Sovereign rating — VietEcon

Moody’s has a big report out that looks at “key themes shaping global credit markets” ahead of 2020. I would say the general mood is pretty pessimistic. They focus on the following:

Recession risks: Moody’s seems to think that we are entering a slowdown. This is somewhat in alignment with my own views, but seems out of step with the rest of the world. See this post about how the markets are generally quite positive right now.
Lower-for-longer interest rates: This goes well with recession risks, because interest rates during a recession are generally low. But even without a recession, I think the consensus is for interest rates to stay low. Specifically for Vietnam, it seems unlikley we will see a big pick up in interest rates, despite inflation risks. The deputy PM said that inflation will be between 3.3-3.9% this year, but about a third of this is due entirely to higher pork prices. I doubt the market (or the central bank) will be too worried about this, unless it gets much worse.
Political risk: This seems a real issue in so much of the world. So many uncoordinated political crises are happening all over. I have a very not-thought-out view that all of these are a response to austerity post-financial crisis. I am reading this book (Austerity: A History of a Dangerous Idea).
Trade tensions: Bad for the world, but, at least for now, great for Vietnam. Of course, it seems like the popularity of trade and open borders is falling, and that could very well hurt Vietnam. But right now, it is benefiting from a new EU trade deal, TPP, and the US-China trade war.
Disruptive technologies: Not sure exactly what this is. The report speaks about disruption from new technologies like A.I and blockchain. Vietnam is probably not well placed to be on the forefront of these technologies, but they may not be all that far behind. There are a fair amount of startups in the country, plus there is a lot of investment and technology transfer. Plus, it is a low-wage alternative to China, which will likely remain the case even after the technologies mature.
ESG Impact: It’s also a bit unclear what this is. But if we think about two things: 1) environmental issues and 2) corruption, these are major trends in Vietnam. On the environmental front, global warming (and attendant hotter temperatures and flooding) plus air pollution are two issues that the Vietnamese population is really worried about. And the government’s crackdown on corruption has limited real estate supply, which could have a significant knock-on effect. I don’t see these making a big splash in the next year, but in the next five years, the government really needs to be on top of this.

So, while these trends are mostly negative for much of the world, Vietnam actually is sitting pretty. Vietnam has limited recession risk plus low interest rates and minimal political risk. Tie that with the benefits of the current trade war, and the country should be able to weather disruption from technologies or ESG issues, at least in the short term.

Vietnam’s sovereign rating (see chart above) reflects the good sitch. It is Baa3, which is the bottom of investment grade. This is helped by a current account surplus (which is unlikely to change) and relatively low external debt as a percentage of GDP (42%). Out of 29, Vietnam is the 6th best of lower-rated sovereigns on that metric. And it is 5th in terms of having low government interest payments as a percentage of revenue.

Moody’s placed Vietnam on potential ratings downgrade in early October, because it appears the country missed a payment, likely due to mis-coordination among arms of the bureaucracy. The Ministry of Finance freaked out and is pushing back hard. I bet that Moody’s will keep the rating. It would be too severe to push it down from investment grade. And investors don’t want that either.

II think Vietnam has done a very good job of selling itself to international bond investors, and the amount of external debt means that it has been able to attract investors (as FDI numbers show as well). But I am skeptical that making a country look pretty for bond investors is an unvarnished good. Vietnam has such a large current account balance because countries like Samsung have plopped their manufacturing in the country. But if the winds change, or labor costs rise, the company (and others like it) could easily move again. I have talked about this a lot, but selling yourself to foreign investors brings its own challenges and risks. Some of those are worth it, some are not. But all put you on a treadmill that is extremely difficult to get off of.