There have been notable advancements in the assessment of Việt Nam’s stock market, the recent MSCI report for June 2024 showed. 

The rating organisation stated that the country has demonstrated improvements in transferability capabilities, attributed to increased off-exchange trading and the ability to transfer physical assets without requiring prior approval from regulatory agencies.

However, it added that the ongoing transition of the domestic market from frontier to emerging status is encountering certain challenges.

MSCI categorises markets based on three criteria: economic development, market size and liquidity, and market accessibility for global capital flows. 

Việt Nam has fulfilled the requirements for market size and liquidity, even surpassing many other emerging markets in the region.

The country’s stock market boasts a market capitalisation of over US$200 billion, surpassing Qatar and the Philippines in size. With daily liquidity of $776 million, the market liquidity is on par with regional markets like Indonesia, Malaysia and Singapore.

However, market accessibility for global investors remains a major hurdle for Việt Nam’s stock market. 

As a result, according to the latest MSCI report on "Global Market Accessibility Assessment," Việt Nam continues to be classified as a frontier market. Although there have been improvements in the transferability criterion, there are still eight crucial criteria that need further enhancement to meet the requirements for market upgrading.

According to a recent analysis by Việt Dragon Securities, the main obstacles in Việt Nam's market upgrade process include foreign ownership openness, ease of international capital flows and market operation efficiency, which need improvement.

To achieve the upgrade, the country just needs to enhance the criteria for foreign ownership openness and market operation efficiency. 

The securities firm explained that the restriction on capital flows is considered weaker than the necessity of a foreign exchange market for the domestic currency.

Regarding foreign ownership openness, Việt Nam’s quantitative factors are similar to Thailand's. However,  in terms of qualitative factors, based on the assessment of the investor community, Thailand's implementation of the “common shares without voting rights - NVDR" policy has significantly improved its market accessibility criterion, leading to its upgrade.

On the market operation efficiency for foreign investors, the lack of information disclosure constraints, limited English-language legal regulations, and the delay in adoption of international financial reporting standards (IFRS) have hindered Việt Nam's compliance with international standards, as perceived by foreign investors.

The current regulation that mandates 100 per cent pre-funding before placing a buy order to mitigate the risk of payment default before securities are transferred to the investor's account creates additional trading obstacles for foreign investors. 

This practice is not aligned with international standards for the Delivery versus Payment (DvP) mechanism, which requires simultaneous transactions of funds and securities.

To resolve the pre-funding issue, Dương Ngọc Tuấn, Deputy General Director of Vietnam Securities Depository and Clearing Corporation (VSDC), has proposed a solution focused on foreign institutional investors. 

Securities companies would assess investor capacity and determine deposit levels to ensure timely payments. If an investor fails to meet payment requirements, the obligation would shift to the securities company's proprietary trading block. 

However, challenges remain in addressing technical issues and arranging sufficient funds. To mitigate risks, transaction limits were being considered for market members, Tuấn said at a conference in mid-April.

He added that securities companies must guarantee the execution of transactions at a sufficient scale for foreign investors. Additionally, the payment capacity of these companies should be adequate to fulfil obligations, even in worst-case scenarios.

Cautions after the upgrade

In addition to the objectives and benefits gained from market upgrades, an important question arises: efforts must be made to maintain the upgraded status.

In reality, there have been cases, like Argentina, that were upgraded but later downgraded due to the inability to sustain the necessary conditions.

Vũ Chí Dũng, Head of the International Cooperation Department at the State Securities Commission, suggests that securities companies will need to upgrade their systems to establish online connections with stock exchanges and foreign investors.

This enhancement aims to improve order execution capabilities. As the market scale increases and products allow investors to boost capital turnover, such as short selling and day trading, the number of trading orders will rise. 

This highlights the crucial need for securities companies to possess the capacity to receive and process trading orders effectively.

Moreover, the failure of the market to maintain its attractiveness after an upgrade can pose a substantial risk of a sharp decline when foreign investors withdraw their capital.

According to experts from the Market Development Department of the National Institute of Financial, the decision of foreign investors to withdraw capital is not solely influenced by internal market conditions but also by fluctuations in the international market.

Nevertheless, the substantial withdrawal of foreign capital can result in negative market sentiment, causing a strong selling effect that leads to an uncontrollable market decline. —  VNS