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)
UPDATE 1-China’s FX reserve managers defend their record
BEIJING, July 6 (Reuters) – The managers of China’s hoard of currency reserves defended their investment record on Tuesday, saying they had avoided big losses during the global crisis and voicing confidence they could achieve stable long-term returns.
The State Administration of Foreign Exchange is an easy target for domestic critics who question why China has amassed $2.45 trillion in reserves and invested the money largely in U.S. and European bonds instead of spending it at home.
In a detailed statement apparently aimed at deflecting such criticism, SAFE said it had realised “relatively good returns” in 2008 and 2009 when the international financial crisis was raging.
“In any specific year, the investment return on our foreign exchange reserves may not be very high, but we are confident of achieving good, stable returns in the long term,” it said.
Worries this year have centred on Europe after Greece’s failure to roll over its bonds prompted euro zone governments and the IMF to sling a safety net under the entire bloc in case of a fresh market emergency.
SAFE said the measures had worked so far in staving off debt defaults or restructuring and Europe would remain a key investment market for China’s reserve managers.
“We believe Europe, with the joint efforts of the international community, will overcome its difficulties and maintain financial market stability and healthy development,” SAFE said.
The agency’s statement was the second in a series setting out how it works. Last week SAFE explained to the public why the reserves, built up by selling yuan to hold down the currency’s value, cannot be spent freely inside China. [ID:nTOE661065]
One of the prime concerns of Internet commentators is the long-run health of the dollar. If the U.S. currency weakens, SAFE’s vast holdings of U.S. securities, mainly bonds, will be worth less when translated back into yuan.
Bankers assume that perhaps two-thirds of China’s reserves, by far the world’s largest stockpile, is parked in dollar assets, although the currency composition is a state secret.
But SAFE explained that any currency translation losses are only on paper and would not be realised unless the central bank were to sell its reserves — something that it said was impossible to imagine unless there was a war or a huge crisis.
What’s more, if the yuan appreciates, currency translation losses will be outweighed by book gains from rising asset prices, the agency said on its website, www.safe.gov.cn.
SAFE also took head-on worries voiced in Internet forums about China’s investments in the U.S. mortgage financing agencies Fannie Mae and Freddie Mac.
Washington had to make good on its implicit backing for the two government-sponsored entities during the sub-prime debt crisis by bailing them out.
SAFE had not bought shares of Fannie and Freddie, and the delisting of the agencies’ shares had not affected the value of their bonds, which are a favourite with central bank reserve managers.
“At present, principal and interest payments on Fannie and Freddie bonds are normal, and the prices of the bonds are stable.
“We will continue to closely follow relevant developments at Fannie and Freddie to ensure the safety of our foreign exchange reserve assets,” the statement said. (Reporting by Zhou Xin and Simon Rabinovitch; Writing by Alan Wheatley; Editing by Jonathan Hopfner)