* Rating raised on macroeconomic stability, stronger BOP
* Banks operating in more stable environment, NPLs still a
* Economist says upgrade expected, may boost investment
(Recasts with full details)
By Martin Petty
HANOI, July 29 Moody's Investors Service raised
Vietnam's credit rating for the first time in nearly two years
on Tuesday to B1 with a stable outlook, citing improving
macroeconomic stability and a stronger position in its balance
The communist country, which is still managing the fallout
of bad loans and cash-draining state sector, was bumped up a
level midway through a third year of macroeconomic stability,
Moody's said, with inflation under 7.5 percent for 26 straight
months until July and real GDP growth averaging 5.3 percent.
The upgrade will be a big boost for Vietnam at a critical
time, as competition for foreign investment heats up among other
regional manufacturing or export-led emerging market economies.
Vietnam has faced challenges on multiple fronts as a result
of an overheating economy that grew on average 7 percent from
2001-2010, with inflation reaching 28.3 percent at one point in
Banks were now operating in a more stable environment,
although the sector was still undercapitalised and
non-performing loans (NPLs) remained a risk, Moody's said.
Export diversification towards cellphones and electronics,
away from textiles and commodities had strengthened the external
payments position, while exchange rates kept stable and foreign
currency reserves reached a high of $35.9 billion.
"Combined with weak imports, this situation has resulted in
the current account shifting from a deficit to healthy surplus,"
it said in its report.
"Vietnam's sovereign credit profile is still marked by
important challenges. Capital levels in the banking system
remain inadequate, especially in the context of the continued
weakness in asset quality."
Many economists emphasise economic fragility from its
failure to expedite long promised and urgently needed structural
reforms, mainly in banking and its hundreds of State-Owned
Enterprises (SOEs). State firms account for half the country's
debt, but generate only a third of its GDP.
Lax oversight and a spree of easy lending left Vietnam with
the region's highest ratios of NPLs, slamming the brakes on
credit and retail growth and resulting in widespread
bankruptcies. Some 68,000 companies were forced to close or halt
trade in the first five months of 2014 alone.
Moody's downgraded Vietnam to B1 negative in August 2012,
then B2 stable a month later after a major fraud scandal - the
first of several to come - was uncovered in one of its biggest
banks, Asia Commercial Bank .
The State Bank of Vietnam (SBV) is leading a banking
shake-up, overseeing several mergers and acquisitions and
allowing foreign investors to wholly buy banks considered weak,
with total foreign shares in bigger lenders capped at 30
The central bank set up an asset management company a year
ago to buy bad debt, but critics say its effectiveness has
proved difficult to gauge in the absence of transparency and say
the real level of toxic debt has been understated.
The SBV said NPLs were at 4.03 percent in April, up from
3.93 percent in March and 3.61 percent in December. Moody's said
the NPLs and SOEs may continue to hamper progress.
"Risks from the SOE sector persist, posing important
constraints to the improving health of the banking system and
domestic demand," it said. "The re-emergence of macroeconomic
instability ...could exert downward pressure on the rating."
Le Anh Tuan, chief economist at domestic fund Dragon
Capital, which manages $1.4 billion, said the upgrade had been
anticipated and could help boost the country's profile.
"This is a good signal for investors outside of the country
and don't follow Vietnam so closely," he said. "Vietnam's
economy has been following a good recovery path, but still
contains issues that need to be tackled better."
(Additional reporting by Nguyen Phuong Linh; Editing by