Monday,  Aug 20, 2018,23:27 (GMT+7) 0 0
Vietnam’s sovereign credit rating upgraded
Phuong Thao
Wednesday,  May 16, 2018,22:03 (GMT+7)

Vietnam’s sovereign credit rating upgraded

Phuong Thao

HCMC – Ratings firm Fitch on May 15 raised Vietnam’s sovereign credit rating, explaining that the country’s track record of policy-making focused on strong macroeconomic performance has been improving.

The rating agency said Vietnam’s long-term foreign-currency issuer default rating has been upgraded to ‘BB’ with a stable outlook, from ‘BB-’. It expected Vietnam to remain among the fastest-growing economies in the Asia-Pacific region.

The nation’s gross domestic product (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 the end of last year 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.

FDI inflows remained strong in 2017, especially into the manufacturing sector, with registered FDI increasing by around 40% from the previous year to US$21.3 billion. As such, Vietnam would remain among the fastest-growing economies in Asia Pacific, and fastest among ‘BB’ rated peers.

Vietnam’s external buffers have improved, with its foreign-exchange reserves in 2017 rising to US$49 billion (around 2.5 months of external current payment) from US$37 billion at the end of 2016, driven by large capital inflows and a current account surplus. The improvement was facilitated by the Government’s adoption of a flexible exchange-rate mechanism in January 2016.

Although the new exchange-rate mechanism could be tested in a stronger dollar environment, the rise in foreign-exchange reserves provides a cushion against external shocks. Fitch projected foreign-exchange reserves to rise to around US$66 billion by the end of this year, equivalent to a reserve coverage of 3.1 months of external current payments.

However, Fitch said Vietnam’s banking sector remains structurally weak and weighs heavily on the sovereign rating. The agency believed that the banking system’s non-performing loans remain under-reported and true asset quality is likely to be weaker than stated, adding that it expects the situation will be more adequately addressed over the longer term.

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 non-performing loan formation, a sustained rapid credit growth poses a risk to financial stability in the medium term. Overall credit growth at the end of 2017 was around 18%, in line with the Government’s target, and the official credit growth target for 2018 is currently 17%.

Despite lower government debt levels, the risk of contingent liabilities arising from legacy issues at large state-owned enterprises remains a weakness for Vietnam’s broader public finances given the still-large role of the state in the economy.

In addition, although the number of wholly owned State-owned enterprises has been declining under the equitization program, it was still significant at 505 at the end of 2017. Government guarantees for State-owned entities and potential banking sector recapitalization costs continue to weigh on Vietnam’s public finances.

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