Country risk: Vietnam is bouncing back
Of all the frontier markets competing for inward investment, the one-party state is still one of the more attractive prospects.
Climbing a little higher in Euromoney’s country risk survey to 82nd out of 186 sovereigns worldwide – rising eight places in three years – Vietnam has gradually become safer, signalling its credit ratings are outdated, not least the B1 rating from Moody’s.
Its rise within the fourth of ECR’s five tiered categories, encompassing credits up to BB+, has continued in Q4 2015, according to the provisional results of Euromoney’s crowd-sourcing country risk survey.
Vietnam’s score trend keeps it well ahead of tier-five Bangladesh – a safer bet according to Moody’s – and is narrowing the risk-differential with Sri Lanka, another export-dependent economy, as survey experts award higher risk-factor scores:
Vietnam already has one of the fastest-growing economies in Asia, and prime minister Nguyen Tan Dung is promising even faster expansion through to 2020.
IMF forecasts signal this year’s 6% real GDP growth will rise to to 6.5% in 2016, alongside which there will be continuing low inflation and unemployment.
ECR expert Li Yan, professor of economics at the Université du Québec en Outaouais, believes “economic risks in Vietnam are decreasing because of its better export performance during the past months”.
Another of ECR’s survey contributors, Max Schieler, a senior country risk specialist with RobecoSAM, agrees, saying: “Economic performance has regained momentum and robustness compared to some years ago when Vietnam went through a rather delicate period.
“Vietnam has been able to strengthen its foreign trade and to softly diversify its export structure away from just lower value products and into more high technology products, such as electronics or computers.”
This is supporting the current account, boosting reserves and feeding into domestic demand, raising investment and private consumption supported by credit growth.
Everything in moderation
That’s not to say there aren’t still risks to be aware of.
Vietnam’s cultural and political framework is unlikely to change, which is a problem not least in terms of corruption, a lack of transparency and repression under Communist Party rule.
There are still vulnerabilities in the banking sector, limiting credit extension to local small and medium-sized enterprises.
The budget deficit (6% of GDP) and public debt-to-GDP ratio (slightly exceeding 50% of GDP) require correcting.
Moreover, the country’s export-driven economy is facing downside risks from the weaker global environment, China’s industrial slowdown and potential negative consequences from the US Federal Reserve’s looming interest-rate hike.
Added to that there are foreign-policy risks stemming from the maritime dispute between China and other countries, including Vietnam, bordering the South China Sea.
This concerns territorial claims to subsea oil deposits and a group of islands offering China a military advantage – a crisis which is escalating with China refusing to heed the Law of the Sea Convention, and will need to be monitored.
Reasons to be cheerful
Yet despite the fact Vietnam is a (junk status) sub-investment grade, structural reform is proceeding.
This will lead to banking sector consolidation and has seen some attempt to resolve the non-performing loan (NPL) problem weighing down the banks after they were hit with credit losses in the wake of the global financial crisis – even if the official rate of NPLs, now comprising 2.9% of total loans, is undoubtedly massaged by the authorities.
The government has been slow to privatize state-owned enterprises, but has made a good start on eradicating red tape and is behind Vietnam’s improving reputation for doing business.
The country has a fairly low level of short-term debt, too, the authorities have opened up the real-estate sector to foreign investment, and the country will benefit long-term from participation in the landmark Trans-Pacific Partnership (TPP) trade deal affecting some 40% of the world’s GDP.
More can be done for sure to ensure Vietnam is a more balanced and attractive market with a stronger banking sector.
However, its low-wage, export-driven economy suggests it will be one of the main beneficiaries from the increased market access for its clothing, footwear and seafood products stemming from reduced tariffs in the Japanese and US markets.
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