Fitch has upgraded the long-term foreign-currency issuer default rating for Vietnam to BB from BB- with a stable outlook.
Vietnam's record of policy-making focused on strong macro performance is improving, and the authorities are committed to containing debt levels and reforming state enterprises, says Fitch. The rating agency expects the budget deficit in 2018 to narrow to around 4.6% of GDP from 4.7% in 2017. External debt sustainability metrics remain favourable.
GDP growth accelerated to 6.8% in 2017 from 6.2% in 2016, supported by export-oriented manufacturing and continued growth in services. Vietnam's five-year average real GDP growth at end 2017 was 6.2%, above the BB median of 3.4%. It sees growth of 6.7% in 2018 in line with the growth target set by the National Assembly, supported by FDI inflows, continued expansion in manufacturing and an increase in private consumption. Vietnam should remain among the fastest-growing economies in the region, and fastest among BB peers.
Vietnam's external buffers have improved, with forex reserves in 2017 rising to US$49 billion (circa 2.5 months of external current payments), from US$37 billion at end 2016, buttressed by capital inflows and a current account surplus. The improvement was facilitated by the adoption of a flexible exchange-rate mechanism in January 2016. Although this could be tested in a stronger dollar environment, the rise in reserves provides a cushion.
Strong capital inflows and unsterilized reserve accumulation have led to a build-up in liquidity in the banking system. Five-year domestic government bond yields have declined by about 150bp since end 2017 to around 2.6%. Bumper liquidity could exacerbate volatility amid tighter global monetary conditions and rapid domestic credit growth.
The BB IDR also reflects: 1) Vietnam's banking sector is structurally weak, with NPLs likely under-reported and asset quality below estimates. 2) A banking sector recapitalisation remains a sovereign risk. 3) Structural weaknesses remain (thin capital buffers, weak profitability). 4) While the solid economy should cap NPL formation, sustained rapid credit growth could dent financial stability in the medium term. Despite lower government debt levels, guarantees for state-owned entities and potential banking sector recapitalisation costs continue to weigh on public finances.