Fitch says economic outlook stable for Vietnam

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Fitch Ratings says the outlook for Vietnam's economy is stable but warns unresolved problems in the relatively large and weak banking system are a source of risk.

Vietnam has been rated B+ by the agency, the same as a year ago.

The ratings are supported by Vietnam's growth record, averaging 7 percent over 2006-2010, Fitch said. It has been underpinned by the country's success in attracting foreign investment inflows, the agency added.

However, despite strong growth, average incomes remain low at only US$1,200 in 2010, and underdevelopment has weighed on the rating.

Fitch sees Vietnam's Resolution 11 as a support for domestic confidence in the dong, economic stability and sovereign ratings. The currency has been broadly stable since February against the US dollar, it said.

"But continued official commitment to the plan will be essential," the agency said, adding that further monetary easing before inflation is clearly brought under control would risk undermining the credibility of the policy shift.

"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," said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch.

"Sticking with a policy-tightening package agreed in February would support the ratings, but slippage could see negative pressure build," he said.

Fitch said with credit at 125 percent of GDP by end-2010, Vietnam's banking system is the third-biggest relative to GDP of any emerging market sovereign rated by the agency. However, as deposits in the system continue to grow, Fitch expects banking system problems should be manageable.

Banking sector reforms, for example toughened loan classification standards, would support the ratings, the agency said.

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