Moody’s Investors Service, the credit rating agency, has downgraded Vietnam’s sovereign debt, warning that shortcomings in economic policy were leading to a heightened risk of a balance of payments crisis.
The rating was cut on Wednesday by one notch, changing the debt assessment to “speculative and subject to high credit risk”.
The move is likely to increase the cost of government and private borrowing at a time when global investor sentiment remains fragile amid sovereign debt concerns in the eurozone.
The downgrade comes at an awkward time for Vietnam’s communist rulers, who began a crucial week-long meeting on Monday to determine who would take charge of the country at the five-yearly Communist party congress in January.
“The timing is awful,” said one Hanoi-based economist. “The government may come out fighting over the downgrade for political reasons.”
Despite growing at an annual rate of 7 per cent over the past decade, Vietnam’s economy has faced some long-standing challenges, with a chronic balance of payments deficit and a lack of confidence in its currency, the dong.
Macroeconomic policy has undergone violent swings as the government tried first to control inflation, which peaked at 28 per cent two years ago, before moving into stimulus as the financial crisis hit. It has since been struggling to put the brakes on.
Moody’s warned that inflation, which hit 11 per cent year-on-year in November, was adding to downward pressure on the dong, which has been trading in the black market well below the official rate.