December 15, 2010 / 10:44 AM / 7 years ago

UPDATE 1-Moody's cuts Vietnam on higher risk of BOP crisis

* Six Vietnamese banks also downgraded on macro concerns

* “Stronger” monetary stance likely needed for inflation

* External payments crisis probably not imminent

(Adds context, details)

By John Ruwitch

HANOI, Dec 15 (Reuters) - Moody’s Investors Service lowered Vietnam’s bond rating on Wednesday, citing the heightened risk of a balance of payments crisis, accelerating inflation, a falling currency and debt distress from state shipbuilder Vinashin.

The agency also downgraded six Vietnamese banks, including three that are partly owned by foreign lenders, on the same set of concerns.

(For a Factbox on the banks click [ID:nHAN225113])

Vietnamese authorities have recently begun signaling a shift away from a pure growth focus toward more balanced economic policies in the face of double-digit inflation and a steadily weakening dong .

Vietnam raised policy rates by 100 basis points in early November, but Moody’s suggested that was not enough.

“Moody’s considers that short-comings in economic policies have allowed pressures to remain unabated on the balance of payments and are resulting in ongoing macroeconomic instability,” Tom Byrne, a senior vice president with Moody’s Sovereign Risk Group, said in a statement.

“An unwillingness to tighten effectively monetary policy and to allow the exchange rate to depreciate in line with market pressures have weakened the balance of payments and have elevated the risk of an external payments crisis,” he said.

Though a payments crisis was “probably not imminent”, the ratings agency said a “stronger” monetary policy stance was likely needed to check inflation, which hit 11.1 percent in November compared with the same month last year -- the highest annual rate in 20 months.

Economists and government officials expect the full-year consumer price index to be above 10 percent, compared with a parliament-approved government target of 8 percent.

Inflation is just one of Vietnam’s many macroeconomic worries.

The dong has lost more than 7 percent against the U.S. dollar on unofficial markets since the beginning of October, under pressure from inflation, a chronic trade deficit, high gold prices and intractably weak public confidence in the currency.

The authorities said they would not devalue the dong before Tet, or the Lunar New Year, which is in early February this year, and would instead try to help meet dollar demand by selectively tapping into foreign exchange reserves.

But the currency has remained weak, in part because Vietnam does not have the reserves for an all-out defence of the dong.

Moody’s said expectation of a weak dong and more inflation had fuelled capital flight last year and appeared to be doing the same this year.

The International Monetary Fund warned last week that Vietnam needed further monetary tightening to bring the foreign exchange market and inflation under control, and called for fiscal consolidation.

Le Xuan Nghia, deputy director of the National Financial Supervisory Commission, which oversees financial and monetary policy and reports to the prime minister, agreed with some of Moody’s reasoning but said “crisis” was too strong a word to use with regard to the balance of payments situation.

“Vietnam’s BOP deficit was forecast to be $4 billion this year, down from $8.8 billion in 2009. But we think it could be around $2-2.5 billion this year, as exports may jump 25 percent from a target of 12 percent. I think Vietnam’s BOP has been basically improved,” he told Reuters.

Moody’s also cited debt distress at the near bankrupt state-run Vietnam Shipbuilding Industry Group, or Vinashin.

The company, one of Vietnam’s biggest state-owned firms, has asked to delay a $60 million payment due to international creditors next week and a senior economic official said Vinashin was responsible for its own debts, suggesting that the government would not intervene.

Moody’s said the Vinashin’s debt trouble “suggests a reduced ability or capacity on the part of the government to provide financial support to that, and perhaps other, large, state-owned enterprises”.

The trouble at Vinashin, which the government said was some $4.4 billion in debt, was part of the reason behind the downgrade on Wednesday of Asia Commercial Bank , Bank for Investment and Development of Vietnam (BIDV), Military Commercial Bank, Saigon Hanoi Bank , Technological & Commercial Bank (Techcombank) and Vietnam International Bank (VIB), Moody’s said.

ACB is 15 percent owned by Standard Chartered Plc , Techcombank is 20 percent owned by HSBC Holdings Plc , and VIB 15 percent owned by Commonwealth Bank of Australia .

The Moody’s downgrades come at a sensitive time for Vietnam with leaders of the ruling Communist Party meeting this week ahead of a congress to anoint new leaders and set a policy course for coming years. (Additional reporting by Ngo Thi Ngoc Chau; Editing by Robert Birsel)

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