Vietnam Waits 3 1/2 Years to Get Fitch Upgrade to 'BB'

Tuan Minh

11:33 15/05/2018


Fitch forecasts Vietnam’s GDP growth at 6.7% this year and forex reserves to rise to around $66 billion by end-2018

Vietnam Waits 3 1/2 Years to Get Fitch Upgrade to 'BB'

Fitch has upgraded Vietnam's IDR to "BB".

Fitch Ratings has upgraded Vietnam's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB-' with stable outlook.
The rating agency cited Vietnam's improved track record of policy-making focused on strong macroeconomic performance for the upgrade. GDP growth accelerated to 6.8% in 2017 from 6.2% in 2016 supported by the export-oriented manufacturing sector and continued growth in services. Vietnam's five-year average real GDP growth at end-2017 was 6.2%, far above the 'BB' median of 3.4%.
“We expect growth of 6.7% in 2018 in line with the growth target set by the National Assembly, supported by strong inflows of foreign direct investment (FDI), continued expansion in manufacturing and an increase in private consumption expenditure,” Fitch said in a press release.
As such, Vietnam would remain among the fastest-growing economies in the Asia-Pacific region, and fastest among 'BB' rated peers, it added.
The agency highlighted that Vietnam's external buffers have improved, with its foreign-exchange reserves in 2017 rising from $37 billion at end-2016 to $49 billion (around 2.5 months of external current payments, CXP), supported by large capital inflows and a current account surplus. The improvement was facilitated by the authorities' adoption of a flexible exchange-rate mechanism in January 2016.
“We project foreign-exchange reserves to rise to around $66 billion by end-2018, equivalent to a reserve coverage of 3.1 months of CXP,” the Fitch said.
Strong capital inflows and unsterilised reserve accumulation have led to a build-up in liquidity in the banking system. As evidence, five-year domestic government bond yields have declined by about 150bp since the end of 2017 to around 2.6% at present.
In addition, Fitch recognizes the authorities have maintained their commitment to containing debt levels and reforming state-owned enterprises. Gross general government debt, as calculated by Fitch, declined to 52.4% of GDP in 2017 from 53.4% in 2016, based on preliminary official estimates, while outstanding government guarantees fell to 9% of GDP by end-2017 from 10.3% at end-2016.
As a result, Vietnam's public debt (general government debt including guarantees) declined to 61.4% of GDP by end-2017 down from 63.6% at end-2016, and remained below the authorities' debt ceiling of 65% of GDP. The decline in public debt was facilitated by inflows from privatization proceeds, close to the target for the year. The privatization program for 2016-2020 aims to raise revenues of VND250 trillion.
According to Fitch debt and deficit calculations, general government debt is likely to fall further and to decline to under 50% of GDP by 2019, aided by proceeds under the privatization program. The authorities remain committed to bringing down the deficit and debt levels under their 2016-2020 budget plan.
Fitch expects the country’s budget deficit in 2018 to narrow to around 4.6% of GDP from around 4.7% in 2017.
Locals drive past the headquarters of the State Bank of Vietnam in Hanoi. Photo: Minh Tuan/BizLIVE 
On the other hand, the 'BB' IDR also reflects that Vietnam's banking sector remains structurally weak and weighs heavily on the sovereign rating. “We believe banking system non-performing loans remain under-reported and true asset quality is likely to be weaker than stated, and the agency expects it will be more adequately addressed over the longer term.”
In addition, recapitalization needs of the banking sector remain a risk for the sovereign. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. Further, while improving economic performance is likely to support lower NPL formation, a sustained rapid credit growth poses a risk to financial stability in the medium term.
Despite lower government debt levels, the risk of contingent liabilities arising from legacy issues at large state-owned enterprises still remains a weakness for Vietnam's broader public finances given the still-large role of the state in the economy.