Francesco Guaraccio and Phuong Nguyen
HANOI, January 18 (Reuters) – Vietnam risks missing a self-imposed 2025 deadline to complete reforms that would allow it to upgrade its stock market to emerging economy status and attract billions of dollars in investment, three officials told Reuters.
The delays have been caused by clashes between state institutions over key reforms, including settlements and foreign ownership of companies, officials said, as the overhaul would increase oversight tasks in a typically risk-averse country.
The main stock exchange, Ho Chi Minh City Stock Exchange .VNIis the smallest of Southeast Asia’s major economies, with a market capitalization of about $180 billion, less than half from Malaysia. It was one of the worst in the world last year, with a drop of more than 30% caused mainly by turmoil in the real estate sector.
Despite that opened an economy that relies on offshore industrial investment and whose total exports equal its gross domestic product, Vietnam has protected its stock market by restricting access to foreign investors.
As a result, top equity index managers classify Vietnam as a frontier market, along with much less developed economies such as Benin or Burkina Faso.
In July, the government pledged to aim to improve the status of emerging markets in at least one major index by 2025.
But the conflicts are delaying much-needed market reforms, said three officials familiar with the discussions. All declined to be named because the discussions are internal.
One source directly involved in the discussions and another in the Vietnamese government said there could be a delay of at least a year unless significant progress is made soon.
A third source said the upgrade could be delayed until the end of this decade.
The Ministry of Finance did not respond to a request for comment.
The upgrade could boost share prices by up to 3%, according to researchers Burca Hacibedel and Jos van Bommel, who assessed the impact of index inclusion in 24 countries. For Vietnam, this could mean an inflow of cash worth around $5 billion.
Other internal estimates, shared with Reuters by one of the sources, also pointed to an initial profit of between $5 billion and $8 billion, even if only a few actions met the conditions for inclusion, thanks to passive flows of funds.
Trinh Nguyen of Natikis, an investment bank, said Vietnam’s market regulations are preventing upgrades, limiting access to more liquidity.
The additional liquidity is seen as crucial for Vietnam’s banks, which account for about a third of the stock market capitalization, to increase their relatively low capital reserves, thus boosting financial stability.
PRIOR FINANCING AND FOREIGN OWNERSHIP CAP
Inclusion in any major emerging market index until 2025 would require an announcement a year in advance, leaving only about 11 months for authorities to adopt and implement complex market reforms, one of the sources said.
Index manager FTSE Russell added Vietnam to its list of frontier economies that could improve in 2018, but “progress is slower than expected,” it said in its latest September update on equity reclassifications.
Index provider MSCI published in June a long list of reforms Vietnam needs to implement before an upgrade can be considered.
MSCI and FTSE declined to comment.
Both FTSE and MSCI have said publicly that Vietnam’s pre-financing requirements and strict restrictions on foreign share ownership are among the main obstacles to improving emerging market status.
Two sources involved in talks to resolve these issues said the pre-funding requirement was seen as a major issue, particularly by MSCI.
Investors usually settle their trades two days after the deal in the open markets, but in Vietnam they have to ensure the availability of funds before executing a trade, which adds a significant cost to traders who execute multiple daily operations.
A possible solution involving the establishment of a clearing house is being hindered by Vietnam’s central bank, which would have increased its supervisory responsibilities as a result of the reform, the sources said.
The central bank did not respond to a request for comment.
Another major obstacle is Vietnam’s strict limit on foreign ownership, which is as high as 30% for banks and has already been reached for many top lenders.
Authorities have discussed several options for lifting restrictions or effectively bypassing them, but no decision appeared imminent, the sources said.
One possibility, two sources involved in the talks said, was to allow foreigners to buy non-voting shares without adjusting the existing limit.
Another solution, which is being lobbied by foreign investors, is to gradually raise the limit initially to 35%, but sources say it will take months for the central bank to get that change approved by parliament.
(Reporting by Francesco Guaraccio and Phuong Nguyen; Editing by Vidya Ranganathan and Nick McPhee)
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