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How does credit rating affect businesses?

How does credit rating affect businesses?

Monday 21, 10 2019
The most obvious effect of the credit rating downgrade is that the cost of interest rates on raising capital, stocks and bonds for foreign investors will be higher.
Recently, the credit rating agency Moody's Investors Service has informed that they are considering lowering Vietnam's credit rating and 17 domestic banks . Many securities companies believe that this will negatively affect businesses, organizations, or government agencies that have issued bonds to foreign investors.
BSC Securities said that in the event of a down in Vietnam's and banks’ credit scores, interest rates of bond groups or CDS (credit default swap) will increase. The reason is that foreign investors will require higher interest rates with higher risk debts.

Negative impacts

According to BSC, this could have a negative impact on businesses, organizations or government agencies that have been issuing bonds to foreign investors, especially in the cash flow management stage of business activities, financial activities and key projects.
However, Moody's also acknowledged that with large foreign exchange reserves (approximately USD 71 billion) and low financial requirements, Vietnam is fully capable of meeting debt repayment obligations. The upcoming rating of this agency will consider whether the restrictions on coordination among Government agencies will lead to the possibility of late payment of debts in the future. "Therefore, in the next 3 months, Vietnam may work closely with Moody to ensure the current Ba3 credit rating," the BSC report said.

Meanwhile, Yuanta Vietnam Securities Company said that Moody's may lower Vietnam's credibility if after the review process, the agency finds that the administrative gap still exists and poses risks of delayed debt payment.
The downgrade will affect the ability of the nation and businesses to raise capital. Specifically, the cost of capital mobilizing interest rates will be higher to offset risks and attract investors. The increase in capital cost will affect the efficiency of public investment and economic growth. However, this securities company said that this is considered a motivation for the Government to improve administrative procedures and regulations to avoid the occurrence of downgrade in credit rating, affecting the ability to raise capital in the future.

Not reflect correctly the country’s economic situation

According to Yuanta Vietnam as well, Moody’s has just announced their consideration, and the evaluation will take place within 3 months. Currently, Vietnam has almost no risk of solvency with abundant foreign exchange reserves of approximately 70 billion USD, equivalent to nearly 14 weeks of imports. 

Payment of (other) debt obligations of Vietnam is still going on normally. In particular, in the second quarter only, Vietnam paid USD 4.2 billion of short-term principal debt and USD 1.4 billion of long-term debt (including private and government). Accordingly, the financial balance dropped from USD 7.2 billion to USD 0.8 billion.
Ban Viet Securities Company (VCSC) also stated that Moody's consideration of lowering credit rating with Vietnam and 17 banks is an unfortunate as the separate indicators measuring credit quality of banks have been recorded steady improvement over the past 2 years. The company affirmed that the credit rating adjustment will not reflect properly the progress that banks have made.

Currently, Vietnam is being rated by 3 rating agencies including Moody’s, Fitch and S&P. Ratings and assessments have both improved significantly thanks to the improvement and macroeconomic stability of the economy in the past 3 years. This factor has created favorable conditions for mobilizing international bonds with low mobilization costs.
However, Vietnam is still a speculative market and cannot be invested, so the cash flow moving into Vietnam will circulate quickly, especially the stock market. According to Yuanta Securities, Vietnam needs to further improve its business environment, especially increasing the ownership ratio of foreign investors in conditional business groups.
Economy News

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