The upgrade reflects Vietnam's favourable medium-term growth outlook, underpinned by robust foreign direct investment inflows, which will continue to drive sustained improvements in its structural credit metrics.

Fitch Ratings has increasing confidence that the near-term economic headwinds from the property-sector, weak external demand, and delays in policy implementation owing to a corruption crackdown are unlikely to affect medium-term macroeconomic prospects and that the nation's policy buffers are sufficient to manage the short-term risks.

Fitch Ratings forecasts medium-term growth of around 7 per cent. Vietnam's cost competitiveness, educated workforce relative to its peers, and entry into regional and global free-trade agreements bode well for continued strong FDI inflows amidst the diversification of global supply chains.

Diplomatic relations with the United States were upgraded to a comprehensive strategic partnership in September, which could facilitate greater US investment and trade.

Fitch Ratings said, "We expect some growth headwinds in the near term owing to a weaker external environment and some spillover to domestic demand from the slow property-sector. Under our baseline, we expect growth to moderate to 4.8 per cent in 2023, from 8 per cent in 2022, but pick up further to 6.3 per cent in 2024 and 6.5 per cent in 2025."

Vietnam's GDP has recovered in the third quarter of 2023, growing by 5.3 per cent on-year after slowing to 3.7 per cent in the first half of 2023. However, the reliance on credit growth in the policy mix to support economic activity will continue to pose a challenge to macroeconomic stability.

Weakness in the property market and slower economic growth have dampened loan demand and contributed to an increase in banks' asset slowdown in the first 9 months of 2023. Some highly leveraged firms could face refinancing risks as maturities fall due. Many banks have not reduced real-estate lending or bond holdings significantly, suggesting that they will refinance safe borrowers to avoid causing wider defaults and losses.

The State Bank of Vietnam (SBV) will retain an accommodative policy stance in 2024, as some of the property-sector stresses are likely to linger. The SBV cut the refinancing rate by 150 basis points in 2023 after raising it by 200 in 2022 to support growth and reduce the credit-market issues arising from the property sector. After falling to 3.2 per cent on average in 2023, inflation is forecast to decline further in 2024 and remain within the SBV's target.