Vietnam stock market upgrade and issues that must be addressed immediately

On December 12, 2023, the Prime Minister promulgated Decision No. 1726/QD-TTg approving the stock market development strategy until 2030. Notably, one of Vietnam's specific goals under this decision is to upgrade Vietnam's stock market classification from a frontier market to an emerging market by 2025 according to the stock market classification standards of international organizations. The upgrading of Vietnam's stock market from a frontier market to an emerging market is not a new issue, but has been mentioned many years ago. However, the failure to meet the standards of international organizations is an obstacle that makes the stock market in Vietnam remain a frontier market. In order to realize the set goal, we believe that Vietnam has a lot of work that needs to be done quickly in 2024.

1. Benefits of upgrading the stock market classification

The global stock market is divided into 04 levels including the developed markets, the emerging markets, the frontier markets, and the stand-alone markets. Currently, Vietnam is being classified as a frontier market, which is the same as Bangladesh, Pakistan, Sri Lanka, etc[1]. The main difference between these markets is the size and freedom of transactions, so upgrading the stock market is the goal of many countries including Vietnam. It is conceivable that some of the basic benefits that Vietnam can gain from being upgraded to an emerging market are as follows:

Firstly, Vietnam will be able to attract large amounts of foreign capital. According to the World Bank’s report, Vietnam is expected to attract USD 7.2 billion from foreign investors [2]. This is a predictable scenario due to the difference between markets. Markets with higher classification will easily attract large global investment funds and be a driving force for the development of the Vietnamese market.

Secondly, upgrading the market classification requires meeting certain criteria of international organizations. This will promote the development of trading conditions in the market and create opportunities to improve the Vietnamese stock market.

Thirdly, the participation of foreign investors with large capital in industries that do not limit foreign ownership may change the market structure. At the same time, this could be an opportunity for Vietnamese enterprises to gain access to investment capital as well as management and operational experience from large global corporations.

2. Barriers preventing Vietnam from upgrading its market classification

In the short term, Vietnam aims to upgrade its stock market classification according to the evaluation criteria of FTSE Russell and MSCI. According to these institutions, Vietnam still has several criteria that have not been met, especially the issues of pre-transaction margin, foreign ownership limit, and the language of information disclosure. These are issues that Vietnam needs to resolve quickly in 2024.

First, on the language of disclosure. This is an issue that Vietnam can solve quickly. Investment activities, especially through the stock market, always emphasize information transparency. At present, information disclosure in Vietnam is only required to be in Vietnamese, which is a major obstacle for foreign investors. Above all, whether the Vietnamese stock market is considered for upgrading depends on the assessment and experience of foreign investors, so as soon as it is difficult to access information when investing in Vietnam, it will be difficult for investors to appreciate the Vietnamese market.

Secondly, the issue of pre-transaction margin. Pursuant to Point a Clause 1 Article 7 of Circular 120/2020/TT-BTC, investors are only allowed to place buy orders for securities if there are sufficient funds in the trading account, except for margin transactions. Meanwhile, Clause 3 Article 7 of this Circular stipulates that, except for certain cases (not within the scope of this Article), investors are only allowed to place sell orders for securities eligible for trading that are already available in the investors' securities accounts on the trading day. According to the above-mentioned regulations, it can be understood that investors, whether domestic or foreign, must ensure, before placing trade orders, that there is a sufficient amount in the trading account for the buyer and a sufficient number of shares to be sold for the seller. This rule restricts short selling of securities or non-payment of orders placed. However, this also creates difficulties for investors, who have to have enough money/shares at the time of placing the order, but the corresponding securities/money are collected only after 02 days (T+2) and can be traded/withdrawn from the account only on the next day (T+3). For foreign investors, especially those who invest in the market with a large capital, money transfers will incur relatively high fees, including fees to transfer money in and out of Vietnam. Therefore, if the purchase and sale of securities is not completed and this amount needs to be withdrawn, the foreign investor will incur a significant fee. For foreign investors, especially those who put a large source of capital into the market, money transfers will incur a significant amount of fees, including transfers to Vietnam and vice versa. Therefore, if the purchase and sale of securities are not completed and this amount needs to be withdrawn, the foreign investor will incur a significant fee.

Thirdly, on foreign ownership limits. Under current laws, some Vietnamese industries still limit the proportion of shares held by foreign investors. Therefore, the market entry of foreign investors in these industries is still limited. The criteria for evaluating a market depends on the freedom of that market, so this is still an obstacle for upgrading Vietnam's stock market classification.

3. The potential of the targets set and the actions to be taken

The goal of upgrading the Vietnamese stock market from a frontier market to an emerging market by 2025 is an ambitious but challenging goal for Vietnam. For MSCI, the upgrade evaluation process takes a relatively long time. Specifically, in June each year, the MSCI Advisory Board conducts an initial analysis and consideration of upgrades for a market. The board will then seek input from investors around the world on upgrades to that market's equity market classification. By the end of the third quarter, the Advisory Board will receive feedback from investors and place the market on a watch list. The monitoring will continue for at least one year, after which the MSCI board will announce in June of the following year whether a market will be upgraded[3]. According to this process, the goal of upgrading a market in 2025 according to MSCI's evaluation criteria is unlikely to be achieved. However, in order to achieve the upgrade target at the earliest time, Vietnam still needs to accelerate in 2024 to immediately remove barriers that delay the market upgrade process.

Meanwhile, on the issue of pre-transaction margin, according to the provisions of Decree 155/2020/ND-CP, Vietnam aims to implement the central clearing partner mechanism, which is roughly understood as the fact that investors do not need to have 100% money or shares at the time of placing a trading order, instead, trades are still executed, the investor's trades are then offset against each other. Also, according to Decree 155/2020/ND-CP, within 03 years from the effective date of this Decree (01/01/2021), securities clearing and settlement activities under the central clearing partner mechanism must be implemented. However, it is known that the central clearing partner mechanism has not yet been implemented. Therefore, we believe that in the near future, the relevant authorities must speed up the progress to put the mechanism into practice promptly.

Finally, regarding the foreign ownership limit, we believe that the current problem is not only in the law, but also depends on the internal regulations of enterprises. Many enterprises still limit foreign ownership by themselves through the provisions of the articles of association, or in case the enterprise registers many industries (with foreign ownership limit) but does not conduct business in these industries. Therefore, it is necessary for enterprises to review and re-evaluate their business and exclude registered but inactive industries, which may affect the ownership ratio of foreign investors. Meanwhile, from a state management perspective, the Ministry of Finance and the State Securities Commission should soon work with the Ministry of Planning and Investment and the State Bank to adjust the foreign ownership ratio in certain industries to ensure the openness of Vietnam's stock market.