Standard & Poors (S&P) Global Rating has raised Vietnam’s long-term credit rating from its “BB-” since December 2010 to “BB” with stable outlook and the short-term sovereign credit ratings at “B”.
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Additionally, S&P expected to raise its rating if the economy's continued outperformance significantly improves fiscal outturns, and systemic banking system risks recede appreciably.
The Vietnam government's socioeconomic development plans provide useful policy anchors that have improved macroeconomic stability and inflation management over recent years, according to S&P.
At the same time, the economy has achieved impressive development outcomes, including consistently high real GDP growth. The government has built a strong record of promoting balanced economic growth, with real GDP growth averaging 6.2% annually since 2012.
Importantly, the Vietnamese government has delivered strong development outcomes since the global financial crisis and its own domestic banking sector crisis at the beginning of this decade.
S&P commented the government's accession as a founding signatory to the Comprehensive and Progressive Agreement to Trans-Pacific Partnership (CPTPP) in late 2018 reflects the government's willingness to adopt and implement necessary reforms, especially in the state sector, over the long term.
Additionally, a much more aggressive approach toward corrupt practices over the past two years, which is expected to continue beyond 2019, would support strong and balanced economic growth over the coming years, S&P stated.
Although Vietnam has a lower middle-income economy, with GDP per capita that S&P projected at approximately US$2,695 in 2019, the economy is relatively diversified.
Continued improvements in macroeconomic stability have supported a strong performance in the sizable foreign-owned and export-focused manufacturing sector (electronics, mobile phones, and textiles). The robust FDI-oriented economy is fueling stronger domestic activity, particularly through the private consumption channel. Low household leverage provides space for this trend to continue.
S&P expects real GDP per capita growth at approximately 5.7% through 2022, higher than the average of Vietnam's peers at a similar income level.
Although S&P expected Vietnam's strong economic performance to continue over the next few years, the country faces a variety of domestic and external risks. On the external front, trade disputes between major economies could undermine export momentum over the short term.
Given the extraordinarily large share of trade relative to the size of Vietnam's economy, the country would face additional headwinds in the event of an acute external slowdown. Domestically, elevated fiscal deficits and public indebtedness mean that new sources of funding will likely be needed to continue to spur strong infrastructure investment. Relatively weak banks in Vietnam, characterized by low levels of capitalization and poor asset quality, also pose a degree of risk to the economic outlook.
Vietnam's current account is likely to remain broadly in balance annually to 2020. Robust manufacturing and services (mainly tourism), exports, and large (and rising) remittances will counteract strong growth in the import of capital and consumption goods.
Strong FDI in manufacturing, combined with competitive unit labor costs relative to peers (Malaysia, Thailand, and Indonesia) and a large, young, and educated labor force, implies further strength in exports over 2018-2020.
Participation in free trade agreements could provide further upside to Vietnam's export earnings. "We expect Vietnam to continue to pursue enhanced market access via bilateral and multilateral free trade initiatives, including the CPTPP and the Regional Comprehensive Economic Partnership (RCEP)."
Moreover, S&P made the assessment that the State Bank of Vietnam (SBV) has pursued an increasingly market-oriented framework that allows the dong to trade more freely. Further progress on this front, combined with a deeper and more diversified financial and capital market, may lead to a more effective monetary policy framework and improved credit metrics in the long term.
