As 2025 deadline nears, Vietnam faces hurdles in bid to reach emerging-market status

[HO CHI MINH CITY] VIETNAM has given itself a deadline of 2025 to upgrade its stock market – currently the smallest among the main South-east Asian economies – from frontier status to an emerging market.

Doing so, said analysts, would open the floodgates to possibly having billions of dollars of foreign capital flow into Vietnamese stocks every year.

Much rests on the MSCI and FTSE Russell – the two main organisations when it comes to stock market classifications – giving the green light. There is also the question of how the main bourse – the Ho Chi Minh Stock Exchange – will perform in 2024, and if it can continue the strong momentum from last year.

To meet the 2025 target, the upgrade to emerging-market status must be announced this year as the process for the formal inclusion can take anywhere from six to 12 months.

In a report last September, FTSE Russell said that Vietnam’s progress on its planned market reforms has “remained slow”, and that a recommitment to the work required has been made by senior levels of government. The report also included Vietnam in the FTSE’s secondary-emerging watchlist for the fifth straight year.

Many of Vietnam’s neighbours in South-east Asia have been designated as emerging markets for years, including Thailand, Indonesia, Malaysia and the Philippines.

Vietnam currently has a frontier status together with less-developed markets such as Bangladesh, Kenya, and Sri Lanka. It is, however, the largest constituent of MSCI’s frontier index, accounting for roughly 27 per cent of the index’s total capitalisation.

Room for growth “Vietnam’s market has tremendous room for growth given its nascent position compared to its regional peers,” said Tyler Manh Dung Nguyen, the head of institutional equity sales at Maybank Investment Bank, Vietnam. 

Currently, Vietnam has an average daily trading value of around US$1 billion, with retail investors accounting for more than 80 per cent of total market liquidity, he added. This exposes the market to vulnerable retail sentiments and leads to frequent volatility.

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In comparison, the average daily trading turnover hit around US$3 billion in Thailand, which FTSE classifies as an advanced emerging market. Institutional investors also make up almost half of market participants in Thailand’s stock market. 

With a greater participation of foreign agents, a more diverse investor base and better price discovery, Maybank analysts anticipate the benchmark VN Index to see a liquidity boost of at least US$4 billion after the promotion to emerging-market status.  

In an e-mail response to The Business Times, a FTSE Russell spokesperson said that being added to a new global benchmark often accelerates the equitisation and divestment of state-owned enterprises. It may also encourage large family-owned businesses to go public and raise additional funds.

The Vietnam government said in December that it aims to raise its stock market size to 100 per cent and 120 per cent of gross domestic product by 2025 and 2030, respectively. As at end-2023, the ratio stood at 56.4 per cent with a total market capitalisation of US$240 billion.

Unresolved hurdles A prerequisite for this upgrade is the launch of a new trading system called KRX, which was set to go live in Vietnam at the end of last year.

However, it failed to meet this timeline despite having gone through several trials with many securities companies over the past year. As at October 2023, three-quarters of all brokerage firms in Vietnam had tested the full functionality of KRX; only 13 per cent of all brokerage firms said that they were ready for the official roll-out. 

“If Vietnam fails to launch the new system by mid-2024, we will probably miss the reclassification timeline by FTSE Russell this year and only be included by March 2025 at the earliest,” said Pham Vu Thang Long, chief economist of Ho Chi Minh City Securities Corporation (HSC).

The new system has been in development for over a decade, under a 900 billion dong (S$49.1 million) partnership between the Ho Chi Minh Stock Exchange and the Korean stock exchange.

The overhaul is expected to support the introduction of new financial products to the market, tackle system overload, shorten the settlement cycle, and ensure the stability and efficiency of the financial market. 

In particular, KRX could facilitate the deployment of a central clearing counterparty (CCP) model, which could help resolve the pre-transaction deposit hurdle for foreign investors – a significant barrier to Vietnam’s stock market elevation.

In advanced markets, investors have a standard two-day window to complete transactions after buying shares. Those in Vietnam, however, must have the necessary funds available on the same day, incurring greater costs and risks for them.

“To implement the CCP mechanism, Vietnam needs to tackle not only technical problems but also inconsistencies in current securities and banking laws. This will take a lot of time,” said Long. 

The other main hurdle to overcome is in the foreign ownership limits for listed companies.

Currently, Vietnam has a 30 to 50 per cent cap for combined foreign stakes in companies in sectors such as banking, airline, real estate, as well as oil and gas. This helps the government prevent a disproportionate control by foreign investors in Vietnam’s key industries.

Before any reclassification can be made, said the FTSE Russell spokesperson, international investors typically expect an introduction of a mechanism to facilitate trading between non-domestic investors in securities that have reached, or are approaching, their foreign-ownership limits.

“There needs to be adequate room in a company’s share register for new investors to acquire an index constituent stock. Should this not be adequately addressed, the number of stocks that will be transitioned at the time of any potential reclassification will be limited,” the spokesperson added.