Fitch Ratings has revised the outlook on Vietnam's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the rating at 'BB'.

The outlook revision reflects the impact of the escalating Covid-19 pandemic on Vietnam's economy through its tourism and export sectors, and weakening domestic demand, said Fitch in a statement.

Meanwhile, the affirmation indicates Vietnam's strong medium-term growth prospects, lengthening record of macro-stability, lower government debt levels and stronger external finances compared with peers, including foreign-exchange reserves built up over the previous few years during more favorable economic conditions.

The rating agency projects Vietnam's GDP growth to slow to 3.3% in 2020 from 7.0% in 2019, on account of the pandemic. This would be the lowest annual growth rate since the mid-1980s.

Growth in in the first quarter slowed to 3.8%, from about 7% in the previous quarter. The 2020 forecast is highly uncertain and subject to downside risk, depending on the evolution of the pandemic, both within Vietnam and in its major export markets.

Vietnam has so far recorded a relatively low number of Covid-19 cases, but these could increase, and large parts of the country are already subject to curbs on economic and business activity to prevent the spread.

The tourism and export sectors are particularly vulnerable to weaker activity. Tourism accounts for about 10% of GDP directly, but its contribution to overall GDP is considerably higher through indirect spillovers. Tourist arrivals for March fell by about 68% year-on-year. Fitch’s baseline assumes the outbreak is contained by the second-half of this year and the global tourism industry starts to recover at a gradual pace.

Fitch expects exports to contract sharply, given the fall in demand in Vietnam's key export markets, including the US and China, although the latter has begun to recover; about 23% of total exports were to the US at end-2019, while about 16% were to China. Weak export demand will affect foreign direct investment (FDI) inflows into the manufacturing sector. The actual FDI in the first three months was down by 6.6% from a year ago.

Fitch expects the current account to shift to a modest deficit in 2020, from a surplus of around 3% in 2019, as exports, tourism and remittances decline However, it should return to surplus in 2021 as the global economy recovers.

Domestic demand is likely to stay muted as strict measures aimed at maintaining social distancing to contain spread of the virus are put in place. The authorities are implementing policies to mitigate the impact, including relief measures to assist households and the tourism and transport sectors. Specifics include payment extensions for value-added, personal income and land taxes for those affected by the outbreak, and cash handouts to workers who have lost jobs.

The relief package to combat Covid-19 so far amounts to VND171 trillion (US$7.25 billion), or around 2.1% of GDP. Additional measures may be introduced if downward economic pressures intensify, including an acceleration of infrastructure spending.

Fiscal consolidation is likely to be delayed due to the pandemic relief measures and higher spending to cushion the economic impact of the outbreak.

Meanwhile, the budget deficit is predicted to widen to 6.5% of GDP in 2020, from an estimated 3.4% in 2019, and for gross general government debt to increase to 42.5% of GDP, from about 38% of GDP in 2019, which is in line with the 'BB' median.

The country's economic momentum is expected to rebound in 2021, with growth projected at 7.3% as external and domestic demand gradually recover in line with global and regional trends. Exports and tourism are likely to rebound and FDI in the manufacturing sector should pick up, supporting strong medium-term growth prospects, according to Fitch.