The current situation of Vietnam
To materialize its goal of reaching the Emerging Market status by
2025, great efforts, including the conclusion of
back-to-back-to-back Free Trade Agreements with powerful allies,
issuance of new laws to promote the market, have been made by
Vietnam in the recent years. However, according to the latest
Market Classification issued by Morgan Stanley Capital
International (MSCI), Vietnam continues to be classified as a
Frontier Market. According to the MSCI, Vietnam remains a Frontier
Market for the following reasons:
1. Foreign Ownership Limit Level: Limited foreign ownership,
ranging from zero to fifty-one percent, applies to companies
operating in specific sensitive and restricted industries. Still,
over ten percent of the Vietnamese equities market is impacted by
these restrictions.
2. Foreign Room Level: As the foreign ownership limit level remains
for some sensitive sector, the foreign room level is deemed as low
and the equity market is significantly impacted accordingly.
3. Equal Rights to Foreign Investors, Information Flow, Market
Regulations: Lack of readily available English
information/regulations for foreign investors.
4. Foreign Exchange Market Liberalization Level: Both the onshore
and offshore currency markets are restricted (for example, foreign
exchange transactions need to be connected to securities
transactions).
5. Investor Registration & Account Set Up: Registration for
security trading, as a mandatory procedure, can be time-consuming
and costly. Further, account setup requires the approval of the
Vietnam Securities Depository and Clearing Corporation.
6. Clearing and Settlement: Funding of trade must be done in
advance, and there are no overdraft facilities.
The same also applies to the FTSE Classification of Equity Markets
– FTSE Equity Country Classification Announcement October
2024 of FTSE Russell. According to FTSE, Vietnam was added to the
Watch List for Emerging Market since 2018, however, according to
FTSE, Vietnam has not yet been recognized as an emerging market
because of the market practice of doing a pre-trading check to
confirm the availability of funds prior to trade execution, making
Vietnam not eligible for the "Settlement Cycle (DvP)"
criterion. The "Settlement – costs associated with
failed trades" criterion is unrated as the market does not, by
default, encounter failed trades. Improvements must also be made to
the procedure for registering new accounts, as market practices may
cause the registration process to take longer than expected. It is
also seen to be crucial to implement an effective system to enable
trading between foreign investors in securities that have achieved
or are on the verge of reaching their foreign ownership limit
(FOL).
Recommended action plan
To address MSCI's concerns as well as foreign investors'
concerns, the following action plan should be carefully considered
by the competent authorities of Vietnam:
1. To make the optimal use of the already-concluded Free Trade
Agreements (i.e. CPTPP, EVFTA, EVIPA), the Government should ensure
that foreign investors receive the best possible treatment when
they make their decisions to invest in Vietnam. In other words,
amendments of the laws and legal reforms regarding the security
market, security trading, investment procedure, foreign ownership
limitation, etc. should be taken into consideration to reflect the
commitments in the recent Free Trade Agreements.
2. To require organizations to adopt English as one of the primary
language regarding information flow for foreign investors to grasp
the idea of the market easily. This action can either be regulated
under relevant laws or can be implemented directly by competent
authorities.
3. To consider translating the new legal regulations into English
on its issuance date for foreign investors to understand the laws
as soon as they can.
4. To seek the support of international commercial experts
Recent developments and the magic date!
Recently, Vietnam has made great efforts to meet its deadline of
obtaining the Emerging Market status by 2025. On September 18,
2024, the Ministry of Finance issued Circular 68/2024/TT-BTC, which
outlines changes to a number of legislation. By amending many laws
that control securities transactions, transaction clearing and
settlement, securities company operations, and information
disclosure, the Circular eliminates the need for pre-funding for
foreign investors implementing transactions in Vietnam. Further, on
29 November 2024, the National Assembly of Vietnam issued Law No.
56/2024/QH15 on amending and supplementing Law on Securities, Law
on Accounting, Law on Independent Audit, Law on State Budget, Law
on Management and Use of Public Property, Law on Tax
Administration, Law on Personal Income Tax, Law on National
Reserves, and Law on Penalties for Administrative Violations (Law
No. 56) where the market transparency and investor interests were
promoted by (i) providing definitive concepts on market
manipulation; (ii) simplifying procedures for public companies;
(iii) providing clearer responsibilities for parties involved in
security activities; (iv) providing professional investors with
rights to participate in the corporate bond market. These new
amendments open the door to a more robust and competitive market by
establishing clearer roles, more stringent issuance standards, and
improved supervision procedures aligning with international
standards.
Since it is traditional for FTSE Russell to issue its country
classification around late September and early October, we are of
the opinion that the magic date for Vietnam could be 31 March 2025
where FTSE Russell, subject to its assessment on new changes in
Vietnam and its observation of the implementation of Law No. 56,
can finally decide the Emerging Market status for Vietnam and then
publish it with their official Country Classification six months
later.
For Vietnam to reach its goal of an Emerging Market – Duane
Morris Vietnam LLC, led by Dr. Oliver Massmann with almost 25-year
working experience in Vietnam, could support the Government in this
process by providing consultation on the necessary legal reforms
and advising on step-by-step action plan for Vietnam with regards
to requirements for the Emerging Market status.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
