Fitch Upgrades Vietnam to 'BB-'; Outlook Stable
Fitch Upgrades Vietnam to 'BB-'; Outlook Stable
Fitch Ratings has upgraded Vietnam's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB-' from 'B+'. The Outlook is revised to Stable from Positive.
The issue ratings on Vietnam's senior unsecured foreign and local currency bonds are also upgraded to 'BB-' from 'B+'. The Country Ceiling is upgraded to 'BB-' from 'B+' and the Short-Term Foreign Currency IDR is affirmed at 'B'.
KEY RATING DRIVERS
The upgrade of Vietnam's IDR to 'BB-' reflects the following key rating drivers:
- Improved Macroeconomic Stability: Vietnam's macroeconomic policy mix has moved towards policies aimed at achieving macroeconomic stability. The State Bank of Vietnam has tightened its monetary stance, contributing to a slowdown in credit growth to a projected 12% in 2014 from 32% in 2010. Real GDP growth has remained relatively strong at a three-year average of 5.6% against a 'BB' range median of 3.7%. Inflation has moderated to 3.2% as of October 2014, down from an average of 6.6% in 2013. High savings and investment rates compared with peers support growth prospects.
- Stronger External Balances: Macroeconomic stabilisation has contributed to a sharp turnaround in the current account from a deficit of 3.7% in 2010 to a projected surplus of 4.1% in 2014. Vietnam is now on track to report its fourth consecutive year of current account surpluses, driven by strong export growth and remittances. Consistent net FDI inflows averaging 4.5% of GDP over 2011-13 have contributed to balance of payments surpluses and modest foreign reserve accumulation. Net external debt of 14% of GDP is in line with the 'BB' median of 16%.
Our revised rating assessment continues to incorporate the following factors:
- Contingent Risks Large, Yet Manageable: Vietnam's contingent liabilities are high, but not high enough to keep it at 'B+'. Fitch's latest assessment of the degree of contingent liability facing the sovereign from debts in the banking and state-owned enterprise (SOE) sectors is not inconsistent with a rating in the 'BB' category.
- Rising Public Indebtedness: Vietnam's public debt stock is high compared to peers. Persistent fiscal deficits and off-budget expenditures will result in direct government debt rising to an estimated 44% of GDP in 2014 (versus a 'BB' median of 39%). Recent fiscal policy decisions, such as cutting corporate tax rates, may lead to further deterioration in government debt ratios. Vietnam lacks a formal medium-term fiscal framework, although the authorities have articulated policy goals of reducing the budget deficit by 2020 and of observing a 65% ceiling for the debt-to-GDP ratio. The country's relatively modest sovereign external debt service burden is driven by the fact that approximately 94% of sovereign external debt is concessionary in nature.
- Thinly Capitalized Banking Sector: Fitch believes stricter classification of NPLs would reveal under-capitalisation of the banking sector. Banks officially report NPLs of approximately 4.2%, while other estimates range from 9% (State Bank of Vietnam) to 15% (Fitch). If the true NPL ratio were 15%, Fitch estimates the banking sector's equity capital base could fall to US$10bn from US$32bn.
- Unconvincing SOE Reform: Aggregate SOE debt is high at approximately 42% of GDP, and proposed reforms to the sector are too cautious to impact our view of contingency risk. The equitization program - a plan to restructure state-owned companies - will keep the government as the controlling shareholder (greater than 50% stake) across a large number of industry groups, and Fitch remains sceptical that the government is prepared to see through material improvements to efficiency and corporate governance.
- Vietnam's levels of average income, measured in either market exchange rates or purchasing power parity, remain well below the 'B' and 'BB' peer rating group medians.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risk to the rating are well balanced.
The main factors that individually, or collectively, could trigger positive rating action are:
- A commitment to rein in fiscal deficits, contributing to an improved outlook for government debt ratios.
- Greater transparency into the full scale of contingent liabilities, including increased disclosure pertaining to the banking and SOE sectors.
- Progress in banking sector reform.
The main factors that individually, or collectively, could trigger negative rating action are:
- A move away from the current macroeconomic policy mix aimed at achieving macroeconomic stability, low and stable inflation, and external equilibrium.
KEY ASSUMPTIONS
- Fitch assumes the problems in Vietnam's banking system do not crystallise in a manner that would disrupt economic or financial stability, or lead to an immediate large requirement for sovereign resources.
- No escalation of regional or geopolitical disputes to a level that disrupt trade and financial flows.
- Global economic conditions broadly in line with Fitch's recent "Global Economic Outlook".
Fitch
