Fitch affirms Vietnam at 'BB', outlook positive

Fitch Ratings on Wednesday affirmed Vietnam's long-term foreign-currency issuer default rating (IDR) at 'BB' with a positive outlook, reflecting the country’s favorable medium-term growth outlook, strong external liquidity, and lower government debt compared with the peer median.

“However, our growth forecasts remain subject to uncertainty related to ongoing stresses in the property sector and possible delays in policy implementation following a corruption crackdown,” the global credit rating agency said in a release.

Key rating drivers

Fitch Ratings said it expects Vietnam's growth to remain strong, supported by large foreign direct investment inflows.

“We forecast GDP growth of 5.7% in 2023 despite a slowdown in growth to 3.3% in Q1-2023, and 6.5% in 2024, driven by expansion in services and manufacturing.

“Inflationary pressure has subsided,” the firm said as May inflation slowed to 2.43% year-on-year after a peak of 4.9% in January.

Intervention by the State Bank of Vietnam (SBV) and capital outflows, partly reflected in large negative errors and omissions in the balance of payments, led to a sharp drop in reserves to $88 billion in 2022.

“We expect reserves to improve in 2024, with coverage of current external payments (import of goods and services, income payments and current transfer payments) averaging about 2.7 months,” Fitch wrote.

In the medium term, exports should improve Vietnam's cost competitiveness, trade diversion from China, and entry into key trade agreements. A current account surplus is forecast for 2023-2024, partly on a pick-up in tourism, which is at pre-pandemic levels.

Regarding government debt, Fitch forecast the general government debt/GDP ratio in Vietnam will stabilize at around 37% in 2023 and 2024, far below the 'BB' median. “We project Vietnam's budget deficit to narrow from 2024 after widening this year, as there is some upside to our expenditure forecast, including a possible hike in public-sector salaries.”

Vietnam has set fiscal targets to lower its budget deficit to at or below 3% of GDP and to keep government debt at or below 50% of GDP. The key elements of this strategy include broadening the value-added tax base, enhancing the capacity of tax authorities, simplifying import tariffs, and providing electronic and digital services to taxpayers. These measures could support government revenue over the medium-term, though in the near-term Vietnam's revenue ratio remains below the peer median, Fitch explained.

Contingent liability risks from legacy issues at state-owned enterprises, which still make up a significant share of GDP, and banking-sector weaknesses continue to drag on Vietnam's rating, the American firm added.

The country has a large financial sector, with assets of around 190% of GDP at the end of 2022. This, combined with high credit growth and structural weaknesses related to thin capitalization and opaque stressed problem-loan disclosures, is a rating constraint. Explicit government guarantees have, however, continued to decline, falling to 3.2% of GDP in 2022, from 3.8% in 2021.

Fitch also assessed the country’s property sector risks. It said these risks remain elevated amid a policy-driven crackdown targeting the financing practices of some developers. This included the October 2022 arrest of Truong My Lan, chairwoman of Van Thinh Phat Holdings Group for alleged illegal bond issuance, stoking deposit runs at some banks with perceived links to the group.

Bond issuance is an important source of finance for property developers in the country, according to Fitch. Some highly leveraged firms could face refinancing stresses as maturities fall due, and would be likely to turn to commercial banks to refinance maturing bonds. Many banks have not reduced real-estate lending or bond holdings significantly in Q1-2023, “suggesting that they will refinance qualified borrowers to avoid crystallizing wider defaults and losses,” it wrote.

The SBV has cut the discount and refinancing rates by 100 basis points, after hiking the rates by 200 basis points in last year’s second half.

“We view this move as a measure to support growth and lower the credit-market stress associated with the property sector.

“We expect the SBV to remain accommodative for the rest of the year, as it aims to support economic growth. We forecast inflation to remain within the SBV's 4.5% target and the bank has allowed greater exchange-rate flexibility, widening the daily trading band to +/-5%, from +/-3%,” Fitch said Wednesday.

Liquidity and interest rates in the banking system have eased in recent weeks, although loan growth remains subdued and was at a decade-low in this April.

Narrow spreads between Vietnamese dong and US dollar interest rates limit the extent by which policymakers can reduce banks' funding costs further, which have eaten into net interest margins, especially at smaller banks, according to the credit rating agency.

“The government and SBV's policies appear to aim to unclog liquidity flows. This includes encouraging credit and granting forbearance on bank regulations,” it said.

HSBC assessment

Vietnam is not out of the woods yet, HSBC Vietnam said in a report seen on the same day.

Despite no further deterioration in economic activity data in May, there is no clear sign that Vietnam is bottoming out amid intensifying headwinds to growth. Indeed, sluggish external data remains the biggest downside risk to growth, the HSBC report said.

Retail sales rose 11.5% year-on-year in May, indicating ongoing robust domestic consumption. In particular, tourism-related sales continued to support the domestic sector, with accommodation and ‘food and beverage’ sales growing 12.1% year-on-year.

Vietnam welcomed around 916,000 international tourist arrivals in May, bringing the total of foreign tourists to the country between January and May to about 4.6 million. In particular, tourists from mainland China have continued to rise, registering almost 147,000 in May.

HSBC noted that inflation in Vietnam has been consistently cooling down. Headline inflation momentum in the country remained flat in May, bringing year-on-year headline inflation to 2.4%.

“Indeed, moderating inflation is one of the reasons behind the SBV’s second rate cuts recently,” the bank wrote.

Vietnam's consumer price index in May was 0.01% higher than in April. The May CPI increased by 0.4% compared to December last year and 2.43% against May 2022.