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Finance-sector executives in Vietnam, encouraged by the government’s reform agenda and a surge of global investor interest, hope the country will enter MSCI’s emerging-market stock index by the end of 2017.
Those hopes are unlikely to be realised, but highlight the euphoria currently taking place among financial participants.
Phan Anh Vu, deputy CEO at Vietcombank Securities in Hanoi, predicted the stock market would quintuple in size in the next two years, from today’s capitalisation of $57 billion.
That, he says, will be the result of government intentions to boost privatisation efforts and encourage more participation by foreign portfolio investors.
“Then the next step will be for Vietnam to join MSCI’s global emerging-market index,” Vu said. This will involve improving the stock market’s transparency and liquidity, but Vu said reforms would speed up next year after a Communist Party leadership reshuffle.
Vu is on the bullish side, but his view reflects a similar optimism among executives, including foreign investors, that the country is on the path to bigger and more liquid capital markets.
Le Thi Le Hang, CEO at SSI Asset Management in Hanoi, said MSCI has recently consulted with the government about what it would take to graduate the country from ‘frontier’ to ‘emerging market’ status. Once the country meets MSCI criteria on matters such as market cap size and investor access, “Then it’s a two-year process,” she said. “We had hoped for an announcement [from the government regarding meeting MSCI requirements].”
The government of Prime Minister Nguyen Tan Dung has added joining MSCI’s emerging-markets index as one of its intentions among many in market reform, but no one is sure how serious it is.
The prime minister decreed in June that foreign-ownership limits on most public companies, currently at 49%, be lifted, subject to each company’s management voting to change those limits.
The privatisation process, which has been criticised for failing to allow companies that have been turned into joint-stock companies to actually list and trade on an exchange, has also been improved. Now state-owned enterprises that are turned into joint-stock companies must list and trade within six months. Meanwhile the ministry of finance also announced its determination to sell 10 large SOEs partly owned by the State Capital Investment Corporation, a Temasek-like government investment group.
But the government has a poor track record when it comes to implementing changes. For example, after Dung’s decree on foreign-ownership limits, only one company’s management (SSI’s) has actually voted to allow 100% foreign ownership. Various ministries have declared 267 “sectors” that cannot allow majority foreign ownership (there are fewer than 700 listed stocks). The minister for planning has since affirmed a list of eligible stocks will be made by the end of this year, although such deadlines also have a tendency to slip in Vietnamese bureaucracy.
With regard to privatisations, ministries and provincial governments have been reluctant to list big companies in meaningful size, because they are frightened of being seen as selling a national asset at too low a price. For example, PetroVietnam and Vietnam Airlines have listed only 3% each of their shares, making them almost impossible to access by foreign investors. This also distorts local indices, because of the huge difference between a company’s market cap and its available free float.
“Relaxing foreign-ownership limits is one thing, but increasing the free float of securities is another – and it’s not happening,” said Chin Chia-ping, managing director at MSCI in Hong Kong. “There remains limited foreign participation. Investors can’t get in.”
He agreed that Vietnam’s government had made important improvements, but as long as privatisation and fewer restrictions on foreign ownership fail to translate into meaningful access to big companies, the country will remain in the frontier bucket.
“In the context of our framework and criteria, the minimum size [of both the market, and the free float] must be much larger,” Chin said. “We don’t initiate a change [in status] unless a lot of foreign investors are able to be active onshore.”
Typically when a country graduates to emerging-market status, it has a $1.3 trillion market cap, of which half is a free float. Other factors include levels of disclosure, filings in English, and transparency. Another hurdle will be ease of hedging the local currency, the dong, into dollars, which is hampered today by poor liquidity and Vietnamese capital controls.
