Vietnam securities market should soon adopt NVDR following the model of Thailand

Foreign investors' net selling reached a record amount in June at $691.33 million. Do you expect banks to increase deposit interest rates in the second half of this year to reduce such prolonged net selling?

Nguyen The Minh, head of Research & Development for Retail Clients at Yuanta Securities Vietnam

There are two main reasons for the net selling by foreign investors. The first reason is the high exchange rate pressure, as the exchange rate has increased by nearly 5 per cent since the beginning of the year. The second reason is that the performance of the Vietnamese securities market is less efficient compared to the stock markets in the US, Europe, and some other Asian markets.

I expect the exchange rate to cool down after September when the Federal Reserve starts lowering interest rates, and the State Bank of Vietnam may also raise the policy rate soon as commercial banks increase deposit rates and interbank market interest rates trend upwards. As a result, foreign net selling may gradually decrease in the third quarter or after September.

What solutions does Vietnam need to successfully upgrade to emerging market status to attract foreign capital?

Non-voting depository receipts (NVDR) are a tool that helps the Thailand market maintain the foreign investor room ratio over a prolonged period. The Thailand market was fortunate because, when it first upgraded to emerging market status, institutional funds had not yet emphasised foreign ownership ratios. However, in 2006, index funds began to impose conditions on foreign ownership ratios. At that time, Thailand circumvented this by introducing NVDR, and this practice continues today.

The Vietnamese stock market is currently facing a situation similar to the early stages of the Thailand stock market when it first moved to emerging market status. Therefore, the Vietnamese stock market should immediately apply NVDR, following the Thailand model, as a temporary solution to meet the criteria for foreign ownership ratios.

Looking at Thailand's securities market, NVDR accounts for an average liquidity of 21 per cent of daily market transactions. Thus, NVDR will address two solutions.

First, the foreign ownership ratio in the short term. Because resolving this issue in the Vietnamese stock market requires more time due to overlapping laws such as the Enterprise Law and Investment Law, which cannot be adjusted only by the Ministry of Finance. Second, NVDR will add value to the financial market because, in the Thailand market, NVDR accounts for up to 21 per cent.

Why the current Vietnamese stock market should not implement the NVDR model from other countries but Thailand?

The Philippines also applied the NVDR model but was unsuccessful due to low liquidity. The NVDR model in the Philippines was issued and managed by individual companies. For NVDR, they are like stocks with their own listed boards, similar to covered warrants, and are managed by the committee.

Another issue is the free-float ratio in the Vietnamese stock market, the proportion of freely transferable shares compared to the total outstanding shares. While the foreign ownership room is already limited, the floating ratio is even narrower. This is a current concern in the Vietnamese stock market because the individual investor base holds a large amount, and although the floating ratio may appear high, in reality, it may be related to the board of directors.

Thus, the actual floating amount is very low. This again relates to resolving the foreign ownership ratio issue. It shows that Vietnam should quickly apply NVDR following the Thailand model to address this issue.

What is the roadmap for the Vietnam stock market to apply the Thailand NVDR model in the context of the decreasing NVDR ratio in Thailand?

Initially, NVDR was introduced to address the issues mentioned above, but over time, people began to value ownership with a stake in the operation of the company. This is the biggest drawback of NVDR. In Thailand, the stock market has grown and developed to the point where individuals need to have decision-making power in the operation of companies.

For Vietnam, the roadmap should still follow Thailand's securities market. First, it should address the foreign ownership ratio issue with NVDR. Later, when the market is stable and large enough, Vietnam can gradually reduce the NVDR ratio. If NVDR is not applied, it will take a long time to resolve the foreign ownership ratio issue, involving various business sectors. Even increasing the ownership ratio in banks from 30 to 35 per cent has not been resolved for many years, indicating that other business sectors will face similar difficulties.

More issuances approved to bolster securities capital Vietnamese securities firms are rapidly raising capital to enhance financial capacity, gearing up for market shifts and the expected upgrade to emerging market status.