The current situation of Vietnam
To materialize its goal of reaching the Emerging Market status by 2025, great efforts, including the conclusion of back-to-back-to-back Free Trade Agreements with powerful allies, issuance of new laws to promote the market, have been made by Vietnam in the recent years. However, according to the latest Market Classification issued by Morgan Stanley Capital International (MSCI), Vietnam continues to be classified as a Frontier Market. According to the MSCI, Vietnam remains a Frontier Market for the following reasons:
1. Foreign Ownership Limit Level: Limited foreign ownership, ranging from zero to fifty-one percent, applies to companies operating in specific sensitive and restricted industries. Still, over ten percent of the Vietnamese equities market is impacted by these restrictions.
2. Foreign Room Level: As the foreign ownership limit level remains for some sensitive sector, the foreign room level is deemed as low and the equity market is significantly impacted accordingly.
3. Equal Rights to Foreign Investors, Information Flow, Market Regulations: Lack of readily available English information/regulations for foreign investors.
4. Foreign Exchange Market Liberalization Level: Both the onshore and offshore currency markets are restricted (for example, foreign exchange transactions need to be connected to securities transactions).
5. Investor Registration & Account Set Up: Registration for security trading, as a mandatory procedure, can be time-consuming and costly. Further, account setup requires the approval of the Vietnam Securities Depository and Clearing Corporation.
6. Clearing and Settlement: Funding of trade must be done in advance, and there are no overdraft facilities.
The same also applies to the FTSE Classification of Equity Markets – FTSE Equity Country Classification Announcement October 2024 of FTSE Russell. According to FTSE, Vietnam was added to the Watch List for Emerging Market since 2018, however, according to FTSE, Vietnam has not yet been recognized as an emerging market because of the market practice of doing a pre-trading check to confirm the availability of funds prior to trade execution, making Vietnam not eligible for the “Settlement Cycle (DvP)” criterion. The “Settlement – costs associated with failed trades” criterion is unrated as the market does not, by default, encounter failed trades. Improvements must also be made to the procedure for registering new accounts, as market practices may cause the registration process to take longer than expected. It is also seen to be crucial to implement an effective system to enable trading between foreign investors in securities that have achieved or are on the verge of reaching their foreign ownership limit (FOL).
Recommended action plan
To address MSCI’s concerns as well as foreign investors’ concerns, the following action plan should be carefully considered by the competent authorities of Vietnam:
1. To make the optimal use of the already-concluded Free Trade Agreements (i.e. CPTPP, EVFTA, EVIPA), the Government should ensure that foreign investors receive the best possible treatment when they make their decisions to invest in Vietnam. In other words, amendments of the laws and legal reforms regarding the security market, security trading, investment procedure, foreign ownership limitation, etc. should be taken into consideration to reflect the commitments in the recent Free Trade Agreements.
2. To require organizations to adopt English as one of the primary language regarding information flow for foreign investors to grasp the idea of the market easily. This action can either be regulated under relevant laws or can be implemented directly by competent authorities.
3. To consider translating the new legal regulations into English on its issuance date for foreign investors to understand the laws as soon as they can.
4. To seek the support of international commercial experts
Recent developments and the magic date!
Recently, Vietnam has made great efforts to meet its deadline of obtaining the Emerging Market status by 2025. On September 18, 2024, the Ministry of Finance issued Circular 68/2024/TT-BTC, which outlines changes to a number of legislation. By amending many laws that control securities transactions, transaction clearing and settlement, securities company operations, and information disclosure, the Circular eliminates the need for pre-funding for foreign investors implementing transactions in Vietnam. Further, on 29 November 2024, the National Assembly of Vietnam issued Law No. 56/2024/QH15 on amending and supplementing Law on Securities, Law on Accounting, Law on Independent Audit, Law on State Budget, Law on Management and Use of Public Property, Law on Tax Administration, Law on Personal Income Tax, Law on National Reserves, and Law on Penalties for Administrative Violations (Law No. 56) where the market transparency and investor interests were promoted by (i) providing definitive concepts on market manipulation; (ii) simplifying procedures for public companies; (iii) providing clearer responsibilities for parties involved in security activities; (iv) providing professional investors with rights to participate in the corporate bond market. These new amendments open the door to a more robust and competitive market by establishing clearer roles, more stringent issuance standards, and improved supervision procedures aligning with international standards.
Since it is traditional for FTSE Russell to issue its country classification around late September and early October, we are of the opinion that the magic date for Vietnam could be 31 March 2025 where FTSE Russell, subject to its assessment on new changes in Vietnam and its observation of the implementation of Law No. 56, can finally decide the Emerging Market status for Vietnam and then publish it with their official Country Classification six months later.
For Vietnam to reach its goal of an Emerging Market – Duane Morris Vietnam LLC, led by Dr. Oliver Massmann with almost 25-year working experience in Vietnam, could support the Government in this process by providing consultation on the necessary legal reforms and advising on step-by-step action plan for Vietnam with regards to requirements for the Emerging Market status.
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Please do not hesitate to contact Dr. Oliver Massmann at omassmann@duanemorris.com if you have any questions. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.