Fitch Vietnam outlook shift is "hasty"

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Fitch Ratings' reasons for placing Vietnam's debt rating on negative watch last week are unjustified, Barclays Plc said.

Fitch on March 12 cited a lack of confidence in the dong, declining foreign-exchange reserves and a risk of accelerating inflation as weaknesses in the Southeast Asian nation's economy. The government should tighten its monetary policy to avoid a downgrade of its BB- rating, Fitch said.

Vietnam has been increasing its attractiveness to foreign investors, wrote Prakriti Sofat, a Singapore-based economist for Barclays Capital, citing investments by companies including Intel Corp. as well as the country's 2007 admission to the World Trade Organization.

"The Fitch rating outlook change to negative is hasty and short-sighted," Sofat wrote. "It does not take into account the fundamental strength of the Vietnamese economy and the country's long-term potential."

Domestic confidence in the dong hasn't deteriorated recently, Sofat said. The Vietnamese government devalued the dong in February and in November 2009. The currency is allowed to move 3 percent on either side of a daily reference rate set by the central bank.

"When the State Bank of Vietnam devalued the currency in early February, spot Vietnamese dong did not immediately jump to the top end of the new band, as was the case in previous devaluations, which suggests underlying pressures were not that stretched," Sofat wrote.

"The grey-market rate is currently trading fairly close to the official rate, indicating improved foreign exchange demand- supply dynamics," she said in the note.

Trade deficit

The balance of payments needs "significant support," Fitch said. Vietnam recorded a $1.75 billion trade deficit in the first two months of 2010, compared with a $1.27 billion surplus in the same period a year earlier, based on preliminary figures from the General Statistics Office in Hanoi. The monthly deficit narrowed 15 percent in February from January.

"The trade deficit has improved since the start of the year," Barclays' Sofat wrote. "For 2010, we expect foreign direct investment disbursements to be $11 billion and remittances of $7 billion, which should more than cover the trade deficit."

Vietnam's central bank is "tightening policy quietly," according to Barclays, which cited the removal of an interest- rate cap, as well as previous measures to cut back on loan subsidies that were part of a 2009 government stimulus package.

"Fitch's arguments may not accurately reflect realities in Vietnam's economy," Sofat wrote.

The Fitch move may make it more expensive for Vietnam to borrow money and more difficult for the government to sell bonds, according to research by VinaSecurities Joint-Stock Co., the brokerage unit of Vietnam's largest fund manager.

"The timing of the negative watch move is somewhat of a surprise," wrote Johanna Chua, the Hong Kong-based head of Asian economic research for Citigroup, Inc. "Without strong policy tightening, a downgrade looks likely."

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