Moody's Investors Service says that the stable outlook on Vietnam's B2 government bond rating reflects a firming of macroeconomic settings and initial progress on the restructuring of the banking system.
Vietnam's real GDP growth has rebounded from lows reached last year and has been accompanied by stable inflation and a strengthening in the external payments position. In particular, the growth of the foreign-owned manufacturing sector's exports, particularly in telephones, has helped restore health to the current account and the overall balance of payments. As a result, foreign exchange reserves are near multi-year highs. Consequent exchange rate stability has in turn contributed to benign inflation over the past two years.
Vietnam's most pressing credit challenges relate to contingent risks from the banking system and state-owned enterprises (SOE). While the government's direct liabilities to the two sectors remain moderate, the expansion of SOEs' balance sheets in the last decade was facilitated by rapid domestic credit growth that has contributed to a much larger debt burden for the public sector.
However, a Moody's report also says that there has been progress on the restructuring of the banking system, although the risks that contributed to the rating downgrade to B2 in September 2012 have not been completely alleviated. Notably, the Vietnam Asset Management Company has started to absorb non-performing loans from the banking sector, which should over time reduce downside risks.
Vietnam's favorable debt structure provides additional credit support. A significant portion of the government's annual financing needs—and thus its debt stock—are sourced from official creditors on concessional, low cost and generous repayment terms, bolstering debt affordability.