Bangkok--22 May--Standard & Poor's
-- Ratings on Vietnam reflect the country's low-income economy, developing financial system, and evolving policy framework.
-- Healthy growth prospects, reinforced by the government's persistent efforts in economic restructuring, and a modest level of external indebtedness partly offset these weaknesses.
-- We affirmed the 'BB/B' foreign currency and 'BB+/B' local currency ratings on Vietnam.
-- The negative outlook on the ratings reflects the risks to financial stability as Vietnam banks face an economic slowdown with weakened balance sheets.
Standard & Poor's Ratings Services said today it affirmed its 'BB/B' foreign currency and 'BB+/B' local currency sovereign credit ratings on Vietnam. The outlook on the long-term credit ratings remains negative. "The credit ratings on Vietnam reflect the country's low-income economy, developing financial system, and evolving policy framework," said Standard & Poor's credit analyst Kim Eng Tan. "These weaknesses increase the vulnerability of the economy to severe shocks that could significantly increase the public financial burden."
Healthy economic growth prospects, reinforced by the government's persistent efforts in economic restructuring, partly offset these weaknesses. A modest level of external indebtedness also supports the government's credit quality.
Developments since 2007 highlight the risks associated with Vietnam's credit weaknesses. Strong foreign capital inflow in 2007 and early 2008 was met with inadequate policy responses, which caused credit growth to accelerate from already high levels. By early 2008, this combination had led to clear signs of macroeconomic imbalances as inflation and trade deficit rose steeply.
"A strong policy response from the government prevented imbalances from developing into instability," Mr. Tan said. By April 2009, consumer price inflation has receded to below 10% and the trade account was in surplus for the first four months of this year.
The politically difficult steps taken to achieve this, as well as the continuing economic reforms implemented over this period, likely reassured investors, he added.
"Foreign direct investment remained very strong in 2008 and we expect it to contribute to maintaining Vietnam's trend annual economic growth at about 7%. We forecast this year's growth to be lower at 4% because of the global slowdown," Mr. Tan said.
The volatility of recent years, however, has weakened the banking sector's balance sheet. Nonperforming loans are expected to rise over the next one to two years, particularly at the newer and smaller banks that had seen the fastest lending growth. If the economic downturn is prolonged, financial pressure will mount to exacerbate asset quality deterioration.
The government may have to support the banks to preserve financial stability. This would damage the sovereign financial position by raising net general government debt significantly above the current level of close to 29% of GDP, Mr. Tan said.
RELATED RESEARCH
Full analysis on Vietnam, published Dec. 30, 2008, on RatingsDirect.
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Elena Okorotchenko, Singapore (65) 6239.6375
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