Moody's changes outlook on Vietnam's ratings to positive

Moody's said on Friday it has affirmed the Vietnamese government's B1 issuer and senior unsecured debt ratings and revised the outlook to positive from stable.

The positive outlook is based on Moody's expectations that strong foreign direct investment (FDI) inflows, fostered by ongoing economic reform, will continue to diversify the economy and enhance economic performance compared to rating peers.

“FDI allows Vietnam to diversify its economy and gain market share in international trade, contributing to prospects of sustained strong GDP growth,” the company commented.

Macroeconomic and external stability will be maintained, and in turn, strong growth and a stable macroeconomic environment will help stabilize government debt around current levels, according to the bond credit rating company.

Concurrently, Moody's has raised Vietnam's local-currency (LC) bond and deposit ceilings to Baa3 from Ba1.

The country's foreign-currency (FC) bond and deposit ceilings remain at Ba2 and B2, respectively.

In addition, the short-term FC bond and deposit ceilings were unchanged at "Not Prime.''

Ratings rationale

Vietnam's improving competitiveness and reform impetus have supported net FDI inflows averaging 5.2 percent of GDP between 2014 and 2016, higher than the B1-rated median of 3.6 percent, according to Moody’s.

The Southeast Asian country has also benefited from its entry into several free trade agreements in recent years, which have spurred the liberalization of the economy.

As a result of improvements to the investment climate, Vietnam's ranking rose to 60th out of 138 countries in the 2016-2017 World Economic Forum Global Competitiveness Index, up from 70th in 2013-2014, while its showing in the World Bank's Doing Business Indicators similarly rose to 82nd out of 190 countries in 2017 from 99th in 2014.

Robust FDI inflows have spurred gross fixed capital formation, allowing export growth to outperform regional and rating peers amidst slow global trade and lower commodity prices.

Vietnam has become a more important node in the regionally dispersed supply chain for electronics, especially for mobile phones, as foreign investments have helped to diversify the economy towards higher value-added manufacturing.

As a result, Vietnam has gained market share with its share of world exports nearly doubling to 1.2 percent in 2016 from 0.7 percent in 2013.

“With ongoing improvements to infrastructure, rapid growth in the population of working age, and the government's continued focus on reform to support FDI, we expect economic growth to remain robust at around 6.3 percent per annum through 2019, nearly twice as high as the B1-rated median of 3.3 percent,” Moody’s said.

Moody’s also explained that Vietnam's B1 issuer rating incorporates credit strengths, including the size and diversity of the country's economy and its robust growth performance relative to similarly-rated peers.

These strengths are balanced against low GDP per capita, as well as the vulnerabilities posed by wide fiscal deficits and the accumulation of debt over the past few years.

Nevertheless, sizeable financial support from official creditors at concessional terms has prevented a marked deterioration in debt affordability.

The banking system continues to pose prominent but manageable contingent risks. The recovery of domestic demand since 2015 has coincided with rapid credit growth, challenging a system still encumbered by poor capital adequacy and legacy non-performing loans.

Nevertheless, the benign inflation outlook and somewhat stricter underwriting standards as compared to previous credit booms mitigate financial stability risks.

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