Fitch Cuts Vietnam Ratings

Fitch Ratings cut Vietnam's credit rating Thursday, citing a deterioration in its finances and a banking system increasingly vulnerable to systemic stress, and warned that the country could face economic and financial instability ahead.
The ratings firm also slammed the country for poor management of its macroeconomic policies.
"Vietnam's track record of stop-go policy tightening and easing has been ad-hoc, reactive and inconsistent," said Ai Ling Ngiam, director in Fitch's Asia Sovereign team.
Fitch downgraded Vietnam's long-term foreign and local currency ratings to B+ from BB-. The outlooks on those ratings are stable. Fitch also cut Vietnam's Country Ceiling to B+ from BB- and affirmed the short-term foreign currency rating at B.
Mrs. Ngiam said Vietnam's weaker external finances and rising external financing requirements amid an inconsistent macroeconomic policy framework, a highly dollarized economy and a weak banking system were behind the rating downgrade. Fitch also noted that while Vietnam's foreign exchange reserves increased in the second quarter, it doesn't believe the country's external finance position has stabilized yet.
The ratings firm said net long-term capitals flows, including direct and portfolio investment, may fall short of covering Vietnam's current account deficit for a third straight year. Fitch estimates the deficit will amount to more than 10% of GDP in 2010.
Fitch said the repatriation of external assets by state-owned firms suggests that the rise in foreign exchange reserves so far this year may not be sustainable. It forecasts Vietnam's gross external financing requirements will increase to 79% of forex reserves in 2010 from 37% in 2009, higher than the median of 55% for "B" ratings. "This would increase Vietnam's vulnerability to changing external financing conditions," Fitch said.
Mrs. Ngiam said there is a risk that Vietnam may loosen its policies toward a pro-growth stance in the run-up to the January 2011 national congress of the ruling Communist Party.
"Premature easing increases the risk of macroeconomic and financial instability," she said.
Fitch said prolonged double-digit credit extension to state and private entities underlines rising sovereign contingent liability risks posed by the banking sector. It forecasts the stock of private credit to reach 116% of gross domestic product in 2010, the highest stock of private credit relative to output in the B-rated category.
Vietnam also suffers from a large budget deficit, which Fitch expects will total 7.6% of GDP in 2010, only slightly narrower than 8.7% of GDP in 2009.
"Financing deficits of this size has proved difficult, with the government resorting to domestically-issued foreign currency instruments, raising exposure to exchange rate risk," Fitch said.
Fitch said Vietnam's public debt increased to 45% of GDP in 2009, "eroding what had traditionally been a key rating strength, while the risk of contingent liabilities migrating to the public sector's balance sheet is high."
The ratings firm also said that according to its Macro Prudential Risk Monitor the vulnerability of Vietnam's banking system to potential systemic stress has increased to "high" from "moderate" and now ranks E3, the lowest point on the matrix.
A preliminary Fitch analysis based on Vietnamese accounting standards estimates a possible banking sector recapitalisation bill for the top six systemically important banks, which represent 51% of total banking sector assets, would be at least 12% of GDP, should systemic risks materialise, the ratings firm said.
Uncertainty surrounding the banking system's asset quality is underscored by the fact that non-performing loans based on Vietnam's accounting standards often fall short of that of international accounting standards by three to five times.
"Furthermore, domestic confidence remains sensitive to shocks, leaving the Vietnamese dong vulnerable to renewed switches into foreign exchange and gold. Further rounds of currency pressure would be negative for financial stability given the highly dollarized banking system," Fitch said.
Fitch said Vietnam's sovereign fundamentals remain supported by strong backing from multilateral and bilateral creditors as well as significant gains in income per capita following the introduction of the "doi moi" policy in 1986.
Write to Arran Scott at arran.scott@dowjones.com

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