Việt Nam will continue to receive large FDI inflows into the manufacturing sector. zing.vn

HÀ NỘI Việt Nam’s long-term issuer default rating (IDR) has been upgraded to positive from stable, thanks to its improving track record of economic management, evidenced by high growth with stable inflation.

The comment was made by Stephen Schwartz, head of Fitch Ratings’ Asia-Pacific Sovereigns, on Tuesday.

At the ‘Fitch on Việt Nam’ conference held in Hà Nội, Schwartz said the Fitch Ratings’ revision on Việt Nam last month was also driven by strengthening external buffers from consistent current account surpluses, falling government debt levels, large FDI inflows into the export-oriented manufacturing sector and external liquidity metrics that were stronger than other "BB" rated peers.

However, Schwartz said, Việt Nam's weak banking sector and recapitalisation needs pose high risks while the country's per capita income and human development indicators are also below the peers.

According to Fitch, Viêt Nam's growth remained broad-based at 7.1 per cent in 2018, driven by an improvement in agriculture, services and industry. Agriculture grew by 3.7 per cent while industry and services expanded by 9 per cent and 7 per cent, respectively. Growth in industry continued to be driven by large FDI inflows into the export-oriented manufacturing sector, with registered capital in manufacturing rising to US$16.6 billion by end-2018 from $15.9 billion in 2017.

“Fitch expects Việt Nam will continue to receive large FDI inflows into the manufacturing sector, primarily in the electronics segment, given its low cost advantage and global supply-chain linkages. These positive trends should support steady economic expansion in the near-term, although the weaker external environment and Việt Nam’s high degree of trade dependence are likely to weigh somewhat on growth in 2019 and 2020,” Schwartz said.

“As a result, we expect growth to slow modestly in 2019 and 2020 to 6.7 per cent. However, this still remains within the National Assembly’s target of between 6.6-6.8 per cent, and Việt Nam should remain one of the fastest-growing countries in Asia-Pacific,” Fitch analysts said.

“In addition, anecdotal evidence suggests that trade tensions between the US and China is leading to trade diversion and shifting of some production facilities to Việt Nam. This is positive for the economy, although we think any large scale relocation of factories from China to Việt Nam could take some time to materialise.”

According to Fitch, Việt Nam’s gross general government debt had fallen to 50.5 per cent of GDP by end-2018 from 53.4 per cent in 2016, and the rating agency expects it to decline further to below 50 per cent by 2020 as the authorities are likely to remain committed to containing the deficit and debt.

Fitch also estimates the country’s budget deficit at 3.6 per cent of GDP by 2020, adjusted to the GFS standards of accounting, compared with the authorities' target of 3.5 per cent of GDP by 2020 under the 2016-20 medium-term budget plan. The agency expects the deficit to be achieved mainly through better management of public finances.

The ratings agency also expects Việt Nam’s current account surplus to narrow modestly to 2.8 per cent in 2019 and 2020, as external risks remain high, associated with trade tensions between the US and China, which may undermine trade flows and sentiment and as growth in Viet Nam’s key trading partners – the US and China – is expected to slow.

Nevertheless, it said, steady remittance inflows and earnings from tourism should remain key drivers of the current account. Viet Nam receives remittances of about $10 billion annually, equivalent to roughly 5 per cent of its GDP. At this level, Việt Nam’s current account surplus position is a strength compared with deficits in the ‘BB’ rating category.

Fitch also noted a key risk to Việt Nam’s export performance continues to be its heavy reliance on exports of products of a single company, Samsung, which accounts for nearly 25 per cent of total exports. However, the agency thinks the impact of a sharp decline in exports on the trade balance and current account would be mitigated by the high import content of Việt Nam’s exports.

“Overall, Việt Nam’s external debt and liquidity metrics remain stronger than its peers. At 215 per cent, its external liquidity ratio is far above peer medians and external debt-servicing as a share of current external receipts is much lower than peers, reflecting in part the highly concessional nature of Việt Nam’s external debt,” Fitch analysts said.

The agency also said Viet Nam’s overall ranking on the World Bank’s governance indicators and its level of GDP per capita continues to lag behind. Nevertheless, its business environment is stronger than the peer median, and it continues to score above peers on the World Bank’s Ease of Doing Business Index.

Speaking at the conference, Võ Hữu Hiển, deputy director of the Ministry of Finance’s Department of Debt Management and External Finance, said Việt Nam would continue to restructure public debts and State budget, renovate its economic growth model, control inflation and cut business red tape to boost economic growth and support investors and businesses.

“2019 will be a breakthrough year for Việt Nam’s economy, with focus on the restructuring of State-owned enterprises and credit institutions,” Hiển said, adding the Government would pursue a cautious fiscal policy, control budget spending and increase revenue. VNS