Over the course of 2023, foreign investors exited their positions in the Ho Chi Minh City Stock Exchange–or the HoSE–to the tune of more than US$1 billion. 

This mass exodus could have been for any number of reasons: demand in key export markets was faltering, several financial crimes had been exposed throughout the year that were waning on investor sentiment, or simply that other lower-risk markets were performing better.

It didn’t, however, stop an almost palpable optimism from permeating the local media and trading circles in Vietnam–a 2025 deadline to have the HoSE reportedly upgraded from a frontier to an emerging market was getting closer and this promised to be a boon for the local bourse.

In fact, toward the end of February, it was reported that Vietnam could receive up to an additional US$25 billion in investment by 2030 if an upgrade were achieved. These billions, however, may be further out of reach than it looks at just a glance.

Indeed, there are a multitude of index-making firms that classify the world’s stock markets, each with its own market classifications and criteria–whereas the HoSE may be upgraded by one it may not be by another.

With this in mind, this article looks at who might do what and when, what’s holding the HoSE back, and what reforms are on the cards to get past these barriers.

Who might do what and when?

There are two key index makers–the FTSE Russell and MSCI. The first headquartered in London, the latter in New York, the indices maintained by these firms have become key guides for investors in just about every market for everything all over the world.

Each of these index makers maintains its own indices for the world’s stock markets which it separates by market classifications. For MSCI there are three stages. A market goes from frontier to emerging to developed (there is also a standalone category for markets dealing with unique circumstances, for example, countries at war).

FTSE Russell, however, is slightly different, whereas it has both a frontier and developed classification, it divides its emerging market classification into two tiers–secondary emerging and advanced emerging. The former has fewer conditions than the latter and far fewer than MSCI’s emerging market classification.

With these classifications guiding foreign investment, the higher up the market classification ladder a country climbs the more investment it attracts. Of note, it has not been made clear which rung Vietnam would need to reach to realise the aforementioned US$25 billion in additional investment.

The low hanging fruit: FTSE Frontier to Secondary Emerging

With all of this in mind, what’s actually on the table for Vietnam in the near future is an upgrade by FTSE Russel from a frontier to a secondary emerging market. Though notably the country has been on FTSE’s watchlist since 2018 with reforms ‘slower than anticipated’ according to the firm’s market classification Annual Announcement 2023.

This jump will require Vietnam to meet just two outstanding criteria. Specifically settlement costs and delivery-versus-payments. But whereas there are two criteria that need to be met, the crux of both problems is singular: Vietnam’s pre-funding requirements.

Vietnam’s pre-funding bottleneck

In developed markets, trades are completed instantaneously with settlement usually within two days. When after two days a buyer fails to front up the cash or a trader fails to deliver the shares it’s a failed trade.

In Vietnam, however, proof of funds must be provided before a trade is made with payment and delivery taking place at the same time. This makes delivery and payment times criteria redundant. Subsequently, there can be no failed trades by default and therefore no settlement costs associated with failed trades. Ergo, FTSE has settlement costs and delivery-payment times marked as ‘restricted’ and ‘unrated’, respectively.

With all of this in mind, by removing this pre-funding requirement both of the two criteria should be met–two birds, one stone.

And though slow, there has been progress made on this front.

Notably, provisions in Circular 120/2020/TT-BTC remove the pre-funding requirement when there is a central party clearing mechanism in place; Decree 26/2022/QD-TTg imbues the Vietnam Securities Depository and Clearing Corporation with the powers of a central party clearing house; and the KRX trading system currently being installed on the HoSE should provide the technical capabilities necessary to manage the process sans pre-funding requirements.

With all of this in mind, when the KRX is complete and functional it looks as though most of the pieces will be in place.

That said, it’s not clear when the KRX will be functional. It was slated to go live in 2015, however, its operation date has been repeatedly pushed back. Most recently, it was expected to start operating at the end of December 2023. This deadline, however, has been and gone with no revised deadline in place. Of note, FTSE Russell market classification reviews are completed in March and September each year.

What comes next?

Assuming the HoSE can find a way to meet FTSE’s settlement costs and failed trade criteria, the next step would be to move from secondary emerging to advanced emerging, the criteria of which largely fall in line with MSCI requirements for an upgrade to emerging market status.

Specifically, FTSE Russell has Vietnam marked ‘restricted’ or ‘not met’ on the following criteria:

• Simplified registration process for foreign investors;
• Efficient trading mechanism;
• Developed foreign exchange market;
• Central Counterparty Clearing House (Equities);
• Fair and non-prejudicial treatment of minority shareholders; and
• Foreign ownership restrictions.

Similarly, MSCI lists the following:

• Foreign ownership limit level;
• Foreign room level;
• Equal rights to foreign investors;
• Foreign exchange market liberalisation level; 
• Investor registration and account set-up;
• Market regulations;
• Information flow;
• Clearing and settlement; and
• Transferability. 

These can be broken down into six key obstacles.

Foreign ownership limits

Regulations on foreign ownership limits in securities are outlined in Section 6 of Decree 155/2020/ND-CP. These regulations dictate that caps on investing in publicly listed companies are determined by international treaties first and then local laws and regulations. On the latter, these are often set by different ministries for different industries. For example, foreign ownership limits in aviation are set by the Ministry of Transport whereas in banking they are set by the Ministry of Finance. The criteria by which they are determined are not particularly transparent; neither are these determinations necessarily consistent.

Of note, as of March 11, of 401 stocks listed on the HoSE, 371 stocks had foreign ownership limits. For 366 of those stocks, foreign ownership was capped at 50 percent or less. For some context, the Korea Stock Exchange, which is around the most advanced of the emerging markets, had only 32 stocks in which foreign investment was limited as of March 2024 out of a total of 928. 

These restrictions also lead to challenges in foreign room limits which are essentially how much of a publicly listed company is available for purchase by foreign investors. For example, foreign investment in an airline in Vietnam is capped at 34 percent. If foreign investors own 32 percent of the shares in an airline already, that leaves just 2 percent of shares in which foreign firms can trade. 

This makes it difficult for foreign firms to buy a stock when its foreign ownership limit is almost reached in that they can only essentially purchase stocks from other foreign investors to avoid breaching the cap. MSCI notes that these caps impact more than 10 percent of listed companies and FTSE specifically references this as a problem for the HoSE in meeting its ‘effective market mechanism’ criteria.

Information disclosures

HoSE information disclosures have been cited as a key challenge by both key index makers.

The lack of communication materials in English, in particular, has been referenced as a barrier for foreign investors. Information disclosures are often circulated in Vietnamese before an English copy is made available. Furthermore, it is not uncommon for information disclosures to be scanned copies of printed documents rather than dynamic PDFs that can be translated online. This can give local traders ta time advantage over foreign investors.

On top of that, disclosures on the HoSE are often late, sometimes by months or even in some cases years. Vietnam Airlines’ audited financial statements for 2022, due in early 2023 were not made available until December of that year. These sorts of delays are common and problematic for traders, but whereas the HoSE has attempted to crack down on this behaviour, the reality is it is still rampant.

Foreign exchange management

Vietnam heavily manages and restricts trading of the local currency. 

This issue comes up repeatedly in any number of challenges facing Vietnam’s economic development. For example, it is one of the key criteria Vietnam needs to overcome for the US Department of Commerce to remove its non-market economy label (For more information see: Unpacked: Vietnam’s Non-Market Economy Review).

Essentially, foreign investors need to be able to move money into and out of Vietnam easily. As it stands, to transfer funds out of Vietnam it must be proven that they were lawfully earned. This means that proof must be provided that funds came from the sale of shares, for example, a sales contract. The trade in Vietnamese dong is also restricted to approved banks and credit institutions in Vietnam. This limits the ability of holders of Vietnamese dong to exchange the local currency in other parts of the world.

But this looks unlikely to change much any time soon.

The State Bank of Vietnam is mandated to keep the price of the Vietnamese dong relatively stable and this requires a tight grip over the currency trade.

Off-exchange transactions

Currently, the exchange of shares outside of the public trading system is governed by several conditions outlined in Circular 119/2020/TT-BTC. Essentially, these trades require approval from the State Securities Commission which can require a number of documents and more importantly deliberation on the part of the SSC which can take time which can be costly.

Registration process

Registration requirements are detailed in Decree 155/2020/ND-CP. Specifically, before a trading account can be opened a foreign investor must first be given a stock trading code. This requires a number of documents and can take up to five days to be issued by the Vietnam Securities Depository and Clearing Corporation. After this has been issued, only then can a foreign investor open a trading account in Vietnam, which is another long process altogether.

These restrictions make opening a trading account cumbersome and time-consuming. It is not clear that there is any impetus for reform any time soon.

Where does that leave it?

To join the FTSE advanced emerging economies or to become an MSCI emerging economy not only will there have to be huge reforms of the currency market and foreign ownership restrictions, but there has to be a will to change and it’s not clear that exists.

Of note, Vietnam has been on FTSE’s watchlist for an upgrade to secondary emerging since 2018–almost six years–with the same two criteria, settlement costs and delivery-versus-payments still waiting to be addressed. The new KRX trading system may be the solution to both of these problems provided the supporting legislation works. That said, this will only be a small step forward and one small upgrade does not an emerging market make.

That is not to say there are not opportunities in Vietnam’s stock market as a frontier market. For more information let us connect you with a local securities expert.

Or if you have an expert opinion to add, let us know via→Letters to the editor.

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