Finance Ministry decries Moody’s downgrade of Vietnam’s outlook

Finance Ministry decries Moody’s downgrade of Vietnam’s outlook

By Dung Nguyen

HCMC – The Ministry of Finance has expressed reservations about Moody’s Investors Service’s decision to change Vietnam’s rating outlook to negative despite the Vietnamese Government’s efforts to enhance coordination and transparency around debt management.

On December 18, the U.S.-based rating agency confirmed the Government of Vietnam’s Ba3 local and foreign currency issuer and senior unsecured ratings, and changed the outlook to negative, concluding the review for downgrade that was initiated on October 9.

“The confirmation of the rating reflects Moody’s assessment that enhanced attention by the administration on forthcoming payments of all the Government’s debt obligations, direct and indirect, reduces the risk of renewed payment delays,” the agency said in a statement.

Moody’s explained that the Ba3 rating is underpinned by strong growth potential and economic diversification, supporting the economy’s capacity to absorb shocks, including a prolonged slowdown in global trade.

The rating also reflects Moody’s expectation that the Government’s direct debt burden will decline gradually, from moderately high levels, and that debt affordability will improve.

Moreover, while the rapid buildup of a large and diversified manufacturing sector denotes policy effectiveness, Moody’s assesses the country’s institutions and governance to be relatively weak, with administrative deficiencies revealed in the delayed debt payments.

Although the financial health of Vietnamese banks has improved in recent years, the banking system remains the chief driver of overall event risks for the sovereign, according to the agency.

It said the negative outlook reflects some ongoing risk of payment delays on some of the Government’s indirect debt obligations, in the absence of more tangible and significant measures to improve the coordination and transparency around debt management within the administration.

In a statement released shortly after the Moody’s announcement, the Vietnamese Ministry of Finance argued that the outlook downgrade was merely based on a single incident regarding the Vietnamese Government’s provisional debt obligations.

The ministry alleged that Moody’s had not taken into account the country’s socioeconomic achievements, improved resilience against external shocks and the enhanced sustainability of the public debt portfolio.

The ministry stressed that government agencies have adopted timely measures to improve administrative coordination in debt payments, ensuring no loss to the creditors.

It also reiterated that the Government is serious about meeting its commitments to make debt payments to its development partners and international financial institutions on schedule. This was clearly demonstrated when the Government accepted responsibility as the guarantor for debt payments, even though it had yet to receive a formal request from the creditor.

To avoid recurring delays in meeting the Government’s indirect debt payment obligations, which could cause misunderstandings among international investors over its ability to repay debts and affect its creditworthiness on global markets, Prime Minister Nguyen Xuan Phuc has asked the Ministry of Finance, and the concerned ministries and agencies to guarantee financial resources and meet their debt payment obligations.

In the months ahead, the Government will further strengthen the macroeconomic foundation; enhance the internal capacity of the economy; speed up institutional reforms; and make resources available to ensure debt payment, public debt sustainability and national financial security, the ministry stressed.

The ministry confirmed that it stands ready with the other relevant agencies to provide transparent information and convincing evidence of the Vietnamese Government’s serious commitment to debt payment, so that Moody’s and other rating agencies will have sufficient information to have an accurate and positive view of Vietnam’s credit profile.

During the rating review, Moody’s assessed the practices and systems the Government has instituted or is instituting to ensure reliable, on-time and smooth fulfillments of all obligations, following a number of payment delays on government-guaranteed debt obligations over the past year.

Moody’s concluded that the debt payment management practices have been strengthened within the administration, with greater scrutiny over the range of debt payments coming due.

The agency stated that the Government is able to monitor a full list of direct and indirect debt obligations. As previously assessed, the Government has the financial capacity to meet these obligations. With a coordinated focus on ensuring that the payments are planned for and processed promptly, the risk of renewed delays has diminished.

The payments that were delayed earlier this year have now been made in full, according to the agency.

Moody’s continues to assess that the delayed payments reflect administrative deficiencies rather than fiscal weakness. Instead, Moody’s expects the Government’s direct debt burden to decline gradually, to some 48% of the gross domestic product by 2020, from nearly 53% in 2016.

Combined with lower domestic interest rates reflecting a lengthening track record of macroeconomic stability, Moody’s also expects an improvement in debt affordability. In addition, the rising share of local-currency market financing will reduce the Government’s exposure to exchange rate risk.