The authorities’ pursuit of rapid economic growth over recent years has come at a cost of macroeconomic instability. Two imbalances that have emerged are large trade and fiscal deficits, rarities in Asia. In addition, inflation has accelerated ― to 20% in May 2011.
A December 2010 default by state-owned shipbuilder Vinashin has raised concerns about the credit quality of Vietnamese banks. Bank credit has risen strongly over the past decade, with the credit-to-GDP ratio more than tripling to 125% of GDP. A significant proportion of the loans have been funnelled into state-owned enterprises and real estate.
Vietnam’s economic troubles have been reflected in the currency. The dong has been repeatedly devalued, while FX reserves have slumped (Chart 4).
Of late, investors have gained some confidence from the government’s renewed focus on stability, through higher interest rates and lower credit and fiscal deficit targets. But with real interest rates still negative, and the trade deficit widening, further policy action may be necessary to ensure stability. Attempts to rein in growth may also worsen loan and liquidity problems at the banks and state-owned enterprises. FX reserves are low and do not provide a large buffer for any further shocks.
S&P view the country’s external foreign currency debt as speculative grade with a BB- rating and a negative outlook. Fitch rate Vietnam slightly lower, at B+ with a stable outlook. Public debt is equivalent to 53% of GDP. Contingent liabilities – in the banking sector and state-owned enterprises – are potentially large.