Fitch Ratings-Hong Kong, Singapore-05 July 2020: Vietnam is positioned to stand out among Asia’s frontier and emerging markets this year in terms of its economic resilience and success in bringing the coronavirus outbreak under control, says Fitch Ratings. These factors should support Vietnam’s ‘BB’ rating, which we affirmed in April 2020 while revising the Outlook to Stable from Positive. Nevertheless, the country faces a number of challenges, including contingent liability risks from state-owned enterprises and structural weaknesses in the banking sector.
Vietnam is one of only four Fitch-rated sovereigns in the Asia Pacific (APAC) that we expect to post positive economic growth in 2020. Official data show the economy expanded by 0.4% yoy in 2Q20, despite the impact of the coronavirus pandemic on tourism and export demand, in line with our full-year 2.8% growth projection. Fitch forecasts that the pace of expansion will accelerate in 2021, as external demand, including tourism exports, recovers.
The relative strength of Vietnam’s growth momentum owes much to its success in curbing the pandemic. Vietnam had no reported deaths from COVID-19 as of end-June, according to the World Health Organisation. This could reflect a variety of factors, including the effectiveness of the official health policy response.
Vietnam has introduced fiscal stimulus of around VND271 trillion (3.4% of GDP) to help offset the effects of the pandemic. This includes tax deferrals, cuts and exemptions, as well as cash transfers to affected workers and households, the latter being worth 0.4% of GDP. We expect the general government debt-to-GDP ratio to rise to around 42% in 2020, from 37% in 2019, based on Fitch estimates, but this still below the 59% median for ‘BB’ rated sovereigns.
The State Bank of Vietnam has also loosened monetary policy to support the economy, but the lower interest-rate environment and state pressure on banks to ease lending terms will weigh on bank profitability. Meanwhile, slower economic growth and loan forbearance will add to asset quality problems. These factors will aggravate the structural weaknesses in the banking sector, such as low capital buffers and under reporting of problem loans, which have already dragged on the sovereign rating. Slower credit growth may, however, provide some relief on capital.
Vietnam’s economic outlook remains vulnerable to shifts in external demand. The country has benefitted from trade diversion associated with rising costs in China and the US-China trade war, and early data suggest it made further gains as China’s exports were disrupted by the coronavirus. Vietnam’s share of US apparel and textile imports rose to 15.5% in 4M20, from 12.9% in 4M19, according to the US Office of Textiles and Apparel. The country also attracted a healthy USD8.7 billion in realised capital investment from overseas in 1H20.
Nonetheless, both textile and apparel exports to the US and realised capital investment were lower yoy, illustrating Vietnam’s vulnerability to the evolution and impact of the pandemic. As elsewhere, restrictions remain on inbound tourism and remittances are declining. Tourism directly accounts for about 10% of GDP, with a higher contribution if indirect spillover effects are considered, while remittances were worth over 6% of GDP in 2019.
Vietnam is also susceptible to policy action by its main trade partners. Its National Assembly ratified the EU-Vietnam Free Trade Agreement on 8 June, which should underpin stable trade relations with the EU. However, Vietnam is on the US Treasury’s watchlist of potential currency manipulators, and relations with China are complicated by clashing territorial claims in the South China Sea. Nonetheless, our base assumption is that trade ties with both countries will remain stable.
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