Fitch warns of Vietnam ratings cut; but Barclays Capital says the outlook change isn’t justified

Fitch Ratings warned it may cut Vietnam’s credit ratings deeper into junk territory, citing weakening domestic confidence in the dong, and said balance-of-payment support is needed before trust can be restored.

In Vietnam, official data show gross international reserves have fallen to $ 15.9 billion in October 2009 year from $ 23.6 billion in September 2008, Fitch said. It noted that more recent figures haven’t been published.

“The strength of Vietnam’s external finance position, which has provided support to the sovereign’s overall creditworthiness, has been sharply eroded as the economy displays signs of domestic overheating and residents lose confidence in the local currency,” Ai Ling Ngiam, Director in Fitch’s Asia Sovereign team, said in a statement released by the ratings agency.

Informal market traders Friday were demanding a 4.2% premium for the U.S. dollar over the official dollar-dong exchange rate, underlining weak confidence in the Vietnamese currency. Fitch said the premium indicates ongoing depreciation pressures on the dong.

But Prakriti Sofat, an analyst at Barclays Capital, said in a note that the Fitch move wasn’t justified. He said that while the dong remains weak, he doesn’t believe domestic confidence in the currency has deteriorated. He added that Vietnam’s trade deficit has improved this year, its external debt is relatively healthy and the central bank has been moving to tighten policy.

“Given this backdrop we believe that Fitch rating outlook change to negative is hasty and short-sighted. It does not take into account the fundamental strength of the Vietnamese economy and the country’s long-term potential,” he said.

Failed attempts by the government to sell domestic bonds illustrate a lack of confidence in dong-denominated assets, Fitch said. A further devaluation of the dong “is not ruled out,” wrote Yong Yin Ng, a Kuala-Lumpur based analyst for Citigroup, Inc., in a note this week on Malaysia’s Gamuda Bhd, which has property projects in Vietnam.

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