Upgrading significantly affects the allocation of foreign capital

Chairman of SSC Vu Thi Chan Phuong stated at the July dialogue program, with the theme "Macroeconomics and the Stock Market," held on July 26 in Hanoi, that the management agency has been actively collaborating with international organizations, relevant ministries, and sectors to implement solutions to soon upgrade the stock market in Vietnam according to the set schedule, to attract the participation of foreign investors in the Vietnamese market.

According to International Monetary Fund (IMF) estimates, stock market rankings and reference index classification for stock markets influence approximately 70% of international investors' investment capital allocation decisions in stock markets. As a result, stock market classification by ranking organizations has a significant impact on leading global investment capital flows, including investment capital in Vietnam.

Upgrade the stock market to attract "billion-dollar" investment in Vietnam

According to the World Bank's assessment report, the upgrade will greatly benefit the domestic market. The market upgrade, in particular, is expected to attract net foreign capital inflows of approximately 7.2 billion USD per year into Vietnam while simultaneously helping to improve share valuation, thereby positively affecting the equitization and divestment of state-owned enterprises. It is also claimed by World Bank that moving from a marginal market to an emerging market will result in a more diverse investor base; on the other hand, it will also encourage more foreign investors to invest in the domestic market.

Vietnam has remained a frontier market and has been on the Secondary Emerging market watchlist in FTSE Russell's latest Market Classification Report, published on March 30, 2023. In general, Vietnam has met the majority of the criteria for the FTSE's primary emerging market ranking.

"Over the past few months, the SSC has made efforts to organize many meetings with related parties to discuss and seek solutions to existing issues so that the stock market can soon be upgraded in line with the approved plan," said the SSC's Chairman.

Two groups of critical issues must be resolved

Chairman Vu Thi Chan Phuong asserted that the evaluation and decisions of international rating organizations like FTSE Russell and MSCI determine whether the stock market will be upgraded. Recently, the management agency has been proactive in proposing and implementing solutions to meet the rating organizations' criteria. The Prime Minister has approved a scheme for the upgrading of Vietnam's stock market from marginal to emerging. However, to achieve the planned goals, the SSC requires the active and effective collaboration of relevant ministries and branches.

According to SSC leaders, there are two groups of crucial issues influencing the upgrading of the securities market and requiring coordination with relevant agencies, ministries, and sectors, including margin requirements before transactions (under the authority of the State Bank) and foreign ownership limits (under the authority of the Ministry of Planning and Investment).

In terms of pre-trading margin requirements, Vietnam still requires to ensure sufficient money and securities before trading under the provisions of Circular 120/2020/TT-BTC; meanwhile, rating organizations necessitate "No pre-transaction margin requirements." Therefore, the remedy to this problem calls for the deployment of a central clearing partner (CCP) for the underlying market, followed by a gradual reduction in the pre-trade margin.

The Vietnam Securities Depository (VSD) and the SSC are currently about to develop a CCP model for the underlying market, such as a model when a depository bank is approved as a clearing member. This model requires the coordination of the State Bank in amending relevant regulations in the field of banking.

Regarding the issue of foreign ownership limits, several proposed solutions contain the implementation of non-voting depository receipts (NVDR), the implementation of a portal to disclose information on transactions outside the amplitude of foreign investors (known as Foreign Boards) with stocks out of foreign rooms, and the acceleration of the process of divestment, equitization, and increasing the percentage of foreign ownership shares./.