Standard & Poor's has downgraded Vietnam's local currency debt rating to BB- from BB, saying that the negative outlook reflects financial instability for the economy.
The agency also affirmed its foreign currency sovereign credit rating on Vietnam at BB-/B, it said in a statement released Friday.
"We lowered the local currency long-term rating on Vietnam after the implementation of Standard & Poor's revised methodology and assumptions for sovereign ratings," said Standard & Poor's credit analyst Kim Eng Tan. "Under the revised methodology, we are narrowing the gaps between the local and foreign currency ratings, where these had existed, for many sovereigns," he added.
Although the downgrade was mostly for technical reasons, S&P warned that there are weaknesses in the economy and that the outlook on the long-term ratings is negative.
"The negative outlook on the ratings reflects our view that Vietnam faces risks of near-term economic and financial instability," it said.
"The macroeconomic volatility of recent years, amid strong lending growth, has weakened the banking sector's resilience to a new financial or economic shock. The outflows of resident capital have reduced domestic liquidity and raised the cost of domestic funding," according to the agency.
The BB- sovereign credit ratings on Vietnam reflect the country's low-income economy, developing financial system, and evolving policy framework, S&P said.
Striking an optimistic note, the agency said openness to foreign direct investment has improved Vietnam's economic prospects. It said FDI projects should help maintain Vietnam's annual GDP growth at 5-6 percent.
S&P estimates Vietnam's growth in 2011 at 5 percent. The government has set its growth forecast at 6 percent.
Another rating agency, Fitch, earlier this month maintained its B+ rating on Vietnam's debt with a "stable" outlook.