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Structural weaknesses in the banking sector weigh on the sovereign rating. The capital-adequacy ratio of state-owned banks was around 9.5% at end-September 2020.

Economists Point out the Key Drivers behind Vietnam’s Sovereign Ratings

In Fitch's view, contingent liability risks associated with legacy issues at large state-owned enterprises are a weakness for Vietnam's broader public finances. Government guarantees issued to state-owned entities, potential banking-sector recapitalisation costs and institutional weaknesses also weigh on public finances. As authorities are taking steps to control provision of guarantees, explicitly guaranteed government debt to GDP fell to about 4.2% in 2020 from 5.3% in 2019.

Structural weaknesses in the banking sector weigh on the sovereign rating. The capital-adequacy ratio of state-owned banks was around 9.5% at end-September 2020. The banking system's non-performing loans remain under-reported and asset quality is likely to be weaker than official data indicate, with loan forbearance on pandemic-related exposures likely underestimating the underlying deterioration in loan quality. These structural weaknesses in the banking sector, along with low capital buffers, have already dragged on the sovereign rating, though the improving economic outlook is likely to provide support to banking-system asset quality and profitability in the near term.

The SBV has eased policy rates since January 2020 by a cumulative 150-200bp cut. The exchange rate has remained generally stable against the US dollar. Vietnam's foreign-exchange reserves have been rising in recent years, providing the central bank some capacity to stabilise exchange-rate volatility. An adequate management of domestic liquidity derived from large capital inflows will help policy transmission and preserve macroeconomic stability improvements.

Vietnam's per capita income and human development indicators are weaker than those of peer medians. Fitch estimates per capita income was USD3,603 at end-2020, against the 'BB' median of USD5,009. Furthermore, Vietnam is in the 38th percentile on the UN Human Development Index, compared with the 'BB' median's 50th percentile. In the latest World Bank Governance Rankings, Vietnam's score improved on regulatory quality, voice and accountability, political stability and government effectiveness. However, the country's World Bank Governance Indicator ranking is in the 41st percentile, still below the peer median.

ESG - Governance: Vietnam has an ESG Relevance Score of '5' for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Vietnam has a medium ranking at the 41st percentile, reflecting a recent peaceful political transition, a moderate level of rights for participation in the political process, moderate institutional capacity, and a high level of corruption compared with peers.

DIEP NGUYEN