Fitch Ratings announced Friday an affirmation of Vietnam rating at ‘B+’, and evaluated the country’s economic outlook as being stable.
Vietnam’s foreign- and local-currency issuer default ratings are affirmed at ‘B+’, while the outlook for both ratings is stable, the report said.
The country ceiling is also affirmed at ‘B+’, and the short-term foreign currency IDR at ‘B’.
“The ratings and stable outlook reflect the success so far of efforts by Vietnam’s authorities to tackle the macro-financial imbalances that arose in 2010 and 2011,” the report quoted Art Woo, director in Fitch’s Asia-Pacific Sovereign Ratings group in a statement as saying.
“However, despite recent signs of greater macroeconomic stability including lower inflation, a stronger current account position and a more stable dong exchange rate, further evidence that these improvements have become entrenched and reform of the banking and state-owned enterprise sector is needed to put upward pressure on Vietnam’s sovereign ratings.”
Since implementing fiscal and monetary tightening measures to restore macroeconomic stability under Resolution 11 in February 2011, Vietnam has made vital progress in taming inflation, Fitch stated.
Headline CPI inflation grew 10.5 percent y-o-y in April, down from a recent peak of 23 percent y-o-y in August 2011.
CPI inflation is forecasted to average 10 percent in 2012, compared with 18.7 percent in 2011.
Resolution 11 also lent support to the current account position, which recorded a surplus to 0.2 percent of GDP in 2011 versus a deficit of 4 percent in 2010.
It should be noted that foreign-direct investments (FDI) have remained robust, totalling USD7.4bn in 2011 (6 percent of GDP).
These factors supported the improvement in the balance of payments and in turn foreign exchange reserves position, which has recently proven vulnerable to capital flight, particularly when economic stability has been under strain.
The success Vietnam has enjoyed in attracting FDI and the dynamism of its economy are significant sovereign rating strengths.
Vietnam’s last reported official reserves, excluding gold, increased to $14.1 billion at end-November 2011, from $12 billion at end-2010.
Fitch estimates that reserves may have reached $16 billion – 17 billion at end-March 2012, which roughly equates to 1.8 months of current external payments receipts.
The increase illustrates the stabilisation of the macro economy and balance of payments, though import coverage of less than two months is low relative to rated peers.
Vietnam’s banking sector remains a source of weakness and a constraint on the sovereign rating.
Some smaller banks are still facing liquidity pressures as they expanded credit more rapidly than their deposit base. However, the authorities have recently stepped up efforts to pressure weaker banks to clear up bad debt and encourage consolidation.
The ability to persist with Resolution 11 measures and in turn create a more balanced macroeconomic environment of lower inflation, stable GDP growth and a more stable balance of payments would be a positive development for Vietnam’s sovereign ratings. Acceleration of broader structural economic reforms, particularly with respect to SOEs and public investment, would be positive for the sovereign credit profile.
However, were recent macro-stabilisation gains to be reversed with a resumption of excessive credit growth and double-digit inflation, downward pressure on Vietnam’s sovereign ratings would emerge. In addition, large-scale losses in the banking sector, which require sovereign support, could trigger negative rating action.