Fitch Ratings (Fitch) upgraded Vietnam’s long-term national credit rating from BB to BB+ with a 'Stable' outlook, based on many positive signs in the national economy, the Ministry of Finance reported on Friday.
The upgrade reflects Vietnam’s favorable medium-term growth outlook, reinforced by robust foreign direct investment (FDI) inflows, which Fitch expects will continue to drive sustained improvements in its structural credit metrics, the American credit rating agency said in a commentary on the same day.
“We have increasing confidence that near-term economic headwinds from property-sector stresses, weak external demand and delays in policy implementation owing to a corruption crackdown are unlikely to affect medium-term macroeconomic prospects and that policy buffers are sufficient to manage near-term risks,” according to the commentary.
Fitch forecasts Vietnam will gain a medium-term growth of around seven percent, thanks to its cost competitiveness, educated workforce relative to peers, and entry into regional and global free-trade agreements that all help maintain continued strong FDI inflows amid global supply chain diversification.
Fitch cited the Vietnamese government’s estimate showing that FDI projects have disbursed about $2.4 billion (or 6 percent of GDP) as of December 20, 2022, an increase of 13.5 percent year on year.
Vietnam and the U.S. upgraded their diplomatic relations to a comprehensive strategic partnership in September, which could facilitate greater FDI from the U.S. to Vietnam as well as further promote two-way trade.
Another positive sign is that Vietnam’s foreign exchange reserves, after a sharp decrease last year, have improved gradually, reaching US$89 billion by end-September 2023, partly reflecting some return of capital flows and a larger trade surplus.
Fitch expects that Vietnam’s reserves are expected to improve further in the next two years with coverage of current external payments averaging about three months, under the organization’s baseline.
“Vietnam’s external debt composition remains favorable, as most of the debt is owed to bilateral and multilaterals. This leads to a lower external debt service burden and supports its high external liquidity ratio,” Fitch stated.
It also commented that the large size of the financial system's assets, at 190 percent of GDP at end-2022, remains a rating constraint, combined with high credit growth and thin capitalization.
Fitch expects loan growth to accelerate to around 14 percent in 2024, three percent points higher than the 2023 average, in line with the government's credit growth target, as consumer sentiment improves.
Meanwhile, the banking sector capitalization will improve gradually on improved internal capital generation and planned capital raising, the organization predicted.
Although Vietnam’s GDP has recovered in the third quarter of 2023, growing by 5.3 percent year on year, 1.6 percent points higher than in the first quarter, “the reliance on credit growth in the policy mix to support economic activity will continue to pose a challenge to macroeconomic stability,” Fitch warned.
Under its baseline, Fitch expects Vietnam’s 2023 economic growth to moderate to 4.8 percent, from eight percent in 2022, but vigorously rebound to 6.3 percent in 2024 and 6.5 percent in 2025.
According to the finance ministry, Fitch’s upgrade of Vietnam’s national credit rating came as the world has been facing challenges of declined economic and trade growth, and many countries have been struggling with financial risks.
The advancement has therefore reflected the international recognition of the great efforts of the Party, the National Assembly and the government of Vietnam over the past time to consolidate the nation’s socio-political background, stabilize its macroeconomics and accelerate its economic recovery and development, the ministry stated.
The agency said it will continue to coordinate with Fitch and other credit rating organizations, as well as relevant international organizations, to provide them with the latest information necessary for a complete and updated assessment of Vietnam’s credit profile.
Fitch Ratings Inc. – headquartered in New York, the U.S. – is a leading provider of credit ratings, commentary and research for the global market with world-wide office locations.
Fitch is internationally considered one of the ‘Big Three credit rating agencies’, the other two being Moody’s and Standard & Poor’s.