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Fitch revises Vietnam outlook upwards to positive

By Hung Le   May 10, 2019 | 04:58 pm PT
Fitch revises Vietnam outlook upwards to positive
Workers arrange steel structure in Hanoi, Vietnam. Photo by Reuters/Kham
Global credit rating agency Fitch said Vietnam will remain one of the fastest growing economies in the Asia-Pacific region.

The firm announced the revision of Vietnam's outlook to Positive from stable on Thursday, affirming that the country will keep its ‘BB’ sovereign credit rating.  

The agency said the upgrade reflects an improving track record of economic management, which is evident in persistent current account surpluses, falling government debt levels, high economic growth rates and stable inflation. These form Vietnam’s buffers to external shocks, the agency said.

The authorities' continued commitment to containing debt levels led to a decline in general government debt to 50.5 percent of GDP in 2018 from a peak of 53 percent in 2016. This ratio is expected to decline further to around 46 percent by 2020, Fitch said.

Fitch also noted that Vietnam's public debt has also been declining, to around 58 percent of GDP by end-2018 after being close to the ceiling of 65 percent at end-2016.

The reduction has also been aided by stable receipts from privatization of state-owned enterprises (known in Vietnam as equitization), high nominal GDP growth and lower fiscal deficits.

The overall pace of equitization has slowed, but the process has nevertheless continued to advance, with 28 state-owned enterprises being equitized compared with 69 in 2017.

According to Fitch, the Vietnamese government is maintaining its policy focus on macroeconomic stability. GDP growth improved to 7.1 percent in 2018 from 6.8 percent in 2017, while inflation remained stable at 3.5 percent, supported by strong foreign direct investment (FDI) into the manufacturing sector as well as expansion in the services and agriculture sectors.

Fitch predicts that Vietnam’s growth will slow in 2019 to around 6.7 percent, as a result of slowing global growth and US-China trade tensions, which will weigh on regional trade flows and sentiment.

Vietnam would nevertheless remain among the fastest-growing economies in the Asia-Pacific and in the 'BB' rating category globally, the agency said.

Vietnam is expected to remain an attractive destination for foreign investors given its low-cost advantage. Further, there is evidence to suggest Vietnam will benefit from U.S.-China trade tensions, which will over time lead to production shifts from China to Vietnam.

Last May, Fitch raised Vietnam’s long-term foreign-currency issuer default rating to 'BB' from 'BB-', with a stable outlook.

Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale from 'AAA' to 'D', which indicates a country’s relative ability to meet financial commitments, such as debt and interests, as well assess a fair price to charge debt contracts traded in the secondary market, such as treasury bonds.

A country losing its credit rating or being downgraded can have a major effect on its ability to borrow money from the markets.

Fitch said Vietnam retains its ‘BB’ rating because its external liquidity ratio (foreign-exchange reserves relative to external debt service obligations due in the coming year) remains well above the current and historic medians for the 'BB' sovereign rating category.

However, structural weaknesses in the banking sector, especially regarding the fact that non-performing loans remain under-reported, weakening true asset quality, is a factor weighing down Vietnam’s rating, the agency said.

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