In its recent report, Fitch said that improving levels of vaccination in the country should reduce the risk that the recovery is set back by further COVID-19 outbreaks. However, the evolution of the pandemic remains subject to uncertainties, in particular as daily cases have trended higher in recent months.
Economic growth in 2021, at 2.6 percent, was much weaker than the 7 percent that Fitch had expected in April 2021, when it affirmed Vietnam’s rating at ‘BB’ and revised the Outlook to Positive, from Stable.
According to Fitch, this partly reflected a 6 percent year on year contraction in real GDP in the third quarter last year as the authorities moved to control a surge in COVID-19 cases.
Further pandemic-related shocks, while possible, are unlikely to be so severe, because the government has shifted from a “zero COVID” approach to one of flexible adaptation as vaccination rates have increased, it said.
Growth will be led by exports, which rose by 19 percent in 2021, it said, adding that it expects goods demand growth to decelerate in the developed world in 2022 as activity normalises and services demand picks up.
Inward investment remained strong in 2021, at 19.7 billion USD, down only slightly from 20 billion USD in 2020. The strong export performance that Fitch expects in 2022-2023 will catalyse domestic investment and consumption, through positive spill-overs, for example from job creation.
Fitch’s current forecasts see Vietnam's public debt/GDP ratio broadly stable over 2022-2023, at around 41 percent of GDP.
Since this forecast, the government has approved a fiscal stimulus package covering the period, worth around 15.3 billion USD (roughly 4 percent of 2021 GDP), but Vietnam’s debt/GDP level will remain below the peer median of 56.6 percent in 2022 and 56 percent in 2023, it noted.
The package continues certain tax breaks and exemptions, which will weigh on the revenue base, but these may be rolled back as the recovery strengthens. It also contains additional infrastructure spending that could help to underpin medium-term growth prospects, Fitch commented.
Non-performing loans in Vietnam’s banking sector rose in 2021 amid disruption to economic activity associated with efforts to control COVID-19 outbreaks, it said, adding that a return to strong economic growth should reduce risks to asset quality.
It believed the pace of bank capital accrual will remain modest in 2022-2023, as much of the internal capital generated is likely to be consumed by rapid balance-sheet growth. Last April, Fitch held that a material reduction in risks posed to the sovereign balance sheet from weaknesses in the banking sector could lead to a rating upgrade. ■