Fitch Ratings today affirmed the Long-term foreign and local currency Issuer Default ratings (IDRs) of Vietnam at 'BB-'and 'BB', respectively. At the same time, the agency also affirmed the Short-term foreign currency IDR at 'B' and the Country Ceiling at 'BB-' (BB minus). The Outlook on the ratings remains Stable.
Despite weak public finances and the need for further banking system reforms, Vietnam's improving external financial position and sustainable economic growth continue to support its sovereign ratings.
"Vietnam's rating strengths are based on the country's net external creditor status and declining gross external debt relative to GDP," said Vincent Ho, associate director of Fitch's Asia Sovereign Ratings team in Hong Kong.
"Continuous fiscal deficits, rising general government debt relative to GDP and the vulnerable banking system remain the major rating constraints," Ho added.
Vietnam's strong external sector performance has allowed for a steady accumulation of foreign exchange reserves.
Relative to reserves, the country's gross external financing requirement and international liquidity ratios are stronger than the 'BB' peer group median.
The increase in reserves has been driven mainly by private remittances and net foreign direct investment (FDI) inflows.
In addition, gross external debt fell to about 30 percent of GDP in 2006, which was the lowest for the past decade. For the first time, Vietnam became a net external creditor in 2006 and Fitch expects this to be sustained in the medium-term.
The country's "renovation" policy towards a market-based economy has proven to be a success. During 1996-2006, the average economic growth rate was 7.3 percent per annum, which was second only to China in the region.
Strong growth and the country's favorable investment climate have been attracting large FDI capital inflows. In 2006 FDI inflows were estimated at USD2.4 billion. With its accession to the WTO, Fitch believes Vietnam's external sector will continue to grow and strengthen its external financial position.
The transformation of the Development Assistance Fund into the Vietnam Development Bank and the introduction of sounder regulations have led to reductions in policy lending activities and the dominance of state-owned commercial banks (SOCBs).
For the system as a whole, non-performing loans relative to total loans have been falling. Even so, SOCBs still account for 75% of system assets, and limited foreign participation suggests the evolution towards a more internationally competitive banking system will take time. Fitch believes the equatization of the SOCBs could help to expedite the needed changes.
In addition to the weaknesses in the banking system, continuous general government fiscal deficits (including grants, off-budget investments and on-lending) and rising debt relative to GDP are major rating constraints.
Source: Thanh Nien
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