Deadline Ticking Away
By Ho Ba Tinh
In line with Vietnam’s World Trade Organization (WTO) commitments, wholly foreign-owned securities firms and fund management companies will be allowed to operate in Vietnam from January 1, 2012. The question is whether these foreign businesses are interested in this prospect given the current economic gloom. Besides, what should domestic firms and management agencies do to make optimal use of this change and minimize risks?
In recent years, the downturn of the market has adversely affected foreign indirect investment in Vietnam. Several foreign investment funds that operate in the country have been mired in staggering losses. In 2009 and 2010, foreign indirect investment flowed briskly into a number of emerging markets, including many Southeast Asian countries, but stagnated in Vietnam.
The most important factors that determine a country’s allure to foreign investment are economic stability, macroeconomic policies and growth rates. Unfortunately, Vietnam’s economic performance over the past four years has been volatile and characterized mainly by soaring prices, sky-high interest rates, drastic exchange rate fluctuations and slowing growth. Macroeconomic policies, meanwhile, are largely inconsistent and not really efficacious. To aggravate matters, the credit ratings of Vietnam and its banking system have been downgraded. The risk posed by bad debt has jumped and the need to restructure banks and State-owned enterprises becomes more pressing than ever.
As a result, foreign investors have been less keen on pouring money into Vietnam. Foreign net selling on the Hochiminh Stock Exchange (HSX) has surpassed VND1 trillion since early August. In comparison, foreign net buying since the start of 2011 has amounted to some VND2 trillion only.
The establishment of foreign fund management firms in Vietnam has been underpinned mainly by the founders’ desire to lure capital from the international market. This task has been increasingly daunting as the world economy is in a trouble and Vietnam’s market is far from attractive now. Many investment funds in the country are fetching prices equal to merely 40-60% of their net asset value.
Foreign investors are not interested in setting up securities firms, either. At present, there are up to 105 securities firms in a market with a capitalization value of approximately US$30 billion only. The performance of these companies is hardly stellar, with over 50% of them plunged into the red in 2010 and almost 70% suffering the same fate in the first half of 2011. Given current economic woes, the bankruptcy of a number of securities firms is only a matter of time.
Long-run prospects are not much brighter since the economy is small and the market is ferociously competitive. With giant domestic players having secured a steady client base, foreign firms will find it hard to penetrate the market. In fact, some joint ventures are virtually dominated by foreign stakeholders at present, but still struggle to flourish in the current market.
Not all is lost, though. As economic integration deepens and growth continues, Vietnam’s stock market boasts considerable long-term potential. Big firms with technological, financial and managerial advantages may invest in this sector to cash in on a possible boom in the next 3-5 years.
Recently, the Ministry of Finance and the State Securities Commission have planned to enact reforms to nourish market growth. For example, new products such as open-ended and exchange-traded funds will be launched and enterprises allowed to mobilize capital through global depository receipts. These changes can bring a breath of fresh air to the market.
The stock markets of several Southeast Asian countries such as Malaysia, Indonesia and Thailand have entered a new phase of development after welcoming foreign securities firms. The same trend may very well arise in Vietnam.
On another note, struggling securities and fund management firms may seize this opportunity to undergo mergers and acquisitions and clinch a cooperation deal with better partners to overcome existing hurdles. Current high achievers, meanwhile, can turn the challenge from intense competition into an opportunity for self-improvement, in terms of managerial capabilities and service quality. Foreign companies which excel in management, technology and product provision will not only fuel development in Vietnam’s stock market but also make room for experienced international investors and their abundant cash to enter Vietnam.
Of course, to realize these opportunities and reduce risks, the authorities must promptly flesh out a comprehensive legal and supervisory framework, with effective solutions to new challenges. In addition, there should be measures to safeguard the financial system, as well as the well-being of various stakeholders. The flotation of State-owned enterprises has to speed up to make the stock market more enticing and boost economic restructuring.