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S&P upgrades Vietnam’s rating to 'BB+/B' on improved governance on guaranteed debt; outlook stable

May 26, 2022 11:33 pm

Standard and Poor today upgraded Vietnam’s sufficing good recovery post pandemic.

Below is a detailed statement from the rating for the upgradation.

Vietnam's economy is back on track to recovering following disruptions from a surge in COVID-19 cases last year. The strict lockdown in the second half of 2021, particularly around economic zones, resulted in real GDP growth slowing to a record low of 2.6% from 2.9% in 2020. Two consecutive years of subpar growth provide a favorable base for an economic rebound this year. As vaccination rates increase, the government has announced a shift away from the zero-COVID policy. The progressive removal of domestic and border restrictions to usher in tourists should further support the economic rebound this year.

Vietnam's GDP per capita has risen quickly in the past few years from a relatively low base. A recent re-evaluation of the country's official nominal GDP--meant to better capture activity from emerging industries--led to an upward revision by more than 20% over the revised period. We expect GDP per capita in 2022 to reach US$3,868.

We forecast real GDP will grow 6.9% in 2022 before settling closer to Vietnam's long-term trend of growing 6.5%-7% from 2023 onward. Vietnam's economy is increasingly well-diversified, with a booming manufacturing sector that is largely funded by FDI. Vietnam's attractiveness as a premier destination for FDI in Southeast Asia, along with its young, increasingly educated, and competitive workforce, should help to keep the country's long-term development trajectory intact despite temporary labor market disruptions from COVID-induced lockdowns.

Vietnam's macroeconomic stability has supported the manufacturing sector's attractiveness for global firms in the electronics, mobile phone, and textiles industries. The FDI-oriented segments continue to fuel stronger domestic activity, with better employment opportunities and higher wages powering robust private consumption growth. The resilience of these growth drivers is demonstrated in macroeconomic data from the first quarter, which showed exports growing 5.1% and consumption increasing 4.3% from a year ago.

We expect Vietnam's 10-year weighted average growth of real GDP per capita to be approximately 5.7%, significantly higher than the average of the country's peers at a similar income level.

Pandemic developments remain unpredictable, although Vietnam's high vaccination rate may help mitigate the impact of potential COVID waves on the healthcare system in the future.

Risks to economic growth are tilted toward the downside, because Vietnam's export-led economy relies on strong external demand. Rising inflation and financing conditions, as well as geopolitical risks, could dampen global growth and reduce demand for Vietnamese exports. Additional risks to Vietnam's economy include the condition of its financial sector, which is characterized by low levels of capitalization and mixed asset quality, which has deteriorated during the pandemic.

In October 2019, Vietnam's Ministry of Finance announced a delayed payment on a government-guaranteed debt obligation that was due the previous month. The government had not received an official request from the creditors at the time of its repayment on the obligation. In our view, the delay in repayment on this obligation represented shortcomings in administrative capacity at the time, but did not indicate financial resource stress on the part of Vietnam's government.

Since then, the government has put in place measures to tighten administrative procedures to ensure that such delays do not recur. It also made the Ministry of Finance wholly responsible for ensuring that full and immediate payment on debt obligations will be made. In our opinion, the government has demonstrated an improved track record in managing such obligations with the implementation of these measures over the past two years.

Vietnam's government has generally delivered strong development outcomes in the past decade. In our opinion, checks and balances within the government are limited, but the social compact between the government and citizens remains strong.

Nevertheless, decision-making in Vietnam remains highly centralized under its one-party system, and transparency is impaired, in our opinion. These considerations are factored into our broader assessment of the country's institutional settings, along with our overall ratings.

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