Believing that the Government's delayed repayment of indirect debt obligations means “weak institutions and governance strength rather than weak financial background”, Moody's has lowered Vietnam's outlook to Negative.
On December 18, Moody's announced to adjust Vietnam's outlook to Negative, ending the time of monitoring Vietnam's credit records since October 9. Moody's believes that there is still a potential risk of delayed repayment of indirect debt obligations of the Government, in the absence of clear solutions to improve coordination among related agencies as well as increasing transparency on debt management guaranteed by the Government.
According to this credit rating agency, late payments reflect an administrative problem rather than a financial weakness. Delayed payments indicate institutional and administrative weaknesses, including the problem of complex administrative procedures that hinder timely and smooth payments.
However, Moody's maintained Vietnam's credit rating at Ba3 for domestic currency, foreign currency and unsecured senior loans. The credit ceiling for long-term bonds issued in foreign currencies remained unchanged at Ba1. The maximum credit level for deposits and bonds in local currency is still Baa3.
Meanwhile, the Ba3 credit rating given by Moody's was based on the country’s strong growth potential, economic diversification, and ability to absorb shocks, including the slowing down in global trade. Moody's expects that the government's direct debt burden will also gradually decrease to about 48% of GDP by 2020, from nearly 53% in 2016. With respect to risks, despite the fact that financial health of Vietnamese banks has improved in recent years, the banking system is still believed to be a major source of risk for Vietnam.
According to the Ministry of Finance, that Moody's downgrades Vietnam's credit outlook based on a separate incident to the Government's contingent liabilities, ignoring the comprehensive results Vietnam has achieved in socio - economic development, coping with external shocks, and improving the sustainability of the public debt portfolio, is not reasonable.
“In the press release, Moody's noted that with the focus on supervision and coordination to ensure debt repayment obligations are timely met, the risk of recurring late payment has been significantly relieved.
However, the Ministry of Finance acknowledged that Moody's continuing to monitor Vietnam's credit profile (with Negative outlook) is not commensurate with the drastic and timely guidance of the Government, as well as a series of measures that the Government, the Ministry of Finance, and relevant agencies have implemented in recent years to improve the administrative coordination in the settlement of contingent liabilities of the Government, ensuring no damage to the lender", said the Ministry of Finance.
The Ministry of Finance also affirmed that the Government of Vietnam always strictly fulfills its debt repayment obligations on time as committed to international partners and financial institutions. "This is also evidently seen through the fact that the Vietnamese Government has actively implemented the guarantor's responsibility for payment, even before the lender's official request was sent," the Ministry of Finance said.
The Ministry also added that delayed repayment of government-guaranteed loans will not arise in the near future, which could cause an unnecessary misunderstanding to the community of investors about the Government's ability to repay debts as well as negative impact on Vietnam's prestige and national image on the international arena. The Prime Minister has commanded the Ministry of Finance, relevant ministries, branches and agencies to arrange sources and fulfill the debt repayment obligations when they are due.
In the coming period, the Government of Vietnam will continue to pursue the goal of solidifying the macro-economic foundation, enhancing the internal capacity of the economy, promoting institutional reform and expanding resources in order to ensure solvency, maintain public debt and national financial security while facilitating development.
"In the near future, besides continuing to implement economic reform solutions, the Government together with the Ministry of Finance and the concerned agencies are ready to provide transparent information and theoretical proofs on the Government's serious fulfillment of debt repayment commitments. Thereby, the Ministry of Finance believes that Moody's, credit rating agencies as well as other international organizations will have sufficient information and authentic basis to give a accurate and positive view on credit records of Vietnam ", the Ministry of Finance said.
Read more: The Ministry of Finance’s comment on Vietnam's credit potential downgrade
Source: compiled by VietnamCredit