Vietnam Stock market: Striving to shift from frontier market to emerging market

It is expected that Vietnam stock market will soon be upgraded to emerging markets. Source: Internet

Difficulty stage

Although it has operated for 20 years, until now, Vietnam stock market is still a frontier market. In the end of September 2018, Vietnam stock market was put into the list for considering to upgrade by FTSE Russell – a global provider of stock market indexes located in London. This set many expectations because the operation of Vietnam’s stock market is influenced by foreign investors with more than 20% of total assets in the market and about 14% of transaction value of this sector. Therefore, the transactions of foreign investors would cause a huge impact on transactions as well as the psychology of domestic investors. In that context, the process of upgrading would help improve many conditions on the investment environment, helping Vietnam’s stock market to develop and step more closer to international standards, bringing benefits for all investors as well as listed enterprises in the long run.

However, recently, in the Global Market Accessibility Review on June 2020 announced by MSCI, no country was put in the list of monitoring for upgrading from frontier market (FM) to emerging market (EM). Regarding Vietnam, there was no improvement in the global market accessibility review of MSCI compared to 2019.

According to MSCI, companies in some sectors and industries were still limited in terms of foreign ownership and the rate of foreign capital ownership was still a difficulty in many sectors and shares. For the equality rights of foreign investors, many companies have not met the requirement of bilingual information. Besides that, the rights of foreign investors were limited due to the regulation limiting foreign ownership for the total proportion of foreign ownership and ownership of each investor.

For the level of freedom in the foreign exchange market, there were still limitations when there was no currency trading market in a foreign country. There was only a small adjustment of the clearing when MSCI deleted the sentence "there is no official clearing house and Vietnam Securities Depository Center (VSD) plays the role of clearing".

According to Nguyen The Minh, Analytical Director of Yuanta Vietnam Securities, in 2018-2019, Vietnam encountered many difficulties in the market while the process of equitisation of State-owned enterprises was too slow. Therefore, MSCI has not considered upgrading Vietnam’s stock market in the period of 2020. Besides that, the situation of the Covid-19 pandemic posed great risks for the global stock market in general and Vietnam's stock market in particular, so the consideration for upgrading Vietnam's stock market might be delayed this year.

According to many experts, despite meeting quantitative criteria, Vietnam's stock market has not met qualitative criteria such as a lack of market openness to foreign investors and limits in the equality rights of foreign investors (expressed mainly through the limit of foreign ownership).

Removing obstacles

It could not be denied that management authorities have made great efforts in changing management functions, increasing transparency and fairness for the stock market as well as creating the most favourable conditions for investors. The evidence is that the State Securities Commission is rushing to complete the legal framework and the main task is to complete the guidance documents of the Securities Law 2019 in the direction of solving current problems with the Enterprise Law and Investment Law; improving the competence of management agencies in the management, supervision and handling of violations in the market; improving quality of corporate management; information disclosure; creating a mechanism to handle inefficient securities companies and promoting the development of securities organisations.

This agency also added a mechanism to protect investors, diversifying and improving the quality of goods in the market (raising conditions for offering securities to the public, managing and preventing the circumvention of the law through private offering); supplement the principle of applying financial statements in accordance with international standards and the issue of information disclosure in English.

According to VNDirect Securities Company, in the process of upgrading to an emerging stock market, the issue of room for foreign investors plays an important role. The market expected that the 2019 Securities Law that would take effect from the beginning of 2021 and would open the upgrade door for Vietnam's stock market, when most public enterprises were not in the list if conditional business (or according to international law, there is a regulation on foreign ownership rate) would loosen room “automatically” to 100%.

In addition, the amended Enterprise Law has added a tool of non-voting depositary receipt (NVDR), foreign investors could access stocks out of room, contributing to solving the room problem in the upgrade of Vietnam’s stock market. Specifically, under the new law, the definition of securities including the supplement of depository receipt (DR) and provisions on non-voting depositary receipt (NVDR) would be specified. This was good news for businesses that have not been able to loosen foreign room as their business operation were in conditional business lines. Foreign investors would not be limited in ownership of NVDRs in those enterprises. This would attract more foreign capital into Vietnam’s stock market.

The changes in these laws would contribute to removing current barriers to the process of upgrading Vietnam's stock market, especially the limitation of foreign ownership and equality rights of foreign investors.