Standard and Poor’s (S&P) on May 21 announced its decision to maintain Vietnam’s sovereign rating at BB, with stable outlook.

Standard and Poor’s (S&P) announced its decision to maintain Vietnam’s sovereign rating at BB, with stable outlook.

The stable outlook reflects S&P’s expectation that Vietnam's economy will continue to expand rapidly, exemplifying gradual improvements in its policymaking settings and underpinning credit metrics, stated the rating agency in a statement.

In tandem with the global economy, Vietnam's economic growth will be hit hard by the Covid-19 pandemic and the associated downturn.

S&P forecast the country’s real GDP growth to fall to 1.2% this year, with precipitous declines in global trade and tourism taking a considerable toll on the economy's near-term prospects.

However, Vietnam's economy is well-placed to achieve a rapid recovery, assuming that the pandemic is largely contained toward the end of 2020 or the beginning of 2021.

Under these circumstances, S&P expect real GDP growth to rebound in 2021, before settling closer to Vietnam's long-term trend rate of growth between 6.0%-7.0% from 2022 onward.

Vietnam's attractiveness as a premier destination for FDI in Southeast Asia, along with its young, increasingly educated, and competitive workforce, should help to keep the country's long-term development trajectory intact, it said.

Meanwhile, continued improvements in macroeconomic stability have supported the manufacturing sector's attractiveness to global firms in the electronics, mobile phone, and textiles industries.

Vietnam's robust FDI-oriented economy continues to fuel stronger domestic activity, particularly through private consumption. The outlook for these growth drivers over the next year is poor, owing to weakening global trade and labor market conditions, as well as cautious consumer sentiment. However, low household leverage in Vietnam provides space for private consumption growth to rebound quickly once the global economy begins to recover.

Despite consistently strong credit growth prior to 2019, and the considerable scale of banking sector assets relative to GDP, S&P do not observe credit being the primary driver of economic growth.

Still, the global economic downturn will test rising land prices and strong real estate development trends in major cities such as Hanoi and Ho Chi Minh over the last few years.

It is expected Vietnam's 10-year weighted average growth of real GDP per capita to be approximately 5.2%, significantly higher than the average of the country's peers at a similar income level.

Domestic and external risks remain

While Vietnam is well-placed to recover following the containment of the pandemic, the economy faces a variety of domestic and external risks.

On the external front, trade disputes between major economies and the impact of the Covid-19 pandemic, especially on its key trading partners, will very likely undermine export momentum over the short term.

According to S&P, Vietnam’s key trading partners such as China, South Korea, the US, and Japan would face substantial economic damage from the pandemic over the near term.

Given the extraordinarily large share of trade relative to the size of its economy and exposure to risks from disruption to the global supply chain, Vietnam faces elevated risks associated with the severe decline in global trade flows.

Domestically, a higher fiscal deficit this year and moderate public indebtedness mean that new sources of funding will likely be needed to continue to spur strong infrastructure investment. Relatively weak banks in Vietnam, characterized by low levels of capitalization and mixed asset quality, also pose a degree of risk to the economic outlook.

Last April, S&P upgraded Vietnam’s rating to BB from BB-, the first time since 2010, on the back of the economy’s strong macroeconomic performance and improved government institutional settings.