Moody’s Investors Service raised the outlook on Vietnam’s banking system, citing an increase in the stability of the economy and operating environment for lenders. 

Moody’s revised the outlook to stable from a negative assessment, also noting a reduction in liquidity stress at banks. The revision comes after the agency raised Vietnam’s credit rating in July. Still, Vietnam’s large bad debt problem will make any recovery in bank solvency gradual and lenders’ profitability will remain “under pressure,” it said in a statement today. 

Vietnam’s efforts to overhaul its financial system and emphasize economic stability over growth has resulted in credit ratings upgrades that enabled it to sell dollar bonds abroad in November, the first time in almost five years. Government officials last week said the economy is expected to grow 5.9 percent this year, above a World Bank estimate of 5.6 percent. 

“Improvements in macroeconomic stability have led to strengthened systemic liquidity,” Gene Fang, a Singapore-based Moody’s vice president, said in the statement. 

Loan loss reserves and capital at banks are probably insufficient to absorb potential losses on problem assets, according to the statement. 

Fitch Ratings raised Vietnam’s credit rating by one step to BB-, three levels below investment grade, early November and said government policies have put the Southeast Asian nation’s economy on a more stable footing. Standard & Poor’s rates Vietnam at BB-, while Moody’s Investors Service raised its assessment in July to B1, four steps below investment grade.