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Fitch upgrades Vietnam on strong growth, forex reserve cushion

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Fitch upgrades Vietnam on strong growth, forex reserve cushion

Fitch Ratings on May 14 raised Vietnam's long-term foreign currency issuer default rating to BB, two notches below investment grade, from BB-, with the country's economic expansion far outpacing its peers and its growing foreign-exchange reserves helping to guard against external shocks.

Fitch also upgraded Vietnam's long-term local currency issuer default rating to BB from BB-. The outlook is stable.

Fitch expects Vietnam's GDP growth, which accelerated to 6.8% in 2017 from 6.2% in 2016 due to robust manufacturing exports and services expansion, to slow slightly to 6.7% in 2018 but remain in line with the National Assembly's target. Vietnam's five-year average real GDP growth at the end of 2017 was 6.2%, "far above" the BB median of 3.4%, the rating agency noted.

Fitch also cited Vietnam's enhanced external buffers, evidenced by foreign-exchange reserves in 2017 increasing to $49 billion after the adoption of a flexible exchange-rate mechanism in January 2016. The level is expected to climb to $66 billion by 2018-end.

"Although the new exchange-rate mechanism could be tested in a stronger dollar environment, the rise in foreign-exchange reserves provides a cushion against external shocks," the rating agency said, as the dollar's appreciation and the turning of the U.S. rate cycle weighs on emerging markets.

The rating was also supported by contained debt levels, with public debt falling to 61.4% of GDP by the end of 2017 from 63.6% at 2016-end, Fitch estimates showed.

Fitch expects the budget deficit to shrink to around 4.6% of GDP in 2018 from around 4.7% in 2017, supported by the government's commitment to the 2016-2020 budget plan. But Fitch warned that government guarantees for state-owned entities and potential banking sector recapitalization costs continue to weigh on public finances, with the latter in particular remaining a risk for the sovereign.

The rating agency holds a stable outlook, noting that a strong banking sector and improved public finances could help lift the rating. Conversely, policy shifts that result in macroeconomic instability and increased overheating risks could lower the rating.