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Moody's and S&P affirm sovereign rating

Released at: 09:18, 03/05/2017

Moody's and S&P affirm sovereign rating

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Strong FDI, macro-economic and external stability, and manageable external debt cited as factors in ratings.

by Anh Duy

Moody’s and Standard & Poor’s (S&P) both affirmed Vietnam sovereign rating on April 28, citing the country’s strong foreign direct investment (FDI) inflows, macro-economic and external stability, and modest external debt burden.

Moody’s affirmed the Vietnamese Government’s B1 issuer and senior unsecured debt ratings, at the same time raising the outlook to positive from stable. Four steps below investment grade, the B1 rating is considered relatively stable, with a moderate chance of default.

The ratings agency also raised its assessment of Vietnam’s local-currency bond to Baa3 from Ba1, while the foreign currency bond remained at Ba2.

The positive outlook for Vietnam is based on three key factors: strong FDI inflows boosted by ongoing economic reform and liberalization, macroeconomic and external stability, and the stabilization of prospective debt and an improved funding profile.

Moody’s noted that robust FDI inflows will continue to sustain Vietnam’s dynamic economic performance relative to is similarly-rated peers, as it allows the country to diversify its economy and gain market share in international trade.

Vietnam has seen significant improvements in its investment climate. Its ranking rose to 60th out of 138 countries in the 2016-2017 World Economic Forum Global Competitiveness Index, up from 70th in 2013-2014, while its showings in the World Bank’s Doing Business Indicators similarly rose to 82nd out of 190 countries in 2017 from 99th in 2014.

The country has also become a more important node in the regional supply chain for electronics, especially mobile phones, as foreign investments have helped diversify its economy towards higher value-added manufacturing. Its market share nearly doubled, to 1.2 per cent of global exports in 2016 from 0.7 per cent in 2013.

Moody’s expected the country’s economic growth to remain robust at around 6.3 per cent per annum through 2019.

S&P’s Global Ratings also affirmed its long-term “BB-” credit rating and a short-term “B” ratings with a stable outlook for Vietnam. The ratings reflect the country’s lower middle-income status, weaknesses in the banking sector, and emerging institutional settings that hamper policy responsiveness.

“These weaknesses are offset by Vietnam’s external settings that feature balanced external accounts, strong foreign direct investment inflows, and a modest external debt burden,” S&P said in a press release.

The ratings agency also said the financial and technical assistance Vietnam has received from donors also contributed to its rating. Its stable outlook reflects S&P’s expectation that Vietnam’s growth prospects will continue to improve, leading to gains in its key economic and fiscal measures, it said.

However, it has cautioned that the large fiscal deficit and rising debt burden, with net general government debt at 46.6 per cent of GDP in 2016, signals a further delay in fiscal consolidation. S&P estimates that the fiscal deficits will average 4.9 per cent of GDP over the 2017-2020 period, down from an average 6.4 per cent over 2012-2016.

During the first quarter of this year, Vietnam’s GDP increased 5.1 per cent year-on-year to VND931.6 trillion ($40.9 billion). The growth is lower than those of 6.12 per cent and 5.48 per cent in the same period of 2015 and 2016, respectively, according to the General Statistics Office (GSO). It is also the lowest since 2011, said Mr. Nguyen Bich Lam, GSO’s Director General, with a 10 per cent decline in the mining sector largely to blame.

Vietnam has set a GDP growth target of 6.7 per cent for this year, equal to the target set for last year, while inflation is targeted at 4 per cent against 5 per cent last year.

Moody’s Vietnam ratings

Issuer and senior unsecured debt ratings: B1 (affirmed)

Outlook: Positive (upgraded from Stable)

Local-currency bond and deposit ceilings: Baa3 (upgraded from Ba1)

Foreign currency bond ceiling: Ba2 (unchanged)

Foreign currency deposit ceiling: B2 (unchanged)

Short-term foreign currency bond and deposit ceilings: Not Prime (unchanged)

Short-term foreign currency deposit ceiling: Not Prime (unchanged)

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