Moody's upgraded Vietnam's long-term issuer and senior unsecured ratings to Ba3 from B1 and changed the outlook to stable from positive, citing the country's strong growth potential and moderating government debt burden along with improvements in the banking sector.

Vietnam's rising competitiveness and move to higher value-added industrial activity should support robust growth in the medium term, the rating agency said. GDP growth is projected to be 6.4% from 2018 to 2022, higher than similarly rated sovereigns. Moody's expects increased contributions from the private sector and productivity growth to drive Vietnam's economic expansion.

"Vietnam has climbed up the manufacturing value chain within a short span of time, gaining competitiveness in the assembly of higher value-added electronic products — such as smartphones — while continuing to retain its comparative advantage in the export of labor-intensive goods, such as textiles and garments," Moody's said.

Vietnam's government debt is projected to remain broadly stable at the current level of around 52% of GDP and is expected to slowly moderate after 2020, rating agency said.

Moody's said the upgrade also is based on lower risks to the creditworthiness in the country's the banking sector. It said the health of the banking system has improved due to better asset quality, stabilizing capitalization and recovering profitability of several banks.

The stable outlook is based on the rating agency's view that positive or negative shocks are not expected to significantly affect Vietnam's credit metrics in the next few years.