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Fitch Affirms Vietnam at 'B+'; Stable Outlook

January 30, 2013 Fitch Ratings
Fitch Ratings-Hong Kong-29 January 2013: Fitch Ratings affirmed Vietnam's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+'. The Outlooks on the ratings are Stable. The agency has also affirmed the Country Ceiling at 'B+' and the Short-Term Foreign-Currency IDR at 'B'.
Vietnam's ratings are underpinned by its track record of strong economic growth and a favourable environment for foreign direct investment that has rendered the economy less vulnerable to external shocks and raised its potential growth rate. The ratings are also supported by favourable overall levels of external debt and debt service relative to rated peers as well as by high levels of domestic savings and investment. Fitch estimates that Vietnam's domestic savings and investment rates have averaged 28% and 36% respectively over the past five years.

The ratings are constrained by higher and more volatile consumer price inflation than peers that renders the economy and exchange rate vulnerable to adverse economic and financial shocks. Despite rapid economic growth and development over the last two decades, human capital and the value-added per person remain low relative to single 'B' and 'BB' rated peers. The quality and timeliness of economic and financial data in Vietnam are also rating weaknesses, particularly the lags in the release of data on the stock of official foreign exchange reserves.

The principal constraint on Vietnam's sovereign rating is the potential risk to macro-financial stability and to public finances posed by a large and opaque banking sector. In particular, the potential fiscal cost of restructuring the banking sector is highly uncertain. Fitch's base-case estimate is a recapitalisation cost of 10% of 2012 GDP but there is a wide range of possible outcomes around this estimate, depending on the evolution of the economy, structural reform and the role of foreign capital.

The State Bank of Vietnam's (SBV) admission that non-performing loans (NPLs), which accounted for 8.8% of total loans at end-September 2012, were higher than previously reported by banks is a positive step toward addressing the structural weakness of the sector. The SBV is also reportedly considering setting up a state asset-management company to help restructure banks. Improvements on the quality of financial reporting and governance as well as greater confidence in the size of the fiscal risk posed by the banking sector would lift a key constraint on Vietnam's ratings.

The Stable Outlook reflects Fitch's expectation that the policy authorities will remain committed to macroeconomic stability, including lower inflation, a stable currency, and avoiding an excessive current account deficit.

Vietnam has rebalanced its current account while avoiding a steep recession, in contrast to certain emerging and advanced economies. Fitch estimates the current account surplus rose to 7.2% of GDP in 2012 (0.2% in 2011). Foreign-exchange reserves may have reached around USD24bn at end-2012 as a result. This should provide Vietnam with a larger buffer to cope with any further capital flight.

The worst of the downturn is over after Vietnam's economy slowed rapidly in response to austerity measures implemented in February 2011 under Resolution 11's objectives of achieving macroeconomic stability. Real GDP grew 5.5% yoy in H212, following a 4.4% yoy increase in H112. Fitch forecasts real GDP to grow 5.5% in 2013 versus 5% in 2012.

Headline CPI inflation slowed rapidly, averaging 9.1% in 2012 versus 18.7% in 2011. This allowed SBV to cut benchmark interest rates by 600bp in 2012. However, Fitch believes monetary policy is unlikely to be loosened further as this could erode support for the exchange rate. Core inflation pressures also remain high.

Fitch expects the government to slightly tighten its fiscal stance in 2013. Fitch estimates that Vietnam's budget deficit, including off-budget spending, will narrow to 5.1% of GDP in 2013 from 5.9% of GDP in 2012. The general government debt/GDP ratio remained stable at 44% of GDP in 2012, in line with 'B' and 'BB' peer group medians.

The main factors that could lead to a positive rating action are:
-A sustained improvement in the overall macroeconomic outlook consistent with sustainable economic growth with moderate and stable inflation and external equilibrium
-Greater clarity on the potential cost of resolving non-performing loans or improvement in the standalone credit quality of the banking sector
-An acceleration in structural reforms, particularly with regard to state-owned enterprises and public investment

The main factors that could lead to a negative rating action are:
-Higher-than-expected losses in the banking sector, which would require large-scale sovereign support and potentially threaten macro-financial stability
-Abandoning Resolution 11 macro-economic stability objectives and adoption of policies that threaten price and external stability
-A sharp, sustained deterioration in public finances which leads to a large increase in Vietnam's general government debt-to-GDP ratio

-Fitch assumes that Vietnam's authorities will continue to adhere to policies aimed at achieving macroeconomic stability of slower GDP growth, lower inflation and a healthier current account balance
-Fitch assumes that the potential cost of restructuring the banking sector will be broadly in line with the agency's base-case of 10% of GDP
-Fitch assumes that political stability will persist in the medium-term
-Fitch also assumes global growth, with world real GDP growth projected to rise 2.4% and 2.9% in 2013 and 2014 respectively, compared with an estimate of 2% in 2012

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