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Vietnam's Ten-Year Quest for Emerging Market Upgrade Lingers On After Latest Setback

Vietnam's stock market upgrade to emerging status has been delayed due to the State Securities Commission's rejection of a new trade clearing system proposed by the Ho Chi Minh City Stock Exchange. This setback has significant implications for the market, which was anticipating an influx of foreign capital estimated between $1.5 billion and $10 billion with the upgrade. The delay could have broader economic consequences, including a potential reduction in foreign direct investment and slower growth in the financial sector.

Vietnam's stock market is part of the frontier index, and the upgrade would have seen its inclusion in emerging market indices, attracting more capital due to the higher investment mandates for emerging markets. As of now, the market cap of Vietnam's stock market stands at $240 billion, highlighting its growth and the high stakes involved in this upgrade process.

Vietnam’s aspirations to expedite trade settlements on its premier bourse suffered a setback after the market regulator, the State Securities Commission (SSC), rejected a proposal from the Ho Chi Minh City Stock Exchange (HOSE) to launch a new trade clearing system.

The new system was scheduled to launch on May 2, 2024, according to an April 25 statement from Vietnam's SSC.

The new system is thought to be required in order to satisfy international investors who would like to upgrade Vietnam to an emerging market country. The upgrade from frontier to emerging market status would inject anywhere from $1.5 billion to $10 billion in additional foreign capital into Vietnam.

Upgrading to emerging market status would lure more capital because being included in the emerging market indices, such as MSCI, means more funds are mandated to invest. There are few funds mandated to invest in markets in the frontier indices. The upgrade would also improve investor perception since emerging markets are perceived as more stable and less risky than frontier markets.

Vietnam's stock market capitalization has grown significantly in recent years, reaching $240 billion in 2023, up from $100 billion in 2019. This growth reflects the increasing interest of foreign investors in the Vietnamese market, which could be further enhanced with an emerging market status upgrade.

Vietnam began the process of upgrading its stock market infrastructure 10 years ago, and is now in the final stages of completing the upgrades. The slow rollout is due in part to the complexity of the integrations required, and large number of stakeholders who have to agree or be compelled to participate.

Other countries have managed to overcome the challenges quicker than Vietnam. Qatar and the UAE were both upgraded to emerging market status, from frontier, in 2014. Both began the process of integrating the new technology between 2009 and 2010.

Political observers in Vietnam point to competition between Hanoi and Saigon as a potential cause of the delays. Hanoi holds the political power, but Ho Chi Minh (i.e., Saigon) is the commercial hub. Each city has its own stock exchange and Hanoi understands that an emerging market upgrade would mean more influence and capital flooding into its competitor to the south.

Some of the changes investors require in the regulatory framework and stock market infrastructure is to limit the role of future governments to interfere improperly. Post-upgrade, Hanoi will have less influence over the nation's stock markets and a richer more emboldened Saigon to contend.




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