HANOI, July 29 (Reuters) – Fitch Ratings downgraded Vietnam’s sovereign rating by a notch to B-plus on Thursday, citing inconsistent state policies, worsening external finances, higher funding needs, its dollarised economy and weak banks.

Economists said downgrades could follow from other ratings agencies on one of Asia’s most promising emerging markets, where the move which was widely expected.

Vietnam’s sovereign dollar bonds due in 2020 VN048365868= fell a point to 109.50 cents on the dollar. Its credit default swaps (CDS) were not traded, traders said. [ID:nTOE66S04B]. There was no immediate reaction in the local currency market.

Vietnam’s external finance position had yet to stabilise despite additional foreign exchange reserves, Fitch sovereign analyst Ai Ling Ngiam said. Vietnam was also suffering from a highly dollarised economy and a weak banking system, Ngiam added.

“Vietnam’s track record of stop-go policy tightening and easing has been ad-hoc, reactive and inconsistent,” Ngiam said.

Fitch’s last downgrade of Vietnam was on June 29, 2009, when it knocked the country’s local currency rating to BB- from BB.

The new rating is now four notches below investment grade. It also puts Vietnam three steps below Indonesia and two under the Philippines, countries seen as its investment peers in Southeast Asia.

Fitch expects Vietnam’s government deficit to remain high and added the country’s public debt situation, a traditional area of strength, had also deteriorated.

Matt Hildebrandt, an economist at JP Morgan in Singapore, said the rating came at a time of some improvement for Vietnam in terms of inflation, the budget deficit and foreign exchange reserves, but said the downgrade was justified.

“I think the issue is even if things are getting better do you fundamentally think it should be rated where it is, and I think the answer they came up with was: no. I think the downgrade is warranted,” he said.

Vietnam’s sovereign five-year credit default swaps VNGV5YUSAC=R have signalled that the market considered Vietnam significantly risker than Indonesia or the Philippines, and on Thursday Vietnam’s CDSs were quoted about 60-70 basis points higher than those of the other two.

Rival agencies Moody’s and Standard & Poor’s both have a negative outlook on Vietnam’s rating.

Moody’s has rated Vietnam Ba3, while S&P has a BB rating on the Southeast Asian country, three and two notches below investment grade respectively. (Additional reporting by Umesh Desai in Hong Kong; Editing by Jason Szep)