Fitch Ratings has upgraded Vietnam's sovereign ratings by one notch, citing improvements in the economy and stronger finances, as the country hosts a roadshow to sell a rare sovereign bond.

The Southeast Asian country's long-term foreign and local currency issuer default ratings (IDRs) were raised to 'BB-' from 'B+', three notches below investment level, while its outlook was revised downwards to 'stable' from 'positive'.

Fitch said in a report on Monday the upgrade reflects improved macroeconomic stability and stronger external balances.

It cited a central bank policy on tightening its monetary stance, leading to a slowdown in credit growth, a quickening pace of economic growth and moderate inflation.

Inflation this year could be less than 4 percent, well below the government's target of keeping the rate below 7 percent, Prime Minister Nguyen Tan Dung was quoted in an official statement on the weekend as saying.

But Vietnam's economic growth and fiscal balances have not been sustainable, Dung told the National Assembly last month, citing a high state budget deficit, fast rising debt and slow growth in domestic demand and lending.

Dung's comments are in line with those of many independent economists, who say strong exports and a booming manufacturing sector are driving an economy otherwise constrained by structural woes, such as a wasteful state sector, stubborn bad debts and subdued domestic spending.

Vietnam's $171 billion economy has been grappling with a slow recovery in the real estate market, and a territorial dispute with China has strained bilateral ties.

Fitch said its downgrade of Vietnam's outlook was made on the assumption of "no escalation of regional or geopolitical disputes to a level that disrupts trade and financial flows."

Vietnam's long-term foreign currency rating was rated at BB- by Standard & Poor's, and B1 by Moody's Investors Service. Both rating agencies have a stable outlook on the country.

Rare sovereign bond sale

The ratings upgrade comes as Vietnam plans to raise $1 billion from its first global sovereign bond in more than four years. The roadshow is being held in Singapore, Hong Kong, London and three cities in the United States, the Thanh Nien (Young People) newspaper said.

Ahead of the rating change, Vietnam's five-year CDS contract outperformed the broader market, moving in by four basis points to 183-198 bps.

Some participants at the roadshow said the government could have provided potential investors with a bit more guidance on how it planned to improve revenue growth while containing expenditure, without hurting long-term economic growth.

"While more concessions to the SME (small- and medium-sized enterprises) sector could strengthen economic activities, a planned VAT (value-added tax) increase for next year may offset some of the benefits. In addition, with a moderating global growth scenario, it is uncertain how Vietnam's FDI and exports, etc will be affected," said Pinebridge fund manager Arthur Lau.

"They have been coming to the market at infrequent intervals but we could see the frequency increasing given an improving economy and the positive rating trajectory. The existing sovereign bonds are illiquid," he said.