Fitch Ratings, a global credit rating agency, announced earlier this week that it has revised Vietnam’s outlook from “Stable” to “Positive” and affirmed the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at “BB”.

FItch’s decision to upgrade Vietnam’s outlook to “Positive” from “Stable” was down to improvements in the nation’s economic management, which was evident through more robust external buffers from persistent current account surpluses, declining government debt (53% of GDP in 2016 to 50.5% in 2018), high economic growth and stability in the inflation rate. Vietnamese public debt also experience a decline from 65% of GDP in 2016 to 58% in 2018. The reduction was aided by privatisation of state-owned enterprises, high nominal GDP growth and lower fiscal deficits.

Macroeconomic stability through GDP growth (6.8% in 2017 vs 7.1% in 2018) and steady inflation (3.5%, within the National Assembly’s target of below 4%) were also cited by Fitch. Foreign direct investment (FDI) into the export-oriented manufacturing sector, as well as services and agriculture, have contributed significantly to Vietnam’s performance. Fitch also expect that FDI flows will continue especially during a period of trade tensions between the US and China as trade diversification and production shift’s to Vietnam’s benefit.

“We expect growth to slow in 2019 to around 6.7%, still within the National Assembly’s target of between 6.6% and 6.8%. Growth in Vietnam, which has a high degree of trade openness, is likely to be affected by slowing global growth and US-China trade tensions, which will weigh on regional trade flows and sentiment. Vietnam would nevertheless remain among the fastest-growing economies in the Asia-Pacific and in the ‘BB’ rating category globally,” Fitch said.

Fitch also highlighted the challenges that Vietnam will be facing that may weigh in on the sovereign rating, including: increasing in funding costs for loans from the International Development Association; non-performing loans in the banking sector; and large state-owned enterprises’ effect on public finances.

“Vietnam’s per capita income and human development indicators are weaker than the peer medians. According to Fitch estimates, per capita income was USD2,512 at end-2018, against the current ‘BB’ median of USD6,188. Further, it fell in the 38th percentile on the UN Human Development Index compared with the current ‘BB’ median of the 58th percentile. The country’s ranking on the composite governance metric is at the 41st percentile, still below the peer medians. On the Ease of Doing Business Index, however, Vietnam ranks in the 64th percentile, above the current ‘BB’ median of 60th percentile,” according to Fitch.

The full list of rating actions by Fitch are as follows:

• Long-Term Foreign-Currency IDR affirmed at “BB”; Outlook revised from “Stable” to “Positive”
• Long-Term Local-Currency IDR affirmed at “BB”; Outlook revised from “Stable” to “Positive”
• Short-Term Foreign-Currency IDR affirmed at “B”
• Short-Term Local-Currency IDR affirmed at “B”
• Country Ceiling affirmed at “BB”
• Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at “BB”
• Issue ratings on long-term senior unsecured local-currency bonds affirmed at “BB”