Vietnam - working with the government to open the market

clock • 5 min read

In many ways Vietnam is like a phoenix emerging from the ashes of the past. The paralyzing effect of the Vietnam War (1954-1975) and the repression that followed means the economy is growing from a low base. But GDP has been expanding at a rate around 7% and remains one of the fastest growth economies in the world. The Socialist Republic of Vietnam is a one-party communist state similar to its northern neighbor China. In 1986, Vietnam launched an economic reform program (Do Moi) aimed to move the country towards a socialist oriented market economy - under a communist government. Do Moi encouraged the free market growth in areas such as the production of consumer goods, which led to inflows of foreign capital and rapid economic growth. Foreign investment remains a key driver and the U.S is the country's largest business and trade partner. A further benefit to the economy has come from the large diaspora many who originally left the country at the time of Saigon's fall in 1975. Many refugees settled in Western countries and their remittances to relatives in the country now runs at around US$ 7billion annually, approximately 3% of GDP.
 
Vietnam is a growth story with GDP growth running at 6.9% for the 12 months ending September 2018 - having reached a high of 8.5% in the fourth quarter 2017. Growth could actually benefit from a reset of trade relations between China and the US as firms move production out of China. Vietnam shares a border with China, has a large (95.5 million population 2017) and low cost labor force, and a much smaller trade surplus with the U.S. than China. In 2017, Vietnam had the fifth largest trade surplus with the U.S. at U.S.$38 billion, just one tenth of China's U.S.$375 billion (ranked behind China, Mexico, Japan, and Germany - source U.S. Census Bureau).
 
Reforms have opened the country to new freedoms of internet, media and communication, and Western culture is now very evident in the major cities. The country has a vibrant economic environment with very long-term growth potential; however, the country is run with a communist political framework.
 
Debt to GDP has steadily risen from around 31% in 2000 to 62% in 2017 (State Bank of Vietnam). As a result, the government would like to attract foreign investment and has embarked on a privatization drive. 2017 saw the largest privatization of a state owned firm, with Thai Beverage taking a 54% stake in the Saigon Beer Alcohol Beverage Corporation, for around $4.8 billion. The privatization plan has been slow. Lack of transparency has often been blamed by potential buyers in making asset valuations difficult. However, the government is moving ahead and has released a list of 375 state owned enterprises (SOEs) they intend to wholly or partially sell by 2020.
 
To help the ongoing transition towards a market economy with foreign participation, a revision of the Securities Law will be submitted next year for implementation in January 2020. The government would like to have MSCI lift their status from frontier to emerging markets. Vietnam is widely considered as a market that is emerging, and where standards and market capitalization are rising. The State Securities Commission (SSC) realizes that quantitative measures to align Vietnam to MSCI standards is critical to attract FDI and have stated that it is their goal to reduce the bureaucracy and costs facing investors in their market.
 
If the government wants to succeed in a large privatization plan, ease of participation in Vietnamese IPOs is an important area for the regulators to focus on. Currently there is a time delay between the IPO and the listing date during which time investors' funds are escrowed providing both FX and counterparty risks that could be avoided with a streamlined process. Furthermore, the rudimentary subscription process could be significantly improved if the regulators moved to a central database where accounts could be opened, and subscription data could be stored for reuse in future transactions - rather than resubmitted from scratch each time as is the case currently.
 
To help them develop towards these goals they have reached out to foreign investors such as Vontobel for input as they draft the amendment of the Securities Law. Over the past quarter our Head of Trading, Gary Thompson, travelled to Hanoi to discuss these issues with the State Securities Commission (SSC) under approval from the Ministry of Finance. He held discussions with the Chairman of the SSC as well as with representatives from the Hanoi and Ho Chi Minh Stock Exchanges.

A Vietnamese NVDR, would ideally be regarded as a security by the SSC and automatically listed by both the Hanoi and Ho Chi Minh Stock Exchanges. The use of a NVDR would remove foreign ownership issues and allow foreign investors to gain economic exposure to the underlying companies. It is likely these securities would come without votes, which would not be ideal in our view as it would deprive foreign investors any form of control. But it's a start and would open up a number of investment opportunities that would not otherwise be available.
 
We look forward to further helping the Vietnamese regulators address and improve their market efficiency, regulatory environment, custody and settlement structure and process, and the overall transaction landscape to the benefit of the country and foreign investors.

Sudhir Roc-Sennett, Head of Thought Leadership & ESG at Vontobel Asset Management