Transparent policies needed to draw foreign capital Clear, transparent and efficient policies are needed to encourage more foreign investors to jump into the Vietnamese securities market if it is to reach its considerable potential.   According to the State Securities Commission (SSC), the local market is valued at US$124 billion and has been among the seven fastest-growing in the world in the past two years. It has made significant developments and become more attractive to foreign investors.  But although over 1.86 million accounts have been opened so far, only 1.1 per cent of them belong to foreign investors, showing the market could absorb more foreign investors. “We saw foreign investors escape from the local securities market in 2016, but they have returned with focus on both stock and bond markets,” said Tran Van Dung, SSC chairman. At the end of October, the total value of indirect foreign investment in the securities market rose 47.4 per cent year on year from the end of 2016. As of October 25, foreign investors purchased a total of VND93.9 trillion (14 per cent of the market’s trading value) and sold a total of VND79 trillion (11.94 per cent of the market’s trading value), resulting in a total net buy value of VND14.9 trillion. The total value of assets possessed by foreign investors has reached $27.2 billion in the first nine months, an increase of 34 per cent from last year. There are several factors that could help Vietnamese securities market draw more foreign investment in the near future, Dung said. Firstly, macro-economic conditions should be stable. The country’s growth is estimated to be above 6.7 per cent for 2017 and the next five years, inflation is kept under control, and foreign exchange and lending rates should be stable, he said. “Viet Nam has made changes in its view to the private sector as the Government now sees private businesses as the most powerful force for the country’s socio-economic development,” he said. “This favours the development of the capital-securities market in the future.” Secondly, the equitisation and privatisation of State-owned enterprises (SOEs) should be enhanced to transform those firms into joint-stock companies in the next one to two years. Then their shares could be traded on the stock market, increasing the number of available high-quality stocks and attracting more foreign investment, Dung said. In the first three quarters, the Government offloaded its stakes in 34 of the 44 targeted SOEs that are slated for the equitisation process. In the remaining months of the year, the Government is speeding up the equitisation of the PetroVietnam Oil Corporation (PV Oil) and PetroVietnam Power Corporation (PV Power), while it will continue selling its ownership in brewer Sabeco and dairy producer Vinamilk. The Government will sell its capital in 64 others companies next year, including Viet Nam Paper Corporation and mobile service provider MobiFone. Deals expected to come in 2019 include Viet Nam National Coffee Corporation (Vinacafe), telecom operator Viet Nam Posts and Telecommunications Group (VNPT), Viet Nam National Chemical Group (Vinachem) and Viet Nam Coal and Minerals Industry Group (Vinacomin). Thirdly, new financial products should be introduced to the market, increasing the opportunities for investors, Dung added. Incoming products include covered warrants, which will be launched late this year or early next year, and the Government bond futures contracts, which will be available on the derivatives market in 2018. In addition, new derivatives products are being assessed so that they may become tradable in the next one or two years, meeting investors’ demand for tools to prevent market risks, he said. Fourthly, the legal framework for the capital-securities market will be supplemented in the near future, starting with the amended Law on Securities to be released in 2019, according to the SSC chairman. Others, such as the Law of Enterprises 2016 and relevant regulations will also be amended, allowing businesses to raise funding through share and bond issuance, and helping market regulators improve the monitoring of the market, he said. Nguyen Viet Duc, market analyst at MB Securities Company, said that more foreign investment is being drawn into the Vietnamese market as investors note the quality of local assets and market trading liquidity—the two most important factors to draw higher foreign capital, Duc said. Many large-cap companies debuted on the securities market this year, such as VPBank, gas station operator Petrolimex and aviation firm Vietjet, offering a large number of high-quality shares for the market, he said. Those listing also helped boost trading liquidity – a factor that helps foreign investors increase their purchases easily as they are able to offload existing shares as soon as possible, he added. Existing problems Major barriers to foreign investors now include English information disclosure, the restriction on exchanging the Vietnamese dong to foreign currencies and the limits on foreign ownership in listed companies whose business involves national security issues, Duc at MB Securities said. The Government “needs to work with the Morgan Stanley Capital International and other foreign institutional investors on their standards and make adequate changes to the current legal system,” he said. Of the problems, it appears that the restrictions on foreign ownership remain the biggest challenge for foreign investors. Foreign investors are not allowed to freely become strategic shareholders of listed companies, though the Government has made its efforts to improve existing policies. A decree that took effect in September 2015 limits the foreign ownership in conditional businesses to 49 per cent in sectors involving national security issues, such as real estate, telecommunications and banking. According to the Foreign Investment Agency under the Ministry of Planning and Investment, there are about 113 conditional sectors, in which foreign ownership is limited. Most of the companies in those sectors are State-owned firms, operating in commodity production, transportation, construction, agriculture and aquaculture. According to Phan Duc Trung, head of the enterprise renovation and development department at the Central Institute for Economic Management (CIEM), the current policies limiting foreign ownership may help protect the country’s young industries but will make those businesses less attractive to foreign investment. Foreign investors are discouraged from buying stakes in the companies as they are not guaranteed a chance to participate in the business management and governance, he said. In large-cap SOEs, foreign investors do not have controlling stakes, though they have spent millions of dollars buying stakes in those companies, he added. “Concerns have been raised among foreign investors as they could be outnumbered by a majority of shareholders and benefit less from the investments.” CIEM director Nguyen Dinh Cung said that limits on foreign ownership will discourage strategic shareholders from fulfilling their obligations stated in the agreements and contracts. “Foreign investors could avoid implementing the contracts and agreements properly as they do not have the rights to make decisions but still have to provide assistance for the businesses,” he said. According to Adam Sitkoff, executive director of the American Chamber of Commerce in Viet Nam, the Vietnamese Government needs to come up with a transparent procedure to evaluate SOEs accurately and allow foreign investors to buy larger stake in the SOEs, ensuring foreign shareholders are able to make decisions and have positive impacts on the business governance and management. Economist Can Van Luc said that to draw more foreign investment into the local market and keep the flow stable year after year, Viet Nam must be consistent with its macro-economic growth targets, speed up the restructuring of the economy and encourage the development of the private sector. “The Government needs to make ensure the securities market operates transparently to reduce the chance of cross-ownership among companies and the manipulation of share prices,” Luc said. Market regulators should offer more securities products, and market members must operate transparently and meet the standards on corporate governance and risk management, he said. - VNS