Rating downgrade sharply turns up the heat

09:05 | 21/12/2010

Moody’s downgrading of Vietnam’s government bonds means Vietnam will face mounting pressure to further tighten monetary policies and depreciate its currency.

Last week, Moody’s lowered the rating from Ba3 to B1 and maintained a negative outlook.

Tai Hui, Standard Chartered’s head of research for South East Asia, said Moody’s downgrade was likely to reinforce the prevailing negative sentiment towards the Vietnamese dong.

“We expect the authorities to continue to opt for further one-off devaluations of the dong over the next 12 months, with the official USD/VND exchange rate reaching 20,800 by the end of 2011,” said Hui.

At the moment, the official exchange rate was VND19,500 per dollar.

According to Moody’s, the rationale behind their move was the “heightened risk of a balance of payments crisis, the rise of inflation and debt distress at the state-owned shipbuilder, Vinashin, which suggests a reduced ability or capacity on the part of the government to provide financial support to that and perhaps other large state-owned enterprises.”

“Moody’s considers that short-comings in economic policies have allowed pressures to remain unabated on the balance of payments and are resulting in ongoing macroeconomic instability,” said Tom Byrne, a senior vice president in Moody’s Sovereign Risk Group.

In fact, this move followed Fitch’s downgrade to B+ in July 2010. S&P’s foreign-currency rating for Vietnam is now BB, two notches above those of Moody’s and Fitch.

“With S&P’s rating outlook at negative, the risk of a downgrade in the near term has risen considerably following Moody’s latest actions. Higher interest rates and orderly currency depreciation are needed,” said Hui.

Last week, S&P said in its latest report that the debt troubles of Vinashin were likely to undermine the credit quality of Vietnam’s banking industry. Standard & Poor’s Ratings Services believed that the resultant credit costs would put downward pressure on the industry’s overall profitability and capital.

“Vinashin’s woes highlight the lack of transparency, weak accountability and poor corporate governance in Vietnam, which is still in the early stages of transitioning from a centrally planned to a market-based economy,” said Standard & Poor’s credit analyst Ivan Tan.

Standard Chartered forecast that Vietnam’s gross domestic product growth would accelerate to 7.2 per cent in 2011 from 6.7 per cent in 2010 due to robust domestic demand.

“We expect consumer price index  inflation to rise to 10.5 per cent in 2011 from 8.9 per cent in 2010 on rising commodity prices. Thus, the State Bank is likely to raise interest rates in the second quarter, with base rates peaking at 11 per cent in the third quarter from the current 9 per cent,” said Hui.

Thai Thao

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