Vietnam's B1 Sovereign Rating Reflects Emerging Record of Macroeconomic Stability

Vietnam's broad macroeconomic stability, the strengthening of its balance of payments and external payments position, and the easing of contingent risks in its banking sector has resulted in a B1 sovereign bond rating from Moody's Investors Service.

While real GDP growth has fallen since 2012, Moody's says much of the slower growth has been driven by weak domestic demand. In contrast, the export-oriented, foreign-owned sector of the economy has remained robust, helping sustain overall economic activity.

In a new report, Moody's says that the strengthening of Vietnam's balance of payments and external payments position has been underpinned by a diversification in the structure of its exports.

Combined with weak imports, this situation has resulted in the current account shifting from a deficit to a healthy surplus.

The current account surplus in turn contributed to the accumulation of foreign exchange reserves to an all-time high of $35.9 billion in April 2014, as well as to the stability of the exchange rate.

Resilient banking system

On the country's banking system, Moody's report says the operating environment for banks has stabilized, particularly in relation to liquidity.

The report points out that while Moody's maintains a negative outlook on Vietnam's banking system, the system is now more resilient than it was between 2010 and 2012. Such a situation therefore poses less of a contingent risk to the government.

According to Moody's, the banks' greater resilience is driven by their healthier liquidity profiles and gradual workout of non-performing loans. Moreover, the country's economic growth will support the banks' moderate credit growth levels, as well as the repayment capacity of borrowers.

However, Moody's report points out that Vietnam's sovereign credit profile is marked by important challenges.

Capital levels in the banking system remain inadequate, especially in the context of the continued weakness in asset quality. At the same time, risks from the state-owned enterprise sector persist, posing important constraints to the improving health of the banking system and domestic demand.

In addition, the government's fiscal position has eroded over the past few years, driven by weaker revenue performance.

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