Challenges hound Vietnam’s sovereign credit profile

For example, inadequate banking system capital levels.

Vietnam’s sovereign credit profile is still marked by important challenges, based on a recent analysis.

According to a research report from Moody’s Investors Service, for instance, capital levels in the banking system remain inadequate, especially in the context of the continued weakness in asset quality.

At the same time, risks from the state-owned enterprise (SOE) sector persist, posing important constraints to the improving health of the banking system and domestic demand.

In addition, the government’s fiscal position has eroded over the past few years, driven by weaker revenue performance.

Here’s more from Moody’s Investors Service:

In July 2014, we upgraded Vietnam’s sovereign rating by one notch to B1 from B2. The outlook on the rating remains stable.

The key drivers of the upgrade are:

(1) an emerging track record of macroeconomic stability;

(2) a strengthening in the balance of payments and external payments position;

and (3) an easing in contingent risks from the banking sector.

Vietnam is in the midst of its third consecutive year of broad macroeconomic stability.

Compared with the previous decade, real GDP growth has fallen since 2012.

However, the economy has been characterized by price stability.

Much of the slowing in growth has been driven by the relative weakness of domestic demand, whereas the export-oriented, foreign- owned sector of the economy has remained robust, helping to sustain overall economic activity.

Credit support is provided by the strengthening of Vietnam’s balance of payments and external payments position, which has been underpinned by a diversification in the structure of Vietnam’s exports.

Combined with relatively weak imports, this situation has resulted in the current account shifting from a deficit to a healthy surplus.

In turn, this development has contributed to the accumulation of foreign exchange reserves to an all-time high of $35.9 billion, as of April 2014, as well as to the stability of the exchange rate.

The operating environment for the banking system has also stabilized, particularly with regards to liquidity.

Risks to the government’s balance sheet have eased accordingly, but have not been entirely eliminated