Vietnam’s Law on Investment is due to come into effect on July 1, which will make it simpler to make changes to foreign ownership limits. Coming on top of one of the region’s healthiest economies, with reasonable valuations, any such reforms could spark a rally for stock investors.
Market participants are split as to whether any such reforms will take place, however.
The final draft of the law has not been released by parliament, which may not be made public until Wednesday, July 1. Details therefore may change but the thrust is clear: the new law removes contradictions between a previous investment law and the country’s securities law regarding who has the power to change foreign ownership limits (FOL). The new Law on Investment puts that power clearly in the hands of the prime minister, not parliament.
Prime Minister Nguyen Tan Dung has said in speeches and local media reports that he supports raising limits on foreign ownership of public companies. Foreign capital is understood to be necessary to help the government execute plans for partial privatsations of hundreds of state-owned enterprises and to help banks clear non-performing loans.
The limits today force block trades to occur off-exchange, impede transparency, and distort the true value of listed companies.
Will Dung deliver?
“The prime minister has said he wants the limits to increase,” said Lawrence Brader, associate portfolio manager at PXP Asset Management, based in Ho Chi Minh City. “He’s said he would like it to increase for banks, and for non-sensitive sectors.”
Currently foreigners can own up to 49% of public companies and 30% of banks and securities companies.
Brader added that Vietnam is meant to increase foreign ownership of securities companies in line with its World Trade Organisation obligations, which could see limits raised to at least 49% and, in theory, up to 100%.
For portfolio managers, this could create a virtuous cycle of increased investment supporting an expansion of the listed universe and a growth in market capitalisation.
Liquidity constraints make Vietnam’s stocks difficult to access, but many investors are keen on the country’s story.
“Vietnam is a bright spot in the gloom encompassing Asean,” said a CLSA Securities research report published on June 17. Analyst Anthony Nafte noted the economy regained 6% real GDP growth in 2014, which will accelerate. CLSA predicts GDP growth of 6.3% this year and 6.6% in 2016, thanks to strong export growth, macroeconomic stability, and strong FDI inflows, particularly to companies involved in supply chains for electronics companies.
CLSA pinpoints two question marks for foreign investors: when will FDI inflows stop growing, and what impact will that have on export volumes; and whether the government will raise FOL.
Not right away
The CLSA report is cautious about immediate changes to those limits, noting that real changes may not occur until the 12th National Congress, slated to be held in January, which may see the Communist Party change leadership.
This event determines who controls patronage, which is an important unofficial driver of the economy and decisions around control over assets, market participants told FinanceAsia. Outcomes that favour reformers – such as Dung becoming Party chairman and filling the top ministerial spots with allies – could accelerate liberalisation.
The conclusion of the Trans-Pacific Partnership would also be a spur to reforms including the lifting of foreign ownership limits, although that pact’s fate currently rests in Washington, where Senate Democrats are currently obstructing President Barack Obama’s ability to negotiate the trade deal.
Some market players are sceptical, however, that meaningful changes will result from the revamped law. “FOL remains a sensitive subject that bears a lot of responsibilities that no one wants to face,” said a domestic broker in Ho Chi Minh City.
Many people in government fear Chinese investment. “They [the government] fear that if they open up the banking sector, or any other sector, that the Chinese will rapidly consume whatever they can get their hands on,” said the domestic broker. “The government is very protective of the economy here, and is afraid of the imminent threat from their Chinese neighbours.”
Another local broker suggested the prime minister might experiment with FOL changes rather than make wholesale amendments. For example, Nguyen Duc Huy, head of institutional sales at Saigon Securities, said, “The government is afraid of unforeseen consequences, so their best bet is to test it out on certain sectors first,” such as securities companies. It may be another two or three years before FOL changes apply more broadly. “I don’t think we’re going to see the red carpet being rolled out for FOL,” Huy said.
When change comes
Others, however, are bracing for a potential rally. PXP’s Brader said if local retail investors – who account for around 85% of daily turnover – think foreign inflows will increase, they will switch into those blue chips that foreigners favour, such as HCMC Securities, Vinamilk, FPT Corporation, REE Corporation and VN Container Shipping.
Once foreigners can actually purchase more stocks from local shareholders, the most popular stocks, such as Vinamilk, could perform very well, at least until foreign demand tempers.
One reason for optimism is that Prime Minister Dung, early in his administration, raised FOL from 30% to 49% in 2006, so there is a precedent.
Over the longer term, said Brader, “Newly increased limits would boost the appeal of Vietnam’s equity markets, as well as faith in the government’s ability to deliver on promised reforms.” It is also a precondition of graduating Vietnam from MSCI’s frontier markets classification into its emerging market index.