Vietnam rating outlook stable, debt and policy responsiveness the risks: S&P

By Tran Le Thuy   April 29, 2016 | 08:07 pm PT
Standard & Poor's rates Vietnam 'BB-' long-term and 'B' short-term sovereign credit ratings due to rising debt burden, banking sector weakness, and the country's emerging institutional settings that hamper policy responsiveness.

These strengths are offset by Vietnam's sound external settings that feature adequate foreign exchange reserves and a modest external debt burden, stated the rating firm in a press release on April 29. "The stable outlook reflects our expectation that Vietnam's growth prospects will continue to improve, leading to gains in its key economic, fiscal, external, and monetary credit measures. This outlook assumes progress on growth-enhancing improvements over the next three to five years".

S&P says it would lower the ratings if Vietnam's banks weaken further, or·government debt rises significantly, either because of fiscal loosening or support for Vietnamese banks. It would raise the ratings if the reform program of Vietnam's government results in substantially better growth, fiscal outturns, and bank system resolution than we currently expect, such that net general government debt falls below 30% of GDP and net external debt remains low. "We consider this scenario unlikely over the next year, however".

It ranks Vietnam 'axBB+/axB' ASEAN regional scale rating.

The firm said to expect Vietnam's real GDP per capita growth to rise by 5.3% in 2016 (2015: 5.6%) and average 5.2% over 2016-2019. "The stable outlook reflects our expectation that Vietnam's growth prospects will continue to improve, leading to gains in its key economic, fiscal, external, and monetary credit measures. This outlook assumes progress on growth-enhancing improvements over the next three to five years". 

However, uncertain conditions in export markets and the slow pace in addressing government enterprise reforms, fiscal consolidation, and banking sector resolution add downside risks to this growth outlook, it adds.  

"Recent improvements in macroeconomic stability have supported strong performance in the sizable foreign-owned and export-focused manufacturing sector, including electronics, telephones, and clothing. This strength will likely be offset by weaker domestic activity as the impetus to growth stemming from low household and company sector leverage is hampered by weak banks and government enterprises, and shortfalls in infrastructure", S&P stated. 

Large fiscal deficits and a sustained rise in Vietnam's debt burden signal a continued delay in fiscal consolidation. Fiscal deficits have averaged 5.6% of GDP over 2010-2015 and S&P forcasts the deficit to average 5.8% over 2016-2019. The deficit will underpin a rise in the net general government debt burden to 51.5% of GDP in 2016 and about 55% by 2019. "Vietnam's debt burden may prove higher than we forecast if the shortfall in basic services and infrastructure that feature prominently in its capital spending plans lead to additional borrowings. Other potential constraints on the government's fiscal flexibility are guarantees related to its enterprises that we estimate at 11% of GDP. This percentage may also rise should progress in reforming Vietnam's inefficient government enterprises remain slow or reverse". 

While Vietnam's fiscal settings are becoming stretched, its external metrics are adequate. Its current account is likely to remain broadly in balance annually to 2019, reflecting robust manufacturing and services, mainly tourism, exports, large and rising remittances,and subdued domestic import demand.

Strong foreign direct investment (FDI) in manufacturing, combined with competitive unit labor costs relative to peers (Malaysia, Thailand, and Indonesia) and a large young educated labor market, implies further strength in exports over 2016-2019. Participation in free trade agreements could provide further upside to Vietnam's export earnings. The high capital outflows in 2013, following the unwinding of gold deposits at commercial banks and announcement of U.S. Federal Reservetapering, have been offset by large FDI and loan inflows that have contributed to reserves rising to US$34.3 billion by December 2015.

"We expect Vietnam to remain in an external asset position, shown by its narrow net external debt. The ratio of gross external debt less official reserves and financial sector external assets to current account receipts, CARs, averaging close to zero over 2016-2019". External liquidity will also remain a sound 92% on average over the period. "We do not envisage a marked deterioration in Vietnam's external financing stemming from a reduction in disbursements from donors, or from a shift in foreign direct investments or portfolio equity investments".

Other factors that mitigate risks associated with Vietnam's international liabilities include a very low reliance on external savings by Vietnam's combined bank and company sectors, as well as the low and mainly long-term and concessional nature of the government's external borrowings. Vietnam's banks benefit from being in an external net asset position with limited linkages to global markets.

"System stability is hampered by high non-performing assets and cross-ownership, connected lending, and heavy exposure to Vietnam's weak property market". Capital adequacy is reportedly above the 9% regulatory minimum but unclear loan classification and provisioning, and government policies directed at the resolution of distressed banks through the Vietnam Asset Management Co. (VAMC) weigh on a fuller assessment of the condition and outlook for Vietnam's financial system.

S&P's Bank Industry Credit Risk Assessment for Vietnam is '9', with '1' being the highest assessment and '10' being the lowest. "In our opinion, greater exchange rate flexibility and use of inflation targeting, combined with a deeper and more diversified financial and capital market, may facilitate a more effective monetary policy framework and improved credit metrics".

"The government's socio-economic development plans also provide useful policy anchors that have improved macroeconomic stability and the inflationary environment in the past two years. However, policymaking remains highly centralized and opaque, and the government's ability to develop and implement swift policy responses, if required, is uncertain", the firm adds.  

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