ECONOMYNEXT – The outlook of Vietnam’s BB credit rating has been upgrade to positive by Standard and Poor’s,a rating agency amid strong growth and no ‘stimulus’ to de-stabilize its exchange rate peg or state finances.
“The outlook also reflects our expectation that Vietnam’s economy will continue to expand rapidly, exemplifying continued improvements in its policy making settings and underpinning credit metrics,” S&P said.
“Our ratings on Vietnam reflect its modest GDP per capita, legacy banking sector weaknesses, and evolving institutional settings.
“These weaknesses are balanced against the economy’s strong growth prospects and sound external position. Vietnam’s solid external accounts and its ability to attract consistently strong foreign direct investment (FDI) provide further support to the ratings.”
The rating agency had previous raised concerns over administrative delays in paying government guaranteed debt but a new directive had allowed the Treasury to make direct payments to creditors.
S&P said it may upgrade the BB rating over the next two years if it shows a “sustained track record of effective administrative capacity in line with its 2020 reforms to sufficiently reduce the risk of credit events on its obligations, such that future payment delays will very unlikely recur.”
“This also assumes that Vietnam’s economy will achieve a healthy recovery and the government’s fiscal settings will remain anchored despite enduring pandemic risks.”
Vietnam is one of the most effective countries in controlling Coronavirus with minimal lockdowns due to fast testing and isolation and it has also avoided heedless Western-style Keynesian ‘stimulus’ that destroys external stability wastes taxes and pushes up debt.
Instead of heedless Keynesian spending Vietnam’s frugal government directed funds to troubled businesses and per diems to people in surgical lockdown.
The upgrade came weeks after the International Monetary Fund projected 6.5 percent growth for the country which eschewed stimulus and avoided a ‘flexible exchange rate’ which de-stabilized its neighbor Laos.
No Stimulus, incredibly proactive containment policies
Jonathan Ostry, Deputy Director of IMF’s Asia and Pacific Department claimed “macroeconomic policy support on a huge scale was not needed in Vietnam.”
“Vietnam performed much better than virtually all of the countries in our region last year,” he said when a 6 percent growth for 2021 was projected by the IMF.
“A rare positive growth number in a sea of negatives. And this was due mainly to the incredibly proactive and effective set of containment policies introduced very, very early in 2020, and really showed what can be achieved with a strong health response.”
Vietnam’s currency collapsed in 2010 after ‘stimulus’ and led to a banking collapse the relics of which the country is still suffering.
In 2013 and 2018, Fed tightening automatically led to domestic tightening though the State Bank of Vietnam policy corridor with two-way auctions allowing it to maintain a currency peg against IMF advice giving monetary stability to help the poor as well as the overall economy and investors.
However in May 2021, Vietnam is battling its worst Coronavirus outbreak yet with an Indian variant also involved. Deputy Prime Minister Vu Duc Dam, who heads the country’s Covid-19 task force has said a broader lockdown will be imposed if containment efforts fail.
Vietnam Outlook Revised To Positive; ‘BB/B’ Ratings Affirmed
Vietnam’s economy is likely to see a healthy recovery over the coming years despite enduring headwinds stemming from the COVID-19 pandemic.
We revised our outlook on Vietnam to positive from stable to reflect the country’s progress in strengthening important administrative processes, and a continued gradual improvement in its broader credit profile.
At the same time, we affirmed our ‘BB’ long-term and ‘B’ short-term sovereign credit ratings on Vietnam.
Our ratings on Vietnam reflect the country’s evolving institutional settings, strong growth prospects, stable fiscal position, and structural financial sector vulnerabilities.
On May 21, 2021, S&P Global Ratings revised the outlook on its long-term ratings on Vietnam to positive from stable. At the same time, we affirmed our ‘BB’ long-term and ‘B’ short-term sovereign credit ratings on Vietnam.
The positive outlook captures Vietnam’s improving track record of effective administrative processes following the introduction of a directive in January 2020 that empowers the Ministry of Finance to make full and immediate payment of guaranteed government debt obligations directly to the creditor.
The outlook also reflects our expectation that Vietnam’s economy will continue to expand rapidly, exemplifying continued improvements in its policy making settings and underpinning credit metrics.
We may raise our ratings over the next one to two years if the Vietnam government establishes a sustained track record of effective administrative capacity in line with its 2020 reforms to sufficiently reduce the risk of credit events on its obligations, such that future payment delays will very unlikely recur. This also assumes that Vietnam’s economy will achieve a healthy recovery and the government’s fiscal settings will remain anchored despite enduring pandemic risks.
We may lower the ratings if the economic downturn in Vietnam persists well beyond 2021. Potential risks include a longer-lasting, more severe global pandemic and the emergence of considerable stress in the country’s banking system.
We may also downgrade Vietnam if its fiscal performance deteriorates markedly, leading to a higher annual change in net general government debt relative to GDP on a sustained basis.
We revised the outlook on Vietnam to positive to reflect the continued outperformance of the economy against the challenging backdrop of COVID-19, and an improving track record in the government’s administrative capacity.
Our ratings on Vietnam reflect its modest GDP per capita, legacy banking sector weaknesses, and evolving institutional settings. These weaknesses are balanced against the economy’s strong growth prospects and sound external position. Vietnam’s solid external accounts and its ability to attract consistently strong foreign direct investment (FDI) provide further support to the ratings.
Institutional and economic profile: Vietnam’s economy should pick up over the next two years following the pandemic-related slowdown in 2020.
Vietnam’s recovery prospects are strong following the deceleration in real GDP growth last year.
We expect export-led growth and strong domestic demand to keep the economy’s trend growth rate well above the average of its peers, though the pandemic poses enduring risks to near-term growth.
Vietnam is establishing a track record of stronger administrative capacity after the delayed payment on a government obligation in September 2019.
In tandem with the global economy, Vietnam was materially affected by the COVID-19 pandemic, which resulted in the downturn last year. Nevertheless, the economy’s real GDP expansion of 2.9% in 2020 was among the best globally, supported by the government’s highly effective response to and containment of COVID-19 domestically. Vietnam’s economy is well-placed to achieve a healthy recovery over the next one to two years as the pandemic becomes more contained, though near-term risks remain elevated, especially following larger domestic outbreaks over recent weeks.
We expect real GDP growth to rebound to 8.5% in 2021 before settling closer to Vietnam’s long-term trend rate of growth from 2022 onward. Vietnam’s attractiveness as a premier destination for FDI in Southeast Asia, along with its young, increasingly educated, and competitive workforce, should help to keep the country’s long-term development trajectory intact.
Vietnam’s GDP per capita has risen quickly in the past few years from a relatively low base. A recent upward revision of the country’s official nominal GDP–meant to better capture activity from emerging industries–measures GDP per capita in 2020 at US$3,572, versus US$1,964 in 2011. Vietnam’s economy is increasingly well-diversified, with a booming manufacturing sector that is largely funded by FDI.
Vietnam’s macroeconomic stability has supported the manufacturing sector’s attractiveness to global firms in the electronics, mobile phone, and textiles industries. The FDI-oriented segment continues to fuel stronger domestic activity, with better employment opportunities and higher wages powering robust private consumption growth. The outlook for these growth drivers is challenged in the context of the pandemic. However, Vietnam’s export sector held up well in 2020 and a deeper slowdown in private consumption has so far been averted thanks to effective public health measures. Greater household access to credit is also helping to support consumer demand.
We do not observe that economic growth in Vietnam has primarily resulted from a rapid increase in credit creation, despite consistently strong credit growth prior to 2019, and the considerable scale of banking sector assets relative to GDP. Still, rising land prices and strong real estate development trends in major population centers could entail risks to Vietnam’s large financial sector should they materially outpace income growth. We expect Vietnam’s 10-year weighted average growth of real GDP per capita to be approximately 5.3%, significantly higher than the average of the country’s peers at a similar income level.
Vietnam is well-placed to recover once the pandemic is better contained. Related domestic and external risks are still lurking, however. While we forecast a strong global trade rebound this year that should substantively benefit Vietnam, the enduring nature of the pandemic and severe flare-ups in various neighboring countries create some uncertainty and, potentially, volatility in external demand conditions. That said, key trading partners including China, South Korea, and the U.S. should exhibit a normalization of demand conditions this year and the next, with the world’s two largest economies set for sprightly GDP growth this year.
Notably, Vietnam’s total goods exports grew at a nominal rate of about 7% in 2020, contrasting with declines suffered by many emerging market peers. This performance speaks to the orientation of Vietnam’s manufactured products toward reliable sources of global demand which have held up well during the pandemic.
Additional risks to Vietnam’s otherwise sound economic fundamentals include the condition of its financial sector, which is characterized by low levels of capitalization and mixed asset quality.
Vietnam is gradually reforming its economy toward a more market-based model. The country’s global ranking in the World Bank’s annual Doing Business survey surged to 70th in 2019, from 99th in 2013, with strong gains in contract enforcement, regulatory environment, and improvements in access to credit and tax payment.
The government’s socioeconomic development plans provide useful policy anchors that have improved macroeconomic stability and inflation management in recent years. This has translated into consistently high real GDP growth, averaging 6.0% annually since 2013.
Vietnam’s government has delivered strong development outcomes since the global financial crisis and its own domestic banking sector crisis in the early 2010s. In our opinion, checks and balances within the government are limited, but the social compact between the government and citizens remains strong.
The Vietnamese government undertook a quinquennial leadership transition process in 2021, yielding new appointees to the roles of prime minister and president, with Nguyen Phu Trong staying on as general secretary of the Communist Party. We believe the government faces limited challenges to its legitimacy in the medium term. The government’s successful management of the COVID-19 outbreak is likely to have further solidified public support for the party, and speaks to the competencies of Vietnam’s institutions.
Nevertheless, decision-making in Vietnam remains highly centralized under its one-party system, and transparency is impaired, in our opinion. These considerations are factored into our broader assessment of the country’s institutional settings, along with our overall ratings.
Vietnam’s Ministry of Finance announced a delay in payment on a government-guaranteed debt obligation in October 2019, which the government had already repaid at that point. The government had not received an official request from the creditors at the time of its repayment on the obligation. In our view, the delay in repayment on this obligation represents shortcomings in administrative capacity then, but does not indicate financial resource stress on the part of Vietnam’s government.
In the ensuing months, the government tightened administrative procedures to ensure that such delays do not reoccur. It also made the Ministry of Finance wholly responsible for making full and immediate payment on debt obligations. In our opinion, the government is in the process of establishing an improved track record in managing such obligations since the introduction of these measures.
Vietnam still faces relatively high levels of corruption, but the Communist Party has adopted a much more aggressive approach toward corrupt practices over the past three years. We expect this approach to continue over the coming years. These improvements should support strong and balanced economic growth.
Flexibility and performance profile: Steady fiscal profile despite the pandemic
The government’s fiscal settings have remained largely stable despite pandemic-related revenue and expenditure pressures.
Pandemic-related risks are likely to remain elevated at least into 2022, but we expect Vietnam’s associated change in net general government debt to be manageable.
Vietnam’s external profile is solid, and the central bank continues to amass foreign exchange reserves at a healthy pace amid strong net FDI inflows and a goods trade surplus.
Vietnam graduated to high human development status in the United Nations Development Programme’s 2020 Human Development Index ranking, signifying consistent progress in the provision of improving physical infrastructure and public services by the government. Following these improvements, we no longer consider the government’s obligations toward future expenditures in these areas as a material constraint on its fiscal settings.
Officials have successfully curtailed growth in government guarantees, which has stabilized Vietnam’s broader measure of public and public-guaranteed debt well below the self-mandated cap of 65% of GDP. However, stricter standards for the provision of these guarantees are likely to have affected financing conditions for infrastructure projects, especially electricity generation. The government’s net indebtedness is now less than 40% of GDP, owing in part to a significant upward revision to Vietnam’s GDP figures.
We expect the Vietnam Asset Management Co. (VAMC) to begin issuing debt to fund the purchase of bad assets over the coming years. We will incorporate this debt into the general government’s balance sheet, per our definition of general government debt. Legislation empowered the VAMC in 2017 to purchase and resolve nonperforming assets with cash; the VAMC’s previous process relied solely on exchanging special bonds for troubled assets from banks. Over time, this should contribute to the development of more sophisticated bad debt markets in Vietnam, leading to greater financial market stability.
Vietnam’s fiscal deficit is likely to be slightly more than 4% of GDP over the next two years, owing partially to enduring risks associated with the pandemic. We expect the government’s change in net general government debt, adjusted for the one-off impact of the pandemic, to average just above 4% of GDP through 2024. General government revenues are less than 20% of GDP, and we believe Vietnam has a roughly equivalent ability to raise revenues or cut expenditure, relative to governments in countries with a similar level of development.
We anticipate Vietnam’s external metrics will remain steady, having held up well against difficult global demand conditions in 2020. The country’s current account is likely to remain in modest surplus annually to 2024. In particular, we envisage continued outperformance in manufacturing exports, though we also foresee a much more gradual recovery in services receipts, especially those related to tourism.
Vietnam’s competitive unit labor costs, improving educational standards, and constructive demographics imply continued growth in FDI and goods exports, even as the pandemic and an ongoing trade dispute between the U.S. and China add uncertainties to the external environment. Vietnam has actively pursued enhanced market access via bilateral and multilateral free trade initiatives, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, EU-Vietnam Free Trade Agreement, and Regional Comprehensive Economic Partnership. .
The country’s external debt stock position–as measured by narrow net external debt (the ratio of gross external debt less official reserves and financial sector external assets to current account receipts [CARs])–continues to gradually improve, and we expect it to average roughly 15% over 2021-2024. The proportion of the government’s debt that is denominated in foreign currency has fallen below 40%, signifying a decline in foreign exchange rate risk. Vietnam has accumulated foreign exchange reserves at a rapid pace in recent years owing to its high balance of payments surpluses. These reserves can act as an additional buffer during periods of external stress.
At the same time, we project external liquidity needs–measured by the ratio of gross external financing needs to CARs and usable reserves–will remain below 90% over the period. We do not expect a marked deterioration in Vietnam’s external financing due to a reduction in disbursements from donors or a destabilizing shift in FDIs or portfolio equity investments.
Vietnam’s gross external indebtedness at the economy-wide level has grown markedly in recent years, and we forecast this trend will continue. Vietnam’s external data lack consistency, with persistently high errors and omissions in its balance of payments.
The country’s domestic banks benefit from being in an external net asset position, with still-limited linkages to global markets. However, its system stability is hampered by elevated nonperforming assets and cross-ownership, connected lending, and legacy exposure to borrowers still affected by the 2009-2012 real estate downturn.
Even though Vietnam’s economy has fared better than most since the outset of the pandemic, pockets of credit weakness are likely to arise over time in affected industries. The State Bank of Vietnam will allow banks to restructure the debts of certain borrowers that have been materially affected by the pandemic through at least the end of 2021. The aggregate impact of this program is not yet clear, though it may lead to higher recognized nonperforming loans beginning in 2022.
Capital adequacy in Vietnam’s banking sector is in some cases borderline, and may be pressured further amid the ongoing implementation of stricter Basel II standards. Loan classification and provisioning practices, combined with government policies directed at the resolution of distressed banks through the VAMC, weigh on a fuller assessment of the condition and outlook for Vietnam’s financial system.
Relative to GDP, the size of the total banking system is large for a sovereign at this development level.
We classify Vietnam’s banking sector in group ‘9’ under our Banking Industry Credit Risk Assessment (with ‘1’ being the highest assessment and ’10’ being the lowest). For these reasons, we expect the sovereign to face moderate contingent liability risk from the banking sector. System credit growth declined notably in 2018 and has remained steady at just above 12% per year since then. Given the system’s considerable scale, faster credit growth could signal rising risks to Vietnam’s macroeconomic stability.
In our view, the State Bank of Vietnam has a limited ability to support sustainable economic growth while attenuating economic or financial shocks. This reflects chiefly its limited independence, which weakens its ability to calibrate monetary policies with fiscal, economic, and development policies; use of market-orientated instruments to conduct policy; and record in maintaining low inflation, which we believe has strengthened in recent years.