(Bloomberg) -- Vietnam will remove a requirement for overseas investors to fully pre-fund equity trades, marking the country’s latest effort to boost its chances of being reclassified as an emerging market.
The new rule takes effect Nov. 2, the finance ministry said in a circular late Wednesday. It resolves a long-standing barrier that has prevented rating agencies from upgrading the nation from its frontier status, which has discouraged large funds from investing in that market. Currently, overseas investors must transfer 100% of funds before buying securities.
The regulatory change bolsters Vietnam’s case for an upgrade by FTSE Russell, which placed the country on its watch list in September 2018 due to slow progress in improving access to local equities. Enhanced market access may help attract more overseas flows to one of Southeast Asia’s fastest-growing economies this year.
“With expectations of an upgrade happening in 2025, I expect large cap blue-chip companies to do well,” said Ruchir Desai, a co-fund manager at AFC Asia Frontier Fund. The pre-funding rule “was the major sticking point,” he said.
FTSE will likely upgrade Vietnam within the next 12 months, leading to more than $500 million of passive inflows, and a likely revision from MSCI Inc., JPMorgan Chase & Co. analysts Khoi Vu wrote in a note. The country may get up to $1.7 billlion in passive inflows following its inclusion into FTSE indexes, said Hoang Viet Phuong, head of research and advisory center at SSI Securities Corp.
Foreigners have turned net buyers of local stocks over the past week, supported by the Vietnamese dong’s appreciation in September, which reflects the nation’s robust economic growth and political stability.
Increased inflows would help the country meet its goal of raising the market value of its stock market to between 100% and 120% of gross domestic product by 2030. The government also aims for a stock market upgrade next year.
“While immediate additional foreign inflows may remain modest, this approval marks a pivotal step in regulatory reform,” said Tyler Manh Dung Nguyen, chief market strategist at Ho Chi Minh City Securities Corp.
The next review by FTSE is due on Oct. 8. Brokerages, custodian banks and investors will focus on the paperwork needed to implement the rule change, SSI’s Phuong said. After implementation, FTSE will give their clients several months to test the process, with September next year being likely target for its upgrade decision, she said.
Under the circular issued late Wednesday, brokerage firms will assess the risk to determine the pre-funding ratio for foreign institutional investors when placing purchase orders. If an overseas investor fails to complete the payment, the liability will be assumed by the brokerage.
--With assistance from John Cheng.
(Updates with analysts comments, details through out)
©2024 Bloomberg L.P.
