Fitch upgrades VN to ‘BB-' with stable outlook
Fitch upgrades VN to ‘BB-' with stable outlook
Fitch Ratings has upgraded Viet Nam's long-term foreign and local currency issuer default ratings (IDRs) to ‘BB-' from ‘B+' and has revised the outlook to ‘stable' from ‘positive'.
According to a report which the agency released on its website on November 3, the issue ratings on the country's senior unsecured foreign and local currency bonds have also been upgraded to ‘BB-' from ‘B+', while the short-term foreign currency IDR is affirmed at ‘B'.
Fitch said that Viet Nam's macroeconomic policy mix has moved towards policies aimed at achieving macroeconomic stability. The State Bank of Viet Nam (SBV) has tightened its monetary stance, contributing to a slowdown in credit growth to a projected 12 per cent in 2014.
Real gross domestic product (GDP) growth has remained relatively strong at a three-year average of 5.6 per cent against a ‘BB' range median of 3.7 per cent, while inflation has moderated to 3.2 per cent as of October 2014, down from an average of 6.6 per cent in 2013. High savings and investment rates compared with peers' support growth prospects.
Macroeconomic stabilisation has contributed to a sharp turnaround in the current account, from a deficit of 3.7 per cent in 2010 to a projected surplus of 4.1 per cent in 2014. The country is now on track to report its fourth consecutive year of current account surpluses, driven by strong export growth and remittances.
Consistent net foreign direct investment (FDI) inflows, averaging 4.5% of the GDP over 2011-13, have contributed to balance of payments surpluses and modest foreign reserve accumulation. Net external debt of 14 per cent of the GDP is in line with the ‘BB' median of 16 per cent.
Fitch said, however, that Viet Nam'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 per cent of the GDP in 2014, versus a 'BB' median of 39 per cent.
Recent fiscal policy decisions, such as cutting corporate tax rates, may lead to further deterioration in government debt ratios. The country 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 per cent 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 per cent of sovereign external debt is concessionary in nature.
Fitch believes that stricter classification of non-performing loans (NPLs) will reveal under-capitalisation of the banking sector. Banks officially report NPLs of approximately 4.2 per cent, while other estimates range from nine per cent (SBV) to 15 per cent (Fitch). If the true NPL ratio were 15 per cent, the agency estimates the banking sector's equity capital base could fall from US$32 billion to $10 billion.
As aggregate State-owned enterprises' (SOEs') debt is high at approximately 42 per cent of the GDP and the proposed reforms to the sector are too cautious, the agency said that it remains sceptical that the government is prepared to see through material improvements to efficiency and corporate governance.
Viet Nam'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.
According to Fitch, a commitment by the country to rein in fiscal deficit, along with greater transparency pertaining to the banking and SOE sectors and progress in banking reform, may trigger positive rating action.
A move away from the current macroeconomic policy mix aimed at achieving macroeconomic stability, low and stable inflation and external equilibrium, may trigger negative rating action.
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