Bangkok--4 Jun--Moody's Moody's Investors Service has changed to negative from positive the outlook on Vietnam's key ratings owing topolicy shortcomings in addressing inflationary and balance-of-payments pressures. The changed outlooks are for the Ba3 long-term government foreign- and local-currency ratings and the B1 foreign-currency bank deposit ceiling. "The economic imbalances now emerging are greater than anticipated, thereby derailing the improving trend previously evident in the country's credit fundamentals," says Tom Byrne, a Moody's Senior Vice President. "Rising inflation is proving very difficult to control, and pressures have rapidly built up on the balance of payments." Moody's further notes the government is facing greater-than-expected difficulty in ratcheting down inflation because overheated growth -- dueto excessive credit expansion and large "off-budget" development spending, and not just rising commodity prices -- is also a contributing factor. "For the authorities, the dilemma now is how to dampen growth without throwing the economy into recession or damaging the environment for FDI," says Byrne. The measured policy response originally taken was strengthened in May, especially towards reining in credit growth and stabilizing the deposit base of the banking system. The authorities recognize the challenges they face, and have expressed their intent to tighten further, if necessary. "The months ahead will test their resolve in dealing more effectively with inflation and the gaping current account deficit, but for now macroeconomic and balance-of-payments trends are unsustainable," adds Byrne. "Although Vietnam's apparently high level of official foreign exchange reserves is providing a buffer to the abrupt shift now seen in foreign portfolio investor sentiment, surging trade and current account deficits threaten to overwhelm the availability of more stable, long-term financing for the balance of payments, and may put substantial pressure on reserves and the exchange rate," says Byrne. However, Moody's notes Vietnam is facing these challenges against the backdrop of several strengths. Its accession to the WTO last year and the achievement of Permanent Normal Trade Relations with the US have led to a surge in exports and foreign direct investment. Overall export growth this year actually accelerated during January-April to 28% year on year,despite the slowdown in the US, Vietnam's largest market. Meanwhile, FDI amounted to more than 9% of GDP in 2007, essentially financing the country's current account deficit of that year. So far for 2008, during January-May, licensed approvals for investments more than doubled to $15 billion, but realized inflows lagged the sharper rise in the trade and current account deficits in the first quarter. In some respects Vietnam's credit fundamentals still compare favorably with those of other rated peers, and its long-term prospects will be favorable, if a stronger policy framework is put into place. "For the rating outlook to improve, we would need to see an end to high inflation, demonstrated stability in the banking system, and a decline in the current account deficit towards a level which can be financed bystable long-term capital inflows," says Byrne. "However, the unusual secrecy prevalent in the release on a timely basis of the international liquidity position of the State Bank of Vietnam adds difficulty in the assessment of Vietnam's external payments position, and undermines confidence in analyzing current credit conditions," adds Byrne. "Conversely, although ratings in the Ba category do not suggest any clear-and-present debt repayment concerns, the persistence of very high inflation and large current account deficits may overwhelm Vietnam's shock absorption capacity, and would likely add to downward pressure on the government's rating," says Byrne. Press releases on other affected issuers will follow separately. London Pierre Cailleteau Managing Director Sovereign Risk Unit Moody's Investors Service Ltd. JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454