S&P Global Ratings upgrades Vietnam economic outlook

Credit rating agency S&P Global Ratings has 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 S&P’s upgrade was based on Vietnam’s steady economic recovery prospects following the progressive lift of domestic and cross-border mobility restrictions, outstanding improvement in vaccination rates, and flexible shift in Covid-control policy.

The country also showed significant improvements in administrative processes. "The government has implemented rules to ensure timely repayments of guaranteed debt over the past two years," the credit rating agency stated in a release.

The strong external position and attractiveness of FDI inflows despite pandemic disruptions were also major factors for the upward revision.

The stable outlook reflects S&P’s expectations that Vietnam’s economy would continue to recover from the pandemic challenges over the next 12-24 months, supporting the external position and containing fiscal deficits.

The agency predicted Vietnam's real GDP growth of 6.9% in 2022, with a long-term trend of 6.5-7% from 2023 onward.

Vietnam's GDP per capita has risen quickly in recent years with a 10-year weighted average growth rate of around 5.7%, significantly higher than the average of the country's peers at a similar income level, according to S&P.

Macroeconomic stability along with competitive unit labor costs, improving educational standards, and constructive demographics imply continued growth in foreign direct investment and goods exports, even as the pandemic and an ongoing trade dispute between the U.S. and China add uncertainties to the external environment, the report noted.

"The Vietnamese government has generally delivered strong development outcomes in the past decade, strengthening strong social compact between the government and citizens."

On the fiscal front, S&P recognizes that Vietnam’s public finances have been stable despite pressures posed by the pandemic. The agency expects the fiscal deficit to exceed 4% over the next two years due to the implementation of a VND350 trillion ($15 billion) economic recovery program, but policy space remains sufficient.

However, rising inflation and financing conditions, as well as geopolitical risks could dampen global growth and reduce demand for Vietnamese exports.

S&P also noted a number of weaknesses that still exist in banking and institutional settings, as well as the rigid bureaucracies around public investments.

Vietnam’s Prime Minister Pham Minh Chinh on May 16, local time, met representatives from Standard & Poor's in Washington D.C. during his working trip to the U.S.

The PM said that Vietnam is working hard to build a safe, transparent, effective, and sustainable capital market, as well as solicited S&P's aid in credit rating Vietnamese firms.

ADB predicted that Vietnam's economy would improve in 2022, with growth reaching 5.5-6% and maybe higher in 2023. However, inflation is expected to rise substantially, probably to 3.8-4.2% in 2022 and maintain at 4% in 2023.

World Bank in April lowered Vietnam’s 2022 GDP projection to 5.3% due to challenges in terms of rising Covid-19 infections and the country’s vulnerability to external shocks driven by its high economic openness. This estimation is much lower than that of other international institutions.