Moody’s Investors Service has maintained a B1 rating for Vietnam with “stable” outlook. “The Vietnam government’s B1 rating reflects high economic strength, low institutional strength, moderate fiscal strength and high susceptibility to event risk,” it said in its Feb 9 report.

The B1 rating was given in July last year. It was an upgrade from B2.

Moody’s said this was based on Vietnam’s track record of macroeconomic stability, strengthening balance of payments and external payments position, and a fall in contingent risks from the banking sector.

But Moody’s noted on Feb 9 that Vietnam’s sovereign credit profile is still clouded by challenges. “Although the operating environment for the banking system has stabilised, and risks to the government’s balance sheet will likely remain limited, capital levels in the banking system remain inadequate, especially in the context of continued weakness in asset quality.”

It said a sovereign rating upgrade could only happen if there is an improvement in the intrinsic financial strength of the banking system and the state-owned enterprise (SOE) sector, fiscal consolidation and a re-profiling of government debt to mitigate foreign exchange risks.

Moody’s said a rating downgrade could occur if there is a re-emergence of macroeconomic instability that could result in a rise in debt-servicing costs and an erosion of the country's external payments position.

In addition, the crystallisation of contingent risks from either the banking system or the SOE sector will be credit negative.

According to Moody’s report, the government’s GDP growth target for 2015 is 6.2%. Real GDP growth in 2014 was 6.0%, above the official target of 5.8%.

The rating agency opined that the low oil prices should further dampen inflation and support consumption and trade balances. “As we expect current account balances to remain in surplus despite an uptick in imports in the last few months, Vietnam’s economy and domestic funding conditions for the government should be insulated against shifts in global liquidity condition,” Moody’s said.