Moody’s: negative outlook on Vietnam reflects uncertainty

Moody’s Investors Service Inc. said Wednesday its negative outlook on Vietnam reflects balance of payments uncertainty.

Moody’s Investors Service Inc. said Wednesday its negative outlook on Vietnam reflects balance of payments uncertainty, with any change contingent on recent tightening measures arresting inflationary pressures and containing the volatile exchange rate.

The ratings agency also warned, however, that the rating could face further downward pressure if there was continuing erosion of the Southeast Asian nation’s foreign-exchange reserves—estimated at $12.2 billion at the end of 2010, compared with a peak of $25.8 billion in February 2008.

Moody’s in December downgraded its rating on Vietnamese government debt to B1 from Ba3 because of the threat of a balance of payments crisis, depreciation pressure on the dong, and rising inflation.

In a report released Wednesday, it said the country has struggled to balance growth desires with macroeconomic stability, adding that “policy accommodation over the past few years has directly contributed to overheating pressures, which have in turn led to high inflation and deterioration in the external payments position.”

The Vietnamese government has recently reversed its long-standing policy focusing on growth, unveiling a series of measures to combat major imbalances in the economy, which have been highlighted by increasing price pressures. Consumer prices rose 13.89% in March from a year earlier, the fastest on-year pace since February 2009, and far higher than the government’s target of capping inflation at 7% this year.

The government has said it will tighten monetary and fiscal policies, such as by trimming public investment and the budget deficit, boosting domestic production and rebalancing trade. Its credit-growth target will also be lowered, while the State Bank of Vietnam has raised its key interest rates several times in recent months.

At the same time, the government has also announced potentially inflation-stoking policies such as sharp increases in electricity and fuel prices, along with a spike in wages.

“It remains unclear whether the barrage of tightening measures after the Vietnamese new year represents a permanent departure from the previous policy framework, or whether this is merely an extended episode of “stop-and-go” policy making that has exacerbated the imbalances in the economy,” Moody’s said. – WSJ