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Fitch Upgrades Vietnam to 'BB'; Outlook Stable
14 MAY 2018 9:01 PM ET
Fitch Ratings-Hong Kong-14 May 2018: Fitch Ratings has upgraded Vietnam's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB-'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The upgrade of the IDRs reflects the following key rating drivers:
Vietnam's track record of policy-making focused on strong macroeconomic performance has been improving. GDP growth accelerated to 6.8% in 2017 from 6.2% in 2016 supported by the export-oriented manufacturing sector and continued growth in services. Vietnam's five-year average real GDP growth at end-2017 was 6.2%, far above the 'BB' median of 3.4%. We expect growth of 6.7% in 2018 in line with the growth target set by the National Assembly, supported by strong inflows of foreign direct investment (FDI), continued expansion in manufacturing and an increase in private consumption expenditure. FDI inflows remained strong in 2017, especially into the manufacturing sector, with registered FDI increasing by around 40% from the previous year to USD21.3 billion. As such, Vietnam would remain among the fastest-growing economies in the Asia-Pacific region, and fastest among 'BB' rated peers.
Vietnam's external buffers have improved, with its foreign-exchange reserves in 2017 rising to USD49 billion (around 2.5 months of external current payments, CXP), from USD37 billion at end-2016, supported by large capital inflows and a current account surplus. The improvement was facilitated by the authorities' adoption of a flexible exchange-rate mechanism in January 2016. Although the new exchange-rate mechanism could be tested in a stronger dollar environment, the rise in foreign-exchange reserves provides a cushion against external shocks. We project foreign-exchange reserves to rise to around USD66 billion by end-2018, equivalent to a reserve coverage of 3.1 months of CXP.
Strong capital inflows and unsterilised reserve accumulation have led to a build-up in liquidity in the banking system. As evidence, five-year domestic government bond yields have declined by about 150bp since the end of 2017 to around 2.6% at present. The abundant liquidity could exacerbate volatility in Vietnam's financial markets, especially against the backdrop of tighter global monetary conditions and rapid domestic credit growth.
The authorities have maintained their commitment to containing debt levels and reforming state-owned enterprises. Gross general government debt (GGGD), as calculated by Fitch, declined to 52.4% of GDP in 2017 from 53.4% in 2016, based on preliminary official estimates, while outstanding government guarantees fell to 9% of GDP by end-2017 from 10.3% at end-2016. As a result, Vietnam's public debt (general government debt including guarantees) declined to 61.4% of GDP by end-2017 down from 63.6% at end-2016, and remained below the authorities' debt ceiling of 65% of GDP. The decline in public debt was facilitated by inflows from privatisation proceeds (or "equitization receipts"), close to the target for the year. The privatisation (" or equitization") programme for 2016-20 aims to raise revenues of VND250 trillion.
According to Fitch debt and deficit calculations, which are more closely aligned with the Government Finance Statistics (GFS) standard of accounting, general government debt is likely to fall further and to decline to under 50% of GDP by 2019, aided by proceeds under the privatisation (or "equitization") programme. The authorities remain committed to bringing down the deficit and debt levels under their 2016-2020 budget plan. We expect the budget deficit in 2018 (according to our adjusted deficit, which is closer to GFS criteria) to narrow to around 4.6% of GDP from around 4.7% in 2017.
The 'BB' IDR also reflects the following key rating drivers:
Vietnam's banking sector remains structurally weak and weighs heavily on the sovereign rating. We believe banking system non-performing loans remain under-reported and true asset quality is likely to be weaker than stated, and the agency expects it will be more adequately addressed over the longer term.
We believe that recapitalisation needs of the banking sector remain a risk for the sovereign. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. Further, while improving economic performance is likely to support lower NPL formation, a sustained rapid credit growth poses a risk to financial stability in the medium term. Overall credit growth at end-2017 was around 18%, in line with authorities' target. The official credit growth target for 2018 is currently 17%.
Despite lower government debt levels, the risk of contingent liabilities arising from legacy issues at large state-owned enterprises still remains a weakness for Vietnam's broader public finances given the still-large role of the state in the economy. Although the number of wholly owned state-owned enterprises (SOEs) has been declining under the privatisation programme, it was still significant at 505 at end-2017. Government guarantees for state-owned entities and potential banking sector recapitalisation costs continue to weigh on Vietnam's public finances.
External debt sustainability metrics remain favourable. A high share of concessional debt in total external debt is a strength of Vietnam's external finances. External debt service as a percentage of current external receipts (CXR) was 4.7% as against 12.1% of the 'BB' median. However, given the rise in per capita income levels, Vietnam graduated from eligibility for concessional financing under the World Bank's International Development Association in 2017.The sovereign has been increasing its share of domestic debt financing to prepare for the reduced access to concessionary financing, which would increase funding costs.
Vietnam's liquidity ratio of 214% is far stronger than the 'BB' median of 164.8%, reflecting the concessional element of its external debt. This helps to offset its low foreign-exchange reserve cover of CXP relative to the 'BB' median.
Vietnam's per capita income and human development indicators remain weaker than the peer median. Per capita income was USD2,335 at end-2017 as against the 'BB' median of USD5,884. Further, it fell in the 39th percentile on the UN Human Development Index as against the 58th percentile for the 'BB' median. Vietnam's ranking on the World Bank's worldwide governance indicators improved further, on political stability and rule of law. However, the country's ranking on the composite governance metric is at the 41st percentile, still below the 'BB' median of 48th percentile. On the Ease of Doing Business Index, however, Vietnam ranks in the 65th percentile, above the 'BB' median of the 57th percentile.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Vietnam a score equivalent to a rating of 'BBB-' 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 QO, relative to rated peers, as follows:
- Structural Factors: -1 notch to reflect risks to macro stability, including rapid credit growth and unresolved legacy issues in the banking sector.
- Public Finances: -1 notch to reflect relatively high contingent liability risks stemming from government guarantees for state-owned enterprises and potential banking sector recapitalization costs.
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 Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are balanced.
The main factors that, individually or collectively, could trigger positive rating action are:
- Sustainable resolution of the structural weaknesses in the banking sector.
- Commitment to policy-making that entrenches macroeconomic stability, including inflation stability and a further build-up of external buffers.
- Broader improvement in public finances through a sustained decline in general government debt or contingent liabilities.
The main factors that, individually or collectively, could trigger negative rating action are:
- A shift in the macroeconomic policy mix that results in macroeconomic instability, increased overheating risks, higher inflation and 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 Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR upgraded to 'BB' from 'BB-'; Outlook Stable
Long-Term Local-Currency IDR upgraded to 'BB' from 'BB-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling upgraded to 'BB' from 'BB-'
Issue ratings on long-term senior unsecured foreign-currency bonds upgraded to 'BB' from 'BB-'
Issue ratings on long-term senior unsecured local-currency bonds upgraded to 'BB' from 'BB-'
14 MAY 2018 9:01 PM ET
Fitch Ratings-Hong Kong-14 May 2018: Fitch Ratings has upgraded Vietnam's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB-'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The upgrade of the IDRs reflects the following key rating drivers:
Vietnam's track record of policy-making focused on strong macroeconomic performance has been improving. GDP growth accelerated to 6.8% in 2017 from 6.2% in 2016 supported by the export-oriented manufacturing sector and continued growth in services. Vietnam's five-year average real GDP growth at end-2017 was 6.2%, far above the 'BB' median of 3.4%. We expect growth of 6.7% in 2018 in line with the growth target set by the National Assembly, supported by strong inflows of foreign direct investment (FDI), continued expansion in manufacturing and an increase in private consumption expenditure. FDI inflows remained strong in 2017, especially into the manufacturing sector, with registered FDI increasing by around 40% from the previous year to USD21.3 billion. As such, Vietnam would remain among the fastest-growing economies in the Asia-Pacific region, and fastest among 'BB' rated peers.
Vietnam's external buffers have improved, with its foreign-exchange reserves in 2017 rising to USD49 billion (around 2.5 months of external current payments, CXP), from USD37 billion at end-2016, supported by large capital inflows and a current account surplus. The improvement was facilitated by the authorities' adoption of a flexible exchange-rate mechanism in January 2016. Although the new exchange-rate mechanism could be tested in a stronger dollar environment, the rise in foreign-exchange reserves provides a cushion against external shocks. We project foreign-exchange reserves to rise to around USD66 billion by end-2018, equivalent to a reserve coverage of 3.1 months of CXP.
Strong capital inflows and unsterilised reserve accumulation have led to a build-up in liquidity in the banking system. As evidence, five-year domestic government bond yields have declined by about 150bp since the end of 2017 to around 2.6% at present. The abundant liquidity could exacerbate volatility in Vietnam's financial markets, especially against the backdrop of tighter global monetary conditions and rapid domestic credit growth.
The authorities have maintained their commitment to containing debt levels and reforming state-owned enterprises. Gross general government debt (GGGD), as calculated by Fitch, declined to 52.4% of GDP in 2017 from 53.4% in 2016, based on preliminary official estimates, while outstanding government guarantees fell to 9% of GDP by end-2017 from 10.3% at end-2016. As a result, Vietnam's public debt (general government debt including guarantees) declined to 61.4% of GDP by end-2017 down from 63.6% at end-2016, and remained below the authorities' debt ceiling of 65% of GDP. The decline in public debt was facilitated by inflows from privatisation proceeds (or "equitization receipts"), close to the target for the year. The privatisation (" or equitization") programme for 2016-20 aims to raise revenues of VND250 trillion.
According to Fitch debt and deficit calculations, which are more closely aligned with the Government Finance Statistics (GFS) standard of accounting, general government debt is likely to fall further and to decline to under 50% of GDP by 2019, aided by proceeds under the privatisation (or "equitization") programme. The authorities remain committed to bringing down the deficit and debt levels under their 2016-2020 budget plan. We expect the budget deficit in 2018 (according to our adjusted deficit, which is closer to GFS criteria) to narrow to around 4.6% of GDP from around 4.7% in 2017.
The 'BB' IDR also reflects the following key rating drivers:
Vietnam's banking sector remains structurally weak and weighs heavily on the sovereign rating. We believe banking system non-performing loans remain under-reported and true asset quality is likely to be weaker than stated, and the agency expects it will be more adequately addressed over the longer term.
We believe that recapitalisation needs of the banking sector remain a risk for the sovereign. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. Further, while improving economic performance is likely to support lower NPL formation, a sustained rapid credit growth poses a risk to financial stability in the medium term. Overall credit growth at end-2017 was around 18%, in line with authorities' target. The official credit growth target for 2018 is currently 17%.
Despite lower government debt levels, the risk of contingent liabilities arising from legacy issues at large state-owned enterprises still remains a weakness for Vietnam's broader public finances given the still-large role of the state in the economy. Although the number of wholly owned state-owned enterprises (SOEs) has been declining under the privatisation programme, it was still significant at 505 at end-2017. Government guarantees for state-owned entities and potential banking sector recapitalisation costs continue to weigh on Vietnam's public finances.
External debt sustainability metrics remain favourable. A high share of concessional debt in total external debt is a strength of Vietnam's external finances. External debt service as a percentage of current external receipts (CXR) was 4.7% as against 12.1% of the 'BB' median. However, given the rise in per capita income levels, Vietnam graduated from eligibility for concessional financing under the World Bank's International Development Association in 2017.The sovereign has been increasing its share of domestic debt financing to prepare for the reduced access to concessionary financing, which would increase funding costs.
Vietnam's liquidity ratio of 214% is far stronger than the 'BB' median of 164.8%, reflecting the concessional element of its external debt. This helps to offset its low foreign-exchange reserve cover of CXP relative to the 'BB' median.
Vietnam's per capita income and human development indicators remain weaker than the peer median. Per capita income was USD2,335 at end-2017 as against the 'BB' median of USD5,884. Further, it fell in the 39th percentile on the UN Human Development Index as against the 58th percentile for the 'BB' median. Vietnam's ranking on the World Bank's worldwide governance indicators improved further, on political stability and rule of law. However, the country's ranking on the composite governance metric is at the 41st percentile, still below the 'BB' median of 48th percentile. On the Ease of Doing Business Index, however, Vietnam ranks in the 65th percentile, above the 'BB' median of the 57th percentile.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Vietnam a score equivalent to a rating of 'BBB-' 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 QO, relative to rated peers, as follows:
- Structural Factors: -1 notch to reflect risks to macro stability, including rapid credit growth and unresolved legacy issues in the banking sector.
- Public Finances: -1 notch to reflect relatively high contingent liability risks stemming from government guarantees for state-owned enterprises and potential banking sector recapitalization costs.
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 Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are balanced.
The main factors that, individually or collectively, could trigger positive rating action are:
- Sustainable resolution of the structural weaknesses in the banking sector.
- Commitment to policy-making that entrenches macroeconomic stability, including inflation stability and a further build-up of external buffers.
- Broader improvement in public finances through a sustained decline in general government debt or contingent liabilities.
The main factors that, individually or collectively, could trigger negative rating action are:
- A shift in the macroeconomic policy mix that results in macroeconomic instability, increased overheating risks, higher inflation and 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 Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR upgraded to 'BB' from 'BB-'; Outlook Stable
Long-Term Local-Currency IDR upgraded to 'BB' from 'BB-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling upgraded to 'BB' from 'BB-'
Issue ratings on long-term senior unsecured foreign-currency bonds upgraded to 'BB' from 'BB-'
Issue ratings on long-term senior unsecured local-currency bonds upgraded to 'BB' from 'BB-'
