VINACHEM

Fitch Ratings has affirmed Viet Nam'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 Viet Nam'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 per cent of gross domestic product (GDP) for the country this year, compared with an estimated 6.2 per cent 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 per cent of GDP, with an expected reduction of off-budget capital expenditure.

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

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

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

Fitch deems Viet Nam'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 per cent in October 2015 from 5.2 per cent a year prior.

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

Imports have surged by 14.3 per cent in value terms during the first 10 months of this year versus export growth of 8.5 per cent. This has resulted in a trade deficit of US$4.1 billion in the year to October 2015 versus a surplus of $2.4 billion 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 per cent of its gross reserve stock in recent months to defend the exchange rate.

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

Viet Nam'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 per cent, 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.

Viet Nam'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 per cent of Viet Nam's total exports and 23 per cent of imports last year.

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