Vietnam has been growing at an impressive pace for several years, since it began to liberalize its economy in the mid-1980s.
But there are still areas of friction for foreign institutional investors, namely the country’s relatively small scale capital markets and the ensuing issue of limited liquidity within them, says Sriyan Pietersz, an investment strategist at Matthews Asia.
Together, the country’s stock markets have a market cap of roughly US$200 billion, which indicates the country is solidifying its significance as a player on the global stage, he notes.
But while the country is becoming a more viable place for foreign capital, there are certain criteria is must fulfill in order to gain the relevance that comes with official emerging market status as designated by index-makers MSCI or FTSE Russell.
“It’s starting to fill the size, access and liquidity metrics, but one of the remaining issues is accessibility and that basically pertains to the need to raise foreign ownership limits and ease capital repatriation rules,” he says.
Significant changes could be coming to those rules later this year and into 2020, he says. Currently, depending on the sector and even sometimes down to the individual company level, there are restrictions on how much equity in a company a foreign investor can own. For example, there is a 30 per cent limit on banks and in the financial sector, while foreign ownership is restricted to 49 per cent for other sectors, including retail and property development.
“There’s a fairly important development coming up that may help in that regard— a new securities law — which is subject to final review in October this year,” says Pietersz. “And assuming that is passes that review, it’s likely to be implemented by the middle of 2020. And within that law, they allow for the introduction of a non-voting depository receipts model . . . which is similar to one currently being used in Thailand. What that means is investors can invest beyond existing official limits, without the voting rights.”
For a bank then, a foreign entity could actually own 100 per cent of shares, but would hold voting rights on just 30 per cent of them, he notes. “If that comes through, I think that would address the accessibility issues to a large extent.”
It could also push Vietnam over the edge to officially reach emerging market status as designated by the MSCI, broadening the market’s relevance globally, he says.
Overall, Vietnam is well-placed to grow, with a relatively young working population — 64 per cent of people are below the age of 40 — supporting consumption, urbanization and the further solidification of the middle class, he says.
As well, people from Vietnam score well in academic performance, especially in science, technology, engineering and mathematics, he says. For example, in 2018, the World Bank reported students from Vietnam surpassed those from Indonesia, Malaysia, the Philippines and Thailand in the Programme for International Student Assessment test. This expertise has the potential to boost the country’s manufacturing capabilities, enabling a the production of higher value items, he says.