OREANDA-NEWS. The conclusion of the terms of a free-trade agreement between the European Union and Vietnam will have significant long-term macroeconomic benefits for Vietnam, says Fitch Ratings. The deal will help to boost foreign investment, productivity, and exports, strengthening potential growth and external accounts.

An agreement in principal on an EU-Vietnam free trade deal was reached on 4 August after nearly three years of negotiation. It will eliminate almost all tariffs over a 10-year transition period, with most tariffs removed upon the agreement entering into effect. The agreement also opens up parts of the Vietnamese services sector - including financial services - to European investment.

Vietnam already benefits from strong external balances and relatively high real GDP growth rates. Average real GDP growth from 2010-2014 was 5.9% versus a 'BB' country median of 4.5%, while Vietnam posted a current account surplus of 4.5% of GDP in 2014 versus a peer median deficit of -1.3%. External accounts are further strengthened by strong and stable FDI inflows, with net FDI totaling 3.9% of GDP (USD7.2bn). Strong and improving macroeconomic stability was a key driver of Vietnam's upgrade to 'BB-' in November 2014.

The EU countries, together, make up Vietnam's second-largest trading partner after China, with Vietnam benefitting from a substantial goods trade surplus with Europe. Vietnam's exports to the EU were reported at USD27.9bn in 2014, up by roughly 15% from 2013. Further lowering of trade and investment barriers should help support Vietnam's rapidly growing exports sector, and promote further FDI inflows.

Notably, too, Vietnam remains in negotiation for the Trans-Pacific Partnership (TPP) free- trade agreement with 11 other Pacific Rim countries, including the US and Japan. Should the TPP be passed, Vietnam will have concluded free-trade agreements with three of its top four export destinations.

Fitch expects Vietnam's improved macroeconomic stability and external accounts to remain a key support for its sovereign credit profile, while further upside to the rating will be challenged by high and rising public indebtedness as well as potentially large contingent liabilities from the banking sector. Fitch expects the general government deficit to widen further this year to 6.5% of GDP before steadily declining thereafter.