By Francesco Guarascio and Phuong Nguyen
HANOI (Reuters) – Vietnam risks missing a self-set deadline of 2025 to finalize reforms that would allow the country 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 infighting among state institutions over key reforms, including on settlements and foreign ownership of companies, the officials said, as the review would increase oversight duties in a typically risk-averse country.
The main stock exchange, the Ho Chi Minh City Stock Exchange, is the smallest of the major Southeast Asian economies, with a market capitalization of about $180 billion, less than half that of Malaysia. It was one of the world’s worst performers last year, falling more than 30%, largely driven by turmoil in the real estate sector.
Despite being an open economy that relies on offshore industrial investment and whose total exports equal gross domestic product, Vietnam has shielded its stock market by restricting foreign investor access.
As a result, top equity index managers classify Vietnam as a frontier market, along with many less developed economies such as Benin or Burkina Faso.
The government committed in July to aiming for an upgrade to emerging market status in at least one major index by 2025.
But infighting is delaying much-needed market reforms, three officials familiar with the talks said. They all declined to be named because the conversations are internal.
A source directly involved in the talks and another source from the Vietnamese government said there could be at least a year’s delay unless significant progress is made soon.
A third source said the upgrade may be delayed until the end of this decade.
The Treasury Department did not respond to a request for comment.
According to researchers Burcu Hacibedel and Jos van Bommel, who assessed the impact of index inclusions in 24 countries, the upgrades could boost stock prices by up to 3%. For Vietnam, that could mean cash inflows worth about $5 billion.
Other internal estimates, which one of the sources shared with Reuters, also pointed to an initial profit of between $5 billion and $8 billion, even if only a few stocks qualified for inclusion, thanks to passive cash flows.
Trinh Nguyen of Natixis, an investment bank, said market regulations in Vietnam held back the upgrade, limiting access to more liquidity.
Additional liquidity is seen as crucial for Vietnamese banks, which account for about a third of the market capitalization, to increase their relatively low capital buffers and thus enhance financial stability.
PRE-FINANCING AND FOREIGN PROPERTY CAP
Inclusion in a major emerging market index by 2025 would have to be announced a year early, leaving authorities with only about 11 months to approve and implement complex market reforms, one source said.
Index manager FTSE Russell added Vietnam to its watchlist of frontier economies upgradable in 2018, but “progress has been 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 must implement before an upgrade can be considered.
MSCI and FTSE declined to comment.
Both the FTSE and MSCI have publicly said that Vietnam’s pre-funding requirement and strict limits on foreign ownership of equities are among the main hurdles to an upgrade in the status of emerging markets.
Two of the sources involved in talks to address these issues said the pre-funding requirement was seen as the biggest issue, especially by MSCI.
Investors usually settle their trades two days after a deal on open markets, but in Vietnam they must ensure that sufficient funds are available before executing the trade, which incurs significant costs for traders conducting multiple daily trades.
A possible solution involving the establishment of a clearing house is stymied by Vietnam’s central bank, which would see its oversight responsibilities increased as a result of the reform, sources say.
The central bank did not respond to a request for comment.
The other major hurdle is Vietnam’s strict limit on foreign ownership, which is as low as 30% for banks and has already been met for many leading lenders.
Authorities discussed various options to increase or effectively bypass the limit, but no decision seemed imminent, sources said.
One option, said two sources involved in the talks, was to allow foreigners to buy shares without voting rights, without changing the existing limit.
Another solution, which foreign investors are lobbying for, is to gradually raise the limit to 35% initially, but sources say the central bank would need months to get that change approved by parliament.
(Reporting by Francesco Guarascio and Phuong Nguyen; editing by Vidya Ranganathan and Nick Macfie)