S&P lowers Vietnam credit rating

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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.

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