Moody’s: Domestic demand supports Vietnam’s growth outlook, banking sector risks remain

02-Sep-2016 Intellasia | Moodys | 6:00 AM Print This Post

Moody’s Investors Service says that Vietnam’s (B1 stable) credit profile is supported by its robust economic growth and diversified economy.

These credit strengths are balanced against accelerating credit growth, wide fiscal deficits and an increasing government debt burden. At the same time, while the operating environment for the banking sector has stabilised, capital levels remain inadequate and asset quality is still weak.

Moody’s conclusions were contained in its just-released annual credit analysis of government of Vietnam – B1 Stable. The report elaborates on Vietnam’s credit profile in terms of Economic Strength: High (-); Institutional Strength: Low; Fiscal Strength: Low (+); and Susceptibility to Event Risk: High, which are the four main analytic factors in Moody’s Sovereign Bond Rating Methodology.

Over the last two years, GDP growth in Vietnam picked up to above 6.0 percent, which stands in contrast to slower growth across much of the region as well as among rating peers. Moody’s forecasts real GDP growth to remain around 6.0 percent in the next two years. Vietnam’s exports have been resilient to the slowdown in China (Aa3 negative) and to muted global growth. Growth has also been underpinned by a recovery in domestic demand and foreign investment, low inflation and buoyant consumer sentiment. Some of the uptick in domestic demand owes to rapid credit growth and an accommodative fiscal stance, and if such stimulus continued it could potentially pose financial and fiscal risks.

Stronger domestic demand has in turn prompted healthier demand for imports. As such, the current account surplus has declined and Moody’s forecasts a small surplus of 0.6 percent in 2016. Nevertheless, with the central bank’s new exchange rate mechanism, Moody’s still expects the balance pf payments to be in a healthy surplus with a net accretion of foreign exchange reserves.

Vietnam’s institutional strength score has improved for a third consecutive year to Low. The continued strengthening incorporates the lengthening track record of benign inflation and improved governance. In addition, economic reform momentum has accelerated in recent years and has helped facilitate a gradual and ongoing restructuring of the banking and state owned enterprise sector.

Fiscal deficits, however, remain wide. The government’s debt burden has climbed by over 10 percentage points since 2012 to 50.3 percent of GDP in 2015, although a reliance on concessional financing from bilateral and multilateral development partners keeps debt financing costs moderate.

Vietnam’s Susceptibility to Event Risk is driven by banking sector risk. The banking system remains weak, because of high asset quality risks and pressured capital buffers. These weaknesses are further exacerbated by the very rapid loan growth of 25 percent in 2015, up from 16 percent in 2014. The recent pick-up in credit growth points to potential risks, although a benign economic environment supports the banks’ recovery efforts on legacy problem assets and adequate liquidity profiles.

https://www.moodys.com/research/Moodys-Domestic-demand-supports-Vietnams-growth-outlook-banking-sector-risks-PR_354391

 


Category: Finance, Vietnam

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