Vietnam still on watch list for reclassification to secondary emerging market status: FTSE Russell

Vietnam remains on the watch list for a possible reclassification from frontier to secondary emerging market status as the market has yet to meet the settlement requirements stipulated in the FTSE Equity Country Classification Framework.

According to its September report, FTSE Russell, a subsidiary of the London Stock Exchange Group (LSEG), said the Vietnamese market continues to pursue various regulatory reforms and an upgrade to the main trading platform, which FTSE Russell continues to monitor.

However, the rating firm spoke highly of the Vietnamese government’s commitments, saying the State Securities Commission (SSC) is working hard to seek a workable solution to the issue of pre-funding.

FTSE Russell said Vietnam was added to the watch list in September 2018 for possible reclassification to secondary emerging market status. Progress has been slower than anticipated, in part due to Covid-19, it noted.

“Vietnam has yet to meet the ‘Settlement Cycle (DvP)’ criterion, which is currently rated as ‘Restricted’ due to the market practice of conducting a pre-trading check to ensure the availability of funds prior to trade execution,” it commented. Since, by default, the market does not experience failed trades, the ‘Settlement - costs associated with failed trades’ criterion is unrated.

FTSE Russell stressed that Vietnams need improvements to the process for the registration of new accounts and the introduction of an efficient mechanism to facilitate trading between non-domestic investors in securities that have reached, or are approaching, their foreign ownership limit.

Although progress on the planned market reforms has remained slow, a recommitment to the work required has been made by senior levels of government, it said, adding the SSC has demonstrated renewed energy in seeking a workable solution that would remove the need for pre-funding.

FTSE Russell said it continues to maintain a constructive relationship with the SSC, the World Bank Group and E&Y who are supporting the wider market reform programme, and other key market authorities.

“Finalisation of the required roles and responsibilities, within the settlement model, that are aligned to the new legislation remains a critical next step. FTSE Russell continues to encourage the Vietnam market authorities to provide clearer guidance on the steps and timeframe for implementation,” it noted.

Vietnam will remain on the watch list as a frontier market and reviewed for possible reclassification as a secondary emerging market within the FTSE Equity Country Classification scheme at the Interim Review in March 2024, it added.

According to major international rating agencies and financial institutions, Vietnam has made many improvements and met a number of important criteria. However, they noted the pre-funding requirement and strict limits on foreign ownership of shares are among the main hurdles to Vietnam's emerging market status upgrade. Of which, the pre-funding requirement is seen as the main problem.

Investors usually settle their trades two days after a deal in open markets, but in Vietnam they have to ensure the availability of funds prior to trade execution, which adds a significant cost for traders who execute multiple daily operations.

The other major hurdle is Vietnam’s strict limit on foreign ownership, which for banks is as low as 30% and has already been attained for many top lenders. Foreign investors are lobbying for gradually raising the limit to 35%.

Both issues require practical coordination among relevant agencies and ministries such as the State Bank of Vietnam (SBV) and the Ministry of Planning and Investment to solve, they said.

In the most recent analysis, FTSE Russell gave an optimistic assessment of the Vietnamese stock market. The firm mentioned some of Vietnam's achievements such as a GDP growth rate of 8% in 2022, the FTSE Vietnam 30 Index increasing 12% since the beginning of 2023, and cooperation with FTSE Russell and the Singapore Stock Exchange (SGX). These will help Vietnam develop a comprehensive ecosystem to help foreign investors access Vietnamese stocks and control related risks, it said.

Top Vietnamese broker Saigon Securities (SSI) assessed that the opportunity for the Vietnamese stock market to be upgraded by FTSE Russell may be clearer in 2024. The possibility of upgrade by Morgan Stanley Capital International (MSCI) in the following years would require high efforts and determination of all market players.

Closing Friday, Vietnam's benchmark VN-Index inched up 1.72 points, or 0.15%, to 1,154.15.