Vietnam’s economy has survived global financial volatility but slow restructuring in the banking sector and state owned enterprises (SOEs) continue to weigh down the country’s medium-term economic prospects, says Fitch Ratings.
“The macroeconomic stabilization trend has persisted due to more effective management of monetary and fiscal policies. This is apparent through a current account position which is on course to remaining in a small surplus, and annual inflation which should be contained within the high single digits,” the rating agency said in a recent commentary.
The economy’s stable situation is also supported by GDP growth, having bottomed out with Q3 growth at 5.5 percent year-on-year, up from around 4.9 percent in the first half of this year, Fitch said.
Moreover, the macro-stabilization trend has not been thrown off course by the financial volatility that has hit regional emerging economies hard, the agency added.
In India and Indonesia, such volatility has raised currency strains, left corporate and bank balance sheets somewhat vulnerable, and resulted in policy tightening.
Fitch said one reason for Vietnam's relative financial stability is the shift in the current account position to a surplus since 2011.
“This has sharply lowered the net external financing requirement and helped rebuild foreign-currency reserves to around US$27bilion by end-May - around 2.7 months of current external payments.”
Another reason is that Vietnam is less dependent on the type of portfolio flows that have proven rather fickle and heightened global investor scrutiny of emerging-market vulnerabilities, according to Fitch.
The agency said the last reason is that Vietnam has seen an increasing trend in foreign direct investment (FDI). The country attracted US$15 billion in FDI in the nine months of this year, up 36 percent from a year ago, which has buffered the balance of payments.
“Vietnam has historically attracted more FDI (as a percentage of GDP) than its rated peers, and this has also contributed to a structural transformation of the export base,” Fitch said, adding that this fact has supported a robust pace of export growth since 2012.
However, the rating agency remains doubtful whether Vietnam's GDP growth rate can pick up sharply and revert to a 7 percent level - as was the case in the last decade.
Fitch said there are two important reasons for its cautious view.
“First, the banking sector remains encumbered by substantial bad loans. We do not think the current asset restructuring measures - through the creation of a state-owned asset management company (VAMC) - will replenish capital sufficiently or swiftly enough to bring about a healthy pace of credit extension to the productive sector any time soon.”
Fitch said though greater foreign participation in the banking sector, as hinted recently by the prime minister, could bring in much-needed capital and facilitate a quicker restructuring of Vietnamese banks; the details and timing of any such liberalization is still uncertain.
“Second, SOE reforms have progressed slowly at best. Recent statements suggesting a possible speeding-up of their ownership and governance structures would accord with greater transparency and market-driven principles, and could be credit positive.
“But removal of political protection, and introduction of competition in this area, is easier said than done.”
In its conclusion, Fitch said Vietnam’s macro-stabilization is evident, but the prospect of a sharp improvement in growth prospects is not obvious.
“Vietnam's banking sector has extended significant credit, with a private credit/GDP ratio of 95 percent at end-2012. Moreover, the highly indebted and largely unreformed SOEs play a very large strategic role.
“Thus a protracted pace of asset restructuring and SOE deleveraging, unless speeded up, will continue to weigh on economic activity and place large contingent risks on the sovereign's (B+/Stable) credit profile.”
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