Fitch affirms Vietnam at 'B+'; outlook stable
  • | VOVNews | May 13, 2012 02:04 AM

Fitch Ratings has affirmed Vietnam's Foreign- and Local-Currency Issuer Default Ratings at 'B+' and the outlook for both ratings stable.  

The Country Ceiling is also affirmed at 'B+' and the Short-Term Foreign Currency IDR at 'B'.

Art Woo, Director in Fitch's Asia-Pacific Sovereign Ratings group said the ratings and Stable Outlook reflect the success so far of efforts by Vietnam's authorities to tackle the macro-financial imbalances that arose in 2010 and 2011.

However, he said, despite recent signs of greater macroeconomic stability including lower inflation, a stronger current account position and a more stable dong exchange rate, further evidence that these improvements have become entrenched and reform of the banking and state-owned enterprise sector is needed to put upward pressure on Vietnam's sovereign ratings.

Since implementing fiscal and monetary tightening measures to restore macroeconomic stability under Resolution 11 in February 2011, Vietnam has made vital progress in taming inflation, it stated, citing that headline CPI inflation grew 10.5 percent year on year in April, down from a recent peak of 23 percent year on year in August 2011.

Fitch forecasts CPI inflation to average 10 percent in 2012, much lower than the 18.7 percent in 2011.

Resolution 11 also lent support to the current account position, which recorded a surplus to 0.2 percent of GDP in 2011 versus a deficit of 4 percent in 2010.

It should be noted that foreign-direct investments (FDI) have remained robust, totalling US$7.4bn in 2011 (6 percent of GDP).

These factors supported the improvement in the balance of payments and in turn foreign exchange reserves position, which has recently proven vulnerable to capital flight, particularly when economic stability has been under strain.

The success Vietnam has enjoyed in attracting FDI and the dynamism of its economy are significant sovereign rating strengths.

Vietnam's last reported official reserves, excluding gold, increased from US$12bn at end-2010 to US$14.1bn of the same period in 2011.

Fitch estimates that reserves may have reached US$16bn-17bn at end-March 2012, which roughly equates to 1.8 months of current external payments receipts. The increase illustrates the stabilisation of the macro economy and balance of payments, though import coverage of less than two months is low relative to rated peers.

Vietnam's banking sector remains a source of weakness and a constraint on the sovereign rating. The system is thinly-capitalised and asset quality is deteriorating. These risks are compounded by weaknesses in the quality of financial reporting and disclosure, including materially understating the level of non-performing loans which official figures indicate stood at 3.6 percent at the end of 2011.

Moreover, some smaller banks are still facing liquidity pressures as they expanded credit more rapidly than their deposit base. However, the authorities have recently stepped up efforts to pressure weaker banks to clear up bad debt and encourage consolidation.

The broader economic reform process is also taking shape as the new 2011-15 Socio-Economic Development Plan highlighted the need to transform public investment and state-own enterprises (SOEs).

However, no concrete action plan has been formulated and reform of SOEs and public investment is likely to be a gradual process. As a consequence, given the uncertain health of the SOE sector and low transparency, SOEs remain a large contingent liability for the sovereign.

Fitch said the ability to persist with Resolution 11 measures and in turn create a more balanced macroeconomic environment of lower inflation, stable GDP growth and a more stable balance of payments would be a positive development for Vietnam's sovereign ratings.

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