Fitch Ratings affirms Vietnam at 'BB', outlook positive

Fitch Ratings has affirmed Vietnam's long-term foreign-currency issuer default rating (IDR) at 'BB', with a positive outlook.

“Vietnam's rating reflects its strong medium-term growth prospects, lower government debt compared to peers, and favorable external debt profile,” the agency said Friday in a release.

Issuer default ratings are assigned to corporations, sovereign entities, financial institutions such as banks, leasing companies and insurers, and public finance entities (local and regional governments).

Fitch Ratings said it expected growth of 7.4% for Vietnam in 2022, led by strong gains in industry, construction and services, and partly from base effects. High FDI in manufacturing should continue to support robust growth in the medium term. Downside risks remain, related to the economic implications of the Ukraine conflict and tighter global funding conditions.

The agency forecast a slowdown in Vietnam’s GDP growth to 6.2% in 2023. It predicted Vietnam could be vulnerable to external shocks due to the country’s high degree of trade openness.

However, it expects exports to keep performing well in the medium term, benefitting from Vietnam's cost competitiveness, trade diversion from China, and implementation of key trade agreements.

Vietnam’s exports grew by 17.3% year-on-year in the first nine months this year to more than $282 billion, according to government data.

As for Vietnam’s monetary policy, Fitch Ratings said the State Bank of Vietnam (SBV) has allowed for greater exchange rate flexibility, widening the trading band to 5% from 3% on October 17.

“We expect the exchange rate to remain under pressure, given the continued strength of the US dollar, and believe SBV will intervene in the case of excessive currency volatility.”

For Vietnam’s forex reserves, the agency expects the nation’s reserve coverage of current external payments to average about 2.7 months over 2022-2024. “Vietnam’s FX reserves have become under $100 billion, citing official figures, after rising to a record $109.8 billion at the end of 2021.”

Meanwhile, the country's external debt profile remains favorable, as its creditors are largely bilateral and multilateral. In addition, foreign investor holdings in the local currency government bond market are minimal, at 0.7% of the stock at the end of 2021.

“Despite the fall in FX reserves, Vietnam will remain a net external creditor in 2022-2024, a strength compared to the 'BB' median,” Fitch Ratings said.

It forecast that inflation in Vietnam will exceed the SBV's target in 2022 at an average of 4.3%, and remain at about 4% in 2023 and 2024, under its baseline.

The SBV has tightened its refinancing rate by one percentage point in September and another in October, to 6% from 4%.

Fitch Ratings said it did not anticipate another rate hike before the end of the year, but expected a further increase of the policy rate next year, by just 0.25 percentage points.

Vietnam's economic expansion can hit 7.2% this year and 6.7% next year, the highest in Southeast Asia, the World Bank said late this September. The WB’s East Asia & Pacific economic update revised up Vietnam’s GDP forecast from 5.8% in early June. It projected the country's CPI at below 4% this year, which is the SBV target.

In its October edition of Vietnam Macro Monitoring, the WB said the nation should be "ready to consider further tightening of monetary policy" to ensure inflation remains anchored amidst its strong economic recovery and global uncertainties.