Rating Action Commentary
ֳ Revises Vietnam's Outlook to Positive, Affirms Rating at 'BB'
Thu 01 Apr, 2021 - 8:18 AM ET
ֳ - Hong Kong - 01 Apr 2021: ֳ has revised Vietnam's Outlook to Positive from Stable and affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB'.
Key Rating Drivers
The Positive Outlook reflects Vietnam's growth and public finances' resilience to the Covid-19 pandemic shock, and continued strengthening of external finances due to persistent current account surpluses and rising international reserves.
Vietnam was among the few economies in the Asia Pacific region and the 'BB' rating category to maintain positive growth in 2020, at 2.9%. The relative strength of Vietnam's performance was largely due to its success in bringing the coronavirus outbreak swiftly under control, despite the pandemic's impact on domestic economic activity and tourism inflows, alongside strong policy support and export demand. The rollout of Vietnam's vaccination programme is off to a slow start, but we nevertheless expect GDP growth of about 7% in 2021 and 2022, in line with a broader global economic recovery sustaining export growth and a gradual normalisation of domestic economic activity based on our expectation of continued success by the authorities in containing domestic coronavirus infections.
Vietnam's external finances have strengthened further despite the pandemic. Exports rose by about 7% in 2020 in US dollar terms, and the current account recorded a surplus of about 3.6% of GDP. Strong export performance reflects a surge in demand for high-tech components associated with strong sales of IT equipment in the US and other advanced economies as well as continued benefits of trade diversion, associated with rising costs in China and the US-China trade war. We forecast Vietnam's current account to remain in surplus at 1.2% and 2% of GDP in 2021 and 2022, respectively, compared with an average deficit of 1.7% for the 'BB' median.
Foreign-exchange reserves rose to USD95.2 billion by end-2020 likely due to a combination of factors, including a current-account surplus and foreign currency purchased by the State Bank of Vietnam (SBV). We project foreign-exchange reserves will continue to cover around 3.5 months of current external payments in 2021 and 2022, compared with a forecast 'BB' median of 5.2 and 4.7 months, respectively. Nevertheless, Vietnam's external liquidity ratio, measured by the ratio of the country's liquid external assets to its liquid external liabilities, also improved further to 388% in 2021, more than double the forecast of the 'BB' median.
The bulk of the strong FDI inflows in 2020 went into the manufacturing sector. Net FDI in 2020 was USD15.4 billion (about 4% of GDP), close to the previous year's level. We expect FDI inflows to stay healthy as Vietnam is likely to benefit from the ongoing trade diversion and also its entry into trade agreements such as the EU-Vietnam Free Trade Agreement and the Regional Comprehensive Economic Partnership.
Vietnam's economic prospects will remain susceptible to shifts in external demand due to the economy's high degree of openness. Vietnam was designated as a currency manipulator by the US Treasury in a report dated 16 December 2020, which complicates its economic relationship with the US. Nevertheless, we expect the two countries to engage in discussions in the coming months to reduce tensions, and in the near term, we do not expect this development to have a significant impact on Vietnam's external finances. Separately, we do not anticipate a rapid rebound of inbound tourism, an important driver of the economy, until well after 2021.
The pandemic had a smaller impact on Vietnam's public finances than 'BB' peers. We estimate the general government deficit widened modestly in 2020 to 3.5% of GDP (7.2% for the BB median), as spending was targeted mainly at alleviating the impact of the pandemic. Vietnam introduced a fiscal support package of VND292 trillion (about 3.6% of 2020 GDP), which included tax cuts and deferrals, and cash transfers to affected workers and households. We expect some of the government fiscal support measures to remain in place in 2021 and fiscal consolidation to begin from 2022.
General government debt remained stable at 38.5% of GDP in 2020 compared with the 'BB' median's 13pp increase to 59%. Vietnam's general government debt-to-GDP ratio will remain at about 39% in 2021 and 2022, still below the median for 'BB' rated sovereigns, under our baseline of primary deficits remaining around 2% and a rapid return to high growth. Vietnam's revenue base is low compared with that of peers. ֳ has based our calculations of the budget deficit and government debt ratios on the revised GDP series.
The 'BB' IDR also reflects the following key rating drivers:
In ֳ's view, contingent liability risks associated with legacy issues at large state-owned enterprises are a weakness for Vietnam's broader public finances. Government guarantees issued to state-owned entities, potential banking-sector recapitalisation costs and institutional weaknesses also weigh on public finances. As authorities are taking steps to control provision of guarantees, explicitly guaranteed government debt to GDP fell to about 4.2% in 2020 from 5.3% in 2019.
Structural weaknesses in the banking sector weigh on the sovereign rating. The capital-adequacy ratio of state-owned banks was around 9.5% at end-September 2020. The banking system's non-performing loans remain under-reported and asset quality is likely to be weaker than official data indicate, with loan forbearance on pandemic-related exposures likely underestimating the underlying deterioration in loan quality. These structural weaknesses in the banking sector, along with low capital buffers, have already dragged on the sovereign rating, though the improving economic outlook is likely to provide support to banking-system asset quality and profitability in the near term.
The SBV has eased policy rates since January 2020 by a cumulative 150-200bp cut. The exchange rate has remained generally stable against the US dollar. Vietnam's foreign-exchange reserves have been rising in recent years, providing the central bank some capacity to stabilise exchange-rate volatility. An adequate management of domestic liquidity derived from large capital inflows will help policy transmission and preserve macroeconomic stability improvements.
Vietnam's per capita income and human development indicators are weaker than those of peer medians. ֳ estimates per capita income was USD3,603 at end-2020, against the 'BB' median of USD5,009. Furthermore, Vietnam is in the 38th percentile on the UN Human Development Index, compared with the 'BB' median's 50th percentile. In the latest World Bank Governance Rankings, Vietnam's score improved on regulatory quality, voice and accountability, political stability and government effectiveness. However, the country's World Bank Governance Indicator ranking is in the 41st percentile, still below the peer median.
ESG - Governance: Vietnam has an ESG Relevance Score of '5' for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Vietnam has a medium ranking at the 41st percentile, reflecting a recent peaceful political transition, a moderate level of rights for participation in the political process, moderate institutional capacity, and a high level of corruption compared with peers.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- Macroeconomic Policy and Performance: Sustained high growth that reduces the GDP per capita gap vis-à-vis Vietnam's peers while maintaining macroeconomic stability.
- Public Finances: Further improvement in public finances, for example, through sustainable fiscal consolidation and debt stabilisation over the medium term, as well as a higher revenue base or a reduction in the risk of contingent liabilities.
- Structural: A material reduction in risks posed to the sovereign balance sheet from weaknesses in the banking sector, for instance, through improvements in capitalisation, transparency regarding asset quality and the regulatory framework
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- Macroeconomic: A deterioration in Vietnam's policy mix that creates risks for macroeconomic stability or leads to an increase in macroeconomic imbalances, for instance, resulting in a sustained decline in foreign-currency reserves.
- Public Finances: Crystallisation of contingent liabilities on the sovereign's balance sheet, which leads to a failure to stabilise government debt over the medium term.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Vietnam a score equivalent to a rating of 'BBB-' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Structural Factors: -1 notch to reflect structural weaknesses in Vietnam's large financial sector (about 162% of GDP) related to unresolved legacy issues in banks, weaker asset quality than official data indicate and low capitalisation.
- Public Finances: -1 notch to reflect relatively high contingent liability risks stemming from a large state-owned enterprise sector, including government guarantees for state-owned enterprises and potential banking-sector recapitalisation costs, as well as institutional weaknesses in public-finance management.
ֳ'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 LT FC IDR. ֳ'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.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [/site/re/10111579].
Key Assumptions
Global economic assumptions are consistent with ֳ's latest Global Economic Outlook.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Vietnam has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
Vietnam has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Vietnam has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.
Vietnam has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Vietnam, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v1.7.1 (1)
- Debt Dynamics Model, v1.2.1 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.12.1 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
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