Dagong Maintains the Sovereign Credit Ratings of Vietnam at B+ with a ...

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Dagong Maintains the Sovereign Credit Ratings of Vietnam at B+ with a ... Empty Dagong Maintains the Sovereign Credit Ratings of Vietnam at B+ with a ...

Post  Admin on Thu Dec 08, 2016 1:22 pm

December 7, 2016

Dagong Global Credit Rating Co., Ltd. ('Dagong') has decided today to maintain both the local and foreign currency sovereign credit ratings of the Socialist Republic of Vietnam ('Vietnam') at B+, each with a stable outlook. In spite of a high general government fiscal deficit and a higher debt burden, stable government solvency will be sustained by a stable political environment, rapid economic growth and easier fiscal situation.

The key reasons for maintaining the sovereign credit ratings of Vietnam are laid out below:

1. The political situation remains stable in Vietnam, where the fragile financial system subdues the debt repayment environment which remains under pressure. Following the peaceful transition of power to the new government in 2016, the dominant Communist Party of Vietnam continues to carry out reforms to state-owned enterprises and the private sector. It also continues to attract foreign capital. However, the government's ineffective management makes the realization of reforms difficult. In the short term, the central bank continues with monetary easing, but the state-owned banks' deteriorating liquidity position, low capital adequacy ratio, and slow separation of toxic assets point to persistent vulnerability and low resilience in the financial system.

2. Driven by domestic demand, the economy is growing rapidly and the medium to long term economic growth potential is huge. Despite external demand stunting export growth, in the short term the strong domestic demand, which is underpinned by higher wages, low credit costs and increased public investment, is expected to gear up Vietnam's economic growth to reach 6.1% in 2016 and 6.2% in 2017, and great growth potential could be seen in the medium and long terms. The vulnerability of the export-oriented economy is expected to be improved by structural reforms, so Vietnam's average economic growth rate is estimated to be 6.2% during the period 2016-2021.

3. The wide fiscal deficit is narrowing, but repayment sources remain fragile. The Vietnamese government intends to bring down the public deficit below 4.0% of GDP by 2020. However, it has also introduced economic stimulus polices, such as lowering the tax burden on corporations and maintaining the current investment scale, which will slow down and reduce the effectiveness of the deficit cut. Vietnam's general government deficit is projected to be 6.5% in 2016 and 6.0% in 2017, and remain at a high level over the medium and long terms. In the near term, Vietnam continues to rely on debt financing, and general government financing needs are forecast to be 10.4% in 2016 and 7.9% in 2017.

4. Although the general government debt burden continues to increase from an already high level, a reasonable debt structure is expected to sustain weak yet stable government solvency. Due to high fiscal deficits, the large general government debt burden ratio is projected to rise to 61.9% in 2016 and 64.3% in 2017. Nevertheless, the long debt maturity could ease the government's repayment pressure in the short term, and fast mid- and long-term economic growth will temper fiscal strains, thus maintaining the stability of government solvency in the local currency. Although the government's external debt burden is increasing, the current account surplus and magnetic attraction towards foreign direct investment will support the dong's value which is unlikely to plunge in the short term. Meanwhile, the foreign exchange reserves (about 18.0% of GDP) and massive external assistance will also support stability in the value of the dong.

In the short term, the boons of structural reform and a better investment environment will gradually materialize, while strong domestic demand continues to fuel rapid economic growth and causes the fiscal deficit to narrow. This will be conducive to the improvement of government solvency. Hence, Dagong has decided to maintain a stable outlook for both the local and foreign currency sovereign credit ratings of Vietnam for the next one to two years.



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