The upgrade of the IDRs reflects the following key rating drivers, including:

Improving  track  record  of  policy-making  focused  on  strong  macroeconomic  performance. GDP  growth accelerated to  6.8% in 2017 from  6.2% in 2016 supported by the export-oriented manufacturing sector and continued growth in services. 

Foreign direct investment (FDI) inflows remained strong in 2017, especially into the manufacturing sector. As  such,  Vietnam  would  remain  among  the fastest-growing economies in the Asia-Pacific region, and highest amongst ‘BB’ rated peers.

Vietnam's external buffers have improved, with its foreign-exchange reserves in 2017 rising to USD49 billion (around 2.5 months of external current payments, CXP), from USD37 billion at end-2016, supported by large capital inflows and a current account surplus. The improvement was facilitated by the authorities' adoption of a flexible exchange-rate mechanism in January 2016.

Strong capital inflows and unsterilized reserve accumulation have led to a build-up in liquidity in the banking system. The build-up in liquidity could exacerbate volatility in Vietnam’s financial markets, especially against the backdrop of tighter global monetary conditions and rapid domestic credit growth.

The  authorities  have  maintained  their  commitment  to  containing  debt  levels  and  reforming state-owned  enterprises. As a result, Vietnam’s public debt (general government debt including guarantees) had fallen to 61.4% of GDP by end-2017 down from 63.6% at end-2016 below the authorities’ debt ceiling of 65% of GDP.  The decline in public debt was facilitated by inflows from  privatization  proceeds  (or  “equitization  receipts”),  close  to  the  target  for  the  year.

Following positive views on the macro-economic performance of Viet Nam in 2017, there are a few remaining risks that can affect the overall macro-economic performance in near future. In particular:

Vietnam's per capita income and human development indicators remain weaker than the peer median.

Vietnam’s banking sector remains structurally weak, non-performing loans remain under-reported and true asset quality is likely to be weaker than stated. Recapitalisation needs of the banking sector remain a risk for the sovereign. In addition, structural systemic weaknesses remain, as evident from thin capital buffers and weak profitability. Further, while improving economic performance is likely to support lower NPL formation, a sustained rapid credit growth poses a risk to financial stability in the medium term.

External debt sustainability metrics remain favourable. A high share of  concessional debt in total  external  debt  is  a  strength  of  Vietnam’s  external  finances. However,  given  the  rise  in  per  capita  income  levels  Vietnam  graduated  from  eligibility  for concessional financing under  the World Bank’s International Development Association in  2017 and the Asian Development Bank.  The sovereign has been increasing its share of domestic debt financing to prepare for the reduced access to concessionary financing, and higher funding costs can be expected.