Vietnam Earns Outlook Upgrade From Fitch

With international trade tensions running higher, Vietnamese equities are getting caught in the downdraft. The VanEck Vectors Vietnam ETF VNM, the lone Vietnam exchange traded fund listed in the U.S., is down about 5 percent over the past month.

What Happened

While VNM is struggling against the backdrop of international headline risk, there is some good news for the fast-growing Vietnamese economy. Fitch Ratings recently upgraded its outlook on the country's sovereign debt rating from Stable to Positive. The ratings agency reaffirmed a BB sovereign debt rating on Vietnam.

“The revision of Vietnam's Outlook to Positive from Stable reflects an improving track record of economic management, which is evident in strengthening external buffers from persistent current account surpluses, falling government debt levels, high economic growth rates and stable inflation,” according to Fitch Ratings.

Why It's Important

Vietnam is classified as a frontier market and is the second-largest geographic weight in the MSCI Frontier Markets 100 Index. The country's BB credit rating is on par with or, in some cases, better than frontier markets. The country has eyes on earning a promotion to emerging markets status and joining the widely followed MSCI Emerging Markets Index, something that would likely boost VNM.

Vietnamese policymakers are looking to stabilize the local economy to bolster foreign investment and potentially notch a higher credit rating.

“The authorities are maintaining their policy focus on macroeconomic stability. GDP growth improved to 7.1% in 2018 from 6.8% in 2017 while inflation remained stable at 3.5%, within the National Assembly's target of below 4%,” Fitch said.

“Growth remained supported by strong foreign direct investment (FDI) into the manufacturing sector as well as expansion in the services and agriculture sectors.”

What's Next

The $413.1-million VNM holds 26 stocks and is slightly beating the MSCI Frontier Markets 100 Index over the past 12 months. VNM allocates a combined 42.5 percent of its weight to the real estate and financial services sectors.

“Importantly, Vietnam's external liquidity ratio (foreign-exchange reserves relative to external debt service obligations due in the coming year) remains well above the current and historic medians for the 'BB' sovereign rating category, in part reflecting modest debt repayments associated with the concessional nature of its outstanding debt,” according to Fitch.

“However, with Vietnam's recent graduation from eligibility for loans from the International Development Association, its funding costs are likely to increase over time.”

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