Fitch: Strong Vietnam Macro Outlook Unaffected by Leader Choice

The reappointment of Mr Nguyen Phu Trong as Vietnam's Communist Party General Secretary is unlikely to dramatically alter the country's economic policy, says Fitch Ratings. Vietnam operates under a consensus-based decision-making framework, and therefore changes in personnel will not immediately alter the policy trajectory. A structural reform-oriented policy trajectory including a focus on macro stability and market liberalisation was a key factor supporting Vietnam's upgrade to 'BB-/Stable' in late 2014. Commitment to these policy targets will remain important factors for Vietnam's macro outlook.

Media reports have suggested that Nguyen Phu Trong was a more conservative candidate than Prime Minister Nguyen Tan Dung who was also considered for the post and will step down from his position later this year. Nguyen Tan Dung was seen as a proponent of economic liberalisation and reform as a member of the key Politburo. However, Nguyen Phu Trong has been General Secretary since 2011 and has led the party through an ambitious reform agenda thus far, including Vietnam's participation in the Trans-Pacific Partnership (TPP). Should the TPP be ratified, this would provide a key policy anchor for continued structural reforms and liberalisation. Notably, too, Nguyen Phu Trong stressed the importance of undertaking comprehensive reform in his opening remarks at the 12th Party Congress.

Vietnam's credit rating has benefited from its recent macroeconomic stabilisation and a strong macroeconomic outlook. Real GDP growth accelerated to 6.7% in 2015, which Fitch forecasts as remaining roughly the same in 2016. The conclusion of negotiations for a free trade agreement with the European Union in December 2015, and Vietnam's inclusion in the TPP, point to lowering trade barriers and enhanced access to key export markets in future. The TPP in particular will require continued implementation of structural reforms in areas such as labour, government procurement, and state-owned enterprises.

Key constraints to further ratings upgrades depend on the authorities' ability to reduce fiscal deficits and improve the outlook for the general government debt ratio, despite the strong macro outlook. Fitch estimates gross general government debt to have reached 49.3% of GDP in 2015, moderately higher than the 'BB' median of 42.8%. In November 2015, the National Assembly adopted an official 2016 deficit target of 5.0% of GDP. With the addition of off-balance sheet spending of about 1% of GDP, this suggests a continued upwards trajectory of government debt ratios over the medium term.

Other weaknesses to the country's rating profile stem from a relatively weak foreign-reserve base. Pressures on the Vietnamese dong's quasi-fixed currency regime led to a decline in reserves of nearly 20% in 3Q15. Market pressures resumed in mid-December, when the dong remained near the weakest end of its 3% trading band, but have since subsided. Fitch estimates that the foreign-reserve coverage ratio fell to under 2.1x current account payments at end-2015 - well below the 'BB' median peer of 4.2x.