Reasons for negative watch are unjustified: Barclays

London: Vietnam had its debt rating placed on negative watch by Fitch Ratings, which cited poor sentiment toward the Southeast Asian nation's currency and a risk of accelerating inflation.

The country has had its long-term foreign and local currency issuer default rating of BB- placed on alert for a possible downgrade, Fitch said.

Other countries that Fitch rates BB-, which is three notches below the credit-ratings company's investment-grade, include Armenia, Lesotho, Nigeria, Serbia, and Uruguay.

Vietnam's central bank devalued the dong in Nov-ember and again in February, pushing the exchange rate of the currency to around 19,095 per dollar now from 17,862 four months ago. The dong has been hurt by weakening foreign-exchange reserves and external finances, which have contributed in turn to Vietnamese losing confidence in the nation's currency, Fitch said.

"The ongoing divergence between the black market Vietnamese dong and the market clearing spot rate continues to point to depreciation pressures," Fitch said. "Without a strong policy tightening backed by significant balance of payments support, confidence in the Vietnamese dong is unlikely to be restored."

The dong traded at about 19,330 on the black market yesterday, according to a telephone information service run by Vietnam Posts & Telecommunications.

Bonds failure

Failed attempts by the government to sell domestic bonds illustrate a lack of confidence in dong-denominated assets, Fitch said. A further devaluation of the dong "is not ruled out", wrote Yong Yin Ng, a Kuala-Lumpur based analyst for Citigroup, Inc., in a note on Friday on Malaysia's Gamuda Bhd, which has property projects in Vietnam.

Citigroup also cited "strong economic growth" as driving inflation, while Fitch said the Vietnamese economy is showing signs of overheating. Vietnam's economy expanded 6.9 per cent in the fourth quarter from a year earlier, the fastest pace of 2009, and the government is targeting 6.5 per cent growth this year.

"A preference towards Vietnamese dong devaluation to boost exports and the authorities' pro-growth policy measures in the run-up to the January 2011 national congress of the ruling Communist Party point to risks of further build-up in inflationary pressures and a weak policy response," Fitch said.

Vietnam's year-on-year inflation rate reached 8.46 per cent in February, the highest level reported in 10 months.

"Triggers for a rating downgrade include continued lack of significant policy tightening and continuing pressure on the Vietnamese dong and international reserves," Fitch said.

Vietnam's central bank has held its benchmark interest rate at 8 per cent since December.