S&P lowers Vietnam’s LC rating to BB-

S&P affirmed its foreign currency sovereign credit rating on Vietnam at ‘BB-/B’, the short-term issuer credit rating at ‘B.

The negative outlook on the ratings reflects the view that Vietnam faces risks of near-term economic and financial instability.

“A large part of domestic credit, estimated to equal 118% of GDP at the end of 2011, are priced at nominal interest rates above 15% per annum. A dis-inflationary environment could impair borrowers’ ability to service these loans, which we expect to reprice slowly, and thus could hurt asset quality in the banking system. That may eventually require government recapitalization of key public sector financial institutions.”

In mitigation to the above weaknesses, openness to foreign direct investment (FDI) has improved Vietnam’s economic prospects. FDI has averaged above 8% of GDP during the past four years. These foreign-invested projects should help maintain Vietnam’s trend annual real per-capita GDP growth at 5% – 6%. Standard & Poor’s estimates Vietnam’s growth in 2011 at 5%.

The negative outlook on the ratings reflects our view that Vietnam faces risks of near-term economic and financial instability. We could lower the sovereign credit ratings if balance-of-payment pressures mount or fiscal contingent risks from the financial sector rise. The ratings could stabilize at the current level if we assess that the risks to financial sector stability have declined. This is likely to reflect the successful implementation of policies that lift confidence in the domestic currency and reduce private sector and public enterprise leverage.

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