08 Apr 2020, Fitch Ratings has revised the Outlook on Vietnam’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable, from Positive, and has affirmed the rating at ‘BB’.
KEY RATING DRIVERS
The Outlook revision reflects the impact of the escalating COVID-19 pandemic on Vietnam’s economy through its tourism and export sectors, and weakening domestic demand.
The affirmation reflects Vietnam’s strong medium-term growth prospects, lengthening record of macrostability, lower government debt levels and stronger external finances compared with peers, including foreign-exchange reserves built up over the previous few years during more favourable economic conditions.
Fitch projects Vietnam’s GDP growth to slow to 3.3% in 2020, from 7.0% in 2019, on account of the pandemic. This would be the lowest annual growth rate since the mid-1980s. Growth in 1Q20 slowed to 3.8%, from about 7.0% in 4Q19. The 2020 forecast is highly uncertain and subject to downside risk, depending on the evolution of the pandemic, both within Vietnam and in its major export markets. Vietnam has so far recorded a relatively low number of COVID-19 cases, but these could increase, and large parts of the country are already subject to curbs on economic and business activity to prevent the spread.
The tourism and export sectors are particularly vulnerable to weaker activity. Tourism accounts for about 10% of GDP directly, but its contribution to overall GDP is considerably higher through indirect spillovers. Tourist arrivals for March fell by about 68% yoy. Our baseline assumes the outbreak is contained by the second-half of this year and the global tourism industry starts to recover at a gradual pace.
We expect exports to contract sharply, given the fall in demand in Vietnam’s key export markets, including the US and China, although the latter has begun to recover; about 23% of total exports were to the US at end-2019, while about 16% were to China. Weak export demand will affect foreign direct investment (FDI) inflows into the manufacturing sector. Realised FDI in 1Q20 was down by 6.6% from a year ago.
We expect the current account to shift to a modest deficit in 2020, from a surplus of around 3.0% in 2019, as exports, tourism and remittances decline However, it should return to surplus in 2021 as the global economy recovers. Fitch has used provisional numbers for the revised GDP series, for these calculations.
Domestic demand is likely to stay muted as strict measures aimed at maintaining social distancing to contain spread of the virus are put in place. The authorities are implementing policies to mitigate the impact, including relief measures to assist households and the tourism and transport sectors. Specifics include payment extensions for value-added, personal income and land taxes for those affected by the outbreak, and cash handouts to workers who have lost jobs.
The relief package to combat COVID-19 so far amounts to VND171 trillion (around 2.1% of GDP). Additional measures may be introduced if downward economic pressures intensify, including an acceleration of infrastructure spending.
Fiscal consolidation is likely to be delayed due to the pandemic relief measures and higher spending to cushion the economic impact of the outbreak. We expect the budget deficit to widen to 6.5% of GDP in 2020, from an estimated 3.4% in 2019, and for gross general government debt to increase to 42.5% of GDP, from about 38% of GDP in 2019, which is in line with the ‘BB’ median. The projected deficit and debt levels could rise if the outbreak lasts longer than we expect. Our calculations are based on the provisional numbers for the revised GDP series.
The State Bank of Vietnam (SBV) has eased monetary policy since September last year by a cumulative 125bp cut in the policy rate, including 100bp in March. The exchange rate has weakened marginally against the US dollar, and by much less than regional peers. Foreign exchange reserves have increased in recent years, providing the SBV some capacity to stabilise currency volatility. Foreign currency reserves reached a record high of USD78.5 billion in 2019, driven by inflows associated with a large current-account surplus, foreign currency purchases by the SBV and significant FDI inflows as Vietnam benefitted from trade diversion from the US-China trade dispute. Vietnam’s external liquidity ratio is likely to remain far above the ‘BB’ median, at around 300%, under our baseline assumptions.
We expect economic momentum to rebound in 2021, with growth projected at 7.3% as external and domestic demand gradually recover in line with global and regional trends. Exports and tourism are likely to rebound and FDI in the manufacturing sector should pick up, supporting strong medium-term growth prospects.
The ‘BB’ IDR also reflects the following key rating drivers:
Contingent liability risks associated with legacy issues at large state-owned enterprises are a weakness for Vietnam’s broader public finances, although government debt and guarantees have fallen over time. Government guarantees issued to state-owned entities and potential banking-sector recapitalisation costs also weigh on public finances. We estimate gross general government debt/GDP at 37.8% at end-2019.
In September 2019, payment on a government-guaranteed loan contracted by the Ministry of Transport was delayed. Authorities say this was due to a lengthy procedure in utilising an accumulation fund for debt repayment of realised government contingent liabilities. Steps have been taken to ensure the smooth and timely execution of future payments, including an allocation of funds for upcoming guaranteed payments in the 2020 budget and a directive to the Ministry of Finance and other agencies to allocate sufficient resources to ensure timely payments. Furthermore, Fitch understands that measures have been taken to improve coordination between the Ministry of Finance, Ministry of Planning and Investment and the Ministry of Transport.
Structural weaknesses in the banking sector weigh on the sovereign rating. The banking system’s non-performing loans remain under-reported and asset quality is likely to be weaker than official data indicate. Some banks also continue to grapple with legacy non-performing loans. The economic downturn in 2020 will exert downward pressure on bank balance sheets, and could ultimately pose risks to the sovereign balance sheet. Mitigating these risks is a sharp slowdown in credit growth, which fell to 0.7% at March end-2020 compared to end-2019 level), and progress in reducing non-performing loans; loan recoveries by Vietnam Asset Management Company (VAMC) amounted to VND32.7 trillion in 2019. By end-2019, 12 commercial banks, including Kienlongbank , Joint Stock Commercial Bank For Foreign Trade of Vietnam (BB-/Positive), Vietnam International Commercial Joint Stock Bank and Vietnam Technological And Commercial Joint Stock Bank, had settled all their bad debt through VAMC. By end-March 2020, there were two additional banks, the Joint Stock Commercial Bank for Investment and Development of Vietnam and VietCapital Bank
Vietnam’s per capita income and human development indicators are weaker than those of peer medians. Fitch estimates per capita income was USD3,419 at end-2019, against the ‘BB’ median of USD6,188. Furthermore, Vietnam is in the 38th percentile on the UN Human Development Index, compared with the ‘BB’ median’s 55th percentile. The country’s World Bank Governance Indicator ranking is in the 41st percentile, still below the peer median. On the Ease of Doing Business Index, however, Vietnam ranks in the 64th percentile, above the ‘BB’ median of the 60th percentile.
ESG – Governance: Vietnam has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Vietnam has a medium ranking at the 41st percentile, reflecting a recent peaceful political transition, a moderate level of rights for participation in the political process, moderate institutional capacity, and a high level of corruption compared with peers.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Vietnam a score equivalent to a rating of ‘BBB’ on the Long-Term Foreign-Currency IDR scale.
In accordance with its rating criteria, Fitch’s sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis at this stage because in our view, the SRM output migration to ‘BBB’ has the potential to be temporary.
Assuming an SRM output of ‘BBB-‘, Fitch’s sovereign rating committee adjusted the output to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows:
Structural Factors: -1 notch to reflect risks to macroeconomic stability, including rapid credit growth and unresolved legacy issues in the banking sector, to which Fitch assigns a Bank Systemic Risk indicator of ‘b’.
Public Finances: -1 notch to reflect high contingent liability risks stemming from government guarantees for state-owned enterprises and potential banking sector recapitalisation costs.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Vietnam has an ESG Relevance Score of 5 for Political Stability and Rights, as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are highly relevant to the rating and a key rating driver with a high weight.
Vietnam has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption, as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Vietnam has an ESG Relevance Score of 4 for Human Rights and Political Freedoms, as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Vietnam has an ESG Relevance Score of 4 for Creditor Rights, as willingness to service and repay debt is relevant to the rating and is a rating driver for the US, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).
For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg