The affirmation of Vietnam's long-term foreign-currency issuer default rating reflects the country’s continued strong medium-term growth prospects, despite the Covid-19 pandemic and the global economic spillovers, and strong external finance metrics relative to peers.
Fitch Ratings expects Vietnam’s GDP growth to accelerate to 6.1 per cent this year and 6.3 per cent in 2023 from 2.6 per cent in 2021, led by a recovery in domestic demand, strong exports and high FDI inflows, particularly in the manufacturing sector.
However, risks to the growth outlook remain, including the global economic implications of the war in Ukraine and sanctions on Russia, further pandemic-related shocks and high commodity prices.
Vietnam's economic prospects remain susceptible to shifts in external demand due to the economy's high degree of openness. However, the export sector is expected to continue to perform well into the medium term, benefitting from Vietnam's cost competitiveness, trade diversion from China and implementation of key trade agreements.
Last year, foreign-exchange reserves continued to improve, as the State Bank of Vietnam (SBV) intervened in the foreign-exchange market to stabilise the currency. Foreign-exchange reserves rose further to a record of $109 billion by end-2021, supported by large FDI inflows.
Fitch forecasts a gradual appreciation of the exchange rate, in line with its expectation of current account surpluses, although it expects the SBV to intervene in the case of excessive currency volatility or if the currency faces significant upward pressure.
Vietnam's large external buffers offer a cushion against shocks and support a strong external liquidity ratio, which was 340 per cent at end-2021, above the 175 per cent of the 'BB' median.
A package that was recently approved for disbursement over 2022 – 2023, equal to about 4 per cent of 2021 GDP, will lead to wider fiscal deficits of 4.8 per cent of GDP in 2022 and 4.2 per cent of GDP in 2023. The package includes measures such as tax cuts and deferrals to support firms, ensure social welfare and job creation, and enhance healthcare capacity.
The fiscal stimulus also includes a capex component worth about 2 per cent of 2022 GDP, which could support medium-term growth prospects, although there are risks over the government's implementation capacity.
Vietnam's low revenue base compared with that of its peers remains a weakness in the credit profile.
In addition, the pandemic has had a smaller impact on Vietnam's public finances than the 'BB' median, as early success in containing the pandemic allowed for a restrained fiscal response.
Vietnam's general government debt-to-GDP ratio will rise to about 42 per cent by 2023 from an estimated 39.7 per cent in 2021, based on the authorities' recently revised GDP data series. This is well below the 'BB' median of 54.5 pet cent in 2022 and 55.3 per cent in 2023.
“We think contingent liability risks from legacy issues at SOEs and banking-sector weakness remain a drag on the rating,” Fitch said. Explicit government guarantees fell to 3.8 per cent of GDP by end-2021 from 4.6 per cent in 2020, but institutional weaknesses continue to weigh on Vietnam's public finances.
“We believe the banking system remains subject to structural weaknesses, such as thin capitalisation and under-reporting of problem loans. The under-reporting is exacerbated by regulatory forbearance on pandemic-affected restructured loans, which is available until June 2022,” it noted.
