Fitch Ratings has affirmed Vietnam’s Foreign- and Local-Currency Issuer Default Ratings at ‘B+’. The Outlook for both Ratings is Stable. 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,” said Art Woo, director in Fitch’s Asia-Pacific Sovereign Ratings group. “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. Headline CPI inflation grew 10.5 percent yoy in April, down from a recent peak of 23 percent yoy in August 2011. Fitch forecasts CPI inflation 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 USD14.1bn at end-November 2011, from USD12bn at end-2010. Fitch estimates that reserves may have reached USD16bn-17bn 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.
The country’s economic slowdown has deepened as real GDP grew just 4 percent yoy in Q112, down from a 6.1 percent rise in Q411. The deceleration in economic growth helps to explain State Bank of Vietnam’s recent policy rate cuts of 100bps in both March and April 2012. Fitch believes these rate cuts should not necessarily be viewed as a reversal of the key objectives of Resolution 11 but as an appropriate policy response to the slowdown and decelerating inflation.
Vietnam’s banking sector remains a source of weakness and a constraint on the sovereign rating. Its large size – private sector credit-to-GDP ratio stood at 115 percent in Q311 – poses a potential risk to macro-financial stability and is a significant contingent liability to the sovereign. The system is thinly-capitalised and asset quality is deteriorating. These risks are compounded by weaknesses in the quality of financial reporting and disclosure, including materially understating the level of non-performing loans which official figures indicate stood at 3.6 percent at end-2011. Moreover, 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 broader economic reform process is also taking shape as the new 2011-15 Socio-Economic Development Plan highlighted the need to transform public investment and state-own enterprises (SOEs). However, no concrete action plan has been formulated and reform of SOEs and public investment is likely to be a gradual process. As a consequence, given the uncertain health of the SOE sector and low transparency, SOEs remain a large contingent liability for the sovereign.
Fitch acknowledges that the quality of economic and financial statistics is often constrained in developing and transition economies. Nonetheless, in Fitch’s opinion, shortfalls in the quality and timeliness of economic and financial data, particularly the release of official reserves data, are a rating weakness relative to peers.
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.
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.