The ratings agency said the upgrade reflects Vietnam's improving policy-making aimed at strengthening macroeconomic performance.
Fitch raises Vietnam sovereign credit rating to 'BB' from 'BB-'.
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FDI inflows remained strong in 2017, especially into the manufacturing sector, with registered FDI increasing by around 40% from the previous year to US$21.3 billion. As such, Vietnam would remain among the fastest-growing economies in the Asia-Pacific region, and fastest among 'BB' rated peers, according to Fitch.
"This is very positive for Vietnamese economy as it shows that macroeconomic stability is further improving," said Can Van Luc, an economist with the Bank for Investment and Development of Vietnam to Reuters.
Luc said the Fitch upgrade will further boost foreign investment inflows more strongly and that Vietnam will be able to have access to lower-cost funds.
"The country needs cheaper loans from international lenders to support its growth," Luc said.
Vietnam's external buffers have improved, with its foreign-exchange reserves in 2017 rising to US$49 billion (around 2.5 months of external current payments, CXP), from US$37 billion at end-2016, supported by large capital inflows and a current account surplus. The improvement was facilitated by the authorities' adoption of a flexible exchange-rate mechanism in January 2016.
Although the new exchange-rate mechanism could be tested in a stronger dollar environment, the rise in foreign-exchange reserves provides a cushion against external shocks. Fitch projected foreign-exchange reserves to rise to around US$66 billion by end-2018, equivalent to a reserve coverage of 3.1 months of CXP.
The authorities have maintained their commitment to containing debt levels and reforming state-owned enterprises. Gross general government debt (GGGD), as calculated by Fitch, declined to 52.4% of GDP in 2017 from 53.4% in 2016, based on preliminary official estimates, while outstanding government guarantees fell to 9% of GDP by end-2017 from 10.3% at end-2016.
As a result, Vietnam's public debt (general government debt including guarantees) declined to 61.4% of GDP by end-2017 down from 63.6% at end-2016, and remained below the authorities' debt ceiling of 65% of GDP. The decline in public debt was facilitated by inflows from privatisation proceeds, close to the target for the year. The privatization program for 2016-20 aims to raise revenues of VN$250 trillion.
Fitch expected the budget deficit in 2018 (according to our adjusted deficit, which is closer to GFS criteria) to narrow to around 4.6% of GDP from around 4.7% in 2017.
The latest Fitch upgrade, which comes at a time of pressure on many emerging market economies and worries about capital outflows, means that there are still two more upgrades needed before Fitch considers them investment grade, to BB+ and then to BBB-.
Recapitalization needs of the banking sector remain a risk for the sovereign. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. Further, while improving economic performance is likely to support lower NPL formation, a sustained rapid credit growth poses a risk to financial stability in the medium term. Overall credit growth at end-2017 was around 18%, in line with authorities' target. The official credit growth target for 2018 is currently 17%.
