UPDATE 1-S&P cuts Vietnam outlook to negative

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HONG KONG, May 2 (Reuters) - Standard & Poor's Ratings Services (S&P) cut its outlook on Vietnam's sovereign rating to negative from stable on Friday, blaming macroeconomic risks and dealing a blow to a country dependant on foreign capital inflows.

The rating agency said it had retained Vietnam's BB foreign debt rating and its BB-plus local debt rating, but warned the rating could be lowered if the situation worsened.

"Clearly the economy is suffering from overheating and it has to slow," S&P analyst Kim Eng Tan told Reuters, adding that there was a one in three chance of a downgrade in the next 6-18 months.

"Inflation, current account deficit and loans growth -- all these suggest that the economy has become somewhat destabilised."

Last week, Vietnam said its annual inflation rate in April rose to 21.42 percent, probably the highest since 1991 and among the highest rates in Asia.

The government estimates its trade gap in the January-April period ballooned to $11.1 billion -- four times the figure for the same period last year -- as imports surged 71 percent.

These twin headaches have forced the government to cut its economic growth target for 2008 to 7.5 percent, down from an initial target of 8.5 percent to 9 percent.

Last Tuesday, the country's planning and investment minister said that the target should be further cut to 7 percent as the government makes fighting inflation a priority.