Fitch Ratings has affirmed Vietnam Electricity (EVN)'s long-term foreign-currency issuer default rating at 'BB' with a positive outlook, according to a post on the credit rating agency’s website on Tuesday.

EVN's ratings reflect its Standalone Credit Profile (SCP), which is at the same level as the Vietnamese sovereign rating (BB/Positive). 

Under Fitch's Government-Related Entities (GRE) Rating Criteria, EVN's ratings will be equalized to that of the sovereign in the case of any weakening in the SCP, provided the likelihood of support remains intact. 

EVN's 'bb' SCP reflects its position as the owner and operator of Vietnam's electricity transmission and distribution network, and its 38 percent share of Vietnam's power generation capacity as of end-2021. 

Fitch expects EVN's financial profile to be much stronger than commensurate for its SCP assessment. 

The SCP, however, is constrained by the limited record of Vietnam's cost pass-through regulatory framework.

Fitch highlighted several key rating drivers, including strong state linkages, strong state incentive to support, strong demand recovery, and sufficient headroom amid stable tariff.

The state fully owns EVN, appoints its board and senior management, directs investments, and approves tariff hikes in excess of five percent. 

The support record for EVN is 'Strong,' as it has received guarantees, step-down loans, loans from state-owned banks at preferential rates, project subsidies, and tax incentives.

Vietnam's electricity demand rose modestly by 4.6 percent year on year in the first quarter of 2022 as the country emerged from the COVID-19 pandemic in the previous year and faced a tightened coal supply. 

Fitch expects electricity demand in Vietnam to jump by eight percent in 2022 due to a low base effect, faster export growth, and a recovery in consumer spending. 

The firm also expects electricity demand to increase by an average of eight percent a year from 2022, underpinned by rising industrialization, urbanization, and affluence.

The Vietnamese government has decided to keep electricity tariffs stable until end-2022 to aid post-pandemic economic development. 

Fitch expects EVN's SCP to have reasonable headroom as heavily regulated domestic coal prices and its large hydro share help regulate generation costs and limit the impact of stable tariffs on its financial profile.

Fitch expects the company to generate more than VND60 trillion (US$2.5 billion) in operational cash flow a year over 2022-25. 

However, it is likely to generate low, if not negative, free cash flow due to its high capex plans. 

According to Fitch’s key assumptions, installed generation capacity in Vietnam will increase to 84GW by end-2023, from 77.5GW in 2021, led by private enterprises.

Electricity sales volume will increase by eight percent in 2022, 8.2 percent in 2023, and 8.3 percent thereafter.

The average electricity tariffs will increase by 1.1 percent to VND1,877/kWh in 2022 and remain almost flat subsequently.

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