Vietnam outlook revised to positive

Hanoi

On 21 May 2021, S&P Global Ratings revised the outlook on its long-term ratings on Vietnam to positive from stable. At the same time, the firm affirmed its 'BB' long-term and 'B' short-term sovereign credit ratings on Vietnam.

The Finance Ministry said Vietnam was the only country in the world to have its outlook improved by Moody’s, S&P and Fitch.

According to the report, the positive outlook captures Vietnam's improving track record of effective administrative processes following the introduction of a directive in January 2020 that empowers the Ministry of Finance to make full and immediate payment of guaranteed government debt obligations directly to the creditor. The outlook also reflects its expectation that Vietnam's economy will continue to expand rapidly, exemplifying continued improvements in its policymaking settings and underpinning credit metrics.

S&P revised the outlook on Vietnam to positive to reflect the continued outperformance of the economy against the challenging backdrop of Covid-19, and an improving track record in the government's administrative capacity.

In tandem with the global economy, Vietnam was materially affected by the Covid-19 pandemic, which resulted in the downturn last year. Nevertheless, the economy's real GDP expansion of 2.9 percent in 2020 was among the best globally, supported by the government's highly effective response to and containment of Covid-19 domestically. Vietnam's economy is well-placed to achieve a healthy recovery over the next one to two years as the pandemic becomes more contained, though nearterm risks remain elevated, especially following larger domestic outbreaks over recent weeks.

S&P expects real GDP growth to rebound to 8.5 percent in 2021 before settling closer to Vietnam's longterm trend rate of growth from 2022 onward. Vietnam's attractiveness as a premier destination for FDI in Southeast Asia, along with its young, increasingly educated, and competitive workforce, should help to keep the country's long-term development trajectory intact.

Vietnam's GDP per capita has risen quickly in the past few years from a relatively low base. A recent upward revision of the country's official nominal GDP--meant to better capture

Da Nang City

activity from emerging industries-measures GDP per capita in 2020 at USD3,572, versus USD1,964 in 2011. Vietnam's economy is increasingly well-diversified, with a booming manufacturing sector that is largely funded by FDI.

Vietnam's macroeconomic stability has supported the manufacturing sector's attractiveness to global firms in the electronics, mobile phone, and textiles industries. The FDI-oriented segment continues to fuel stronger domestic activity, with better employment opportunities and higher wages powering robust private consumption growth. The outlook for these growth drivers is challenged in the context of the pandemic. However, Vietnam's export sector held up well in 2020 and a deeper slowdown in private consumption has so far been averted thanks to effective public health measures. Greater household access to credit is also helping to support consumer demand.

The firm expects Vietnam's 10-year weighted average growth of real GDP per capita to be approximately 5.3 percent, significantly higher than the average of the country's peers at a similar income level.

Vietnam is well-placed to recover once the pandemic is better contained. Related domestic and external risks are still lurking, however. While S&P forecast a strong global trade rebound this year that should substantively benefit Vietnam, the enduring nature of the pandemic and severe flare-ups in various neighboring countries create some uncertainty and, potentially, volatility in external demand conditions.

Notably, Vietnam's total goods exports grew at a nominal rate of about 7 percent in 2020, contrasting with declines suffered by many emerging market peers. This performance speaks to the orientation of Vietnam's manufactured products toward reliable sources of global demand which have held up well during the pandemic.

Vietnam is gradually reforming its economy toward a more market-based model. The country's global ranking in the World Bank's annual Doing Business survey surged to 70th in 2019, from 99th in 2013, with strong gains in contract enforcement, regulatory environment, and improvements in access to credit and tax payment.

The government's socioeconomic development plans provide useful policy anchors that have improved macroeconomic stability and inflation management in recent years. This has translated into consistently high real GDP growth, averaging 6.0 percent annually since 2013.

Ho Chi Minh City