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Fitch Cites Dong in Putting Vietnam Rating on Watch

Saturday, 13 March 2010 10:47

Source: Businessweek (Bloomberg)
By Jason Folkmanis and Tim Smith

Vietnam had its debt rating placed on negative watch by Fitch Ratings, which cited poor sentiment toward the Southeast Asian nation’s currency and a risk of accelerating inflation.

The country has had its long-term foreign and local currency issuer default rating of BB- placed on alert for a possible downgrade, Fitch said today. Other countries that Fitch rates BB-, which is three notches below the credit-ratings company’s investment-grade, include Armenia, Lesotho, Nigeria, Serbia, and Uruguay.

Vietnam’s central bank devalued the dong in November and again in February, pushing the exchange rate of the currency to around 19,095 per dollar now from 17,862 four months ago. The dong has been hurt by weakening foreign-exchange reserves and external finances, which have contributed in turn to Vietnamese losing confidence in the nation’s currency, Fitch said.

“The ongoing divergence between the black market Vietnamese dong and the market clearing spot rate continues to point to depreciation pressures,” Fitch said. “Without a strong policy tightening backed by significant balance of payments support, confidence in the Vietnamese dong is unlikely to be restored.”

The dong traded at about 19,330 on the black market today, according to a telephone information service run by Vietnam Posts & Telecommunications.

Failed attempts by the government to sell domestic bonds illustrate a lack of confidence in dong-denominated assets, Fitch said. A further devaluation of the dong “is not ruled out,” wrote Yong Yin Ng, a Kuala-Lumpur based analyst for Citigroup, Inc., in a note this week on Malaysia’s Gamuda Bhd, which has property projects in Vietnam.

Overheating Signs

Citigroup also cited “strong economic growth” as driving inflation, while Fitch today said the Vietnamese economy is showing signs of overheating. Vietnam’s economy expanded 6.9 percent in the fourth quarter from a year earlier, the fastest pace of 2009, and the government is targeting 6.5 percent growth this year.

“A preference towards Vietnamese dong devaluation to boost exports and the authorities’ pro-growth policy measures in the run-up to the January 2011 national congress of the ruling Communist Party point to risks of further build-up in inflationary pressures and a weak policy response,” Fitch said.

Vietnam’s year-on-year inflation rate reached 8.46 percent in February, the highest level reported in 10 months.

“Triggers for a rating downgrade include continued lack of significant policy tightening and continuing pressure on the Vietnamese dong and international reserves,” Fitch said.

Vietnam’s central bank has held its benchmark interest rate at 8 percent since December. Foreign-exchange reserve cover may drop this year to 2.6 months worth of imports, Fitch estimated.