Stepping up

Major achievements have been made in the ten years since Vietnam’s first stock market was opened, but there are still many challenges to meet in order to develop the country’s capital markets to their full potential.

Fourteen years after embarking on “doi moi” and pursuing a market economy, Vietnam opened its first stock market in Ho Chi Minh City (HoSE) in 2000 and a second in Hanoi (HNX) in 2005. Subsequently, the market for unlisted public companies (UPCOM) was then launched in 2009, with the aim of streamlining over-the-counter equity market operations. Virtually from scratch, Vietnam has successfully developed its capital markets and turned them into effective fund raising channels for the economy, reducing the traditional dependence on the banking sector.

Critical mass

It’s no exaggeration to say that Vietnam’s capital markets have come a very long way over the course of the last ten years. The market has even developed rapidly over the past five years, as Vietnam’s equitisation of state-owned enterprises (SOEs) began to be taken more seriously. Its capital markets have since achieved a critical mass and attracted the attention of people from all walks of life. The number of trading accounts opened has reached 950,000, for a penetration rate of over 1 per cent. Several analysts hold that the number of accounts will reach 5 million, or 5 per cent of the population, by 2015. This projection does not seem over-optimistic when compared to Vietnam’s neighbours, where China boasts over 120 million trading accounts, or 8 per cent of its population.

As at July 2010, there were 548 listed equities on HoSE and HNX and 29 registered for trading at UPCOM. Total market capitalisation reached over VND700 trillion ($38 billion), or 45 per cent of GDP. In terms of the number of market players, there are 105 licensed securities companies and 46 fund management companies. Twenty-two onshore investment funds have been established to date, with total assets under management of VND72 trillion ($4 billion).

In addition to the participation of the local investors, foreign investors have also played a major role. Some 12,000 trading accounts have been opened (of which 1,300 are institutional accounts), trading a total portfolio of some $7 billion. The success story of Vietnam’s economic reform has made it a frontier emerging market for many foreign institutional investors, including country-focused funds as well as hedge funds. Together with foreign direct investment (FDI), indirect investment has become an important source of foreign funds to support Vietnam’s growing economy.

New ways to market

The critical mass in the market may not have been achieved without the use of technological advances. In 2009, an online trading platform connecting market participants with HoSE went “live”, followed by a similar event at HNX a year later. The online trading platform fundamentally changed the way orders are placed and matched, unlocking critical bottlenecks in the order-taking process at brokerage houses. This technological breakthrough has helped Vietnamese securities companies to leverage their trade execution capacities, reducing operational costs while improving service quality. The proportion of online and mobile trading as a means of market access has grown quickly, from nothing to an estimated 30-40 per cent of the total trading value within just a very short space of time, and this trend will continue. Many securities companies have already deployed or are in the process of deploying state-of-the-art trading technology in order to stay competitive.

New ways to raise funds

The rapid development of the secondary market has helped the primary market to function relatively well. From the traditional ways of borrowing through the commercial banking sector, Vietnamese companies have found and become accustomed to new ways of raising funds through the capital markets by issuing equities as well as debt instruments. The total funds raised through the equities market over the past five years reached over VND300 trillion ($16 billion), or 20 per cent of GDP. In 2007 alone, the boom year prior to the global financial crisis, some VND127 trillion ($7 billion) in funding was raised through the equities market. This funding has allowed Vietnamese corporations to re-capitalise and finance their much needed business expansions, which would have been otherwise impossible to raise via the banking sector.

Although still very new, some large Vietnamese companies have also managed to successfully issue corporate bonds to raise funding. An estimated VND20 trillion ($1 billion) or more in corporate bonds have been issued each year since 2009. The total outstanding value of the bond market is estimated at $12 billion, of which $10 billion are government bonds and $2 billion corporate bonds. With the momentum achieved, it is expected that the debt market will grow more quickly in the years to come.

As access to capital has been made easier, many private corporations have grown significantly in size and expanded their operations to overseas markets. Never before has the market capitalisation of several large private companies outweighed that of their state-owned rivals, who have traditionally been given priority access to land, capital and other resources. This success may not have happened without the contribution of capital markets.

Legal framework taking shape

Any look at Vietnam’s capital markets must mention the role of the industry watchdog, the State Securities Committee (SSC). Although incomplete and with much still to be done, the SSC has completed a significant amount of work, creating the legal framework necessary to support the development of the market over the past ten years.

In 2006, the Law on Securities, the highest legal document governing the operations of the primary and secondary markets, was issued, replacing Decree 144/2003/ND-CP. The Law is currently under amendment in order to address weaknesses that have come to light after five years of implementation. Important amendments include, inter-alia, the addition of regulations on private placements, timeframe for listing on a stock exchange after becoming a public company, and allowing securities companies/fund management companies to carry out additional activities. In addition to the Law, many by-law documents have also been issued to date.

The SSC has recently taken decisive measures to control market manipulation by increasing sanctions for deliberate wrongful acts by participants. Under the provisions of the newly issued Decree 85/2010/ND-CP, market participants will not only have to pay fines but also repay any profits gained from illegal activities. This is a move in the right direction to restore market confidence.

Challenges ahead

Despite the impressive achievements, there are challenges to be met if Vietnam is to seriously develop its capital markets to the next level of professionalism. The most critical issue is market transparency and supervision. Vietnam’s capital markets have been operating with a relatively low level of transparency, especially with respect to information reporting by public companies. Financial reporting mechanisms are not sufficiently robust from both a public company and market supervision perspective. It has become common for public companies to misreport earnings in their quarterly/annual filings, then correcting the material misstatements to create stock price volatility for the benefit of those in possession of the information. Price manipulation by various market participants is not rare. This has seen confidence fall among public investors in the market and in market supervision over the past few years. With the SSC recently issuing new regulations on administrative breaches, it is expected that market confidence will gradually be restored. In addition, the financial reporting mechanism will need to be revamped and strictly enforced.

Secondly, the deregulation process has taken longer than expected and this has hindered the development of the market. For example, the SSC has, for a long time, announced plans to allow an investor to open more than one trading account at different brokerage houses or buying and selling an equity sticker in the same trading section, improving the settlement cycle (cash and securities) from the current convention T+4 to T+2, and officialising margin lending activities. These are positive plans and if implemented would enhance the attractiveness and improve the liquidity of the market. However, these plans have not been realised to date, creating investor impatience and doubt over their feasibility. Beyond these issues, the SSC also needs to further speed up the deregulation process by allowing securities companies to launch new products such as securities lending, derivatives and structured products.

Thirdly, market education, especially relating to retail investors and public companies, remains limited. Although Vietnamese investors have learned quickly from their own trading experiences over the past few years, they still lack fundamental understanding of more exotic financial products. Without this general education in place, it is almost impossible to develop new products to cater to the mass market. As for public issuers, the understanding of available financial instruments as a means to raise funding remains limited. As a result, not many companies have chosen to issue debt instruments, causing their equities to dilute quickly through excessive use of bonus and rights issues. Not many local CFOs have a good comprehension of book-building as a commonly used method to raise funds in the international market. Furthermore, companies have a rather poor understanding of corporate governance and lack motivation to understand it properly.

Lastly, market participants remain scattered and weak. There are currently too many small securities companies in Vietnam to serve a reasonably small market, creating significant social costs. The Top 10 brokerage houses currently dominate half of the brokerage market, leaving the other half to the remaining 95 rivals. Many small securities companies struggle to maintain operations and retain key employees. Lacking scalability is a major obstacle for small securities companies to raise the level of service quality.

In addition, human resources development and risk management are also big issues facing Vietnamese securities companies.

Vietnam’s capital market has taken an impressive journey over the past ten years, with some significant milestones and achievements. Many challenges, however, lie ahead if Vietnam is determined to build a well-respected capital market to cater to economic development.