Moody's affirms Vietnam positive move in fiscal vigour

As companies aim to diversify their production locations in Asia, Vietnam will continue to attract FDI

The drivers of the positive outlook include signs of improvements in fiscal strength and potential improvements in economic strength that may strengthen Vietnam's credit profile over time.

Sustained fiscal consolidation has led to improvements in fiscal and debt metrics, which Moody's expects to be only briefly interrupted by the pandemic. Moreover, Vietnam's economic strength may benefit from global shifts in production, trade and consumption following the coronavirus pandemic and support Vietnam's economy.

Cyclical and structural features may raise economic strength, driven by Vietnam's integration in Asian supply chains as well as its ability to capitalise on the rise in demand for electronics, smartphones, furniture, and other manufactured goods that is likely to endure beyond the pandemic.

Vietnam's share of global exports has risen rapidly since 2010 and has now caught up to peers in Southeast Asia. Vietnam stands to continue to benefit from shifts in production and trade, including as a party to major trade agreements for the region, including the recently concluded Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and a bilateral free trade agreement with the EU, one of its largest export markets.

As companies aim to diversify their production locations in Asia, Vietnam will continue to attract foreign direct investment (FDI) due to competitive labour costs, political stability, and preferential incentives favouring trade and investment.

Moody's expects these agreements to firm up Vietnam's competitive position in lower value products such as footwear and garments vis-à-vis other major producers, while placing it at the centre of higher-value-added regional tech supply chains for smartphones, semiconductors, and other electronic products.

Trade integration will also drive continued investment in Vietnam's transport and logistics infrastructure, which remains less developed than in other southeast Asian economies but is catching up in terms of efficiency.

Greater spillovers from foreign manufacturing operations to domestic value chains would further support economic strength. Over time, indications of higher fiscal and economic strength may point to improving policy effectiveness, also putting upward pressure on Vietnam's credit profile.

Meanwhile, Moody's has determined that the drivers of the previous negative outlook assigned in December 2019 have receded. The negative outlook, which followed a review for downgrade, related to the risks posed to Vietnam's credit profile from administrative failures leading to payment delays on government-guaranteed debt.

Moody's now assesses that guaranteed debt payment management practices have been strengthened within the administration, with greater scrutiny to the range of guaranteed debt payments coming due.

The government monitors a full list of direct and indirect debt obligations and has instituted an administrative process whereby relevant ministries set aside funding in advance to fulfil these obligations. With a coordinated focus on ensuring that the payments are planned for and processed promptly, Moody's assesses that the risk of renewed delays has diminished.

The Ba3 rating balances Vietnam's robust economic strength, low liquidity and external risks, and relatively weak institutional and governance strength and ongoing risks of crystallisation of contingent liabilities.

In particular, an improved debt financing and maturity strategy, which increasingly draws on domestic borrowing but still includes concessional external borrowing from official creditors, drives low government liquidity risk.

Meanwhile, a robust export sector and investment inflows support external buffers. The central bank, the State Bank of Vietnam (SBV), has accumulated a record high $89 billion in foreign exchange reserves through September 2020 while maintaining a stable exchange rate around the 3 per cent trading band for the dong, a key ingredient of Vietnam's foreign direct investment-driven export sector.

Policies to attract investment have resulted in high levels of FDI and trade integration within Asia and other major economic blocs, supporting increased export dynamism, robust external balances, and the buildup of foreign exchange reserves. Geopolitical tensions related to trade protectionism or tensions may pose challenges for Vietnam's trade-reliant economy.