Fitch affirms B+ ratings for Vietnam, calls for more reform

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Vietnam needs to step up efforts to reform the banking and state-owned enterprise sector to have higher sovereign ratings, Fitch has said in a new report, affirming the country's foreign and local-currency issuer default ratings at B+.

According to the ratings agency, the outlook for both of the ratings is stable.

"The ratings and stable outlook reflect the success so far of efforts by Vietnam's authorities to tackle the macro-financial imbalances that arose in 2010 and 2011," said Art Woo, Director in Fitch's Asia-Pacific Sovereign Ratings group.

"However, despite recent signs of greater macroeconomic stability including lower inflation, a stronger current account position and a more stable dong exchange rate, further evidence that these improvements have become entrenched and reform of the banking and state-owned enterprise sector is needed to put upward pressure on Vietnam's sovereign ratings," Woo said.

Since implementing fiscal and monetary tightening measures to restore macroeconomic stability under Resolution 11 in February 2011, Vietnam has made vital progress in taming inflation, Fitch said. Foreign-direct investments have remained robust for the country, totalling US$7.4 billion in 2011, or 6 percent of GDP, the agency noted.

Fitch estimated that Vietnam's official reserves may have reached $16-17 billion at the end of March, compared to $14.1 billion at end-November.

It also said recent policy rate cuts in March and April is an appropriate response to economic slowdown and decelerating inflation. The country's economic slowdown has deepened as real GDP grew just 4 percent year-on-year in the first quarter, down from a 6.1 percent rise in the previous quarter.

Despite recent improvements, the agency said Vietnam still needs to strengthen its banks and state-owned enterprises.

"Vietnam's banking sector remains a source of weakness and a constraint on the sovereign rating"¦ The system is thinly-capitalised and asset quality is deteriorating," Fitch said in the report.

Meanwhile, reform of SOEs and public investment is likely to be a gradual process. "As a consequence, given the uncertain health of the SOE sector and low transparency, SOEs remain a large contingent liability for the sovereign," the report said.

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