Foreign investors net selling may not signify foreign capital flight

HDBank's foreign shareholding rate has increased by 6 per cent after more than four months on the bourse

This was one of the core reasons behind the stock market recent sharp fall, almost blowing out the gains the market has posted since the beginning of the year until present.

Naturally, when foreign investors net sold, particularly sold in big volumes, the imminent accompanying risks might be foreign capital flow running out of the country, instead of running in as when things keep going smoothly.

When a nation witnesses the foreign capital flow running out of its boundary in a big volume and on a long time (not a short-term or momentary phenomenon), it needs to be well prepared to cope consequences such as rising exchange rate as a result of depreciating home currency, growing inflation threat, banks attracting lesser deposits leading to their lower lending volumes which might lead to dwindling investments as well as GDP growth.

Besides, it would be harder for the government and businesses in their capacity to repay foreign debts because if the income sources for foreign debt repayment chiefly depend on the domestic market and/or on the home currency, they would need to spend a bigger home currency pack to repay the foreign debt.

Another detriment is reduced confidence of the consumers on the home currency. When the consumers feel their assets in the home currency might be devalued, they might self protect by shifting their assets into foreign currency or other assets not quoted by home currency, or bring the assets overseas.

This might dampen the situation and scale up the home currency devaluation, reduced faith and capital flight threat.

In Vietnam case, foreign investors net selling was reflected through statistics. Based on this single phenomenon, it would be hard to affirm there is a reversed trend in foreign capital flow, or more critically, capital flight. There are some factors going counter concerns about a reversed trend in foreign capital flow.

First, the Ministry of Planning and Investment’s Foreign Investment Agency statistics show that foreign indirect investment (FII) touched $1.89 billion in the first quarter this year, a 121 per cent jump on-year. Thereby, if there was a reversed trend of foreign capital flow, it has just taken place and must be in a very big volume of billions of dollars to surpass the big FII volume in the first quarter. This possibility, however, could hardly occur due to the second following factor.

That is foreign investors started their net selling from February, but the proceeds raised from this net sale might not be all converted into foreign currency and then transferred abroad. Possibly, foreign investors have still kept part of the proceeds on their Vietnam-based accounts and in Vietnam currency (for example, waiting for further opportunities).

Therefore, foreign investors’ net selling has not caused a reversed trend in foreign capital flow in Vietnam in the past months.

Of course, some foreign investors might have converted some proceeds into foreign currency and transferred abroad. If this did occur to a significant extent, it might be reflected in the third factor, the exchange rate.

In fact, the dong/US dollar exchange rate just inched up remarkably in the last ten days of March and has smoothened afterwards. It only rose again from mid last week to a total about VND90 until May 29, meaning that despite being considered as “a sharp jump”, it only rose 0.85 per cent from the beginning of the year until present.

Some might argue that the State Bank’s central exchange rate may not properly reflect foreign currency tension in Vietnam, so that one could not base on the relative stability of the exchange rate in the past months to negate the possibility of a reversed trend in foreign capital flow.

Nonetheless, low volatility of the dong/dollar exchange rate in the black market (not showing a big difference compared to SBV central rate) might be a showcase attesting to the fact that there was not a tension in the dollar supply demand situation in Vietnam until present.

Some may also argue that reversed trend in foreign capital flow might be “covered” by continued bigger foreign direct investment (FDI) flow into Vietnam. In this regard, Vietnam has been “lucky” to avoid the consequences of capital flight. This “offset” possibility might be true, but the main reason lies in the stark difference between FDI and FII as the FDI is a long-term capital flow contrary to momentary and short-term nature of FII flow.

Generally, from the macro stability perspective existing foreign currency volume in Vietnam did not be diminished (even be increasing) at any point of time until present.