Fitch Affirms Vietnam at 'BB-'; Outlook Stable
KEY RATING DRIVERS
The affirmation of Vietnam's IDRs with a Stable Outlook reflects the following key rating drivers:
Vietnam's ratings balance its recent macroeconomic stabilisation and strong macroeconomic outlook against high public debt levels, sizeable budget deficits, and relatively weak structural indicators.
Fitch forecasts a 2015 budget deficit of 6.0% of GDP, compared with an estimated 6.2% of GDP in 2014 based on the agency's adjusted measure. The 2016 budget is currently under deliberation by the National Assembly. Fitch forecasts a modest fiscal consolidation in 2016 to 5.4% of GDP. This will be largely driven by a reduction in off-budget capital expenditure, as we expect the official State Budget deficit to remain broadly similar to 2015. Fitch does not anticipate a change in fiscal policy following the planned central leadership transition in 2016.
General government gross debt (GGGD) rose to an estimated 47.3% of GDP in 2014, higher than the 'BB' median of 42.8% of GDP, and up from 42.3% the year prior. Fitch expects GGGD to rise to 49.3% of GDP in 2015 and stabilise at about 50% of GDP as the authorities move towards achieving their stated medium-term fiscal objectives of reducing the official budget deficit to below 4% of GDP. The authorities have indicated that they will not seek to raise the public debt ceiling of 65% of GDP, which captures a broader measurement of public debts, including government guarantees.
Fitch deems Vietnam's refinancing risk as moderate, which balances high concessionary funding with a growing stock of marketable domestic debt at relatively short maturities. Domestic debt has a weighted average maturity of 4.3 years versus 12.8 years for external debt. Five-year domestic bond yields rose to 6.7% in October 2015 from 5.2% a year prior. Vietnam is expected to graduate from the World Bank's International Development Association programme at end-2017, which will require more market-based funding in the future.
Vietnam's macroeconomic growth performance has improved over the past year. Real GDP rose by 6.5% during the first nine months of 2015, up from 5.6% a year prior. Key drivers were final consumption (+9.1%) and gross capital formation (+8.1%), as net exports detracted from growth. Manufacturing continues to be the largest contributor to output growth, although construction and services also reported strong year-on-year increases.
Fitch expects Vietnam's current-account balance to narrow to 0.8% of GDP in 2015, following surpluses averaging 4.1% of GDP over the past four years. Imports have surged by 14.3% in value terms during the first ten months of 2015 versus export growth of 8.5%. This has resulted in a trade deficit of US\\$4.1bn in the year to October 2015 versus a surplus of US\\$2.4bn a year prior.
Foreign reserve coverage of 2.1x current-account payments remains low relative to the 'BB' median of 4.2x, and Fitch estimates the country depleted around 20% of its gross reserve stock in recent months to defend the exchange rate. This led to a 1% devaluation of the Vietnamese dong in September 2015 and a widening of the trading band from 2% to 3%. The devaluation was the third this year, following two separate 1% devaluations in January and May 2015, and an initial widening of the trading band from 1% to 2% in August.
Vietnam's banking sector continues to exhibit lingering asset-quality risks and poor transparency, but is showing preliminary signs of stabilisation. Fitch previously estimated that the true level of NPLs could be as high as 15%, but believes a recent pick-up in real-estate activity is likely to have increased the underlying collateral value of non-performing assets, which could lead to somewhat lower provisioning for banks. Property price indices suggest residential prices are now rising modestly following several years of stagnation.
Vietnam's medium-term growth prospects will be significantly enhanced should the Trans-Pacific Partnership (TPP) be successfully ratified by participating countries. The free-trade elements of the TPP will lower tariff barriers, giving Vietnam greater access to large consumer markets in the US, Japan, Canada and Australia. TPP signatories accounted for 39% of Vietnam's total exports and 23% of imports in 2014. An agreement in principal on a separate free-trade deal with the European Union (18% of total exports) will also lower tariff barriers and enhance access to another key export market.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.
The main factors that could lead to positive action, individually or collectively, are:
- A commitment to rein in fiscal deficits, contributing to an improved outlook for government debt ratios.
- Greater transparency about the size and risks surrounding contingent liabilities.
- Further progress in banking-sector reform.
The main factors that could lead to negative action, individually or collectively, are:
- A move away from a macroeconomic policy mix aimed at achieving macroeconomic stability, low and stable inflation, and external equilibrium.
- Depletion of foreign reserves in a sufficient scale to destabilise the economy.
- No escalation of regional or geopolitical disputes to a level that disrupt trade and financial flows.
- Global economic conditions remain broadly in line with Fitch's recent "Global Economic Outlook".