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Fitch revises Vietnam’s outlook to positive

Fitch Ratings has revised Vietnam's outlook to positive from stable and affirmed the long-term foreign-currency issuer default rating (IDR) at 'BB'.

The positive outlook reflects Vietnam's growth and public finances' resilience to the Covid-19 pandemic shock, and continued strengthening of external finances due to persistent current account surpluses and rising international reserves.

Vietnam was among the few economies in the Asia Pacific region and the 'BB' rating category to maintain positive growth in 2020, at 2.9 percent. The relative strength of Vietnam's performance was largely due to its success in bringing the coronavirus outbreak swiftly under control, despite the pandemic's impact on domestic economic activity and tourism inflows, alongside strong policy support and export demand. Fitch expects GDP growth of about 7 percent in 2021 and 2022, in line with a broader global economic recovery sustaining export growth and a gradual normalisation of domestic economic activity based on its expectation of continued success by the authorities in containing domestic coronavirus infections.

Vietnam's external finances have strengthened further despite the pandemic. Exports rose by about 7 percent in 2020 in US dollar terms, and the current account recorded a surplus of about 3.6 percent of GDP. Strong export performance reflects a surge in demand for high-tech components associated with strong sales of IT equipment in the US and other advanced economies as well as continued benefits of trade diversion, associated with rising costs in China and the US-China trade war. Fitch forecasts Vietnam's current account to remain in surplus at 1.2 percent and 2 percent of GDP in 2021 and 2022, respectively, compared with an average deficit of 1.7 percent for the 'BB' median.

Foreign-exchange reserves rose to USD95.2 billion by end-2020 likely due to a combination of factors, including a current-account surplus and foreign currency purchased by the State Bank of Vietnam (SBV). Fitch projected foreign-exchange reserves would continue to cover around 3.5 months of current external payments in 2021 and 2022, compared with a forecast 'BB' median of 5.2 and 4.7 months, respectively. Nevertheless, Vietnam's external liquidity ratio, measured by the ratio of the country's liquid external assets to its liquid external liabilities, also improved further to 388 percent in 2021, more than double the forecast of the 'BB' median.

The bulk of the strong FDI inflows in 2020 went into the manufacturing sector. Net FDI in 2020 was USD15.4 billion (about 4 percent of GDP), close

Ho Chi Minh City, Vietnam

to the previous year's level. Fitch expects FDI inflows to stay healthy as Vietnam is likely to benefit from the ongoing trade diversion and also its entry into trade agreements such as the EU-Vietnam Free Trade Agreement and the Regional Comprehensive Economic Partnership.

According to Fitch, Vietnam's economic prospects will remain susceptible to shifts in external demand due to the economy's high degree of openness. Fitch does not anticipate a rapid rebound of inbound tourism, an important driver of the economy, until well after 2021. The pandemic had a smaller impact on Vietnam's public finances than 'BB' peers. The rating firm estimates the general government deficit widened modestly in 2020 to 3.5 percent of GDP (7.2 percent for the BB median), as spending was targeted mainly at alleviating the impact of the pandemic. Vietnam introduced a fiscal support package of VND292 trillion (USD12.7 billion, about 3.6 percent of 2020 GDP), which included tax cuts and deferrals, and cash transfers to affected workers and households. Fitch expects some of the government fiscal support measures to remain in place in 2021 and fiscal consolidation to begin from 2022. General government debt remained stable at 38.5 percent of GDP in 2020 compared with the 'BB' median's 13pp increase to 59 percent. Vietnam's general government debt-to-GDP ratio will remain at about 39 percent in 2021 and 2022, still below the median for 'BB' rated sovereigns, under its baseline of primary deficits remaining around 2 percent and a rapid return to high growth. Vietnam's revenue base is low compared with that of peers. Fitch has based its calculations of the budget deficit and government debt ratios on the revised GDP series.