Fitch affirms Vietnam stable debt outlook

The issue ratings on the country's senior unsecured foreign- and local-currency bonds are also affirmed at ‘BB-'. The country ceiling is affirmed at ‘BB-' and the short-term foreign-currency IDR at ‘B'.

Fitch said in an online report late last week that Vietnam's ratings balance its strong macro-economic outlook against high public debt levels, sizeable budget deficits, and relatively weak structural indicators.

The agency forecasts a budget deficit of 6% of gross domestic product (GDP) for the country this year, compared with an estimated 6.2% of GDP last year based on the agency's adjusted measure.

While the 2016 budget is currently under deliberation by the National Assembly, Fitch forecasts a modest fiscal consolidation next year to 5.4% of GDP, with an expected reduction of off-budget capital expenditure.

General government gross debt (GGGD) rose to an estimated 47.3% of GDP in 2014, higher than the ‘BB' median of 42.8% of GDP, and up from 42.3% the year prior.

Fitch expects GGGD to rise to 49.3% of GDP in 2015 and stabilise at about 50% of GDP as the authorities move toward achieving their stated medium-term fiscal objectives of reducing the official budget deficit to below 4% of GDP.

The authorities have indicated that they will not seek to raise the public debt ceiling of 65% of GDP, which captures a broader measurement of public debts, including government guarantees.

Fitch deems Vietnam's refinancing risk as moderate, which balances high concessionary funding with a growing stock of marketable domestic debt at relatively short maturities.

Domestic debt has a weighted average maturity of 4.3 years versus 12.8 years for external debt. Five-year domestic bond yields rose to 6.7% in October 2015 from 5.2% a year prior.

Fitch expects the country's current-account balance to narrow to 0.8% of GDP this year, following surpluses averaging 4.1% of GDP over the past four years.

Imports have surged by 14.3% in value terms during the first 10 months of this year versus export growth of 8.5%. This has resulted in a trade deficit of US$4.1 billion in the year to October 2015 versus a surplus of US$2.4 billion a year prior.

Foreign reserve coverage at 2.1 times current-account payments remains low relative to the ‘BB' median of 4.2, and Fitch estimates the country depleted around 20% of its gross reserve stock in recent months to defend the exchange rate.

This led to a one-per cent devaluation of the Vietnamese dong in September 2015 and a widening of the trading band from 2% to 3%.

Vietnam's banking sector continues to exhibit lingering asset-quality risks and poor transparency, but is showing preliminary signs of stabilisation.

Fitch previously estimated that the true level of non-performing loans (NPLs) could be as high as 15%, but believes a recent pick-up in real-estate activity is likely to have increased the underlying collateral value of non-performing assets, which could lead to somewhat lower provisioning for banks.

Vietnam's medium-term growth prospects will be significantly enhanced should the Trans-Pacific Partnership (TPP) be successfully ratified by participating countries, the agency said.

The free-trade elements of the TPP will lower tariff barriers, giving the country greater access to large consumer markets in the US, Japan, Canada and Australia.

TPP signatories accounted for 39% of Vietnam's total exports and 23% of imports last year.

An agreement in principal on a separate free-trade deal with the European Union, which represents 18% of Vietnam's total exports, will also lower tariff barriers and enhance access to another key export market.