Credit rating key to Vietnam’s stock market status upgrade: Saigon Ratings chairman

Vietnam's low credit rating is one of the reasons why foreign investment funds are hesitant to pour capital into the country, writes Phung Xuan Minh, chairman of Saigon Ratings, the first credit rating agency in Vietnam.

Meaning and benefits of market status upgrade

Over nearly 25 years of development, Vietnam's stock market has made significant achievements in terms of capitalization scale, investor base, number of products, daily trading value, and underlying market infrastructure. It has gradually approached international stock market operating standards and practices and improved the quality of governance and management of businesses, along with increasing the professionalism of all market players.

The Vietnamese stock market has a great chance of being upgraded by prestigious international rating organizations such as the U.S.’s Morgan Stanley Capital International (MSCI) and the UK’s FTSE Russell from a frontier market to an emerging market in the near future.

The status upgrade would have great benefits to many aspects of Vietnam’s stock market, contributing to the goal of developing a safe, transparent, effective and sustainable capital market to create conditions for macroeconomic stability. It would increase the attraction of direct and indirect investment capital resources from foreign investors and a large number of large-scale reputable foreign organizations, thus positively affecting the liquidity of Vietnam's stock market. It will also promote the image of the national capital market in the region and the world. In the future, the stock market will become one of the three most important capital mobilization channels for the Vietnamese economy and businesses, along with the credit and corporate bond markets.

However, we are striving to upgrade the status from a frontier market to an emerging one before 2025 in order to attract domestic and international capital resources. Although we have many opportunities, this is an extremely difficult and challenging task and Vietnam has missed this goal in previous years. Therefore, to make this dream come true, we must solve problems in a more drastic, comprehensive and effective way to continue to improve the legal framework; clearly identify important problems that need to be resolved according to a specific roadmap; and propose key solutions to meet the conditions and criteria of global rating organizations and win the trust of international investors.

Current situation, difficulties, obstacles

Vietnam's stock market has made many efforts to satisfy the conditions of an emerging market. However, there are still a number of obstacles that need to be removed to further encourage the participation of foreign investors, including the pre-funding requirement, foreign ownership limit, and foreign exchange market liberalization level.

Prefunding

We believe that the requirement for a 100% deposit when placing an order is a major obstacle to the effective use of capital by investors. Although pre-funding helps manage payment risks, this regulation slows capital turnover, increases investors' opportunity costs, and affects market liquidity.

Specifically, the settlement cycle of Vietnam's stock market is currently T+2 with the Delivery versus Payment (DvP) model. That means investors can only place buy or sell orders when they have deposited enough money/securities in their stock trading accounts. This has created a bottleneck that prevented Vietnam's stock market from being upgraded by international rating organizations in the September 2023 review period.

Foreign ownership limit

The government issued Decree 60/2015 allowing foreign room to be increased to 100% for businesses that are not on the list of conditional business lines. However, the number of stocks with expanded foreign room is still quite modest, due to regulations of relevant laws and shareholders' unapproval.

We believe that limiting foreign ownership in industries related to national security and system safety is really necessary. However, for other business sectors, it is necessary to gradually increase room for foreign investors to encourage international capital flows towards free capital circulation and expanding economic and trade exchanges with countries around the world.

Foreign exchange market liberalization level

In the banking sector, foreign exchange is highly sensitive and has a direct relationship with the international economic integration process. The introduction of the Ordinance governing foreign exchange activities in 2005, and then its amendments in 2013, showed the state's special attention to foreign exchange and effective foreign exchange management. Current management trends show that our country is moving towards liberalization of foreign exchange management and international capital flows.

However, the elimination or reduction of barriers to trade, financial, and forex liberalization and international capital flows in our country has not met the expectations of many investors. The reason is that Vietnam is an open economy but the internal strength of the economy remains weak. This makes the country's foreign exchange management policy gives priority to stabilizing the value of the currency, controlling inflation, and maintaining economic stability.

Lessons from around the world

For pre-funding requirements

Currently, only very few stock markets apply the pre-funding mechanism, including Vietnam, Russia, Taiwan, Kenya, and Kazakhstan. The vast majority of developed markets and some emerging markets have been using collateral as a very successful risk management measure. The International Organization of Securities Commissions (IOSCO) also evaluates the effective and reasonable use of collateral as an important principle for the infrastructure of a developed financial market.

According to the actual operation of international stock markets as well as the Vietnamese stock market, with locked-in trade, the securities/money of the order after being matched are the most important collateral for the transaction. Therefore, the requirement for a 100% pre-funding at the time of placing a buy order is, in our opinion, an unnecessary regulation, hindering the efficiency of investors' capital use and market liquidity.

For foreign ownership limit

To solve this problem, some countries around the world have applied the "non-voting depositary receipts" (NVDR) model. This is a special type of depository receipt issued by a third organization called an NVDR issuer (a subsidiary of the stock exchange). The NVDR issuer will transfer to investors all financial benefits associated with the stock such as dividends and share purchase rights.

In a number of countries in Asia, NVDR is considered a solution to help foreign investors overcome challenges related to maximum ownership ratios and increase market competitiveness. By owning NVDR, foreign investors have full rights to receive cash dividends and stock bonuses but do not have voting rights. They can also switch from NVDR to regular shares in case the listed company still has room for foreign ownership.

For foreign exchange market liberalization

Foreign exchange market liberalization is a common reform trend for developing countries to integrate into the international market. Vietnam is no exception. However, experience from countries such as South Korea, China, India and Malaysia shows that it is necessary to implement the roadmap to liberalize the foreign exchange market gradually and cautiously, with adjustments in line with the realities to ensure national financial security.

Before carrying out reforms and moving towards foreign exchange liberalization, it is necessary to strengthen internal strength, especially the domestic financial and monetary market. Lessons from other countries show that foreign exchange liberalization can only be successful when the economy meets conditions such as a healthy banking system, a more flexible exchange rate mechanism, and abundant national foreign currency reserves.

Instead of requiring pre-funding, we can consider allowing investors to use cash, stocks and bonds as collateral. Similar to margin trading, the State Securities Commission (SSC) will announce a list of stocks eligible to serve as collateral with corresponding discount rates. Securities companies will base their decisions on the investor's assets and the discount rate to confirm solvency on T+2, thereby determining the required margin level at the time of order placing. In a case of T+2 when the investor does not fulfill his/her obligations, the collateral will be processed to ensure the payment obligation.

To do this, it is necessary to develop a separate mechanism for payment guarantees for securities transactions or granting short-term credit limits to foreign investors to carry out securities transactions. Specifically, we need to urgently deploy a central counterparty clearing house (CCP) model, in which the depository bank must be a clearing member. After being allowed by the State Bank of Vietnam to implement the CCP model, the depository bank will become a clearing member, along with securities companies.

Applying NVDR model and gradually increasing foreign ownership ratio

It is necessary to consider applying the NVDR model based on careful research of other countries and evaluating the impact of this model on business ownership structure. In addition, listed firms also need to be prepared with complete and detailed knowledge to understand and apply these changes.

Vietnam should gradually expand and fully announce the maximum foreign ownership ratios in conditional business lines and only apply foreign ownership limits to industries truly related to national security. Even for some sensitive fields such as finance and banking, it is still possible to set a foreign ownership limit for each activity. Foreign investors are currently encouraged to invest in weak credit institutions and transferees. For joint stock commercial banks, the total foreign ownership ratio for foreign investors should not exceed the 30% limit of charter capital.

Gradually increasing foreign exchange market liberalization level

The foreign exchange management policy needs to determine the focus of management and give specific priorities to carry out reforms in line with the actual situation. For example, in liberalizing capital transactions, restrictions on inward FDI should be removed first and then on outward FDI. In addition, it is necessary to strengthen the management and supervision coordination mechanism among management agencies including the State Bank of Vietnam, Ministry of Finance, Ministry of Industry and Trade, and Vietnam Customs to build and perfect software for managing and monitoring capital flows in a modern and convenient manner.

The process of liberalizing foreign exchange management and international capital flows needs to be carried out very carefully, amid the limited internal strength of the Vietnamese economy. The liberalization must be based on the process of analyzing and evaluating the market and socio-economic situation, especially in the context of Vietnam's strong and extensive international integration. At the same time, there are also many risks and challenges when the Vietnamese economy is truly open. In addition, this process must take into account the development of personnel qualifications and expertise of state management agencies. Only then can we ensure that foreign exchange market liberalization is carried out safely and effectively.

Encouraging listed companies to make information transparent and standardize accounting activities.

Currently, most Vietnamese businesses are applying Vietnamese accounting standards (VAS), and some are no longer consistent with internal financial management requirements and global practices. Therefore, it is necessary to actively implement the roadmap set by the government and the Ministry of Finance: adopting the International Financial Reporting Standards (IFRS) by 2025.

In addition, listed companies need to be aware of providing necessary and important information to partners and investors such as annual financial and credit rating reports. These are reference documents that are objective and highly reliable, providing investors with complete information to evaluate and make investment decisions suiting their needs and risk appetite.

What can independent credit rating organizations contribute to the development and upgrade of Vietnam's stock market?

Upgrading the stock market would bring great benefits. This will require the synchronous contributions of many market participants. In particular, each player has a different position, function and role. Independent credit rating organizations in general and Saigon Ratings in particular are also one of these important intermediary organizations.

Firstly, credit rating organizations will help businesses provide more transparent information to investors in the market, contributing to promoting the development of the national bond market and creating conditions for rated businesses to win more investor trust than those without credit rating. This is extremely important for foreign investors as they require listed companies to disclose a variety of information to have a more accurate assessment of them and at the same time avoid inaccurate or unofficial information and asymmetry in the market.

Secondly, investors participating in the market will have very useful information about the credit risk of rated businesses. Credit rating organizations provide a perspective on whether a business has the ability to fulfill its debt obligations fully and on time, giving more information regarding the level of risk to adjust valuation models, thereby assessing the development potential of the business more accurately.

Thirdly, credit rating helps the market avoid sudden "shocks" such as the failure of some real estate companies to pay bond debt. These shocks have huge consequences and domino effects. Events like this may affect investor sentiment and make them more cautious about pouring capital into the market. It can be seen that if businesses are rated by an independent credit rating organization, similar shocks are minimized. Based on assessments of businesses' ability to repay debt and interest given by credit rating organizations, market players can forecast and anticipate possible scenarios, and thereby limit these sudden “vibrations”.

Fourthly, Saigon Ratings has worked and received feedback from a number of foreign investment funds wishing to pour capital into Vietnam to buy businesses’ shares or bonds. However, according to practices in developed countries, investors can request businesses or issuers in their investment portfolios be evaluated and rated as a basis for making investment decisions. The non-dissemination of a credit rating is one of the main issues that make investment funds hesitant to pour cash into Vietnam. For that reason, we are gradually partnering with financial institutions and parties to accelerate rating activities in order to create a level playing field as well as promote connections between businesses and foreign investors.

Fifthly, recent negative events in the bond market have eroded the confidence of the majority of domestic and international organizations and individual investors. This shows there is a loophole in the management of full and transparent information disclosure, which if available would enable investors to fully quantify risk factors before making their decisions. Congestion in the bond market in recent times has been hindering enterprises from mobilizing capital through this channel. The establishment of a secondary corporate bond trading floor has also partly unleashed the market’s liquidity.

Finally, to promote and develop the stock market size in the long term, related legal documents need to be completed, both creating conditions for businesses and "correcting" the market towards stability and sustainability. In this flow, credit rating organizations are independent parties that "label" issuers and are responsible for providing transparent information to the market.

Conclusion

Upgrading Vietnam’s stock market to an emerging market is an extremely urgent task to promote its sustainable, safe and transparent development, protecting the legitimate rights and interests of investors, and attracting the participation of foreign parties. This is the most important goal for which the government has set out a roadmap and closely directed its implementation. Therefore, all stakeholders must clearly understand their responsibilities and obligations to synchronously develop criteria so that Vietnam can upgrade its status to an emerging market as soon as possible.

This process requires not only the urgent and serious engagement of the State Securities Commission but also close coordination among relevant agencies and already-listed and future-listed firms. Saigon Ratings clearly understands the role of an independent credit rating organization on this mission and we will make every effort to accompany businesses, investors and other stakeholders to increase transparency as well as minimize market information asymmetry so that Vietnam can truly be an attractive destination for foreign capital.

In order to contribute to raising awareness and action among market players on upgrading Vietnam's stock market, and propose solutions to accelerate the upgrade, Nhadautu.vn/TheInvestor.vn held a conference titled “Vietnam stock market: Status upgrade and transparency in listed firms' information disclosure” at JW Marriott Hanoi hotel on Tuesday, October 10.

The event saw the participation of officials from the State Securities Commission, ministries, the Party Central Committee’s Economic Commission, the National Assembly’s Economic and Financial-Budget Committees, experts, and representatives of auditing firms and investment fund management firms.

* Link to the conference