Published on 27 Aug 2019.
RAM Ratings has revised from stable to positive the outlook on Vietnam’s respective gBB3(pi) and seaBB1(pi) global and ASEAN-scale ratings. “The positive outlook reflects the country’s fiscal consolidation efforts which led to narrower government deficit and debt ratios, as well as improvements in its external strength,” highlights Esther Lai, RAM’s Head of Sovereign Ratings. Vietnam’s relatively diversified economic and trade profile will continue to drive its robust growth. Ongoing reforms that have gradually strengthened institutional settings and contributed to a better business climate bode well for investors. These positives mitigate the slower than expected pace of divestment of state-owned enterprises (SOEs) and challenges in the banking sector.
While persistent fiscal deficits have resulted in growing debt levels, the government had successfully reined in its fiscal deficit to -4.0% of GDP in 2018 (2017: -5.1% of GDP) – the figure is expected to further decline in 2019. As a result, the government’s high public debt-to-GDP ratio fell to 58.4% in 2018, significantly lower than its peak of 63.7% in 2016 and the statutory public debt ceiling of 65% of GDP. “Fiscal prudence has helped the government streamline its expenditures and its previous track record of overspending had reversed in 2016,” adds Lai. For the past three years, actual expenditure has been consistently kept within the budget allocation owing to efforts to trim current expenditure. Despite the 7.2% upward adjustment to the basic monthly salary of civil servants in July 2019, the annual increase in administrative expenditure – between 6.4% and 8.4% over the last three years – is manageable compared to the pre-2016 trend of double-digit growth.
On the external front, Vietnam registered a current account surplus of 2.7% of GDP in 2018 (gBB-rated peer median: 0.3% of GDP) following sturdy garment and electronics exports. Foreign exchange reserves climbed to USD55.9 bil in 2018 (2016: USD36.9 bil) subsequent to the adoption of a more market-driven exchange rate in 2016. A decline in the external debt to GDP ratio is also viewed favourably, in line with a switch to domestic financing sources and the limit on external guarantees. Although downside risks to the external sector may intensify, Vietnam’s current account balance is projected to remain in surplus in 2019, reflecting its consistently strong trade balance and the continuous flow of FDI. While overall FDI in 1H 2019 was down 9.2% y-o-y due to a lumpy investment in June last year, FDI inflows from China had surged 411% y-o-y to USD1.6 bil, making up a 9% share.
Slower than expected SOE privatisation, limited progress in addressing their inefficiencies, and poor corporate governance and transparency highlight weak institutional capacities. The main reason behind the lag in the privatisation schedule is the difficulty in determining land and asset valuation. As the public sector has a strong presence in Vietnam, contingent risks are still substantial – the large number of SOEs accounts for a sizeable proportion of government tax revenue and economic activity.
The ratings may be adjusted upwards if we observe continuous improvements in government finances which lead to more sustainable public debt and fiscal deficit ratios, or a more resilient external position that enables Vietnam to better weather external vulnerabilities. A shift in the economic structure further up the value chain as business conditions advance could also lift the ratings. Conversely, negative rating action could be triggered by macroeconomic instability arising from abrupt changes to the policy environment, severe ebbs in capital flow, or a property or banking sector crisis requiring substantial recapitalisation that saddles the government with increased debt.
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Ratings on Vietnam