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Fitch Revises Outlook for Vietnam to Positive; Affirms at 'BB-'
May 18, 2017 / 5:23 AM / 6 months ago

Fitch Revises Outlook for Vietnam to Positive; Affirms at 'BB-'

(The following statement was released by the rating agency) HONG KONG, May 18 (Fitch) Fitch Ratings has revised the Outlook on Vietnam's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the ratings at 'BB-'. The ratings on Vietnam's senior unsecured foreign- and local-currency bonds are also affirmed at 'BB-'. The Country Ceiling is affirmed at 'BB-' and the Short-Term Foreign-and Local-Currency IDRs at 'B'. KEY RATING DRIVERS Vietnam's ratings reflect strong growth performance and prospects, persistent current account surpluses, manageable debt service costs and sustained foreign direct investment inflows. The ratings also reflect a high public debt ratio, low foreign-exchange reserve buffers, macro-prudential and banking sector risks and some structural indicators being weaker than those of peers, including per capita income and human development standards. The revision of the Outlook to Positive reflects the following key rating drivers: Vietnam is building a record of policy-making focused on macroeconomic stability. This approach, which includes greater exchange-rate flexibility and an increasing focus on inflation stability, has supported consistently strong levels of foreign direct investment (FDI) and helped maintain robust economic growth. Vietnam's real GDP expanded by 6.2% in 2016, taking the five-year average real GDP expansion to 5.9%, against the 'BB' median of 3.4%. Growth remains supported by the country's export-oriented manufacturing sector and steady expansion in services, despite weakness in the mining and quarrying sectors from the ongoing oil and gas industry downturn. Fitch expects real GDP growth to improve gradually over the forecast period, to 6.3% in 2017 and 6.4% in 2018, supported by continued FDI inflows into the manufacturing sector and strong private consumption expenditure. Vietnam's foreign-exchange reserves continued to improve, rising to USD37.0 billion by end-2016, from USD28.6 billion at end-2015. This improvement was supported by the adoption of a new exchange-rate mechanism in early 2016, which aims at greater exchange-rate flexibility, alongside a strong current account surplus and continued robust FDI inflows. However, the new regime, in which the central bank sets a daily trading range on either side of the reference rate, could be tested in a stronger dollar environment that results in currency weakness among emerging economies dependent on foreign capital flows. Vietnam's 'BB-' rating also reflects the following key rating drivers: Government debt is above the 'BB' median and has continued to rise. Based on preliminary estimates of the authorities, government debt/GDP rose to 53.4% at end-2016, from 50.1% at end-2015. A broader definition of overall public debt that includes explicit government guarantees reached 63.7% at end-2016, just short of the official 65% debt ceiling. The authorities have reaffirmed their commitment to remain within the ceiling through fiscal measures and limits on guarantee issuance. Fitch expects the authorities to avoid breaching the debt ceiling using a combination of these measures. Proceeds from the 2016-2020 equitization programme could also help contain debt over the forecast period. Fitch estimates a decline in the 2016 fiscal deficit to 5.7% of GDP (on the agency's adjusted deficit, which is more closely aligned with Government Finance Statistics criteria), from 6.2% at end-2015 as fiscal revenues are estimated to have outperformed. The authorities have reinforced their commitment to lower deficit and debt levels under their 2016-2020 budget plan. Fitch expects the deficit to remain close to 5.7% of GDP over 2017-2018, absent major revenue reforms. Vietnam's rankings on a range of governance indicators have improved over the previous few years, including on all six dimensions of the World Bank's worldwide governance indicators from 2014 to 2015. Nevertheless, the country's ranking on the composite governance metric is at the 39th percentile, still below the 'BB' median's 50th percentile. On the Ease of Doing Business Index, Vietnam is close to the 'BB' median. Vietnam's per capita income and human development indicators remain weaker than the peer median: per capita income was USD2,172 at end-2016, ranking at the 37th percentile on the UN Human Development Index, compared with the USD5,058, or 58th percentile, for the 'BB' median. Vietnam's current account remains in surplus, averaging around 4% of GDP for the five years ending 2016. Although Vietnam's reserve coverage of current external payments is below that of its peers, at 2.3 months against 4.2 months of the 'BB' median, a still-high share of concessional debt supports its external liquidity position. External debt service as a percentage of current external receipts was 4.9% at end-2016, against the 'BB' median's 12.9%, although this advantage is likely to start declining in 2017 when Vietnam is scheduled to graduate from the World Bank's International Development Association eligibility criteria, leading to higher funding costs. The sovereign has been increasing its share of domestic debt financing to prepare for the reduced access to concessionary financing. Although Fitch's banking sector outlook for Vietnam is stable, some challenges remain. The agency believes the large stock of non-performing loans (NPLs) is likely to take time to resolve due to legal impediments, and the 2.5% reported system NPL ratio at end-2016 understates actual asset quality issues. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. We believe recapitalisation needs of the banking sector remain a risk for the sovereign. Further, while improving economic performance is likely to support lower NPL formation, a rapid and sustained increase in credit growth poses a risk to financial stability in the medium term. Overall credit growth at end-2016 was around 18% (2016 target: 18%-20%) and the official credit growth target for 2017 has been capped at 18%. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Vietnam a score equivalent to a rating of 'BB+' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its qualitative overlay (QO), relative to rated peers, as follows: - Public Finances: -1 notch to reflect relatively high contingent liability risks stemming from government guarantees for state-owned entities and potential banking sector recapitalisation costs. - Structural Features: -1 notch to reflect continued risks to macro-stability, including rapid credit growth and unresolved legacy issues in the banking sector. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that, individually or collectively, might lead to positive rating action are: - Maintenance of continued macroeconomic stability, low and stable inflation and a build-up of external buffers. - Greater confidence in the government's ability to achieve fiscal consolidation, resulting in a reduction in fiscal deficit and government debt. - Sustainable resolution of structural weaknesses in the banking sector. The main factors that could lead to negative rating action, individually or collectively, are: - A shift in the macroeconomic policy mix that results in macroeconomic instability, higher inflation and a rise in external imbalances. - Depletion of foreign-exchange reserves on a scale sufficient to destabilise the economy or deter foreign investment. - Crystallisation of contingent liabilities on the sovereign's balance sheet, which add to the government debt burden. KEY ASSUMPTIONS - Global economic assumptions are consistent with Fitch's latest <a href="">Global Economic Outlook. - No escalation of regional or geopolitical disputes to a level that disrupts trade and financial flows. Contact: Primary Analyst Sagarika Chandra Associate Director +852 2263 9921 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Andrew Fennell Director +852 2263 9925 Committee Chairperson Tony Stringer Managing Director +44 20 35301219 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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