Fitch Ratings have announced changes to its ratings and given an assessment of Vietnam's economic figures.
Fitch Ratings on November 3 upgraded Vietnam's long-term foreign and local currency issuer default ratings (IDRs) from "B+" to "BB-". The outlook was also raised from "positive" to "stable". The country ceiling and the issue ratings on Vietnam's senior unsecured foreign and local currency bonds were also upgraded to "BB-" from "B+", while the short-term foreign currency IDR remained at "B".
"Vietnam's macro-economic policy mix has moved towards policies aimed at achieving stability," Fitch said. The State Bank of Vietnam (SBV) has tightened its monetary policy, reducing credit growth from 32 per cent in 2010 to 12 per cent in 2014. Real GDP growth has remained comparatively strong at an average of 5.6 per cent in three years - higher than the median of countries in the same rank, which is 3.7 per cent. Inflation has also been moderated, from an average of 6.6 per cent last year to 3.2 per cent in October this year. Higher savings and investment rates than "BB" range countries also contribute to Vietnam's growth potential.
The steady macro-economy has supported the current account's turnaround from deficit in 2010 to an expected surplus of 4.1 per cent in 2014. Vietnam has momentum from having a surplus in its current account for four consecutive years due to strong export growth and remittances. Foreign direct investment (FDI) also contributed strongly to balance of payments' surpluses and foreign reserve accumulation.
In that context, Fitch on November 5 also upgraded its rating on two Vietnamese banks - Vietinbank and Agribank. The upgrade was made due to the government ownership of the banks and their huge assets. Their long-term IDR and support rating floors (SRFs) ranks were raised to "B+" from "B". Despite that, the outlook of both banks were downgraded from "positive" to "stable", which remain behind the national rating due to the government's limited financial support. The rating based on government support is very sensitive to national credit and may be affected if there are signs of decreasing government support for banks. However, this is unlikely to happen because of the newly-upgraded national credit rating and the important links the two banks have with the government.
There was not only optimism when Fitch analyzed Vietnam's economic figures. They estimated that regular fiscal deficit and overspending will cause government debt to rise to 44 per cent of GDP this year. The recent fiscal policy, such as corporate tax reductions, may cause more serious debt issues. Though the target budget deficit to 2020 has been set, agencies still lack a formal fiscal framework in the medium term.
The capitalized banking sector also faces certain issues. Vietnamese banks have officially reported a bad debt ratio of around 4.2 per cent. However, research by the SBV and Fitch put them at 9 per cent and 15 per cent, respectively. If its 15 per cent result is correct, Fitch estimates the banking sector equity capital base could fall from $32 billion to $10 billion.
Fitch also noted that State-owned enterprise (SOE) reform was unconvincing. "Aggregate SOE debt is high, at approximately 42 per cent of GDP, and proposed reforms to the sector are too cautious to impact our view of contingency risk," Fitch commented. Vietnam's level of average income, even when measured by purchasing power parity, is still way behind countries in the same group.
Based on economic figures, the Fitch rating could be changed either positively or negatively in the future. If Vietnam moves away from the current macro-economic stability policy, the rating will be downgraded. However, if the State can keep restraining the fiscal deficit, thereby improving the government debt outlook, boost transparency in banks and SOEs, and accelerate banking sector reform, Vietnam's rating may be upgraded.