Most-Improved Bond Risk as Vietnam Defies Region's Slowdown

  • Nation’s exports have increased every month since March 2015
  • Fitch says there remain threats to the nation’s credit rating

Vietnam’s bond risk is falling at the fastest pace in Asia as buoyant exports and rising foreign direct investment bolster Southeast Asia’s second-best performing economy.

The cost of insuring the nation’s five-year notes using credit default swaps has dropped one percentage point since the end of December and shrank to 1.5 percentage points last month, the least since before the global financial crisis in 2008. That compares with declines of 81 basis points in Indonesia and 61 basis points in Malaysia.

Vietnam’s exports are rising amid a regional slump as the nation’s diverse export base, which ranges from textiles to mobile phones and coffee, enables it to weather global weakness in manufacturing and commodities. While Fitch Ratings says there remains risks to Vietnam’s credit rating, the country’s gross domestic product has grown at least 5 percent each year since the start of the millennium, while foreign direct investment rose to a record in 2015.

“The decline in bond risk reflects improving macro economic fundamentals,” said Trinh Nguyen, senior economist for emerging-market Asia at Natixis SA in Hong Kong. “Vietnam’s credit cycle is on the upswing, exports are expanding and GDP improving. All this means that its likelihood of default has been reduced according to the markets’ perception.”

Quicker Growth

Vietnam’s annual economic growth accelerated to 6.4 percent last quarter, from 5.78 percent in the previous three months, the General Statistics Office said Sept. 29, behind only the Philippines in Southeast Asia. The government has forecast GDP to expand between 6.3 percent to 6.5 percent in 2016. Exports have climbed every month since March 2015, advancing 8.6 percent in September from a year earlier. 

“Having the most diversified export production base, Vietnam continues to buck the regional contraction in exports,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “Vietnam’s economy has improved remarkably over the past three years. Yet, it was only in the past 12 to 18 months that the market has taken notice of the sustainability of the improvements in its macro environment.”

Record Investment

Foreign direct investment climbed to $14.5 billion in 2015 as companies such as South Korea’s Samsung Electronics Co. and LG Electronics Inc. shifted smartphone and television manufacturing to Vietnam to take advantage of competitive labor costs. Total disbursed investments in 2016 are likely to surpass last year’s level based on pledged projects, state-owned Dau Tu newspaper reported Sept. 21.

“To maximize the economic benefits from a large and skilled workforce, Vietnam has been highly open to foreign investment,” said Donghyun Park, a principal economist at the Asian Development Bank in Manila. “The combination of structural advantages and a government with a clear and sensible long-term economic strategy largely explains the optimism of many foreign investors that Vietnam will be the next Asian tiger.”

Vietnam’s five-year credit default swaps declined 40 basis points in the three months through September and were at 185 basis points Tuesday, according to prices from CMA. The yield on the government’s 10-year bonds fell to 6.46 percent Monday, the lowest level since March 2015. The VN Index of the nation’s shares has jumped 19 percent this year.

Challenges Remain

Fitch sees threats to Vietnam’s BB- credit rating, the third-highest junk grade, after the National Assembly said public debt may breach the government’s ceiling of 65 percent of GDP in the second half of the year.

“Challenges to Vietnam’s rating profile remain, and include a rapid re-acceleration in credit growth and rising public debt, which is already higher than the median of ‘BB’ Fitch-rated sovereigns,” said Andrew Fennell, a director at Fitch Ratings in Hong Kong.

Official data show banks in Vietnam have recorded lending growth of 11 percent this year through September, below the government’s goal of as much as 20 percent. The share prices of most Vietnamese lenders have dropped in 2016 amid concern they are undercapitalized and have substantial bad loans on their books. The economy is overly dependent on unsustainable loan growth, Credit Suisse Group AG said in an Aug. 31 research note.

State Sector

The current positive picture is very different from the aftermath of the global financial crisis, when Vietnam lagged behind its peers, held back by an inefficient state-controlled sector.

Vietnam embarked on a drive in the 1990s to cut holdings in state-owned firms to bolster economic growth. The government’s privatization plan fell short of its target in 2015, with 289 state-owned companies selling stakes compared with a goal of 514.

“While the rest of the region enjoyed cheap capital inflows post the financial crisis, Vietnam went through a severe economic slowdown in which it was forced to deal with the inefficiency of its state-owned sector,” Natixis’s Trinh said. “There is still a lot of work to be done, but it has made progress.”

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