Fitch upgrades Vietnam debt outlook

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Fitch, one of three major credit rating companies, upgraded the outlook for Vietnam’s sovereign debt rating from Stable to Positive. Vietnam has a BB rating, or just below investment grade. If this continues, we could maybe see Fitch upgrade Vietnam to BBB at some point.

The revision of Vietnam's Outlook to Positive from Stable reflects an improving track record of economic management, which is evident in strengthening external buffers from persistent current account surpluses, falling government debt levels, high economic growth rates and stable inflation

The Vietnamese government has focused on debt levels, which have been trending up. For example, government debt to GDP was just under 60% but well to 57.5% in 2018. Much of this is due to very strong economic growth (which raises the denominator) of c7%, that allows more flexibility for the country. But the government has stopped guaranteeing some projects and is more rigorous about issuing debt.

RATINGS CLOSE TO VIETNAM SOURCE: TRADING ECONOMICS, VIETECON CALCULATIONS

RATINGS CLOSE TO VIETNAM SOURCE: TRADING ECONOMICS, VIETECON CALCULATIONS

To be honest, I was a bit surprised that Vietnam is still a BB. It has a lower rating than its southeast Asian neighbors. Singapore has the highest rating (no surprise there), but even the Philippines (which I didn’t think was known for its economic management), and Thailand (which has gone through a fair amount of political instability) have higher ratings. Malaysia is doing the best of the emerging players.

Countries similar to Vietnam are Guatemala, Turkey, Paraguay and Georgia. That is surprising to me, but I guess Vietnam’s strong economic performance is still pretty recent. Looking at Moody’s ratings for Vietnam over time (see chart below), it has been pretty consistent. The first rating was in 1997, and it was the same as the one that we see today (Ba3, equivalent to BB-).

SOURCE: MOODY’S

SOURCE: MOODY’S

What does this mean? Well, a lower/worse rating generally means a higher borrowing rate. But that isn’t the case these days. Yields on Vietnamese bonds (10 year) are 4.761%, down 43bps in the past 6 months. It is up 21bps over the past year, but it hit a low in early 2018 along with the rest of the world. It has lower yields than India, Russia and Brazil. Just a few years ago (2011), the yield was as high as 12.53%. it has been steadily down since then. This saves billions and billions of dollars for the country.

Of course ratings and interest rate payments are not correlated that closely based on what we can see from Vietnam. Remember bonds also reflect supply and demand, and we have seen significant demand for yield globally. Because interest rates are so low, investors are willing to search for higher-yielding assets (like emerging market debt). They may not always be judging risks appropriately. Lots of emerging markets have benefited from this search (see Uzbekistan issuing a Eurodollar $500m bond for 4.75% earlier this year).

It will be interesting to see how long this low interest rate environment can last. Back in 2017, I thought it was over and that we would see slowly increasing interest rates everywhere, but then we saw another dip to the lowest levels in 2018. And this year has been down again. It is great for borrowers, not so greater for investors that need yield. Now that may seem unimportant, but lots of old people all over the world need a certain return from their savings in order to live. When I think of my retirement, I assume that 4% is a conservative and very do-able yield. If it’s not, I need to plan better now meaning work longer and spend less, and I don’t want to!

But good for Vietnam. If it keeps this up, it may be able to drive its borrowing rates even lower.