Stock market upgrade may help Viet Nam lure US$25 billion in new investments by 2030

Ketut Ariadi Kusuma, a Senior Financial Sector Specialist at the WB, made the above statement at a conference on the development of Viet Nam's stock market in Ha Noi on February 28.

Addressing the event, Kusuma hailed the Government's decision to approve the Securities Market Development Strategy to 2030, which outlines important goals and implementation solutions to achieve those goals.

The World Bank is glad to see Viet Nam government's strong determination in developing the markets throughout the well-thought strategy and now with its implementation, he said.

Viet Nam's aspiration to elevate its status to an emerging market is a strategic move. It is aligned with its broader ambition to transition into a high-income country by 2045, Kusuma noted.

Achieving this high-income target will require annual real per capita growth of about 5.9 percent per year over the next two decades, meaning that the actual growth should be higher than this to account for population growth.

This ambitious target hinges on effectively leveraging the nation's financial sector to channel investments towards most productive uses and support Viet Nam's objectives.

Capital markets has a crucial role to play in this regard. For example, the stock market reached a capitalization of approximately VND 6 quadrillion (US$247 billion) (about 57 percent of GDP) in 2023, and once even reached a record of 93 percent of GDP in 2021, underscoring the potential to mobilize financing for the corporate sector.

At present, Viet Nam is classified by international index providers MSCI and FTSE Russell as a Frontier Market. It is by far the largest component of Frontier Market indexes (more than 30 percent of aggregate assets under management in the Frontier Market).

An upgrade would be a significant boost for Viet Nam's market as it will be seen as having adequate access for foreign investors and having equities of sufficient size and liquidity to be attractive, in the same league as many developing countries with similar stage of development to Viet Nam, noted Ketut Ariadi Kusuma.

The first condition is that the Vietnamese market needs to be reclassified by both FTSE Russell and MSCI. The World Bank appreciates and agrees with the approach of the State Securities Commission (SSC) of Viet Nam, to prioritize the upgrade from FTSE Russell first. However, it also notes that the majority of new investments will come after the upgrade by MSCI.

Secondly, the State needs to address issues related to foreign ownership limits (FOL) and the equitization of large State-owned enterprises (SOEs). Solutions proposed by Mr. Kusuma include disclosure practices, increasing access to stocks that have reached their limit, and, most importantly, raising the FOL.

If the FOL were to remain, Viet Nam would only receive an extra US$5 billion in investment, as its market accounts for less than 1 per cent of global emerging market indices.

Lastly, there needs to be a healthy global investment environment so that Viet Nam can benefit from the increase in investments into emerging markets, with an estimated growth of 7 per cent annually. This means that Viet Nam can attract an additional US$8-12 billion in investment by 2030.

The WB also emphasized the importance of developing a domestic investment base to accompany and match foreign investments, in which the diversification of investments by the Viet Nam Social Security (VSS) fund would be crucial.

Diversifying VSS's investments into corporate stocks would not only help the fund achieve long-term investment effectiveness but also broaden the investor base and stabilize and develop the domestic capital market.

A modest allocation to corporate stocks by VSS could translate into billions of additional dollars in funding for the corporate sector. Comprehensive reforms in the pension sector could potentially bring about new investments of up to US$25 billion into the corporate sector by 2030.

Further reforms in the insurance and investment sectors, if done correctly, would provide an additional US$28 billion for companies through the capital market. In total, Mr. Kusuma estimates that the potential for new capital mobilization of Viet Nam to be in the order of US$78 billion.

The increasing investment demand in Viet Nam emphasizes the need for high-quality financial products, especially corporate stocks and bonds. This underscores the importance of a healthy ecosystem, including rigorous oversight, transparent disclosure, and reliable credit ratings.

This will ensure that extra capital into the stock market will provide funding for the development of companies that are operating effectively, as well as recapitalize banks and provide funds for infrastructure projects or innovative industries, and not just benefit current shareholders, he added./.