KUALA LUMPUR: Fitch Ratings has downgraded Vietnam's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-' respectively and removed them from Rating Watch Negative. The Outlooks on the ratings are Stable.
At the same time, Fitch downgraded the Country Ceiling to 'B+' from 'BB-' and affirmed the Short-term foreign currency IDR at 'B'.
"Vietnam's sovereign creditworthiness has deteriorated on the back of weaker external finances and rising external financing requirements amid an inconsistent macroeconomic policy framework, a highly dollarized economy and a weak banking system," said Ngiam Ai Ling Ngiam, Director in Fitch's Asia Sovereign team, in a report issued on Wednesday, July 28.
During Q210, the State Bank of Vietnam (SBV) accumulated additional foreign assets from the banking system, marginally adding on to the USD13.8bn trough in official foreign exchange reserves (FXR) in March 2010. However, Fitch does not believe that Vietnam's external finance position has stabilized as yet.
For the third successive year, more stable, net long-term capital flows (direct and portfolio investments) may fall short of covering the current account deficit (CAD), which is expected to stay wide at over 10% of GDP in 2010.
Repatriation of external assets by state-owned enterprises also suggests that the rise in FXR so far this year may not be sustainable.
Fitch forecasts Vietnam's gross external financing requirements (GXFR) to rise to 79% of FXR in 2010 from 37% in 2009, higher than the 'B' median of 55%. This would increase Vietnam's vulnerability to changing external financing conditions.
"Vietnam's track record of stop-go policy tightening and easing has been ad-hoc, reactive and inconsistent," adds Ngiam. There is a risk that policies may ease towards 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.
Fitch notes that prolonged double-digit credit extension to state and private entities underlines rising sovereign contingent liability risks posed by the banking sector. Fitch forecasts the stock of private credit to reach 116% of GDP in 2010, the highest stock of private credit relative to output in the 'B' rated category.
Vietnam has a "twin deficit" problem: the general government deficit widened to 8.7% of GDP in 2009 and Fitch expects the deficit to remain high at 7.6% in 2010. Financing deficits of this size has proved difficult, with the government resorting to domestically-issued foreign currency instruments, raising exposure to exchange rate risk.
Public debt has risen 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.
According to Fitch's Macro Prudential Risk Monitor, Vietnam's banking system's vulnerability 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 (VAS) -- estimates a possible banking sector recapitalisation bill of the top six systemically important banks (which represent 51% of total banking sector assets) to be at least 12% of GDP, should systemic risks materialise.
Uncertainty surrounding the banking system's asset quality is underscored by the fact that VAS-based non-performing loans (NPLs) often fall short of that of international accounting standards by 3x-5x.
Furthermore, domestic confidence remains sensitive to shocks, leaving the Vietnamese dong (VND) 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.
At the 'B' rating category, Vietnam's sovereign fundamentals remain supported by strong support received from multilateral and bilateral creditors as well as significant gains in income per capita following the introduction of the "doi moi" policy in 1986.
At the same time, Fitch downgraded the Country Ceiling to 'B+' from 'BB-' and affirmed the Short-term foreign currency IDR at 'B'.
"Vietnam's sovereign creditworthiness has deteriorated on the back of weaker external finances and rising external financing requirements amid an inconsistent macroeconomic policy framework, a highly dollarized economy and a weak banking system," said Ngiam Ai Ling Ngiam, Director in Fitch's Asia Sovereign team, in a report issued on Wednesday, July 28.
During Q210, the State Bank of Vietnam (SBV) accumulated additional foreign assets from the banking system, marginally adding on to the USD13.8bn trough in official foreign exchange reserves (FXR) in March 2010. However, Fitch does not believe that Vietnam's external finance position has stabilized as yet.
For the third successive year, more stable, net long-term capital flows (direct and portfolio investments) may fall short of covering the current account deficit (CAD), which is expected to stay wide at over 10% of GDP in 2010.
Repatriation of external assets by state-owned enterprises also suggests that the rise in FXR so far this year may not be sustainable.
Fitch forecasts Vietnam's gross external financing requirements (GXFR) to rise to 79% of FXR in 2010 from 37% in 2009, higher than the 'B' median of 55%. This would increase Vietnam's vulnerability to changing external financing conditions.
"Vietnam's track record of stop-go policy tightening and easing has been ad-hoc, reactive and inconsistent," adds Ngiam. There is a risk that policies may ease towards 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.
Fitch notes that prolonged double-digit credit extension to state and private entities underlines rising sovereign contingent liability risks posed by the banking sector. Fitch forecasts the stock of private credit to reach 116% of GDP in 2010, the highest stock of private credit relative to output in the 'B' rated category.
Vietnam has a "twin deficit" problem: the general government deficit widened to 8.7% of GDP in 2009 and Fitch expects the deficit to remain high at 7.6% in 2010. Financing deficits of this size has proved difficult, with the government resorting to domestically-issued foreign currency instruments, raising exposure to exchange rate risk.
Public debt has risen 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.
According to Fitch's Macro Prudential Risk Monitor, Vietnam's banking system's vulnerability 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 (VAS) -- estimates a possible banking sector recapitalisation bill of the top six systemically important banks (which represent 51% of total banking sector assets) to be at least 12% of GDP, should systemic risks materialise.
Uncertainty surrounding the banking system's asset quality is underscored by the fact that VAS-based non-performing loans (NPLs) often fall short of that of international accounting standards by 3x-5x.
Furthermore, domestic confidence remains sensitive to shocks, leaving the Vietnamese dong (VND) 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.
At the 'B' rating category, Vietnam's sovereign fundamentals remain supported by strong support received from multilateral and bilateral creditors as well as significant gains in income per capita following the introduction of the "doi moi" policy in 1986.
No comments:
Post a Comment