Property sector risks to Vietnam’s sovereign credit reduced: Fitch Ratings

Uncertainty has eased over the possible fallout for Vietnam’s sovereign credit from real estate sector stresses, Fitch Ratings said Tuesday.

However, there remains a risk of delays to broader policy implementation while reserve buffers against potential future external shocks have weakened, the international ratings firm cautioned.

Regarding the government’s 2022 crackdown on financing practices, which saw the tightening of regulations and the arrest of some well-known developers, Fitch said it considered the authorities’ commitment to tackling the emergent property-financing bubble a positive factor for financial stability.

It noted that a light regulatory touch had partly contributed to the rise in non-compliant underwriting practices among some realty developers’ bond issuers in 2018-2021.

As interest rates are cut, the stress associated with the realty sector has peaked, making the worse-case scenarios of some contingent liabilities migrating to the sovereign balance sheet much less likely.

The spike in local interest rates in 2022 was partly due to the domestic crackdown and a run-up in the policy interest rates in the U.S., Fitch said.

However, interest rates in Vietnam have fallen substantially so far this year as stresses related to the crackdown have eased. Besides, Vietnam ran down its foreign exchange reserves in 2022 to alleviate pressure on the Vietnamese dong in 2022, leading to the reserves falling from $112.2 billion in January 2022 to $85.9 billion in November 2022.

Though the use of foreign exchange reserves to reduce the market volatility is not an issue, the move has weakened Vietnam’s reserve buffer.

In May, Fitch Ratings affirmed Vietnam's long-term foreign-currency issuer default rating (IDR) at 'BB' with a positive outlook, reflecting favourably on the country’s medium-term growth prospects alongside 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.

Meanwhile, experts and industry insiders have said that Vietnam's real estate market can stage a recovery in 2024.

Vietnam's real estate market can recover and develop in a healthier and more transparent way from the second or third quarter of 2024, said Nguyen Van Khoi, chairman of the Vietnam National Real Estate Association (VNREA).

He based this assessment on legal improvements, positive economic growth prospects, synchronous and modern infrastructure development, digital transformation, and the application of Industry 4.0 technology.

Prominent property services firm Cushman & Wakefield also expected the ailing Vietnamese real estate market to pick up next year and rally in 2025 as it became a more institutional investor market.

“Foreign institutional investors are still keeping a close eye on the market, and we’ve received lots of inquiries from them,” Trang Bui, country manager of Cushman & Wakefield Vietnam, said at a press briefing in Ho Chi Minh City in June. “The credibility of foreign investors in the market still exists,” she said, noting the fact that Vietnam was emerging as a new global manufacturing hub with the presence of leading multinational corporations

Another predictor of real estate market recovery next year was Le Bao Long, director of strategy at Batdongsan.com.vn, a proptech business under Singapore's PropertyGuru.

He said the recovery could start from the first quarter of 2024 at the earliest. In the basic scenario, it will take between four and six quarters for initiatives to kick in and boost market recovery. The initiatives, related to interest rates, credit growth and policy adjustments were introduced in the first quarter of this year, the recovery can begin next year.