Moody's: Strong FDI helps Vietnam diversify economy

Ratings agency releases latest annual credit analysis.

Moody’s Investors Service has said that Vietnam’s B1 rating and positive outlook reflect its expectation that strong foreign direct investment (FDI) inflows will continue to diversify the country’s economy compared with similarly rated peers.

Robust GDP growth continues, along with macroeconomic and external stability, a situation that is favorable for the stabilization of the government’s debt burden, the ratings agency added. Moody’s conclusions are contained in its recently-released annual credit analysis of the country.

The report elaborates on Vietnam’s credit profile in terms of “High -” Economic Strength, “Low +” Institutional Strength, “Moderate -” Fiscal Strength, and “High” Susceptibility to Event Risk.

The banking system remains an important rating constraint, however, and the recovery of domestic demand since 2015 has coincided with rapid credit growth, challenging a system still encumbered by poor capital adequacy and legacy non-performing loans.

Moody’s considers that Vietnam’s advances in competitiveness and reforms have in part been driven by the country’s entry into several free trade agreements over recent years. The economy has notable strengths in a range of sectors, including soft commodities, traditional labor-intensive manufacturing such as shoes and textiles, and, more recently, moderately high value-added manufacturing, which includes mobile phones and other electronics.

Moody’s projects Vietnam’s economic growth will increase in coming quarters, with full-year 2017 real GDP growth of 6.5 per cent, slightly below the government’s target of 6.7 per cent.

Improvements in the external environment have provided a boost to exports, which rose 16.4 per cent year-on-year in US dollar terms in the first four months of the year, up from 9.1 per cent for 2016 as a whole.

The country’s improving competitiveness and reform impetus have supported net FDI inflows, which averaged 5.2 per cent of GDP between 2014 and 2016; higher than the B1-rated median of 3.6 per cent.

A risk to Vietnam’s outlook for investment, exports, and GDP growth is the rising protectionism from key trading partners. A shift in US policies towards protectionism that significantly and durably lowers growth in global trade would affect Vietnam, given the economy’s reliance on trade.

Vietnam’s “Moderate -” fiscal strength incorporates a debt burden of around 50-55 per cent of GDP and high debt affordability. It also incorporates the deterioration in these metrics in recent years. Deficit consolidation is likely to progress only incrementally over the medium term but sufficiently to prevent a further increase in government debt from the 2016 level.

Public debt, which includes debt guaranteed by the government, reached 63.7 per cent of GDP in 2016, approaching the government’s own 65 per cent limit, prompting it to slow the issuance of new guarantees.

The “Low” government liquidity risks are because of moderate gross borrowing requirements and relatively low exposure to non-resident ownership of its market debt. Moreover, the government has established access to international markets, having issued several US dollar-denominated bonds over the past decade.

Finally, Vietnam’s “High” susceptibility to event risk continues to be driven by banking sector risk, which is considered the most severe among rated countries in the Asia-Pacific.

by Quang Huy / VET