The Vietnamese government’s positive credit profile reflects the economy’s robust growth trends, despite fragilities in the banking system and fiscal constraints, says Moody’s Investors Service in a report released on April 3.
Moody’s conclusions are contained in its credit analysis titled “Government of Vietnam B1 positive.” The analysis puts Vietnam’s economic strength at “high (-)”; institutional strength as “low (+)”; fiscal strength as “moderate (-)”; and susceptibility to event risk as “high (-)”.
The report constitutes an annual update to investors and is not a rating action.
Moody’s says that the economy’s robust growth trends are spurred in turn by the country’s increasing competitiveness and a rapid economic transition away from traditional sectors such as agriculture into manufacturing, and further up the value-added scale within these sectors.
The international rating agency expects that strong foreign direct investment (FDI) inflows will continue to diversify Vietnam’s economy and strengthen growth compared with similarly rated peers, thereby supporting stabilisation in the government’s debt burden.
Vietnam’s real gross domestic product (GDP) growth accelerated to 6.8 percent year-on-year in 2017, topping a 6.2 percent expansion in 2016, says Moody’s.
The agency also expects real GDP growth to remain robust, averaging 6.7 percent this year, roughly twice as high as the average for B-rated sovereigns of 3.6%, and supported by domestic consumption and strong investment growth on the back of public sector infrastructure development spending.
Rapid domestic credit growth has in part financed strong domestic demand, and continues to significantly outpace nominal GDP growth. Moody’s points out that while rapid credit growth presents risks to the banking system, it could also represent a degree of financial deepening.
Moody’s warns that high government debt levels and widening deficits act as a credit constraint, and as the Southeast Asian nation graduates from the World Bank’s International Development Association programme, its debt affordability may erode.
Nonetheless, Moody’s notes that a continued shift away from foreign currency financing indicates a deepening in domestic financial markets, which will reduce refinancing risks.
The drive to privatise State-owned enterprises (SOE) which the government refers to as equitisation remains a key policy priority, and has gathered momentum with successful stake sales in large SOEs, according to Moody’s. For example, Vietnam Beverage Co Ltd, a Vietnam-based unit of Thai Beverage Public Co Ltd, acquired a 53.59 percent stake in Saigon Beer, Alcohol and Beverage Corporation (Sabeco) late last year for over $4.8 billion, or at VND320,000 (US$14) a share.
Moody’s predicts that upward rating pressures could come from the passage of concrete measures that lead to a significant reduction in the government’s debt burden; and a further strengthening in the banking system and SOE sector that significantly diminishes contingent risks to the government and lowers macro-financial risks that could stem from boom-bust cycles.
Meanwhile, downward pressures could come from a re-emergence of macroeconomic instability leading to higher inflation, a rise in debt servicing costs, and/or a deterioration in the country’s external payments; a material and durable weakening in economic growth.
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