Fitch affirms Vietnam’s stable debt outlook

Hanoi (VNA) - Fitch Ratings has affirmed Vietnam's long-term foreign and local currency issuer default ratings (IDRs) at ‘BB-' with a stable outlook.

The issue ratings on the country's senior unsecured foreign- and local-currency bonds are also affirmed at ‘BB-'. The country ceiling is affirmed at ‘BB-' and the short-term foreign-currency IDR at ‘B'.

Fitch said in an online report late last week that Vietnam's ratings balance its strong macro-economic outlook against high public debt levels, sizeable budget deficits, and relatively weak structural indicators.

The agency forecasts a budget deficit of 6 percent of gross domestic product (GDP) for the country this year, compared with an estimated 6.2 percent of GDP last year based on the agency's adjusted measure.

While the 2016 budget is currently under deliberation by the National Assembly, Fitch forecasts a modest fiscal consolidation next year to 5.4 percent of GDP, with an expected reduction of off-budget capital expenditure.

General government gross debt (GGGD) rose to an estimated 47.3 percent of GDP in 2014, higher than the ‘BB' median of 42.8 percent of GDP, and up from 42.3 percent the year prior.

Fitch expects GGGD to rise to 49.3 percent of GDP in 2015 and stabilise at about 50 percent of GDP as the authorities move toward achieving their stated medium-term fiscal objectives of reducing the official budget deficit to below four percent of GDP.

The authorities have indicated that they will not seek to raise the public debt ceiling of 65 percent of GDP, which captures a broader measurement of public debts, including government guarantees.

Fitch deems Vietnam's refinancing risk as moderate, which balances high concessionary funding with a growing stock of marketable domestic debt at relatively short maturities.

Domestic debt has a weighted average maturity of 4.3 years versus 12.8 years for external debt. Five-year domestic bond yields rose to 6.7 percent in October 2015 from 5.2 percent a year prior.

Fitch expects the country's current-account balance to narrow to 0.8 percent of GDP this year, following surpluses averaging 4.1 percent of GDP over the past four years.

Imports have surged by 14.3 percent in value terms during the first 10 months of this year versus export growth of 8.5 percent. This has resulted in a trade deficit of 4.1 billion USD in the year to October 2015 versus a surplus of 2.4 billion USD a year prior.

Foreign reserve coverage at 2.1 times current-account payments remains low relative to the ‘BB' median of 4.2, and Fitch estimates the country depleted around 20 percent of its gross reserve stock in recent months to defend the exchange rate.

This led to a one-percent devaluation of the Vietnamese dong in September 2015 and a widening of the trading band from 2 percent to 3 percent.

Vietnam's banking sector continues to exhibit lingering asset-quality risks and poor transparency, but is showing preliminary signs of stabilisation.

Fitch previously estimated that the true level of non-performing loans (NPLs) could be as high as 15 percent, but believes a recent pick-up in real-estate activity is likely to have increased the underlying collateral value of non-performing assets, which could lead to somewhat lower provisioning for banks.

Vietnam's medium-term growth prospects will be significantly enhanced should the Trans-Pacific Partnership (TPP) be successfully ratified by participating countries, the agency said.

The free-trade elements of the TPP will lower tariff barriers, giving the country greater access to large consumer markets in the US, Japan, Canada and Australia.

TPP signatories accounted for 39 percent of Vietnam's total exports and 23 percent of imports last year.

An agreement in principal on a separate free-trade deal with the European Union, which represents 18 percent of Vietnam's total exports, will also lower tariff barriers and enhance access to another key export market.-VNA