Fitch Appreciates Vietnam’s SBV Management of Exchange Rate

Diep Nguyen

13:29 10/05/2019

BizLIVE -

Structural weaknesses in the banking sector continue to weigh on the sovereign rating. The banking system's non-performing loans remain under-reported and true asset quality is likely to be weaker.

Fitch Appreciates Vietnam’s SBV Management of Exchange Rate
Despite the stated shift to flexibility in January 2016, the exchange rate remained broadly stable in 2018. The State Bank of Vietnam (SBV) intervened in currency markets as the dollar strengthened and investor sentiment towards emerging markets became less favourable. This led to a temporary drawdown of foreign-exchange reserves.
 Nevertheless, overall reserve level in 2018 rose by the end of the year and as per Fitch estimates was equivalent to around 2.6 months of current external payments (CXP). Fitch expects modest further reserve accumulation in 2019-2020, but reserve coverage of CXP to remain below the historic peer median of 4.3 months.
Importantly, Vietnam's 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, in part reflecting modest debt repayments associated with the concessional nature of its outstanding debt. However, with Vietnam's recent graduation from eligibility for loans from the International Development Association, its funding costs are likely to increase over time. 
Structural weaknesses in the banking sector continue to weigh on the sovereign rating. The banking system's non-performing loans remain under-reported and true asset quality is likely to be weaker, although Fitch expects the under-reporting to be addressed over the long term. Recapitalisation needs of the banking sector remain a risk for the sovereign and sustained rapid credit growth poses a risk to financial stability. Private sector credit-to-GDP amounted to around 133% at end-2018.
Large FDI flows into the export-oriented manufacturing sector remain a key growth driver. Registered capital in the manufacturing sector increased to USD16.6 billion at end-2018 from USD15.9 billion in 2017. Fitch expects Vietnam to remain an attractive destination for foreign investors given its low cost advantage. Further, there is anecdotal evidence to suggest that US-China trade tensions may, over time, accelerate trade diversion and production shifts to Vietnam's benefit. 
Contingent liability risks from legacy issues at large state-owned enterprises remain a weakness for Vietnam's broader public finances, although government debt and guarantees have fallen over time. Government guarantees issued to state-owned enterprises and potential banking sector recapitalisation costs also weigh on Vietnam's public finances.
Vietnam's per capita income and human development indicators are weaker than the peer medians. According to Fitch estimates, per capita income was USD2,512 at end-2018, against the current 'BB' median of USD6,188. Further, it fell in the 38th percentile on the UN Human Development Index compared with the current 'BB' median of the 58th percentile. The country's ranking on the composite governance metric is at the 41st percentile, still below the peer medians. On the Ease of Doing Business Index, however, Vietnam ranks in the 64th percentile, above the current 'BB' median of 60th percentile.

DIEP NGUYEN

Tin liên quan

Cùng dòng sự kiện