Fitch Ratings slapped a negative outlook on Vietnam’s credit rating today, though maintained the nation’s sovereign BB- score. A negative outlook means that there is risk of a future downgrade for this MAVINS nations. Fitch is most concerned with Vietnam’s depreciating currency, the dong, and the risk of rapid inflation.
“The ongoing divergence between the black market Vietnamese dong and the market clearing spot rate continues to point to depreciation pressures,” Fitch said. “Without a strong policy tightening backed by significant balance of payments support, confidence in the Vietnamese dong is unlikely to be restored.”
Still, Barclays thinks the downgrade is ridiculous. There’s still confidence in the dong, trade data is improving, the nation’s financial position is manageable, and the central bank is actually tightening policy ever so quietly:
Economist Prakriti Sofat @ Barclays Capital:
First, we do not believe domestic confidence in the VND has deteriorated, although the currency remains weak. When the State Bank of Vietnam devalued the currency in early February, spot VND did not immediately jump to the top end of the new band, as was the case in previous devaluations, which suggests underlying pressures were not that stretched. Also the grey-market rate is currently trading fairly close to the official rate, indicating improved FX demand-supply dynamics. The closure of the bulk of the gold trading floors ahead of the official 30 March deadline is also helping.
Second, the trade deficit has improved since the start of the year. The deficit was USD1.8bn during January-February 2010, versus FDI disbursements of USD1.1bn and healthy remittances inflows ahead of Lunar New Year in February. For 2010, we expect FDI disbursements to be USD11bn and remittances of USD7bn, which should more than cover the trade deficit.
Third, Vietnam’s external position remains fairly healthy, with external debt amounting to roughly 30% of GDP and the bulk being multilateral and bilateral loans with long maturity profile. Short-term external liabilities stand at USD4.4bn as of Q3 09, according to World Bank data. Fitch reported that FX reserves were USD16bn in October – suggesting a cover ratio of nearly 4x. By comparison, Indonesia’s short-term external debt was USD29bn as of Q3 09, according to World Bank data, versus FX reserves of USD62.3bn – a cover ratio of 2.1x.
Fourth, the central bank is tightening policy quietly. It removed the 12% interest rate cap on medium- to long-term loans in late February. This implies an effective tightening in policy, with newswires indicating that lending interest rates have risen as high as 19%. The current policy move will be supported by previously announced tightening measures that took effect in January. These include a halving of the government interest rate subsidy for medium- to long-term loans to 2pp; eliminating he subsidy for short-term loans; and a decree that only 30% of short-term deposits can be used for medium/long-term lending, from 40% previously.
Fitch might be missing the fact that Vietnam’s long-term prospects are very bright. For Vietnam, the economic pie is highly likely to grow substantially over time, which means a lot of near-term problems could be eventually solved by the simple benefits of rapid economic growth.
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(Via Barclays Capital, Prakriti Sofat, 12 March 2010)