33.4 C
Ho Chi Minh City
Thursday, June 20, 2024

Fitch Ratings says Vietnam outperforms among Asia’s frontier sovereigns

Must read

HCMC – According to Fitch Ratings, the American credit rating agency, Vietnam is positioned to stand out among Asia’s frontier and emerging markets this year as a result of its economic resilience and success in bringing the novel coronavirus pandemic under control.

“These factors should support Vietnam’s ‘BB’ rating, which we affirmed in April 2020 while revising the Outlook to Stable from Positive,” the agency said, noting that the Southeast Asian country still faces a number of challenges including contingent liability risks from State-owned enterprises and structural weaknesses in the banking sector.

Vietnam is one of only four Fitch-rated sovereigns in the Asia Pacific that Fitch Ratings expects to post positive economic growth in 2020.

Official data shows the economy expanded by 0.4% year-on-year in the second half of this year, despite the impact of the coronavirus pandemic on tourism and export demand.

The result is said to be in line with the country’s full-year 2.8% growth projection made by Fitch Ratings. The agency forecasts that the pace of expansion will accelerate next year, as external demand, including tourism exports, is poised to recover.

The relative strength of Vietnam’s growth momentum owes much to its success in curbing the pandemic, according to Fitch Ratings.

Vietnam had no reported deaths from Covid-19 as of end-June, Fitch Ratings cited the World Health Organization as saying, adding that this could reflect a variety of factors, including the effectiveness of the official health policy response.

Vietnam has introduced a fiscal stimulus of some VND271 trillion, equivalent to 3.4% of the country’s gross domestic product (GDP), to help offset the effects of the pandemic.

This includes tax deferrals, cuts and exemptions, as well as cash transfers to affected workers and households, the latter being worth 0.4% of the GDP.

“We expect the general government debt-to-GDP ratio to rise to some 42% in 2020 from 37% in 2019, based on Fitch estimates, but this is still below the 59% median for ‘BB’ rated sovereigns,” said Fitch Ratings.

The State Bank of Vietnam has also loosened its monetary policy to support the economy, but the lower interest-rate environment and State pressure on banks to ease lending terms will weigh on bank profitability.

Meanwhile, slower economic growth and loan forbearance will add to asset quality problems.

These factors will, according to Fitch Ratings, aggravate the structural weaknesses in the banking sector, such as low capital buffers and under reporting of problem loans, which have already dragged on the sovereign rating. Slower credit growth may, however, provide some relief on capital.

Vulnerable to shifts in external demand

Vietnam’s economic outlook remains vulnerable to shifts in external demand, according to the credit rating agency.

The country has benefitted from trade diversion associated with rising costs in China and the United States-China trade war, and early data suggests it made further gains as China’s exports were disrupted by the coronavirus.

Vietnam’s share of U.S. apparel and textile imports rose to 15.5% between January and April this year from 12.9% in the first four months of 2019, according to the U.S. Office of Textiles and Apparel.

The country also attracted a healthy US$8.7 billion in realized capital investment from overseas in the first half of this year.

Nonetheless, both textile and apparel exports to the United States and realized capital investments were lower than the previous year, illustrating Vietnam’s vulnerability to the evolution and impact of the pandemic, according to Fitch Ratings.

As elsewhere, there are still restrictions on inbound tourism and remittances are declining. Tourism directly accounts for some 10% of GDP, with a higher contribution if indirect spillover effects are considered, while remittances were worth over 6% of GDP in 2019.

Vietnam is also susceptible to policy action by its main trade partners, especially the U.S. and China. The Vietnamese law-making National Assembly ratified the European Union-Vietnam Free Trade Agreement on June 8, which should underpin stable trade relations with the bloc of 27 member states.

“Our base assumption is that trade ties with both countries will remain stable,” said Fitch Ratings.

By Gia Phong

More articles


Please enter your comment!
Please enter your name here

Latest articles