S&P Global affirms Vietnam's 'BB+' long-term sovereign credit rating

S&P Global Ratings has affirmed its 'BB+' long-term sovereign credit rating for Vietnam, while maintaining the short-term rating at 'B'. The outlook on the long-term rating remains stable. This stable outlook reflects expectations that Vietnam's economy will accelerate over the next 12 months as global demand picks up and the country gradually resolves its domestic challenges, thereby maintaining a stable government debt repayment burden.

In a downside scenario, the ratings may be lowered if Vietnam's economic conditions deteriorate rapidly or if significant stress emerges within the banking system, potentially weakening the government's fiscal position. Specifically, an increase in net general government debt by more than 5 per cent of GDP per year, combined with interest payments on government debt exceeding 10 per cent of revenues, or the government's net debt stock surpassing 30 per cent of GDP on a sustained basis, would indicate downward pressure on the ratings, as per S&P Global.

Conversely, in an upside scenario, the ratings could be raised if there are considerable improvements in Vietnam's institutional settings that enhance policy predictability and transparency, including better external data provision and reliability. Such policy environment changes could further bolster investor confidence in Vietnam's economic and financial stability.

Additionally, the ratings could improve if Vietnam becomes a net external creditor, driven by higher-than-expected current account surpluses and a rise in external assets. Sustained accumulation of net general government debt of less than 3 per cent of GDP per year, combined with a reduction in the government's interest burden to below 5 per cent of revenues, could also put upward pressure on the ratings.

The sovereign ratings on Vietnam are supported by the country's strong economic growth outlook, moderate government debt levels, and a generally sound external position. As multinational conglomerates diversify their operations within the region, Vietnam is expected to attract substantial foreign direct investment (FDI) inflows into its export manufacturing sector over the next several years. However, these strengths are tempered by Vietnam's modest GDP per capita, banking sector vulnerabilities, and evolving institutional settings, characterised by a centralised decision-making process and rigid bureaucracy.

Vietnam's economy is beginning to accelerate following a slowdown in 2023, with expectations of healthier global demand conditions supporting real GDP growth of 5.8 per cent in 2024. Despite this, bureaucratic rigidities and a slowdown in the property sector will continue to constrain domestic demand until these issues are gradually resolved. Nonetheless, Vietnam remains an attractive destination for foreign investment, particularly in the manufacturing sector, as firms diversify their operations in the region.

The government's net debt stock is anticipated to average less than 30 per cent of GDP over the next few years, even as borrowing increases. The pace of net debt accumulation is expected to rise gradually as the government boosts capital spending. Additionally, rapid growth in goods exports and a fast-recovering tourism sector will further support Vietnam's external position.

Fibre2Fashion News Desk (DP)