The BB- sovereign credit rating on Vietnam reflects the country's low-income economy, developing financial system, and evolving policy framework. Healthy economic growth prospects, reinforced by the government's persistent efforts in economic restructuring, partly offset these weaknesses, S&P said.

In line with this, the institution lowers the Asean regional scale long-term rating to axBB from axBB+. S&P also affirms its BB- foreign currency long-term rating, and B short-term foreign and local currency ratings on Vietnam.

"We lowered the local currency long-term rating on Vietnam after the implementation of Standard & Poor's revised methodology and assumptions for sovereign ratings," said Standard & Poor's credit analyst Kim Eng Tan.

Standard & Poor's affirms its foreign currency long-term rating on Vietnam because it is unaffected by the criteria update and the sovereign's underlying credit fundamentals have not changed.

"Under the revised methodology, we are narrowing the gaps between the local and foreign currency ratings, where these had existed, for many sovereigns. This is because we believe that governments are likely to have fewer incentives to differentiate between their local and foreign currency debt in the event of debt restructuring, given the increasing globalisation of markets," Tan said in the statement.

In accordance with the S&P criteria for sovereign ratings, the local currency rating on Vietnam is now equal to the foreign currency rating because the dong's pegged exchange rate limits its monetary policy independence and its domestic financial and capital markets are at the early stages of development.

S&P also said the macroeconomic volatility of recent years, amid strong lending growth, has weakened the banking sector's resilience to a new financial or economic shock. The outflows of resident capital have reduced domestic liquidity and raised the cost of domestic funding.

"A large part of domestic credit, estimated to equal 118 percent of GDP at the end of 2011, is priced at nominal interest rates above 15 percent per annum," Tan said.

The outlook on ratings of Vietnam given by Standard & Poor's is still negative. "The negative outlook on the ratings reflects S&P's view that Vietnam faces risks of near-term economic and financial instability," said the agency.

It said it could lower the sovereign credit ratings if balance-of payment pressures mount or fiscal contingent risks from the financial sector rise. The ratings could stabilise at the current level if it assesses that the risks to financial sector stability have declined. This is likely to reflect the successful implementation of policies that lift confidence in the domestic currency and reduce private sector and public enterprise leverage, it said.

In exception to the above weaknesses, openness to foreign direct investment (FDI) has improved Vietnam's economic prospects. FDI has averaged above 8 percent of GDP during the past four years. These foreign-invested projects should help maintain Vietnam's trend annual real per-capita GDP growth at 5 percent-6 percent. Standard & Poor's estimates Vietnam's growth in 2011 at 5 percent.

Earlier, another credit rating agency, Fitch, has given a downgrade warning on Vietnam's creditworthiness if the country cannot take measures of monetary and fiscal tightening policies as committed to curb inflation in the near future.

The Saigon Times Daily - August 24, 2011