Fitch Revises Outlook for Vietnam to Positive, Warns of Toxic Debt

Tuan Minh

11:09 19/05/2017

BizLIVE - Fitch Ratings has revised the outlook on Vietnam's credit ratings to positive from outlook while warning of bad debt in the banking system.

Fitch Revises Outlook for Vietnam to Positive, Warns of Toxic Debt

A view of the heart of Ho Chi Minh City, Vietnam. Photo: Fitch.

Fitch Ratings has revised the outlook on Vietnam's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the ratings at 'BB-'.
The ratings on Vietnam's senior unsecured foreign- and local-currency bonds are also affirmed at 'BB-'. The Country Ceiling is affirmed at 'BB-' and the Short-Term Foreign-and Local-Currency IDRs at 'B'.
According to Fitch, Vietnam's ratings reflect strong growth performance and prospects, persistent current account surpluses, manageable debt service costs and sustained foreign direct investment inflows.
The ratings also reflect a high public debt ratio, low foreign-exchange reserve buffers, macro-prudential and banking sector risks and some structural indicators being weaker than those of peers, including per capita income and human development standards.
The revision of the outlook to positive reflects that Vietnam is building a record of policy-making focused on macroeconomic stability. This approach, which includes greater exchange-rate flexibility and an increasing focus on inflation stability, has supported consistently strong levels of foreign direct investment (FDI) and helped maintain robust economic growth.
Fitch expects real GDP growth to improve gradually over the forecast period, to 6.3% in 2017 and 6.4% in 2018, supported by continued FDI inflows into the manufacturing sector and strong private consumption expenditure.
The country’s foreign-exchange reserves continued to improve, rising to $37 billion by end-2016, from $28.6 billion at end-2015. “This improvement was supported by the adoption of a new exchange-rate mechanism in early 2016, which aims at greater exchange-rate flexibility, alongside a strong current account surplus and continued robust FDI inflows,” Fitch said.
The agency pointed out that the new regime, in which the central bank sets a daily trading range on either side of the reference rate, could be tested in a stronger dollar environment that results in currency weakness among emerging economies dependent on foreign capital flows.
Meanwhile, Vietnam's 'BB-' rating reflects government debt is above the 'BB' median and has continued to rise.
Based on preliminary estimates of the authorities, the government debt/GDP ratio rose to 53.4% at end-2016, from 50.1% at end-2015. Its overall public debt reached 63.7% at end-2016, just short of the official 65% debt ceiling.
Fitch estimates a decline in the 2016 fiscal deficit to 5.7% of GDP from 6.2% at end-2015 as fiscal revenues are estimated to have outperformed. The authorities have reinforced their commitment to lower deficit and debt levels under their 2016-2020 budget plan. Fitch expects the deficit to remain close to 5.7% of GDP over 2017-2018, absent major revenue reforms.
Vietnam's current account remains in surplus, averaging around 4% of GDP for the five years ending 2016. Although Vietnam's reserve coverage of current external payments is below that of its peers, at 2.3 months against 4.2 months of the 'BB' median, a still-high share of concessional debt supports its external liquidity position.
External debt service as a percentage of current external receipts was 4.9% at end-2016, against the 'BB' median's 12.9%, although this advantage is likely to start declining in 2017 when Vietnam is scheduled to graduate from the World Bank's International Development Association eligibility criteria, leading to higher funding costs. The government has been increasing its share of domestic debt financing to prepare for the reduced access to concessionary financing.
The headquarters of the State Bank of Vietnam in Hanoi. Photo: Minh Tuan
Fitch noted that the Vietnamese banking industry is still facing some challenges although its outlook for the sector is stable. The agency believes the large stock of non-performing loans (NPLs) is likely to take time to resolve due to legal impediments, and the 2.5% reported system NPL ratio at end-2016 understates actual asset quality issues.
In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability.
“We believe recapitalization needs of the banking sector remain a risk for the sovereign. Further, while improving economic performance is likely to support lower NPL formation, a rapid and sustained increase in credit growth poses a risk to financial stability in the medium term,” the agency added.

Moody’s Investors Service late last month revised the outlook on Vietnam’s credit ratings to positive from stable while affirming the sovereign issuer and senior unsecured debt ratings at B1.

TUAN MINH