Singapore, August 10, 2018 -- Moody's Investors Service ("Moody's") has today upgraded the Government
of Vietnam's long-term issuer and senior unsecured ratings
to Ba3 from B1 and changed the outlook to stable from positive.
The upgrade to Ba3 is underpinned by strong growth potential, supported
by increasingly efficient use of labor and capital in the economy.
A long average maturity of government debt and a diminishing reliance
on foreign-currency debt point to a stable and gradually moderating
government debt burden, particularly if strong growth is sustained
over time. The structure of Vietnam's government debt also limits
susceptibility to financial shocks. The upgrade also reflects improvements
in the health of the banking sector that Moody's expects to be maintained,
albeit from relatively weak levels.
The stable outlook reflects balanced risks at the Ba3 rating level.
While downside risks may arise from persisting weaknesses in the banking
system or if the ongoing trade dispute between the US and China resulted
in a sharp slowdown in global trade, there are upside risks from
further improvements in debt affordability and better trade performance
than we currently project.
Moody's has also raised Vietnam's long-term foreign currency
(FC) bond ceiling to Ba1 from Ba2 and its long-term FC deposit
ceiling to B1 from B2. The short-term FC bond and deposit
ceilings remain unchanged at Not Prime. Vietnam's local currency
bond and deposit ceilings remain unchanged at Baa3.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Ba3
STRONG GROWTH POTENTIAL AND ONGOING MOVE UP THE VALUE CHAIN SUPPORT ECONOMIC
STRENGTH
Moody's estimates that Vietnam's growth potential is strong,
at around 6.5%, supported by increasingly efficient
use of labor and capital in the economy. Globally, strong
growth potential tends to be associated with relatively low competitiveness.
However, Vietnam's economic strength combines high growth
and high competitiveness as shown in the economy's ongoing shift
towards high value-added sectors.
With an average GDP growth rate of over 6% over the past decade,
Vietnam has climbed up the manufacturing value chain within a short span
of time, gaining competitiveness in the assembly of higher value-added
electronic products - such as smartphones - while continuing
to retain its comparative advantage in the export of labor-intensive
goods, such as textiles and garments. Rising competitiveness
and a further transition towards higher-value added industrial
activity will support growth at high levels in the medium term.
Moody's projects GDP growth of 6.4% in 2018-2022,
higher than the median for B1-rated sovereigns at 3.7%,
and Ba-rated sovereigns at 3.5%.
Potential growth is supported by strong investment, including Foreign
Direct Investment in high-value added manufacturing. As
Vietnam continues to move up the value-chain and the contribution
of the private sector to total value-added grows, Moody's
expects productivity growth to drive the economy's growth potential.
Moreover, according to the World Economic Forum's Global Competitiveness
Index, Vietnam is much more competitive than most other Ba-rated
or B-rated sovereigns. Moody's expects Vietnam to
retain relatively high competitiveness as the shift up the value chain
gives room for relatively rapid income and wage increases.
One factor weighing on Vietnam's economic strength is the economy's
reliance on credit. Demographic trends, including a sizeable
share of working age population-- with relatively higher spending
power - in the overall population, and increasing urbanization
have contributed to strong consumption and credit growth. Corporate
debt is also relatively high and has been rising in recent years.
Previous periods of rapid credit growth have weakened bank solvency and
raised contingency risks for the sovereign. While Moody's
estimates that credit allocation has improved somewhat and poses lower
risks to the sovereign, rapid credit growth sustained beyond the
pace warranted by financial deepening trends raises the risk of a correction
that would amplify the negative impact of an economic shock.
STRONG GROWTH STABILISES DEBT BURDEN; DEBT STRUCTURE LOWERS SENSITIVITY
TO FINANCIAL SHOCKS
Sustained strong growth contributes to a stable and gradually moderating
government debt burden over time. The structure of government debt
enhances stability through its long average maturity and declining share
of foreign-currency debt. These features mitigate Vietnam's
exposure to a potential sudden increase in the cost of debt and/or a sharp
currency depreciation. Resilience of fiscal strength to financial
shocks supports the Ba3 rating.
Fiscal deficits, which averaged 4.4% of GDP between
2008-17, have persistently been above the median for Ba-
and B-rated sovereigns. However, deficits have narrowed
since 2014. Going forward, Moody's expects that deficits
will hover around 4.0% of GDP. While the government
is taking steps to shore up revenue, such as through some improvements
in tax administration and amendments to natural resource and property
taxes, Moody's does not expect these measures to narrow the
deficit markedly. Moreover, proceeds from sales of State
Owned Enterprises equity stakes were sizeable in 2017, but are not
likely to be as significant in the coming years as smaller, less
profitable companies are privatized.
Combining deficits and growth trends, Moody's expects that
government debt will remain broadly stable around the current levels,
at close to 52% of GDP in 2017, compared with a median level
of 47% for Ba-rated sovereigns. The debt burden should
gradually moderate after 2020.
Vietnam's funding profile indicates that the government's
debt burden would be relatively stable in the face of financial shocks.
To reduce reliance on foreign currency financing, the government
has increasingly resorted to local currency bond issuance. By the
end of 2017, the share of FX-denominated debt fell to around
40%, from 61% in 2011. The government has also
benefited from a deepening of onshore capital markets and a shift in domestic
investors' risk appetite towards longer duration assets, consistent
with better-anchored inflation expectations. While Moody's
assumes that debt affordability will weaken somewhat as interest rates
rise, an average maturity of government debt at close to 7 years
significantly slows the transmission of a potential sudden rise in financing
costs.
Contingent liabilities posed by State-Owned Enterprises (SOEs)
could potentially raise the government's debt burden. Some SOEs
are likely financially weak and the government may need to bear a portion
of their overall debt. However, Moody's baseline expectations
do not include a material crystallization of contingent liabilities,
since at this point, the degree of support that may be provided
is not likely to be substantial.
AN ABATEMENT OF BANKING SYSTEM RISKS, ALBEIT FROM RELATIVELY HIGH
LEVELS
The rating upgrade to Ba3 also reflect somewhat lower risks to the sovereign's
creditworthiness from the banking sector.
In the past, rapid credit growth coupled with fragilities in the
banking system resulted in destabilizing macro-financial conditions
for the sovereign, and acted as a credit constraint. While
Moody's continues to view the banking system as the primary source
of event risk, banking sector systemic risks have abated somewhat.
The improvements in the banking system are reflected in the rise in the
average baseline credit assessment of Vietnamese banks to b2 from b3,
that reflect improvements in asset quality, stabilizing capitalization,
and recovering profitability for several banks. Non-performing
loans moderated to 5.9% of total loans at end 2017 on average
for Moody's-rated banks, from 7.3% a
year earlier. Write-offs and recoveries of problem assets,
as well as an improvement in the quality of new credit have contributed
to better asset quality.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that Vietnam's
credit metrics will be broadly stable in the next few years, with
positive or negative shocks unlikely to significantly alter the current
mix of credit strengths and challenges.
Sources of downside risks include remaining weaknesses in the banking
system from still-weak profitability and capitalization for some
state-owned banks, as well as the possibility that rapid
credit growth starts to threaten macro-financial stability.
Downside risks also stem from a potential significant slowdown in global
trade and disruptions of the regional production chain that would affect
Vietnam's large export sector, a scenario to which Moody's
currently assigns a low probability.
Vietnam has for the past decade employed an export-led growth strategy.
While Moody's baseline assumption is that global trade continues
to grow at a relatively robust rate, regional trade flows could
be more severely affected by the ongoing dispute between the US and China
than Moody's currently expects. As a very open economy,
a significant slowdown in global trade potentially involving severe disruptions
to Asia's supply chains would have a marked and lasting negative
impact on Vietnam's GDP growth. In this scenario, and
unless the government were able to offset the negative consequences for
government revenue, the debt burden would rise further, undermining
fiscal strength.
These sources of downside risks are balanced by upside risks to fiscal
strength and creditworthiness from potential further improvements in debt
affordability or a more positive impact of the baseline projections of
strong growth than Moody's currently expects.
FACTORS THAT COULD LEAD TO AN UPGRADE
An upgrade to Vietnam's rating would likely result from: (1)
an increased likelihood of material and sustained progress on fiscal consolidation
that facilitates deficit reduction and a more marked decline in government
debt; (2) a sustained improvement in the intrinsic financial strength
of the banking system, such as through the continued clean-up
of legacy problem assets, build-up of capital buffers,
and improvements in transparency and governance that significantly diminishes
contingent risks to the government and lowers macro-financial risks;
(3) signs of improvement in institutional strength, including through
a more effective policy framework and improvements in data transparency
that raise the credibility and effectiveness of policy.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Downward pressure on Vietnam's rating would result from: (1)
a material and durable weakening in economic performance for instance
either as a result of a prolonged trade slowdown or an erosion in competitiveness;
(2) a reemergence of financial instability, leading to higher inflation,
a rise in debt-servicing costs, and/or a worsening of the
country's external payments position; (3) signs of reversal
of the current stabilization in the debt and deficit trajectory potentially
partly as a result of a sizeable crystallization of contingent risks from
either the banking system or State-Owned Enterprises.
GDP per capita (PPP basis, US$): 6,913 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.8% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -3.5%(2017
Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.9% (2017 Actual) (also
known as External Balance)
External debt/GDP: 48.8% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 07 August 2018, a rating committee was called to discuss the
rating of the Vietnam, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially increased.
The issuer has become less susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
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.
Anushka Shah
VP - Senior Analyst
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
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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
