Moody's upgrades Vietnam’s rating

Moody's has raised Vietnam's rating from Ba3 to Ba2, meaning outlook changed from positive to stable.

The upgrade reflects Vietnam’s growing economic strengths relative to peers and greater resilience to external macroeconomic shocks that are indicative of improved policy effectiveness, the credit rating agency stated in a release Tuesday.

Moody’s expects the outlook would continue as the economy benefits from supply chain reconfiguration, export diversification and continued inbound investment in manufacturing.

The rating also reflects a sounder fiscal footing backed by contained borrowing costs, a conservative approach to fiscal policy and improved government liquidity, driven by the ongoing transition from external concessional borrowing toward longer-dated, low-cost domestic market financing, the firm noted.

The increasing demand for Vietnamese exports through the coronavirus pandemic underpins the growing competitiveness of Vietnam’s manufacturing sector, which has "outperformed regional peers in the attraction of foreign direct investment (FDI) and has driven a rapid rise in per capita income."

Trade tensions between the U.S. and China, as well as the supply chain disruptions due to the waves of lockdowns within China, have accelerated manufacturing investment in Vietnam given the similarity of Vietnam’s exports compared with China’s among Asia-Pacific economies, along with an ample supply of relatively low-cost labor.

Disbursed foreign investment capital in Vietnam hit $12.8 billion in the year to August 20, a 10.5% rise year-on-year, Foreign Investment Agency (FIA) data shows.

Vietnam continues to be one of the top countries in Southeast Asia for FDI attraction, especially in the manufacturing sector, according to HSBC. The country has become a rising star in global supply chains, gaining a substantial global market share in many sectors including textiles, footwear, and consumer electronics, the bank noted in a report.

At a Forbes Vietnam forum in August, economist Brian Lee Shun Rong at Maybank, Malaysia's largest financial services group, also called Vietnam "a rising star in the global supply chain".

Moody's expects Vietnam's centrality to multiple regional and bilateral trade agreements to affirm its entrenched position in global value chains.

Vietnam is a party to the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and bilateral free trade agreements (FTAs) with South Korea, and more recently, with the EU and the UK.

These trade agreements will strengthen Vietnam’s competitive position in lower-value products such as footwear, garments and agricultural goods, while placing it firmly in higher-value-added regional tech supply chains for smartphones, computers and other electronic products, according to the credit rating agency.

On the downside, Moody’s stressed that the relatively low capitalization levels of state-owned banks coupled with high domestic credit growth and potential risks from the real estate sector pose risks to the real economy in the event of a shock.

Uncertainties relating to regional and global geopolitical tensions, higher imported input prices and uncertain growth prospects in Vietnam’s key trading partners may also pose limits to external surpluses for Vietnam’s trade-reliant economy.

"Structural risks to this economic trajectory may emerge over the next 5-10 years as the existing stock of port, airport, electricity and railways infrastructure and the working age population, which will peak around 2035, may be insufficient to absorb large-scale shifts in supply chains to Vietnam from China and other higher-wage locations of production," it said.

Moody’s expects the authorities to seek to address these challenges through investment in education and worker training to support higher productivity and employment in higher value-added activities, while targeting inflows of FDI into sectors and activities that lead to greater direct spillovers to domestic suppliers.

S&P Global Ratings on May 26 revised up Vietnam’s long-term sovereign credit rating to BB+, a "stable" outlook. Vietnam is one of only two economies in the Asia-Pacific region to have been upgraded since the beginning of the year, the other being Taiwan.

The move comes on the back of the country's strong economic recovery prospects following the progressive lift of domestic and cross-border mobility restrictions, outstanding improvement in vaccination rates, and flexible shift in Covid-containment policy.

The World Bank on August 8 upped its Vietnam GDP growth estimate to 7.5% for the year, much higher than the 5.8% it forecast early June. Investment management firm VinaCapital expects the country’s GDP to grow at least 10% in the third quarter and 7.5% the whole year.