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Moody's cuts Vietnam on higher risk of BOP crisis
Moody's Investors Service lowered Vietnam's bond rating Wednesday, citing the heightened risk of a balance of payments crisis, accelerating inflation, and a falling currency.
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 defense 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.
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