HANOI (AFP) — Credit risk evaluator Fitch Ratings on Thursday lowered the outlook on Vietnam's BB-minus sovereign rating from stable to negative, calling double-digit inflation "a serious concern for Vietnam."
The state-run General Statistics Office this week estimated that consumer prices shot up by 25 percent in May year-on-year in the country of 86 million, driven mainly by surging food, energy and construction materials prices.
The galloping inflation has stoked public anger and labour unrest and led the communist government in Hanoi to lower this year's gross domestic product (GDP) growth target to 7.0 percent from last year's 8.5 percent.
The Fitch report warned that "inflation is a serious concern for Vietnam" and said government responses, including price controls, higher interest rates, bond issues and other steps to soak up liquidity, haven't yet worked.
"In Fitch's view, the policy response has been both too slow -- as official pronouncements have not been followed up by immediate action -- and too small, as real policy interest rates remain deeply negative even following their recent increase," the agency's report said.
The agency affirmed Vietnam's BB minus long-term foreign currency issuer default rating (IDR) and its BB long-term local currency IDR, but revised the outlook to negative from stable.
Fitch also affirmed its short-term foreign currency IDR at B and the country ceiling at BB minus, the agency statement said.
"In the medium term, crucial factors affecting the sovereign's rating prospects include further fiscal and state enterprise reforms, ongoing efforts to keep inflation under control, policies to further attract FDI (foreign direct investment) and programmes to improve infrastructure," said the agency.
Fitch warned that "accelerating inflation could pose risks to the stability of the banking system, which is highly dollarised by regional standards."
"Aggressive policy interest rate increases, however, could also threaten the banks, especially if there is a sharp deterioration in economic growth, with consequent negative effects on the quality of banks' assets," it said.
Vietnam's external balance sheet remains strong compared with similar economies, the agency said.
"Gross and net external debt ratios relative to GDP and current external earnings are lower than peer group medians, and most debt is on concessional terms. Short-term debt external liabilities are also negligible."
However, the agency warned that "signs of economic overheating are evident in its recent balance of payments performance."
"There has been a sharp deterioration in the country's current account deficit, whose financing increasingly depends on non-FDI capital inflows," said Franklin Poon, director of Fitch's Asia Sovereign ratings team.
"This highlights the increased external vulnerability of the sovereign, and the potential erosion of what had been a credit strength for the country."
Fitch said it expects public finances to improve slightly this year, mainly on strong oil revenues, but said "the general government deficit is projected to remain high at 6.2 percent of GDP."
"The agency also expects a deterioration of public finances in 2009 on the back of slower economic growth, and increasing expenditure associated with ongoing infrastructure investments," the report said.
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