Vietnam: raising the standard

How the country is developing its capital markets to attract foreign investors — a roundtable sponsored by ANZ and Maybank Kim Eng.

Vietnam: raising the standard
Ho Chi Minh City

How the country is developing its capital markets to attract foreign investors - a roundtable sponsored by ANZ and Maybank Kim Eng.









Nguyen Thanh Long, vice-chairman, State Securities Commission.

Do Viet Dung, deputy director general, banks and financial institutions department, Ministry of Finance.

Ta Thanh Binh, vice-general director, securities market development department, State Securities Commission.

Phan Thi Thanh Binh, Acting chief executive, ANZ Vietnam.

Goh Keat Jin, regional head of institutional equities and international business, Maybank Kim Eng.


Rupert Walker, contributing editor, FinanceAsia.


Moderator: What initiatives are being introduced to make the Vietnamese equity markets more attractive and accessible to foreign portfolio investors who are keen to participate in the country’s tremendous growth trajectory? In particular, what measures will be implemented to promote SOE (state-owned enterprise) equitisation and restructuring?

Nguyen Thanh Long (left): The equitisation process is being strongly promoted across all government departments as a way to restructure state-owned enterprises (SOEs). Several initiatives have already been announced by the Ministry of Finance (MOF). In September, the prime minister approved Decision 51, which clearly sets out a commitment to proceed with equitisation on a substantial scale, and it is an important landmark. One objective is to link equitisation with listings on the stock exchanges. We at the SSC are working closely with other MOF departments to implement the process. In addition, the prime minister has already approved a timeline, proposing that there should be more than 400 equitisations within the next two years. There is close cooperation with other government departments, a determination and a strong commitment to produce tangible results sooner rather than later. Underlying the whole process, is a desire to restructure SOEs in order to make them more transparent and efficient.

Moderator: An equitisation list comprising 432 enterprises over the next two years is dramatic but maybe too ambitious. How will the government ensure its plans are successful?

Do Viet Dung: As Mr Long pointed out, the government’s policy about SOE equitisations is clear, and is one of our main priorities. All state departments and agencies, including provincial administrations are on board with the far-reaching proposals.

Moderator: Will penalties or sanctions be imposed on SOEs that fail to restructure as instructed?

Nguyen Thanh Long: The legal framework is now in place, so the SOEs, the managers and state agencies fully understand what is necessary. They all understand that there will be some measures taken by the government or line ministries if they fail to restructure the SOEs.

Moderator: What companies or sectors are likely to be part of the next round of equitisations?

Nguyen Thanh Long: As I mentioned earlier, the government has a list of firms that are targeted for equitisation in all sectors, excepts some fields the state will majority owner as defined by the Prime Minister Decision No. 37/2014.  The proposals and the dialogue over restructuring plans for the SOEs and their equitisation are under pressure to be moved ahead and it seems that it has led to results, not least because the problems over coordination and cooperation within their management or ministries a few years ago have now been resolved. All are agreed that restructuring will create modern, competitive firms. Furthermore, the proposals and details of plans as they evolve are made public and widely reported in the media. We understand the importance of communication and that there should be more effort to improve it.

Goh Keat Jin: Clearly, there has been a lot of planning by the SSC, but from an investment banker’s perspective, communication is key. The SSC needs to go on roadshows to explain to investors the timeline for equitisations. That way they can shape investor perceptions, receive feedback and elicit demand. The SSC, investment banks and fund managers together can drive the process forward. It is essential that fund managers are clear about the government’s intentions and understand the timetable for equitisations. In some emerging markets investors hear what policy makers intend to do in broad terms but then find that their plans are not introduced for several years.

Phan Thi Thanh Binh (left): As bankers, we have met many investors expressing both interest and concerns about future IPOs. But one clear take-away is that they believe that the government is resolute about moving ahead with equitisation of SOEs. I agree with Mr Goh that the details of the programme must be communicated to them regularly and clearly. It is hard to find information and data of SOE equitisation in a systematic way in Vietnam.

Moderator: Is equitisation the purpose of the SOE restructuring programme?

Nguyen Thanh Long: Equitisation itself is not the ultimate purpose. Instead it a method to achieve a bigger objective, namely to restructure SOEs. It is an enabling tool to enhance their competitiveness and make them more efficient. As far as the distribution ratio - the stake to be sold to the public - we think about it in another way: it is a consequence of a price discovery process conducted by the company managers in order to find out the optimum value of those SOEs.

Goh Keat Jin: The point about price discovery is very important. It needs to be gradual, emerging over time as a function of the market. Also it is important to understand the purpose of equitisation. First it is to improve the allocation of capital and second it is in order to impose better disciple on management. Also, sometimes when it is necessary to take hard decisions, for example making job cuts, then a government might want to detach itself from those decisions.

Bear in mind that there are many natural monopolies in the world - including in Asia - that perhaps should never have been privatised. The fact that they have been might be to instil private-sector discipline, but just as likely it might have been to detach voter pressure from decision-making. In addition, it gives people ownership, providing a tangible connection to the way their taxes are spent.

Do Viet Dung: Equitisation as a strategy to improve the operations and as route to achieve beneficial restructuring of SOEs should be communicated clearly to overseas investors so that they are confident about getting involved. They should understand that as potential shareholders they too will be beneficiaries.

Moderator: Which companies or sectors are fund managers expressing interest in?

Goh Keat Jin: Basically, foreign investors are interested in any sector where they can make money. Of course, quality companies appeal to them.  And there must be consideration for domestic investors too, so they must not lose out during equitisations. The key is that companies need to be identified that have the potential to be strong businesses, but can become that way if they are released from government control. There is no point in an IPO for the sake of it.

Moderator: Was the recent sale of a stake in Vietnam Airlines satisfactory, both in terms of valuation and distribution?

Goh Keat Jin (left): Throughout the world, airlines are a hard sell and valuations are generally challenging. But having regularly flown with Vietnam Airlines, I believe that the company and its management have enormous upside potential. Nevertheless, arguably, the IPO could have been transparent and achieved a broader spread of investors.

Phan Thi Thanh Binh: The serious investors I’ve met have clear concerns. They need to know the objectives behind equitisation and understand the government’s expectations. Most especially, they need to feel confident that if their holdings are restricted to 10%-15% they will still have a voice in a company’s decisions and strategies, and can contribute and help improve corporate governance.

Ta Thanh Binh: There should be no concern regarding these issues. According to our Enterprise Law, whatever the level of investors’ holdings ownership – even 10%-15% - they will still have a voice in a company’s decisions and strategies, or they can be elected as members of its Board of Directors. We all believe that this way foreign investors can help improve corporate governance.

Moderator: Turning to the mechanics and operations of the stock exchanges, what enhancements are planned to facilitate ease of trading and improve governance and transparency?

Ta Thanh Binh: According to the plan for the stock market development approved by the prime minister there are, frankly, many tasks to be conducted. First, the foundation needs to be restructured which will occur through the merger of the stock exchanges in Hanoi (HOSE) and Ho Chi Minh City (HOSE). The plan for the merger will be introduced within six months, so that by the end of 2015 it should be sent to the prime minister for approval. Initially, their individual operational systems will remain as they are to ensure that the equity and bond markets continue to function efficiently, but eventually they will share the same structure, maintaining the highest standards to satisfy the needs and earn the confidence of investors.

Second, we need to implement policies that will attract foreign and local institutional investors. The SSC has already published a series of legal documents that pave the way for the establishment of all kinds of local investment funds and legal documents that facilitate the greater involvement of foreign investment funds.

Third, the variety and liquidity of available financial instruments – both equity- and bond-linked - needs to be enhanced. Clearly, we need to permit the launch of new products to offer investors the ability to diversify, maximise returns and mitigate risk. For instance, we intend to create a derivatives market with a central counterparty system. It will start with futures contracts then later options will be available. A Decree has been drafted and submitted to the prime minister for final approval later this year.

Moderator: How will bond market reforms improve the government’s funding capabilities?

Do Viet Dung (left): The government bond (GVB) market has experienced many reforms since 2011, which have led to a significant increase in its size. In fact, during the past four years, annual GVB gross issuance volume has increased on average 38% per year; outstanding GVB has grown at a 35% annual rate and now amounts to VND 550 trillion, equivalent to 13.8% of GDP. Liquidity has risen too, with a substantial pick-up in daily transaction volume of approximate VND 3.6 trillion, double the 2013 number.

The MOF has introduced substantive reforms to the primary market. Previously government issuance was concentrated on tenors of less than 5-years, but within the last two years it has issued a substantial amount of fixed-rate bonds with 10-15 year maturities to satisfy investor demand, including from the banking sector. New products such as zero-coupon bonds or long-short coupon bond are in the pipeline.

The priority now is to further fine-tune the depository operations for more efficient registration and custodian services, amend listing and trading rules and nurture the development of a wider and deeper investor base beyond the commercial banks which account for 85% of the market and require short-dated bonds.

Indeed, the MOF is drafting a decree for the establishment of voluntary private pension funds. These will have a natural need for longer-dated government issues in order to match their liabilities.

Moderator: So what should be the appeal of the Vietnamese debt markets to foreign investors, and what constraints do they currently suffer from?

Phan Thi Thanh Binh: Of course, investors seek to make profits, but they also want to manage their exposure effectively. International fund managers entering the Vietnamese bond market are most concerned about risk mitigation, which in other sovereign bond markets they can usually do in the derivatives market. Most of all, they need to manage foreign exchange exposure. However, under present regulations foreign portfolio investors cannot hedge their currency risk and this inhibits foreign investor participation.

Goh Keat Jin: One of investors’ principal concerns about all of Vietnam’s securities markets is liquidity. Yet actually, if they bid or offer the “right” price then they will find liquidity. However, there is often a disconnection between the expectations of buyer and seller. The solution is to improve transparency and governance which, by its actions, the SSC is committed to doing. If investors have greater visibility – about companies’ operations as well as stock or bond market transactions – then liquidity will be improved. Clear rules, good monitoring and penalties for transgressions all help.

The other issue for equity markets is size. Global portfolio managers can’t afford to have too many stocks in their portfolios, so they need companies with large market capitalisations to justify an individual investment in order to make a worthwhile impact to their fund’s overall performance.  Transaction costs are important factors too, with bid-ask spreads currently too wide.

Moderator: How is the SSC addressing these issues?

Ta Thanh Binh (left): As Mr Goh has mentioned, the SSC has identified these problems and the path of reform is well under way. For instance, there have been several regulations introduced concerning transparency, with Circular 52 the most recent. We are now in the process of drafting a new circular that among other provisions will insist that companies publish all disclosures and information in English as well as Vietnamese, update the roadmap for listings applications, and will amend the requirements for publication of financial statements. In addition, the infrastructure for collating and announcing information will be improved through an automated system (IDS) and accessibility to data will be broadened.

Also, corporate governance rules now conform to OECD standards following the enactment of Circular 121 at the end of 2012. However, during the initial implementation we found shortfalls so adjustments are being made. We have also established training centres to educate managers at SOEs about the purpose and advantages of strong corporate governance.

On the matter of transaction costs, this is a topic under review although there are already ceilings imposed. The SSC recognises that it is an important issue that has an effect on market liquidity.

Nguyen Thanh Long: To clarify some points. Mr Goh referred to investors’ paramount concerns about liquidity. Well, we identified the problem years ago and have been implementing solutions. There are four main aspects that the SSC is addressing: the range and investibility of financial instruments; the access of a broader investor base; the functioning of intermediary institutions; and the operations and management of markets. Most of all, liquidity depends on investors so our strategy makes them central to reform.

In particular, the introduction of new financial products such as exchange traded funds diversifies investor choice and augments risk mitigation.  Also, we acknowledge the role of the investor base as a direct measure in making the market development more sustainable. Therefore there are many initiatives being taken to improve the investor base, such as streamlining and opening up market entry for foreign investors, creating more favourable conditions for local investments funds to be raised, and public education campaigns to encourage more retail investors to participate in the markets.

To better serve and safeguard the investors’ assets, we also cut about 20% of the number of broker firms, forced the others to improve their financial standing and apply stringent risk management rules. To make sure that all the risk carried by the intermediaries are strictly monitored, we introduced Basel II capital adequacy rules and risk-based supervision using a CAMEL system.

Meanwhile, the plans for the merger of the two stock exchanges are in progress. And to reinforce the comments from my colleague Mrs Binh, the SSC is reviewing all transaction and market-related fees. Also, we intend to apply up-to-date international auditing standards to increase the quality and the reliability of financial information disclosed to the market and public investors. To improve the corporate governance, we also are in the process of establishing an institute of directors with initiatives from private sector. All these are positive moves.

Goh Keat Jin: Properly understanding the role of corporate governance requires education. Successful businessmen know how to run their firms but often they don’t grasp the relevance of governance except to conform to the law. Instead, they should appreciate that by instilling better governance the market would reward their shares with a higher P/E ratio, which would lower the cost of capital. There are tangible benefits.

Moderator:  To sum up, what are the most important messages about Vietnam’s securities markets and how can they best be communicated to investors?

Nguyen Thanh Long: So far, Vietnam has successfully attracted a great number of foreign direct investment (FDI) projects, and now we try to do so with foreign portfolio flows.

Certainly, in order to reach that goal, we need to make the capital market more developed, with diversified products, more liquidity and more transparency. That means raising the standards of transparency and corporate governance, and improving the functionality and performance of the stock markets remain the key task.

A better stock market can be the catalyst for economic restructuring and
reform in Vietnam across many sectors including the banking system, the ambitious SOEs restructuring programme and even the public investment restructuring programme. Perhaps most importantly, a clear, predictable and reliable legal system, along with the regulator’s enforcement activities would make all the above come in life and help instil greater confidence among both local and overseas investors.

Vietnam has the potential to be one of the world’s premier manufacturing workshops. Already multinational firms are arriving and foreign direct investment (FDI) is set to surge, which should also lead to more inward portfolio flows.

Certainly, we cannot be complacent and must continue to ensure that Vietnam is an attractive destination for FDI. That means raising the standards of transparency and corporate governance, and improving the functionality and performance of the stock markets. A better stock market can be the catalyst for economic restructuring and reform in Vietnam across many sectors including the banking system. Perhaps most importantly, a clear and reliable legal system would help enable foreign investment.

Do Viet Dung: I agree with Mr Long. Also, we need to ensure political stability and vigorous economic growth to attract investors. Vietnam has tremendous potential for growth and, in order to realise that fully, we must create a more enabling environment for foreign investors. Then we must determine how best to communicate the reforms and their fruits to investors. The MOF has made a firm decision to look outwards and explain the opportunities available. For instance in 2013 it visited Japan to disseminate its message. But roadshows are just one of several instruments. In addition, we need to upgrade websites and market guides as well as participate in more events like this today.

Goh Keat Jin: Basically, there are three parties involved: the government and its SOEs; investment bank enablers such as Maybank Kim Eng; and the fund managers. The planning has been completed, next the plan must be sold, and then it has to be implemented. And the process is a loop: new plans are devised from experience. At the same time, perception is a significant factor in markets, and reality can be shaped by the implementation of those plans.

Phan Thi Thanh Binh: It is clear from this discussion that the regulators are determined to restructure and enhance the quality of Vietnam’s financial markets. The government has published several well-considered plans and now we are in the middle of the implementation of its programme.

It is essential to keep foreign investors up-to-date with developments, by showing them where the initiatives have been successful and also where they need to be changed in the light of experience. Simply, our words must be matched by our deeds.

Moderator: Thank you.

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