Fitch affirms Vietnam at 'BB' with positive outlook

This affirmation reflects the continued strong medium-term growth prospects ahead, despite facing the negative impact of the COVID-19 pandemic, the global economic spillovers from the war in Ukraine, and strong external finance metrics relative to peers. This rating remains constrained by contingent liability risks associated with the large state-owned enterprise (SOE) sector along with structural weaknesses in the banking sector.

Experts attribute this positive outlook to the active implementation of measures aimed at stabilising the macro-economy, reforming the financial-banking system, the country’s pandemic containment efforts, and high vaccination coverage.

According to statistics compiled by Fitch Ratings, the nation’s GDP growth is forecast to accelerate to 6.1% this year, reaching 6.3% in 2023 after growth of 2.6% in 2021. This will be led by a recovery in domestic demand, strong exports, and high FDI inflows, particularly in the manufacturing sector.

Analysts pointed out that risks to the country’s growth outlook remain, including the global economic implications of the war in Ukraine and sanctions placed on Russia, further pandemic-related shocks, and high commodity prices.

In its report, Fitch outlines that Vietnamese economic prospects remain susceptible to shifts in external demand due to the local economy's high degree of openness.

Despite this factor, the export sector is anticipated to continue to perform well into the medium term, thereby benefitting from Vietnamese cost competitiveness, trade diversion from China, and implementation of a number of key trade agreements.

Export-related FDI inflows have yet to weaken despite facing supply disruptions in the third quarter of 2021. Inward investment remained strong throughout 2021 at US$19.7 billion, down marginally from US$20 billion in 2020.

Moreover, pundits are also factoring in a gradual resumption of tourism inflows this year, although pandemic-related disruptions remain a significant risk while forecasting a reversal to the current account surplus for both this year and next year from a deficit of roughly 1% of GDP in 2021.

Foreign-exchange reserves continued to improve last year, particularly as the State Bank of Vietnam (SBV) intervened in the foreign-exchange market in an effort to stabilise the currency. Foreign-exchange reserves also rose further to a record of US$109.4 billion by the end of 2021, supported by large FDI inflows.

Fitch anticipates a gradual appreciation of the exchange rate, failing in line with expectations of current account surpluses, although the ratings agency expects the SBV to intervene in the case of excessive currency volatility or if the currency faces significant upward pressure. The nation’s large external buffers offers a cushion against shocks and supports a strong external liquidity ratio, which stood at 340% at the end of 2021, above the 175% of the 'BB' median.

In April, Fitch Ratings had announced plans to upgrade Vietnam's credit rating to a 'positive' outlook with a 'BB' rating, a move which reflects the nation’s growth resilience as well as the country’s efforts to maintain macroeconomic stability.