Econ
Fitch revises Vietnam's outlook to Positive at 'BB'
Vietnam remains among the fastest-growing economies in the Asia-Pacific and in the `BB` rating category globally.
Fitch Ratings has affirmed Vietnam's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' and revised the outlook to Positive.
The revision of Vietnam's outlook to Positive from Stable reflects an improving track record of economic management, which is evident in strengthening external buffers from persistent current account surpluses, falling government debt levels, high economic growth rates and stable inflation, stated Fitch in its report.
According to the report, Vietnam’s continued commitment to containing debt levels led to a decline in general government debt to 50.5% of GDP in 2018 from a peak of 53% in 2016, and Fitch expects this ratio to decline further to around 46% by 2020.
Vietnam's public debt (general government debt including guarantees) has also been declining, to around 58% of GDP by end-2018 after being close to the ceiling of 65% at end-2016.
The decline has been facilitated by a reduction in outstanding government guarantees to around 8% of GDP by end-2018 from 9.1% at end-2017. The reduction has also been aided by stable receipts from privatization of state-owned enterprises, high nominal GDP growth and lower fiscal deficits.
The overall pace of equitization has slowed, but the process has nevertheless continued to advance, with 28 state-owned enterprises being equitized compared with 69 in 2017.
Fitch's debt and deficit estimates, which are more closely aligned with the Government Finance Statistics (GFS) standard of accounting, put the budget deficit at 3.6% of GDP in 2020, compared with the authorities' target of 3.5% of GDP by 2020 under their 2016-2020 medium-term budget plan.
Fitch said the government is maintaining a policy focus on macroeconomic stability. GDP growth improved to 7.1% in 2018 from 6.8% in 2017 while inflation remained stable at 3.5%, within the National Assembly's target of below 4%. Growth remained supported by strong foreign direct investment (FDI) into the manufacturing sector as well as expansion in the services and agriculture sectors.
It is expected growth to slow in 2019 to around 6.7%, still within the National Assembly's target of between 6.6% and 6.8%. Growth in Vietnam, which has a high degree of trade openness, is likely to be affected by slowing global growth and US-China trade tensions, which will weigh on regional trade flows and sentiment.
“Vietnam would nevertheless remain among the fastest-growing economies in the Asia-Pacific and in the 'BB' rating category globally,” stated Fitch.
FDI to export-oriented manufacturing sector remains key growth driver
Despite the stated shift to flexibility in January 2016, the exchange rate remained broadly stable in 2018. The State Bank of Vietnam (SBV) intervened in currency markets as the dollar strengthened and investor sentiment towards emerging markets became less favorable. This led to a temporary drawdown of foreign-exchange reserves.
Nevertheless, overall reserve level in 2018 rose by the end of the year and as per Fitch estimates was equivalent to around 2.6 months of current external payments (CXP). We expect modest further reserve accumulation in 2019-2020, but reserve coverage of CXP to remain below the historic peer median of 4.3 months.
Importantly, Vietnam's external liquidity ratio (foreign-exchange reserves relative to external debt service obligations due in the coming year) remains well above the current and historic medians for the 'BB' sovereign rating category, in part reflecting modest debt repayments associated with the concessional nature of its outstanding debt. However, with Vietnam's recent graduation from eligibility for loans from the International Development Association, its funding costs are likely to increase over time.
Structural weaknesses in the banking sector continue to weigh on the sovereign rating. The banking system's non-performing loans remain under-reported and true asset quality is likely to be weaker, although Fitch expects the under-reporting to be addressed over the long term. Recapitalization needs of the banking sector remain a risk for the sovereign and sustained rapid credit growth poses a risk to financial stability. Private sector credit-to-GDP amounted to around 133% at end-2018.
Large FDI flows into the export-oriented manufacturing sector remain a key growth driver. Registered capital in the manufacturing sector increased to USD16.6 billion at end-2018 from USD15.9 billion in 2017. Fitch expected Vietnam to remain an attractive destination for foreign investors given its low cost advantage. Further, there is anecdotal evidence to suggest that US-China trade tensions may, over time, accelerate trade diversion and production shifts to Vietnam's benefit.
Contingent liability risks from legacy issues at large state-owned enterprises remain a weakness for Vietnam's broader public finances, although government debt and guarantees have fallen over time. Government guarantees issued to state-owned enterprises and potential banking sector recapitalization costs also weigh on Vietnam's public finances.
Illustrative photo.
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According to the report, Vietnam’s continued commitment to containing debt levels led to a decline in general government debt to 50.5% of GDP in 2018 from a peak of 53% in 2016, and Fitch expects this ratio to decline further to around 46% by 2020.
Vietnam's public debt (general government debt including guarantees) has also been declining, to around 58% of GDP by end-2018 after being close to the ceiling of 65% at end-2016.
The decline has been facilitated by a reduction in outstanding government guarantees to around 8% of GDP by end-2018 from 9.1% at end-2017. The reduction has also been aided by stable receipts from privatization of state-owned enterprises, high nominal GDP growth and lower fiscal deficits.
The overall pace of equitization has slowed, but the process has nevertheless continued to advance, with 28 state-owned enterprises being equitized compared with 69 in 2017.
Fitch's debt and deficit estimates, which are more closely aligned with the Government Finance Statistics (GFS) standard of accounting, put the budget deficit at 3.6% of GDP in 2020, compared with the authorities' target of 3.5% of GDP by 2020 under their 2016-2020 medium-term budget plan.
Fitch said the government is maintaining a policy focus on macroeconomic stability. GDP growth improved to 7.1% in 2018 from 6.8% in 2017 while inflation remained stable at 3.5%, within the National Assembly's target of below 4%. Growth remained supported by strong foreign direct investment (FDI) into the manufacturing sector as well as expansion in the services and agriculture sectors.
It is expected growth to slow in 2019 to around 6.7%, still within the National Assembly's target of between 6.6% and 6.8%. Growth in Vietnam, which has a high degree of trade openness, is likely to be affected by slowing global growth and US-China trade tensions, which will weigh on regional trade flows and sentiment.
“Vietnam would nevertheless remain among the fastest-growing economies in the Asia-Pacific and in the 'BB' rating category globally,” stated Fitch.
FDI to export-oriented manufacturing sector remains key growth driver
Despite the stated shift to flexibility in January 2016, the exchange rate remained broadly stable in 2018. The State Bank of Vietnam (SBV) intervened in currency markets as the dollar strengthened and investor sentiment towards emerging markets became less favorable. This led to a temporary drawdown of foreign-exchange reserves.
Nevertheless, overall reserve level in 2018 rose by the end of the year and as per Fitch estimates was equivalent to around 2.6 months of current external payments (CXP). We expect modest further reserve accumulation in 2019-2020, but reserve coverage of CXP to remain below the historic peer median of 4.3 months.
Importantly, Vietnam's external liquidity ratio (foreign-exchange reserves relative to external debt service obligations due in the coming year) remains well above the current and historic medians for the 'BB' sovereign rating category, in part reflecting modest debt repayments associated with the concessional nature of its outstanding debt. However, with Vietnam's recent graduation from eligibility for loans from the International Development Association, its funding costs are likely to increase over time.
Structural weaknesses in the banking sector continue to weigh on the sovereign rating. The banking system's non-performing loans remain under-reported and true asset quality is likely to be weaker, although Fitch expects the under-reporting to be addressed over the long term. Recapitalization needs of the banking sector remain a risk for the sovereign and sustained rapid credit growth poses a risk to financial stability. Private sector credit-to-GDP amounted to around 133% at end-2018.
Large FDI flows into the export-oriented manufacturing sector remain a key growth driver. Registered capital in the manufacturing sector increased to USD16.6 billion at end-2018 from USD15.9 billion in 2017. Fitch expected Vietnam to remain an attractive destination for foreign investors given its low cost advantage. Further, there is anecdotal evidence to suggest that US-China trade tensions may, over time, accelerate trade diversion and production shifts to Vietnam's benefit.
Contingent liability risks from legacy issues at large state-owned enterprises remain a weakness for Vietnam's broader public finances, although government debt and guarantees have fallen over time. Government guarantees issued to state-owned enterprises and potential banking sector recapitalization costs also weigh on Vietnam's public finances.
