The upgrade to Ba3 is underpinned by Vietnam's growth potential is strong, at around 6.5%, supported by increasingly efficient use of labor and capital in the economy. Globally, strong growth potential tends to be associated with relatively low competitiveness. However, Vietnam's economic strength combines high growth and high competitiveness as shown in the economy's ongoing shift towards high value-added sectors.

Sustained strong growth contributes to a stable and gradually moderating government debt burden over time. The structure of government debt enhances stability through its long average maturity and declining share of foreign-currency debt. These features mitigate Vietnam's exposure to a potential sudden increase in the cost of debt and/or a sharp currency depreciation. Resilience of fiscal strength to financial shocks supports the Ba3 rating.

Potential growth is supported by strong investment, including Foreign Direct Investment in high-value added manufacturing. As Vietnam continues to move up the value-chain and the contribution of the private sector to total value-added grows, Moody's expects productivity growth to drive the economy's growth potential.

The upgrade also reflects improvements in the health of the banking sector that Moody's expects to be maintained, albeit from relatively weak levels. One factor weighing on Vietnam's economic strength is the economy's reliance on credit. In Viet Nam, there is a sizeable share of working age population-- with relatively higher spending power - in the overall population, and increasing urbanization have contributed to strong consumption and credit growth. Corporate debt is also relatively high and has been rising in recent years. Previous periods of rapid credit growth have weakened bank solvency and raised contingency risks for the sovereign. While Moody's estimates that credit allocation has improved somewhat and poses lower risks to the sovereign, rapid credit growth sustained beyond the pace warranted by financial deepening trends raises the risk of a correction that would amplify the negative impact of an economic shock.