COVID-19 containment contributes to Vietnam’s upgraded outlook: Fitch Ratings

Strong export growth and a successful campaign to contain the spread of COVID-19 have supported Vietnam’s economy through the pandemic and allowed the government to adopt a restrained fiscal policy response, says Fitch Ratings.
COVID-19 containment contributes to Vietnam’s upgraded outlook: Fitch Ratings hinh anh 1A view of Ho Chi Minh City (Photo: VNA)
Hanoi (VNA) - Strong export growth and a successful campaign to contain the spread of COVID-19 have supported Vietnam’s economy through the pandemic and allowed the government to adopt a restrained fiscal policy response, says Fitch Ratings.

These factors have contributed to upward pressure on the sovereign’s rating, reflected in its decision to revise Vietnam’s Outlook to Positive, from Stable, when the agency affirmed the rating at ‘BB’ on April 1.

According to Fitch Ratings, Vietnam’s public finance metrics have improved markedly relative to peers since the start of the pandemic. In December 2019, prior to its April 2020 decision to revise the rating Outlook to Stable from Positive amid uncertainties associated with the pandemic, Fitch Ratings had expected that Vietnam’s general government (GG) debt/GDP would stand at 40.3 percent of GDP in 2021, against a median of 41.7 percent for ‘BB’ sovereigns and 43.8 percent for ‘BBB’ sovereigns.

Fitch Ratings now expects Vietnam’s GG debt/GDP to average around 39 percent in 2021-2022, but the equivalent peer median forecasts have risen to around 60 percent and 58 percent for ‘BB’ and ‘BBB’ sovereigns, respectively.

The improved fiscal position reflects Vietnam’s broader economic strength. Tourism earnings have been severely hit by the pandemic, but other parts of the economy have proved robust. Vietnam was one of only a few countries globally to post positive economic growth in 2020, of 2.9 percent. Growth was buoyed by external demand, with goods exports rising by 6.9 percent. Domestic activity was also supported by the limited spread of COVID-19 in the country.

Fitch Ratings expects growth to remain strong, at around 7 percent annually, in 2021-2022, buoyed by continued export expansion and higher investment. A pandemic fiscal package covering 2020-2021, worth about 292 trillion VND (about 3.6 percent of 2020 GDP), will reinforce growth prospects.

Goods exports rose by 23.8 percent year-on-year in the first quarter of 2021, supporting real GDP growth in the quarter of 4.5 percent year-on-year. Vietnam is benefiting from trade diversion, new trade agreements such as the EU-Vietnam Free Trade Agreement (EVFTA) and the Regional Comprehensive Economic Partnership (RCEP), and Vietnam’s cost competitiveness. Rapid increases in public infrastructure investment and FDI should bolster the sustainability of strong medium-term growth.

Fitch Ratings points out that sustained high growth that reduces Vietnam’s GDP per capita gap against its peers while maintaining macroeconomic stability could put upward pressure on the sovereign rating. Upward pressure could also stem from sustainable fiscal consolidation, a reduction in contingent sovereign liabilities, or improvements in banking-sector capitalisation, transparency and regulation./.

 
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