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Rating Action:

Moody's changes the outlook on Vietnam's ratings to positive from stable, ratings affirmed

28 Apr 2017

Singapore, April 28, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Vietnam's B1 issuer and senior unsecured debt ratings and revised the outlook to positive from stable.

The positive outlook is based on Moody's expectations that:

1. Strong foreign direct investment (FDI) inflows, fostered by ongoing economic reform, will continue to diversify the economy and enhance economic performance compared to rating peers;

2. Macroeconomic and external stability will be maintained; and

3. In turn, strong growth and a stable macroeconomic environment will help stabilize government debt around current levels.

Concurrently, Moody's has raised Vietnam's local-currency (LC) bond and deposit ceilings to Baa3 from Ba1.

The country's foreign-currency (FC) bond and deposit ceilings remain at Ba2 and B2, respectively. In addition, the short-term FC bond and deposit ceilings were unchanged at "Not Prime.''

RATINGS RATIONALE

FIRST DRIVER -- FDI PERFORMANCE ENHANCES ECONOMIC STRENGTH

The first driver of the outlook change is our expectation that strong FDI inflows—spurred in part by the ongoing progress on economic reform and liberalization—will continue to sustain Vietnam's robust economic performance relative to peers. FDI allows Vietnam to diversify its economy and gain market share in international trade, contributing to prospects of sustained strong GDP growth.

The country's improving competitiveness and reform impetus have supported net FDI inflows averaging 5.2% of GDP between 2014 and 2016, higher than the B1-rated median of 3.6%. Vietnam has also benefited from its entry into several free trade agreements in recent years, which have spurred the liberalization of the economy. As a result of improvements to the investment climate, Vietnam's ranking rose to 60th out of 138 countries in the 2016-2017 World Economic Forum Global Competitiveness Index, up from 70th in 2013-2014, while its showing in the World Bank's Doing Business Indicators similarly rose to 82nd out of 190 countries in 2017 from 99th in 2014.

Robust FDI inflows have spurred gross fixed capital formation, allowing export growth to outperform regional and rating peers amidst slow global trade and lower commodity prices. Vietnam has become a more important node in the regionally dispersed supply chain for electronics, especially for mobile phones, as foreign investments have helped to diversify the economy towards higher value-added manufacturing. As a result, Vietnam has gained market share with its share of world exports nearly doubling to 1.2% in 2016 from 0.7% in 2013.

With ongoing improvements to infrastructure, rapid growth in the population of working age, and the government's continued focus on reform to support FDI, we expect economic growth to remain robust at around 6.3% per annum through 2019, nearly twice as high as the B1-rated median of 3.3%.

SECOND DRIVER -- MACROECONOMIC AND EXTERNAL STABILITY WILL CONTINUE

Together with strong growth, we expect macroeconomic stability to be maintained.

In contrast, the period of rapid economic growth prior to 2012 coincided with high inflation, wide current account deficits, exchange rate volatility, and an overheating property market.

After falling to an all-time low in 2015, inflation has picked up due to administrative price increases for health and education. Inflation reached 5.0% in the first quarter of 2017, after averaging 2.7% in 2016 and 0.6% in 2015. In 2017 on average, we expect inflation to remain below the official target of 5% as administrative price pressures ease. Moderate inflation supports consumer purchasing power and helps contain local currency borrowing costs for the government. The de-dollarization trend in recent years and the concurrent deepening of local capital markets also foster moderate inflation by promoting relative stability of the exchange rate and much reduced reliance on an unofficial exchange rate.

Moreover, Vietnam has registered six consecutive full-year current account surpluses, driven by the robustness of exports and steady remittance inflows. These surpluses have combined with strong FDI inflows to help rebuild foreign exchange buffers from lows reached in 2011. The adoption of a more flexible exchange rate regime in 2016 also contributes to our expectation that foreign exchange reserves will remain ample pointing to very low external vulnerability risk.

THIRD DRIVER -- PROSPECTIVE DEBT STABILIZATION AND AN IMPROVED FUNDING PROFILE

In turn, the robust growth outlook and macroeconomic stability provide a favorable backdrop for the stabilization of the government's debt burden, which we expect to have peaked at below 55% of GDP in 2016. The absence of significant revenue reform or expenditure consolidation so far precludes a more rapid pace of debt reduction.

In the context of wide fiscal deficits that have led to a 14 percentage-point rise in direct government debt between 2012 and 2016 according to our estimates, both the government and the National Assembly recently reaffirmed the public debt ceiling--which largely encompasses direct government debt and government-guaranteed debt--at 65% of GDP.

In the near term, we expect revenue to pick up along with the robustness of domestic demand and international oil prices, assuming that the government will not pass additional corporate tax cuts that further erode the revenue base. On the expenditure side, the government has made adjustments to administered prices for education and healthcare to help control current expenditure. Deficit reduction will also depend in part on the projected receipts from the privatization of SOEs, which we do not consider as a revenue item.

At this stage, we do not expect the government's debt burden to decline. First, we expect only a gradual reduction in public expenditure given the existing commitments for capital spending, particularly on infrastructure. Moreover, the government has yet to pursue major reforms to reverse the decline in the revenue as a share of GDP since 2010, precipitated in part by lower oil prices, in the context of generous fiscal incentives to attract foreign investors and the country's international commitments to lower tariff barriers. In addition, improved economic performance has not accrued to higher government revenue given the reduction of corporate tax rates twice since 2014.

Improved fiscal strength also relates to changes in the funding structure of government debt. The government increasingly relies on domestic and local currency sources of financing, which has led to a drop in the share of the government's debt stock denominated in foreign currency. This ratio fell to 39.8% in 2016 from 49.9% in 2013 and 61.0% in 2011, helping to reduce Vietnam's susceptibility to exchange rate shocks. At the same time, non-resident participation in the local-currency government bond market is low at around 5% of the total.

As long as Vietnam maintains external surpluses that contribute to ample local liquidity, as well as robust employment that contributes to deposit growth in the banking system and generates contributions to the compulsory state insurance fund, we project that the government's balance sheet's exposure to external shocks will continue to fall.

RATIONALE AFFIRMING THE B1 RATING

Vietnam's B1 issuer rating incorporates credit strengths, including the size and diversity of the country's economy and its robust growth performance relative to similarly-rated peers. It has also consistently improved its showing in cross-country assessments of institutional quality in recent years, particularly with regards to government effectiveness, albeit from low levels.

These strengths are balanced against low GDP per capita, as well as the vulnerabilities posed by wide fiscal deficits and the accumulation of debt over the past few years. Nevertheless, sizeable financial support from official creditors at concessional terms has prevented a marked deterioration in debt affordability.

The banking system continues to pose prominent but manageable contingent risks. The recovery of domestic demand since 2015 has coincided with rapid credit growth, challenging a system still encumbered by poor capital adequacy and legacy non-performing loans. Nevertheless, the benign inflation outlook and somewhat stricter underwriting standards as compared to previous credit booms mitigate financial stability risks.

WHAT COULD CHANGE THE RATING -- UP

An upgrade to Vietnam's credit rating could result from: 1) the passage of concrete measures that lead to a significant reduction in the government's debt burden; and 2) in light of rapid credit growth over the past couple of years, a further improvement in the intrinsic financial strength of the banking system and the state-owned enterprise sector that significantly diminishes contingent risks to the government and lowers macro-financial risks.

WHAT COULD CHANGE THE RATING -- DOWN

In light of the positive outlook, a downgrade is unlikely but we could revise Vietnam's rating outlook to stable if the government was unable to arrest the deterioration of fiscal and debt metrics. Moreover, a downgrade could result from: 1) a reemergence of macroeconomic instability, leading to higher inflation, a rise in debt-servicing costs, and/or a worsening of the country's external payments position; 2) a material and durable weakening in economic performance relative to peers; or 3) a sizeable crystallization of contingent risks from either the banking system or the SOE sector.

GDP per capita (PPP basis, US$): 6,399 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.2% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -5.7% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 4.2% (2016 Actual) (also known as External Balance)

External debt/GDP: 44.1% (2016 Actual)

Level of economic development: High level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 26 April 2017, a rating committee was called to discuss the rating of the Government of Vietnam. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially increased. The issuer's institutional strength/ framework, have materially changed. The issuer's governance and/or management, have materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in this rating was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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