To maintain the attractiveness of the investment environment in general and capital markets in particular requires more reforms. After all, the “smart” money has always active and flows to profitable place.
Although the stock market in 2015 did not satisfied investors, even it witnessed the outflow of foreign capital in the last quarter of the year, but the Vietnamese stock market was still a rare spotlight in the global securities market.
Some estimations from institutions said that emerging economies have faced with economic slowdown and reversal of capital flows. Net inflows into these economies have fell for the first time since 1988, with a capital withdrawal of about US$ 540 billion from 30 emerging economies in 2015, compared with capital inflow of only US$ 32 billion in 2014. The capital withdraw from emerging economies will continue in 2016 due to the worse economic growth prospects, and high probability that Fed will continue to raise the Fed-funds rate.
In this context, Vietnam stock market has attracted a certain amount of net capital. The total value of mobilized capital was over 283 trillion dongs in 2015 an increase of 2% compared to the same period of 2014, in which the new issuance and equitization (including private issuance) was 51 trillion dongs (up 37 % compared with 2014); government bonds mobilization reached 232 trillion dongs (down 3.5%).
The number of trading accounts reached about 1.505 million, up more than 105,000 accounts (approximately 7%) compared to the end of 2014. In the first 11 months of the year, the net outflow of foreign capital reached nearly US$ 70.7 million. Total foreign portfolio’s value reached US$ 14.79 billion by the end of November, up US$ 1.3 billion compared with the end of 2014.
It was positive results in such difficult period. FII has been withdrawn but with moderate volume, and mostly through short-term selling. It is necessary to recognize that the hot money often move rapidly and pour into high liquid assets, such as equities. The capital withdrawn from the stock market is not surprising in emerging markets so what we should pay more attention on is the withdraw scale.
The withdrawal of FII in Vietnam market was offset by FDI inflows to record levels. Data from the Department of Foreign Investment (MPI) show that in 2015, total newly registered and additional FDI was US$ 22.757 billion, up 12.5% over the same period in 2014.
The big difference between FDI inflows and the FII inflows is that FDI has long-term view and is mainly based on macro-economic fundamentals in the long term. In 2015, macro-economic context of Vietnam was relatively stable and positive with estimated GDP growth of 6.5%, the highest result in the last 5 years; 11 month CPI was 0.58%; credit growth is estimated to increase by 17%.
The difference in the movement of FDI and FII flow shows that the prospects of investment attraction of Vietnam still have a solid basis which is the rebound of domestic economy. Reviews from some international organizations also recognize the recovery of Vietnamese economy. HSBC forecasts the country’s GDP growth in 2016 of 6.7%. The prediction of ANZ is higher, with 6.9%. Both organizations have considered domestic demand as an important reason for economic growth, supporting the service sector. In terms of consumption, annual consumption increased by 9.1%, much higher than the increase of 6.5% in 2014. Growth in the construction industry and the momentum continues to lead the economy’s recovery. FDI disbursement‘s record in 2015 will contribute to maintain strong growth momentum in 2016.
These positive changes in the economy in 2015 are a good premise for task of attracting investment in 2016. However new variables of the global economy may make the task becomes more difficult this year. The international recommendations emphasize the role of macroeconomicpolicy, which should be more “clever” to maintain growth momentum.
The most difficulties in attracting foreign capital inflows consist in the capital market, where FII was very flexible. The new more flexible mechanism of exchange rate, which just has been applied, will have very strong impact on capital flows.
Unlike FDI inflows, which are more attractive at low exchange rate, FII inflows are more sensitive to exchange rate changes. This was demonstrated in last quarter of 2015, the strong flow of foreign funds withdrawn from the stock market when seeing down-trend of Vietnam dong. Maintaining hard commitments in exchange rates caused decline in foreign currency reserves. According to an estimate of the Viet Dragon securities company, the Vietnam central bank had to use at least US$ 10 billion to stabilize the exchange rate in the second half of 2015. Previously, the International Monetary Fund estimated this figure was about US$ 6.7 billion.
The flexibility of the new exchange rate mechanism allows the daily change of exchange rate, making new currency devaluation with less volality rather than a long accumulation, which may lead to a large loss of VDN. The new mechanism is expected to reduce pressure on VND devaluation in 2016.
Is it possible to convert short-term into long-term capital flows of FII? That can be done on the stock market thanks to better reforms. In 2015, foreign investors did not participate in the IPO’s auction due to low selling rate, which hinder foreign organizations to master company operations enough to improve corporate performance. Sell full stock plots, using book bindings instead of public auctions, together with the long-term commitments, can make FII inflows to become long-term capital for business.
The Decree No. 60/2015/ND-CP issued in 2015 has deployed a significant step in attracting inflows into the stock market by broadening the percentage of ownership limit for foreign investors. However, other significant obstacles must be removed. (Under the current law of investment, foreign enterprises are those who are established abroad (foreign investor, F0 level) or if foreigners own 51% or more of a locally incorporated company (F1 level). Foreign investor enterprises (FIEs) are treated as “foreign enterprises” only if foreign investors own directly and/or indirectly through an FIE [owned directly by foreign investors up to 51% (F1 level)] at least 51% of the equity (F2 level).
To overcome these obstacles requires more joint-efforts of relevant ministries, in addition to the Ministry of Finance or the official agency managing the stock market. According to latest proposals, only companies with the initial foreign ownership of more than 65%, which maintain constantly more than 6%, are considered foreign. Businesses can propose the ownership limit for foreign investors and will be guided by competent agencies. However it is, just a temporary solution.
An important task to attract capital flows, is upgrading Vietnam stock market from "frontier" to the "emerging" market. An emerging-market ranking requires “significant” openness to foreign ownership and ease of capital flows, as well as minimum levels of liquidity and market-capitalization. The information transparency is also important, for example notifications must be translated in English. Higher ranking of the Vietnamese securities market will attract more portfolio allocation from global institutions for Vietnam.
With new challenges in the international context of 2016, the reform of securities market and legal framework in 2016 should be enhanced to attract investment. Pressure from outside is also an opportunity to accelerate this process because the attractiveness of a market relies always in best investment opportunities.
