Vietnam's stock market has not yet been improved

An investor communicating while observing market movements. Photo VNA/VNS

H NI There has been notable progress in the assessment of Vietnam's stock market, as shown in the recent MSCI June 2024 report.

The rating agency said 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, he added that the ongoing transition of the internal market from frontier to emerging status faces certain challenges.

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

Vietnam has met market size and liquidity requirements, even surpassing many other emerging markets in the region.

The country's stock exchange boasts a market capitalization of more than US$200 billion, surpassing Qatar and the Philippines in size. With daily liquidity of $776 million, market liquidity is comparable to regional markets such as Indonesia, Malaysia and Singapore.

However, market accessibility for global investors remains a major obstacle for the Vietnamese stock market.

As a result, according to the latest MSCI “Global Market Accessibility Assessment” report, Vietnam continues to be classified as a frontier market. Although the transferability criterion has been improved, eight crucial criteria still need to be improved to meet the market upgrade requirements.

According to a recent analysis by Vit Dragon Securities, the main obstacles in the process of upgrading the Vietnamese market include the opening of foreign ownership, ease of international capital flows and efficiency of market operation, which need to be improved .

To achieve this upgrade, the country simply needs to strengthen the criteria of openness of foreign ownership and efficiency of market operation.

The securities company explained that the restriction of capital flows is considered weaker than the need for a foreign exchange market for the national currency.

Regarding openness to foreign ownership, Vietnam's quantitative factors are similar to those of Thailand. However, in terms of qualitative factors, based on the assessment of the investment community, Thailand's implementation of the Non-Voting Ordinary Shares – NVDR policy has significantly improved its affordability criterion. to the market, leading to its upgrade.

Concerning the efficiency of market functioning for foreign investors, the lack of constraints on information disclosure, limited legal regulations in the English language and the delay in the adoption of International Financial Reporting Standards (IFRS) have hampered Vietnam’s compliance with international standards, as perceived by foreign investors. .

Current regulations that require 100% pre-financing before placing a purchase order in order to mitigate the risk of payment default before the securities are transferred to the investor's account create additional commercial obstacles for investors foreigners.

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

To solve the pre-financing problem, Dng Ngc Tun, deputy general director of the Vietnam Securities Depository and Clearing Corporation (VSDC), proposed a solution focused on foreign institutional investors.

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

However, challenges remain in resolving technical issues and finding sufficient funds. To mitigate risks, trading limits were considered for market members, Tun said at a conference in mid-April.

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

Precautions after upgrade

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

In reality, there have been cases, such as that of Argentina, which were reclassified and then downgraded due to the inability to maintain the necessary conditions.

V Ch Dng, head of the international cooperation department at the National Securities Commission, suggests that securities companies will need to upgrade their systems to establish online connections with foreign exchanges and investors.

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

This highlights the critical need for securities firms to possess the ability to efficiently receive and process trading orders.

Additionally, the market's inability to maintain its attractiveness after an upgrade may present a significant risk of a sharp decline as foreign investors withdraw their capital.

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

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