BANGKOK, May 2 -- The ratings agency Standard & Poor's revised its outlook on Vietnam's sovereign credit rating Friday to negative from stable, the first major sign of international anxiety over Hanoi's ability to cool its overheated economy.
In a statement, the agency cited risks of "widespread economic and financial distress" as Vietnam's Communist rulers struggle to rein in excessive bank lending and spending by state enterprises.
"Things appear to be quite volatile," said Kim Eng Tan, S&P's sovereign analyst. "The government seems to be intent on slowing things down, but the task will be quite complicated."
Vietnam, with one of Asia's fastest-growing economies in the past few years, has been wrestling with skyrocketing inflation, which hit 21 percent in April, and a ballooning trade deficit.
The soaring prices, which are fueling worker discontent and demands for higher wages, are blamed on excessive credit growth by the loosely regulated banking system, especially smaller private banks that have lent aggressively while seeking to build their presence in the market.
S&P has forecast that domestic credit will reach 95 percent of gross domestic product by the end of 2008, up from 71 percent in 2006.
Much of the bank lending has been poured into real estate speculation and a wave of public investment by state enterprises, which have also been branching into real estate and other non-core business activities at a time when the economy has expanded about 8.5 percent a year.
Alarmed by the skyrocketing prices, Hanoi recently said battling inflation was its top priority. The government pared its growth targets to about 7 percent and appealed to agencies and state enterprises to curb unnecessary spending.
S&P warned of the potential for "policy missteps" and banking-system distress that could force an expensive government bailout.
"A lot of these banks have grown their balance sheets quite a lot," Tan said. "If one of them gets into trouble, concerns could spread across a lot of banks. That may force the government to step in to help out, and its own debt will have to go up quite substantially."
Despite these near-term risks, S&P affirmed Vietnam's credit rating at BB/B for foreign currency and BB+/B for local currency, citing "good prospects for sustained economic growth" driven partially by a wave of foreign investment.
The agency said Vietnam's ratings could be lowered if the probability of a banking system crisis rises. However, it said the ratings outlook could improve "on indications that the economy was rising to a sustainable growth path."
Other ratings agencies have not changed their positions on Vietnam. Moody's maintains a positive outlook, putting a Ba3 rating on the country's long-term debt in both foreign and local currencies. Fitch rates Vietnam's outlook as stable.
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