Fitch revises Vietnam's outlook to positive

Fitch expects Vietnam’s economic growth to slow in 2019 to some 6.7 per cent, still within the 6.6 - 6.8 per cent range set by the National Assembly.

Vietnam’s continued commitment to containing debt levels led to a decline in general government debt to 50.5 per cent of the country’s GDP value in 2018 from a peak of 53 per cent in 2016. Fitch said in a press release on May 9 that the ratio is likely to decline further to around 46 per cent by 2020.

Vietnam's public debt, including guarantees, has also been declining, to around 58 per cent of GDP by late 2018 after being close to the ceiling of 65 per cent at end-2016. The drop was attributed by a decline in outstanding government guarantees to around 8 per cent of GDP by end-2018 from 9.1 per cent at end-2017.

The reduction was also aided by stable receipts from the equitization of State-owned enterprises (SOEs), high nominal GDP growth and lower fiscal deficits. The overall pace of equitization has been sluggish, but the process has continued to advance, with 28 SOEs being equitized compared with 69 in 2017.

Fitch's debt and deficit estimates, which are more closely aligned with the Government Finance Statistics (GFS) standard of accounting, put the budget deficit at 3.6 per cent of GDP by 2020, compared with the country’s target of 3.5 per cent of GDP by 2020 under the 2016-20 budget plan.

Vietnam has been sustaining its policy focus on macroeconomic stability as the GDP growth improved to 7.1 per cent in 2018 from 6.8 per cent in 2017 while the inflation rate stood at 3.5 per cent, within the National Assembly's targeted limit below 4 per cent.

Fitch said that Vietnam’s economic growth remained supported by strong foreign direct investment (FDI) into the manufacturing sector as well as expansion in services and agriculture sectors. 

However, Fitch expects Vietnam’s economic growth to slow in 2019 to some 6.7 per cent, still within the 6.6 - 6.8 per cent range set by the National Assembly. The Southeast Asian country, with a high degree of trade openness, is likely to be affected by slowing global growth and US-China trade tensions, which will weigh on regional trade flows and sentiment.

Vietnam would nevertheless remain among the fastest-growing economies in the Asia-Pacific region and in the 'BB' rating category globally, the credit rating agency predicted.

Despite the stated shift to flexibility in January 2016, the exchange rate remained broadly stable in 2018. The State Bank of Vietnam (SBV) intervened in currency markets as the US dollar strengthened and investor sentiment towards emerging markets became less favorable. This led to a temporary drawdown of foreign-exchange reserves.

Nevertheless, overall reserve level in 2018 rose by the end of the year and as per Fitch estimates was equivalent to around 2.6 months of current external payments (CXP). The rating agency expects modest further reserve accumulation in the 2019-20 period, but reserve coverage of the CXP to remain below the historic peer median of 4.3 months.

Large FDI flows into the export-oriented manufacturing sector remain a key growth driver. Registered capital in the manufacturing sector increased to US$16.6 billion at end-2018 from US$15.9 billion in 2017.

Fitch expects Vietnam to remain an attractive destination for foreign investors given its low cost advantage. Moreover, there is anecdotal evidence to suggest that Vietnam could reap benefits from the trade diversion and production shifts triggered by ongoing US-China trade tensions.