Singapore, August 10, 2018 — Moody’s Investors Service („Moody’s“) has today upgraded the Government of Vietnam’s long-term issuer and senior unsecured ratings to Ba3 from B1 and changed the outlook to stable from positive.
The upgrade to Ba3 is underpinned by strong growth potential, supported by increasingly efficient use of labor and capital in the economy. A long average maturity of government debt and a diminishing reliance on foreign-currency debt point to a stable and gradually moderating government debt burden, particularly if strong growth is sustained over time. The structure of Vietnam’s government debt also limits susceptibility to financial shocks. The upgrade also reflects improvements in the health of the banking sector that Moody’s expects to be maintained, albeit from relatively weak levels.
The stable outlook reflects balanced risks at the Ba3 rating level. While downside risks may arise from persisting weaknesses in the banking system or if the ongoing trade dispute between the US and China resulted in a sharp slowdown in global trade, there are upside risks from further improvements in debt affordability and better trade performance than we currently project.
Moody’s has also raised Vietnam’s long-term foreign currency (FC) bond ceiling to Ba1 from Ba2 and its long-term FC deposit ceiling to B1 from B2. The short-term FC bond and deposit ceilings remain unchanged at Not Prime. Vietnam’s local currency bond and deposit ceilings remain unchanged at Baa3.
RATIONALE FOR THE UPGRADE TO Ba3
STRONG GROWTH POTENTIAL AND ONGOING MOVE UP THE VALUE CHAIN SUPPORT ECONOMIC STRENGTH
Moody’s estimates that Vietnam’s growth potential is strong, at around 6.5%, supported by increasingly efficient use of labor and capital in the economy. Globally, strong growth potential tends to be associated with relatively low competitiveness. However, Vietnam’s economic strength combines high growth and high competitiveness as shown in the economy’s ongoing shift towards high value-added sectors.
With an average GDP growth rate of over 6% over the past decade, Vietnam has climbed up the manufacturing value chain within a short span of time, gaining competitiveness in the assembly of higher value-added electronic products – such as smartphones – while continuing to retain its comparative advantage in the export of labor-intensive goods, such as textiles and garments. Rising competitiveness and a further transition towards higher-value added industrial activity will support growth at high levels in the medium term. Moody’s projects GDP growth of 6.4% in 2018-2022, higher than the median for B1-rated sovereigns at 3.7%, and Ba-rated sovereigns at 3.5%.
Potential growth is supported by strong investment, including Foreign Direct Investment in high-value added manufacturing. As Vietnam continues to move up the value-chain and the contribution of the private sector to total value-added grows, Moody’s expects productivity growth to drive the economy’s growth potential.
Moreover, according to the World Economic Forum’s Global Competitiveness Index, Vietnam is much more competitive than most other Ba-rated or B-rated sovereigns. Moody’s expects Vietnam to retain relatively high competitiveness as the shift up the value chain gives room for relatively rapid income and wage increases.
One factor weighing on Vietnam’s economic strength is the economy’s reliance on credit. Demographic trends, including a sizeable share of working age population– with relatively higher spending power – in the overall population, and increasing urbanization have contributed to strong consumption and credit growth. Corporate debt is also relatively high and has been rising in recent years. Previous periods of rapid credit growth have weakened bank solvency and raised contingency risks for the sovereign. While Moody’s estimates that credit allocation has improved somewhat and poses lower risks to the sovereign, rapid credit growth sustained beyond the pace warranted by financial deepening trends raises the risk of a correction that would amplify the negative impact of an economic shock.
STRONG GROWTH STABILISES DEBT BURDEN; DEBT STRUCTURE LOWERS SENSITIVITY TO FINANCIAL SHOCKS
Sustained strong growth contributes to a stable and gradually moderating government debt burden over time. The structure of government debt enhances stability through its long average maturity and declining share of foreign-currency debt. These features mitigate Vietnam’s exposure to a potential sudden increase in the cost of debt and/or a sharp currency depreciation. Resilience of fiscal strength to financial shocks supports the Ba3 rating.
Fiscal deficits, which averaged 4.4% of GDP between 2008-17, have persistently been above the median for Ba- and B-rated sovereigns. However, deficits have narrowed since 2014. Going forward, Moody’s expects that deficits will hover around 4.0% of GDP. While the government is taking steps to shore up revenue, such as through some improvements in tax administration and amendments to natural resource and property taxes, Moody’s does not expect these measures to narrow the deficit markedly. Moreover, proceeds from sales of State Owned Enterprises equity stakes were sizeable in 2017, but are not likely to be as significant in the coming years as smaller, less profitable companies are privatized.
Combining deficits and growth trends, Moody’s expects that government debt will remain broadly stable around the current levels, at close to 52% of GDP in 2017, compared with a median level of 47% for Ba-rated sovereigns. The debt burden should gradually moderate after 2020.
Vietnam’s funding profile indicates that the government’s debt burden would be relatively stable in the face of financial shocks. To reduce reliance on foreign currency financing, the government has increasingly resorted to local currency bond issuance. By the end of 2017, the share of FX-denominated debt fell to around 40%, from 61% in 2011. The government has also benefited from a deepening of onshore capital markets and a shift in domestic investors‘ risk appetite towards longer duration assets, consistent with better-anchored inflation expectations. While Moody’s assumes that debt affordability will weaken somewhat as interest rates rise, an average maturity of government debt at close to 7 years significantly slows the transmission of a potential sudden rise in financing costs.
Contingent liabilities posed by State-Owned Enterprises (SOEs) could potentially raise the government’s debt burden. Some SOEs are likely financially weak and the government may need to bear a portion of their overall debt. However, Moody’s baseline expectations do not include a material crystallization of contingent liabilities, since at this point, the degree of support that may be provided is not likely to be substantial.
AN ABATEMENT OF BANKING SYSTEM RISKS, ALBEIT FROM RELATIVELY HIGH LEVELS
The rating upgrade to Ba3 also reflect somewhat lower risks to the sovereign’s creditworthiness from the banking sector.
In the past, rapid credit growth coupled with fragilities in the banking system resulted in destabilizing macro-financial conditions for the sovereign, and acted as a credit constraint. While Moody’s continues to view the banking system as the primary source of event risk, banking sector systemic risks have abated somewhat.
The improvements in the banking system are reflected in the rise in the average baseline credit assessment of Vietnamese banks to b2 from b3, that reflect improvements in asset quality, stabilizing capitalization, and recovering profitability for several banks. Non-performing loans moderated to 5.9% of total loans at end 2017 on average for Moody’s-rated banks, from 7.3% a year earlier. Write-offs and recoveries of problem assets, as well as an improvement in the quality of new credit have contributed to better asset quality.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody’s expectation that Vietnam’s credit metrics will be broadly stable in the next few years, with positive or negative shocks unlikely to significantly alter the current mix of credit strengths and challenges.
Sources of downside risks include remaining weaknesses in the banking system from still-weak profitability and capitalization for some state-owned banks, as well as the possibility that rapid credit growth starts to threaten macro-financial stability.
Downside risks also stem from a potential significant slowdown in global trade and disruptions of the regional production chain that would affect Vietnam’s large export sector, a scenario to which Moody’s currently assigns a low probability.
Vietnam has for the past decade employed an export-led growth strategy. While Moody’s baseline assumption is that global trade continues to grow at a relatively robust rate, regional trade flows could be more severely affected by the ongoing dispute between the US and China than Moody’s currently expects. As a very open economy, a significant slowdown in global trade potentially involving severe disruptions to Asia’s supply chains would have a marked and lasting negative impact on Vietnam’s GDP growth. In this scenario, and unless the government were able to offset the negative consequences for government revenue, the debt burden would rise further, undermining fiscal strength.
These sources of downside risks are balanced by upside risks to fiscal strength and creditworthiness from potential further improvements in debt affordability or a more positive impact of the baseline projections of strong growth than Moody’s currently expects.
FACTORS THAT COULD LEAD TO AN UPGRADE
An upgrade to Vietnam’s rating would likely result from: (1) an increased likelihood of material and sustained progress on fiscal consolidation that facilitates deficit reduction and a more marked decline in government debt; (2) a sustained improvement in the intrinsic financial strength of the banking system, such as through the continued clean-up of legacy problem assets, build-up of capital buffers, and improvements in transparency and governance that significantly diminishes contingent risks to the government and lowers macro-financial risks; (3) signs of improvement in institutional strength, including through a more effective policy framework and improvements in data transparency that raise the credibility and effectiveness of policy.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Downward pressure on Vietnam’s rating would result from: (1) a material and durable weakening in economic performance for instance either as a result of a prolonged trade slowdown or an erosion in competitiveness; (2) a reemergence of financial instability, leading to higher inflation, a rise in debt-servicing costs, and/or a worsening of the country’s external payments position; (3) signs of reversal of the current stabilization in the debt and deficit trajectory potentially partly as a result of a sizeable crystallization of contingent risks from either the banking system or State-Owned Enterprises.
GDP per capita (PPP basis, US$): 6,913 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.8% (2017 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -3.5%(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.9% (2017 Actual) (also known as External Balance)
External debt/GDP: 48.8% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 07 August 2018, a rating committee was called to discuss the rating of the Vietnam, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially increased. The issuer has become less susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.