Several macro variables, especially high inflation and "chronic" issues of the banking system, caused the strong impacts to Vietnam's prestige and debt affordability, Andrew Colquhoun -Fitch head for Asia Pacific sovereigns - said.

In his opinion, high inflation in Vietnam (reportedly CPI rose 22.2 percent in July compared with the same period of 2010) was attributed to rapid pace of prices of agriculture commodities, credit policies and public spending of last year. The situation made reduce the forex reserve which was $12.4 billion by late February 2011 citing data of Fitch, and partially moved the public faith in the dong as well as discouraged foreign investors.

Fitch highly appreciated later efforts of the Vietnamese government as releasing Resolution 11 to tighten up fiscal and monetary policies with a view to curb inflation. Solutions and implementation of the Resolution helped stabilise the macro econom, improve the faith of domestic investors and foreign credit institutions. Notably, the exchange rate between the dong and the greenback has been kept stable since February 2011.

However, the agency also said that it was too early to have quantitative conclusion on effectiveness of the monetary tightening policies which are leaving some negative affects to the economic growth.

Another factor impacting to Vietnam's sovereign debts was alledged to be variables in the banking system. Among all economies being rated by Fitch, Vietnam ranked the third in terms of the credit provision to GDP ratio (125 percent by the end of 2010). Fitch assessed, Vietnam's recently-publicised bad debt ratio of 2.5 percent will be much higher if international auditing standards are applied. This triggered the big fear of debt management capacity while banks are still racing to raise deposit rates.

With an average economic growth of 7 percent per year during the 2006-2010 period, Vietnam gained the advantage over the countries with the same credit rating B (averaging 4.3 percent a year). Yet, Fitch emphasized, Vietnam's income of $1,200 per person a year has not been matched with such a growth rate. Meanwhile, the country's national debts now equal to around 50 percent of GDP, much higher than the average 37 percent of the same graded countries.

Due to above analysis, Fitch said it might consider to downgrade the rating of Vietnam where the country's monetary tightening policies do not bring in clear efficiency in curbing inflation.

On contrary, if macro movements show positive changes, Vietnam's credit rating may be improved. But, Fitch also marked the reform in banking system (notably classification of debts) which is seen as the determined condition to make stabilisation of the financial system. - August 12, 2011