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Standard & Poor’s says in a statement on April 5 that the stable outlook reflects continued improvements in the Government’s institutional settings, which the agency believes are supporting consistently strong economic growth and development outcomes.
These improvements are weighed against Vietnam’s lower middle-income economy, legacy banking sector weaknesses, and limited fiscal space. Vietnam’s external settings, which feature broadly balanced external accounts, strong foreign direct investment (FDI) inflow, and a manageable external debt burden, provide further support to the rating.
Vietnam has a low-income but fast-growing economy, with per capita gross domestic product (GDP) estimated at around US$2,572 as of late 2018. The agency expects export-led growth and robust domestic demand to keep the trend growth for real per capita GDP above average.
The Government’s socioeconomic development plans provide useful policy anchors that have improved macroeconomic stability and inflation management over recent years. At the same time, the economy has achieved impressive development outcomes, including consistently high real GDP growth.
The Government has built a strong record of promoting balanced economic growth, with real GDP growth averaging 6.2% annually since 2012. Importantly, it has delivered strong development outcomes since the global financial crisis and its own domestic banking sector crisis at the beginning of this decade.
The country still faces relatively high levels of corruption, but the Communist Party has adopted a much more aggressive approach toward corrupt practices over the past two years. Therefore, the agency expects this approach to continue beyond 2019, and these improvements to support strong and balanced economic growth over the coming years.
Although Vietnam has a lower middle-income economy, with GDP per capita that the agency projects at around US$2,695 in 2019, the economy is relatively diversified.
Continued improvements in macroeconomic stability have supported a strong performance in the sizable foreign-owned and export-focused manufacturing sectors such as electronics, mobile phones, and textiles.
The robust FDI-oriented economy is fueling stronger domestic activity, particularly through the private consumption channel. Low household leverage provides space for this trend to continue.
Vietnam’s external metrics are supportive of the rating. Its current account is likely to remain in modest surplus annually to 2022. Robust manufacturing and services (mainly tourism), exports, and large and rising remittances will counteract strong growth in the import of capital and consumption goods.
Strong FDI in manufacturing continued last year, despite a more challenging external environment, which speaks to the resilience of Vietnam’s investment environment. The country’s competitive unit labor costs, improving educational standards, and constructive demographics imply continued growth in FDI and goods exports.
Participation in free trade agreements, including the recently established Comprehensive and Progressive Agreement to Trans-Pacific Partnership, could provide further upside to Vietnam’s export earnings. The agency expects Vietnam to further pursue enhanced market access via bilateral and multilateral free trade initiatives.
Despite strong credit growth over recent years, and the considerable scale of banking sector assets relative to GDP, the agency notes that it does not observe credit being the primary driver of economic growth.
Likewise, the agency believes the risk of potentially destabilizing asset bubbles is limited, even in view of rising land prices and strong real estate development trends in major cities such as Hanoi and HCMC. It expects real GDP per capita growth at 5.7% through 2022, higher than the average of Vietnam’s peers at a similar income level.
Domestic and external risks
The agency says that the country faces a variety of domestic and external risks.
On the external front, trade disputes between major economies could undermine export momentum over the short term. Given the extraordinarily large share of trade relative to the size of Vietnam’s economy, the country would face additional headwinds in the event of an acute external slowdown.
Domestically, elevated fiscal deficits and public indebtedness mean that new sources of funding will likely be needed to further spur strong infrastructure investment. Relatively weak banks in Vietnam, characterized by low levels of capitalization and poor asset quality, also pose a degree of risk to the economic outlook.
Despite debt stabilization, fiscal profile reflects risks, according to Standard & Poor’s. Although the agency forecasts roughly stable debt levels relative to GDP at the general Government level, it believes structural fiscal reform progress has been limited.
Fiscal deficits are unlikely to recede further, and the Government will be challenged to maintain budgetary support from its equitization program (sale of shares) beyond 2020.
The agency views Vietnam’s shortfall in basic services to the population and in infrastructure to be a constraint on fiscal performance. This factor is likely to result in spending pressure for a long time.
Officials have successfully curtailed growth in government guarantees, which has stabilized Vietnam’s broader measure of public and public-guaranteed debt below the self-mandated cap of 65% of GDP. However, stricter standards for the provision of these guarantees may constrain financing conditions for infrastructure projects, especially electricity generation.
This is the first time since December 2010 that Standard & Poor’s has raised the national sovereign credit rating for the Southeast Asian nation.