Vietnam must tread carefully to win investment grade, Fitch says

Motorists and pedestrians pass a construction site of a metro line in Ho Chi Minh City, Vietnam, on Thursday, Jan 11, 2018. (Bloomberg pic)

HANOI: Vietnam mustn’t sacrifice stability for high-speed growth if it’s to become an investment-grade economy, warned Fitch Ratings.

The rating company wants evidence that macroeconomic stability is more entrenched before considering further upgrades for Vietnam, said Stephen Schwartz, head of sovereign ratings in Asia Pacific for Fitch, which last month lifted the nation’s credit score to BB. Fitch is also monitoring efforts to address the economy’s structural weaknesses, including the reform of state-owned enterprises and management of non-performing loans.

“The challenge for policies will be to sustain high economic growth without sacrificing the gains made in macro stability, which were the basis for our recent rating upgrade,” Schwartz said in an interview in Hanoi. “The government is aware of and making progress in the key areas of structural weaknesses and challenges.”

Vietnam won a sovereign rating upgrade from Fitch in May on rising foreign-exchange reserves and strong growth, putting the nation’s long-term, foreign currency-denominated debt two notches away from investment-grade.

Vietnam has one of the world’s fastest-growing economies after annual expansion accelerated to 7.4% in the first quarter, the most since at least 2005. The government wants to maintain fast growth while keeping inflation under control, recently taking measures including subsidizing rising fuel costs and telling ministries not to increase electricity prices.

“In the environment of the global monetary tightening, the central banks in Vietnam and around the region need to stay vigilant,” said Schwartz.

Fitch on Vietnam:
We expect “some degree of monetary tightening from the central bank in the near term, either through open-market-operations or through policy interest rate hikes, especially given the recent build-up in the banking system’s liquidity combined with rapid credit growth,” Schwartz said. After the first quarter’s strong economic expansion, “we would not be surprised to see a little bit of slowdown during the rest of this year, especially against the backdrop of global trends such as rising trade protectionism and the possible slowdown in the Chinese economy.” Vietnam’s budget deficit to narrow to around 4.6%of gross domestic product this year. That compares with the median of 3.2% in economies rated BB, according to Fitch.