Fitch said, “A ratings downgrade would likely occur if there is backsliding on the authorities' tightening package and a failure to rein in inflation, risking further loss of confidence in the Vietnamese currency and intensified risks to economic stability.”
Vietnam’s inflation hit 22.2% in July, up from 11.8% in December, partly on high food prices but also from strong money and credit growth and fiscal spending in 2010. High inflation has undermined domestic confidence in the Vietnamese dong, prompting capital flight and a drop in official reserves, said the credit rating firm.
Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch, said in a statement, “Vietnam's sovereign creditworthiness remains under pressure from the risk to economic stability from high inflation, and from still-unresolved problems in the banking system.” Sticking with a policy-tightening package agreed in February would support the ratings, but slippage could see negative pressure build, he added.
Fitch views the Resolution 11 agenda as a support to domestic confidence in the dong, economic stability and the sovereign ratings. The currency has been broadly stable since February against the U.S. dollar. “But continued official commitment to the plan will be essential,” said the agency.
The State Bank of Vietnam hiked its key lending rate to 15% from 7% between February and June, but then cut it to 14% in July amid evidence of a credit squeeze on corporations. Further monetary easing before inflation is clearly brought under control would risk undermining the credibility of the policy shift.
In addition, the institution has shown concern on the Government’s commitment to fiscal spending cuts. “Fiscal tightening is central to Resolution 11 and to the maintenance of sovereign creditworthiness. Nonetheless, the ratings at their current level already reflect some risk that the conduct of policy will affect economic performance negatively. Fitch awaits more evidence on the policy strategy of the new government of Prime Minister Nguyen Tan Dung, re-appointed in July.”
Unresolved problems in the relatively large and weak banking system are a source of risk for the sovereign, according to Fitch. The banking system is the third-biggest relative to GDP of any emerging market sovereign rated by Fitch, with credit of 125% of GDP by the end of 2010. “Fitch believes the official non-performing loans figure of 2.5% of total loans for end-April 2011 under Vietnamese national accounting standards is heavily understated on an internationally comparable basis,” the agency said.
Fitch said it expects banking system problems should be manageable without broader spillover to economic stability as long as there is a basic level of depositor confidence.
The agency said the emergence of material risks to financial stability, such as a run on deposits, or of a requirement for large-scale sovereign support to the banks could trigger a negative rating action. Banking sector reforms, for example toughened loan classification standards, would support the ratings, Fitch added.
By Thuy Trieu - The Saigon Times DailyBusiness & Investment Opportunities
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