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Fitch Upgrades Vietnam’s Outlook

On January 23, Fitch Ratings revised Vietnam’s sovereign outlook from “stable” to “positive,” a powerful indicator of the country’s rising fortunes. The ratings agency attributed the improved classification to progress regarding Vietnam’s macroeconomic stability and external finances.

According to Fitch Ratings, Vietnam has demonstrated strong signs that it is recovering from the effects of austerity measures implemented in 2011 in response to mounting public debt and a potentially overheating economy. “Real GDP grew 5.4 per cent in 2013 (5.2 per cent in 2012) as both domestic and external demand picked up. Meanwhile, consumer price inflation has moderated, coming in at 6.6 per cent in 2013, compared with 9.1 per cent in 2012 and 18.7 per cent in 2011,” a Fitch report explained. Fitch anticipates that Vietnam’s GDP will expand 5.7% in 2014 and 5.9% in 2015, robust but sustainable rates of growth.

Fitch also estimates that Vietnam ran an account surplus in 2013 that was 5 percent of the GDP. The country currently enjoys strong inflows of foreign direct investment, which amounted to 6.8% of the GDP in 2013. Government statistics show that 40,000 new accounts were opened in Vietnam in 2013, a 56 percent increase over the previous year. As of the conclusion of December 2013, foreign investors hold 1.3 million accounts, and  are currently net buyers in the stock market, possessing a total of $323 million in shares, a 53.1% improvement over last year. This is the the third consecutive year foreign investments have increased.

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Vietnam’s foreign exchange reserves topped $28.6 billion at the end of 2013, which is the equivalent of almost two and a half months of external payments, according to Fitch.

There are still concerns regarding Vietnam’s economic future; the country’s banking sector remains in need of serious reforms and is addled with non-performing loans. Fitch said, “However, the authorities have begun to address the issue by creating a national asset management company to help resolve NPLs. Meanwhile, funding pressures in the banking sector have eased due to divergent trends in loans and deposits, which resulted in the system-wide loan-to-deposit ratio falling to 91.6 per cent at end-Q2 2013, down from 94.8 per cent at end-2012.”

Fitch also revised the outlook for two of Vietnam’s state-owned banks–the Viet Nam Bank for Agriculture and Rural Development (Agribank) and the Viet Nam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)–from stable to positive. Fitch said, “The outlook revision on both banks’ IDRs reflects Fitch’s view that the sovereign’s ability to provide extraordinary support, if needed, is improving.”

Many anticipate that Vietnam’s garment export industry is soon to balloon in growth, especially following the conclusion of the Trans-Pacific Partnership (TPP) which is expected to conclude in the proximate future. Vietnam has been a central seat of controversy for nations embroiled in TPP negotiations, especially regarding the “yarn forward rule of origin.” The U.S. proposed rule stipulates that any garment must be made of either fabric or yarn supplied by the U.S. or any signatory TPP nations to be eligible for duty-free benefits when shipped back to the U.S. For obvious reasons, many importers have strenuously objected to the rule. Conversely, many American textile producers declaim that it is absolutely necessary for them to remain competitive in the future.

Vietnam is also quickly progressing toward a settlement with the E.U. over another major trade deal, which will radically usher in market liberalization, eliminating tariffs on more than 90 percent of its goods and reducing high duties on its imports. The E.U. is Vietnam’s largest export market and second largest trading partner. Vietnam is the E.U.’s fifth largest trading partner, reaching $30 billion in bilateral trade in 2012.