Vietnam's banking sector remains at high risk: Moody's

By Ha Phuong   September 1, 2016 | 10:32 pm GMT+7

Bad debts hold back the country's banking system.

The Investors Service Moody’s has just released its assessment on credit rating of Vietnam as B1, meaning the country’s credit profile condition is relatively stable with moderate chance of default.

This was supported by the country’s robust economic growth and diversified economy, said Moody’s.

Vietnam, however, is susceptible to event risk, which is driven by banking sector risk. While the sector's operating environment has stabilized, there remain inadequate capital levels and high asset quality risks. The acceleration of loan growth by 25 percent in 2015, from 16 percent in 2014 also contributed to the weaknesses of Vietnam’s banking system.

As of June, 2016, bad debt rate was recorded at 2.6 percent, down 2.8 percent on-month. However, there was still VND200 trillion (US$8.9 billion) of bad debt stuck at the Vietnam Asset Management Company (VAMC).

Overall, Moddy's broke down Vietnam's credit profile against four criteria as follows:

Economic Strength High
Institutional Strength Low
Fiscal Strength Low
Susceptibility to Event Risk High

In recent years, Vietnam's GDP growth stood at above 6 percent, higher than most other countries in the region. Moody’s forecasts in the next two years, Vietnam will continue to grow at this rate owing to the recovery of domestic demand together with inflow of foreign investment. Low inflation was also a strong push to the country’s growth.

However, given that the increase in domestic demand leans mostly on rapid credit growth and expansionary fiscal policy, Vietnam may fall into both financial and fiscal risks.

As the State Bank of Vietnam has adopted the central exchange rate since the start of the year, it is expected that Vietnam’s balance of payment will experience a healthy surplus with net accumulation of foreign exchange reserves.  

Although Moody's rated Vietnam’s institutional strength as "low" for three years in a row, the company still noted the country’s effort in restructuring the banking system and state owned enterprises.

Concerns remain with respect to Vietnam’s wide fiscal deficit as public debt burden has climbed by over 10 percentage points since 2012 to account for half of the country’s GDP in 2015.

Last year, Vietnam's credit condition was also rated B1 by Moody's.

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