Refinements necessary for stock market

Ketut Kusuma, senior financial sector specialist at the Finance and Markets Global Practice of the World Bank Group, voiced strong optimism about the potential of Vietnam’s stock market a conference on the issue last week, though he noted that there is still significant room for it to evolve into a crucial capital source.

Vietnam is making a push to overhaul its stock market in order to raise its international standing, photo Le Toan

“Vietnam must overcome three primary obstacles to enhance its appeal to emerging market investors. Key challenges include the need for pre-funding and block transactions, which necessitate establishing a central counterparty and offering payment guarantees for foreign investors,” he said at the event.

Moreover, adjustments are crucial regarding “the foreign ownership cap and the room available for foreign investors”, such as permitting non-voting depository receipts and increasing the foreign ownership limit.

The market’s attractiveness could also be bolstered by ensuring equitable information access. “Providing information in both English and Vietnamese and adopting International Financial Reporting Standards are essential steps,” he noted.

“Further refinements needed include simplifying the process for opening accounts and registering investors, improving account structures, and ensuring efficient and transparent initial public offering processes,” Kusuma said. “Addressing issues related to access, risk mitigation, foreign exchange conversion capabilities, and upgrading trading system infrastructure are also vital.”

He added that an upgrade would enhance Vietnam’s market status, ensuring sufficient capital access for foreign investors with substantial securities scales.

Second Secretary Arabella Bennett from the Australian Embassy in Vietnam added, “Despite facing challenges, Vietnam has achieved notable results in its efforts to ascend to an emerging market status. Moreover, Vietnam has been included on FTSE Russell’s watchlist for a potential upgrade of its stock market.”

Vu Chi Dung, director of the International Cooperation Department at the State Securities Commission of Vietnam, emphasised the broader implications of an upgrade.

“A market upgrade is a clear signal that Vietnam has moved further along in its international economic integration journey, elevating not only the stature of Vietnam’s stock market but also of the entire economy in the eyes of the global community,” Dung said.

The World Bank’s assessment suggests that an upgrade could draw approximately $7.2 billion of net indirect foreign investment into Vietnam annually, predominantly from major global investment funds and foreign investors. “This upgrade will enhance the pricing capabilities of stocks, leading to a valuation that reflects the actual demand and potential of businesses, greatly aiding the equitisation process and facilitating higher state divestment revenues,” Dung explained.

The upgrade would increase the number of institutional investors and large-scale investors in the market, currently dominated by over 90 per cent individual retail investors.

However, Dung cautioned that the greatest challenge remains ensuring the continuous stable and sustainable development of the stock market, maintaining the ranking and avoiding any downgrade. This challenge stems from the market’s ability to meet the ongoing or changing criteria set by ranking organisations.

On the other hand, Duong Ngoc Tuan, deputy general director of Vietnam Securities Depository and Clearing Corporation, discussed the challenges associated with pre-funding, particularly focusing on the group of foreign institutional investors who, despite constituting only 10 per cent of investors, account for a significant share of transactions.

“These investors typically exhibit high compliance and have not yet faced payment defaults due to unarranged funding. Therefore, resolving issues for this group is our priority,” Tuan stated.

He also explained the principle that allows for this based on the brokerage’s assessment of capability of margin levels to ensure payment on the settlement day. “The challenge lies in handling situations where, on settlement day, the investor lacks funds, transferring payment obligation to the brokerage. If the brokerage itself fails to arrange the necessary funds, it would jeopardise payment operation safety,” he added.

Dr. Nguyen Nhu Quynh, director of the Institute of Financial Policy Strategy, recommended vigilant monitoring and preparedness for rapid capital flow reversals. This involves closely tracking capital inflows from individual investors, foreign entities, and securities-related debts.

“Enhancing market resilience against external shocks through improved regulatory and supervisory capabilities, along with financial stability, is crucial. Modernising inspection and surveillance tools and enforcing regulations are vital components of this strategy,” he stated.

“Additionally, a comprehensive restructuring of intermediary organisations is essential to elevate their quality and ensure they meet the demands of an upgraded market, thereby ensuring system stability and financial security.”

Solutions for enhancing provision of the stock market Qualitative criteria is the main hurdle for Vietnam in upgrading the stock market. Nguyen Khac Hai, managing director of Legal and Compliance at SSI Securities Corporation, covers solutions to enhance service capacity with VIR’s Hong Nam.