UPDATE 1-Strained Vietnam economy hit by fresh ratings blow

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By Grant McCool

HANOI, June 4 (Reuters) - Moody's downgraded its ratings outlook on Vietnam to negative from positive on Wednesday, the second outlook cut in a week as the economy grapples with 25 percent inflation and rising trade and current account deficits.

Moody's Investors Service said the swing in ratings outlook reflected its view that Vietnam's economic imbalances were greater than anticipated, but it also noted strengths in its trade opening policies and foreign direct investment having offset the current account deficit last year.

A Vietnamese finance ministry official said the rating was "not conducive to the economic situation here now" and that there was "a lot of work to do from the government side to restore confidence".

Following a year of overheating and high credit growth, 2008 has been strained for Communist Party-ruled Vietnam, which is chafing like other countries under high prices of food and energy and liquidity problems.

But in a place where macroeconomic stability has been taken for granted with growth averaging 7.5 percent a year since 2000, seven consecutive months of double-digit inflation rippling through the economy has raised alarm.

"For the authorities, the dilemma now is how to dampen growth without throwing the economy into recession or damaging the environment for FDI," said Tom Byrne, a senior vice president at Moody's, referring to foreign direct investment.

The report was published less than a week after Fitch Ratings cut its outlook on Vietnam's sovereign rating to negative from stable. Fitch said policies had not dealt quickly or strongly enough with inflation, potentially posing risks to banking.