," Mr Broggi said regarding the decision to forego the political risk cover. "The customers will be the shipping lines and local exporting agencies. Also, since exporting has been identified as the major axis of development of the country, it's an area that is encouraged to develop."

Among the country's leading exports are agricultural products (including rice, coffee and rubber), fuels and mining products. Its top trading partners are diversified geographically - China, Japan, the European Union and the United States. Vietnam is well-positioned to act as another low-cost manufacturing base in Asia, but the lack of modern transportation infrastructure has so far constrained foreign investments in that area. This port and other projects will provide easier access to international markets.

Less than rosy

Source: HSBC

“The master plan to develop significant new port capacity in and around Ho Chi Minh City was built on the assumption that trade growth will remain strong in Vietnam," continued Mr Broggi.  "Given the situation now - the continuing inflation and global economic slowdown - there is more uncertainty in the short to medium term as policies implemented to fight inflation can also affect investment as growth as a result."

What can mitigate the potentially lower demand growth in the next few years, however, are reasonable demand assumptions built in the business plan of SPCT, possible adjustment in the timing of development of similar less-advanced projects in and around Ho Chi Minh City, and the saturation of the existing terminals and the truck traffic pressure they create in downtown areas.

"The development of an export-driven manufacturing base is probably the safest way for Vietnam to improve its economic situation," Mr Broggi said.

Joining up the markets

Several major port players have also identified Vietnam as a key growth realm, including AP Moller-Maersk Group, PSA and Hutchison. The Middle East, in particular, has been showing increasing interest in the country. "We have received and introduced many investors from that region to potential local partners in Vietnam. In fact, last year we decided to set up a small Investment Banking unit in Vietnam partly to cater for investors from the Middle East," according to Loic Faussier, Chief Risk Officer, Vietnam.

SPCT, which will be the only deep-sea water port within Ho Chi Minh City administrative area, will also be the first that is owned and operated by an international player. DP World, who owns 80 per cent of the project, is the fourth largest port operator in the world with 45 terminals and new developments in 29 countries.

The project is perhaps a perfect model of HSBC's continuous effort to join up the emerging markets, an example of how these regions are increasingly looking at one another for investments. Vietnam's coming together with Dubai demonstrates Global Banking and Markets' established network and local knowledge in these emerging regions.