Vietnam warming to foreign portfolio investment
Almost a decade after the Asian financial crisis bought regional economies to their knees and highlighted the risks associated with portfolio investment, Vietnam is slowly opening its doors to foreigners willing to invest money but not time in its economy.
Almost a decade after the Asian financial crisis bought regional economies to their knees and highlighted the risks associated with portfolio investment, Vietnam is slowly opening its doors to foreigners willing to invest money but not time in its economy.
Hanoi has traditionally focused on attracting direct investment into its companies. Fearful of exposing a fragile economy to uncontrollable currency flows, it has shied away from the kind of equity and debt investments preferred by portfolio managers.
"They saw 1997. They saw what happened to Thailand," said Baker & McKenzie lawyer Oliver Massmann in Hanoi. That's beginning to change, thanks largely to the country's growing need for capital.
With growth in gross domestic product averaging more than 7 percent each year, traditional funding sources such as domestic bank deposits and donor aid can no longer meet Vietnam's needs.
To pay for the huge infrastructure developments Hanoi needs to keep the economy growing, it must tap overseas markets. The country sold its maiden sovereign bond, a US$750 million (HK$5.85 billion) 10-year issue at a yield of 7.12 percent Thursday.
Vietnam's need to access an estimated US$3 billion that is held outside the banking system is also behind the cautious welcome now extended to portfolio investors.
Hanoi had hoped to draw money into the economy via a stock market that it launched in 2000, but the market has so far failed to grow in line with expectations. To boost trade, regulators Monday increased the limit on foreign ownership in listed firms to 49 percent from the previous 30 percent.
"We're moving ahead to create growth for the market," said State Securities Commission deputy director Vu Bang.
Hanoi hopes that, by drawing in more investors, it can create a virtuous circle through which improved liquidity will encourage domestic investors to put their money in stocks and, in turn, persuade more companies to list.
Both the bond and the equity ruling were greeted with enthusiasm.
The bond, awaited by fund managers for almost a decade, created an order book worth US$4.5 billion and was sold at a yield much lower than other comparable Asian debt.
"It really put Vietnam on investment banks' maps," said Dragon Capital director John Shrimpton in Ho Chi Minh City.
The sovereign should lead to offshore corporate bond offerings from major state firms like Vietnam Airlines and PetroVietnam.
"We want to make a benchmark. Once we've done this, it will be easier for us and others to come to market," said a government spokesman Thursday.
Meanwhile, the equity ruling has proved "an extremely positive development," Shrimpton said.
The benchmark VN Index rose 20.6 percent to 306.9 points Monday from 254.5 at the end of August, when rumors first surfaced that foreign ownership limits would be raised.
"It's the first step in a long process to open the economy," said Bang.
The shift hasn't gone unnoticed. "For the first time in our 11 years here, investors are chasing us instead of us chasing them," Shrimpton said.
Yet foreign investors still have few options. Those hoping to access Vietnam's offshore debt are limited to the new sovereign, which may not be followed by other government issues for a long time. Officials insists they prefer to use cheaper concessionary donor aid or local funding when possible.
Although some state firms could borrow overseas a year or so from now, most will take much longer to go to market. One example is Electricity of Vietnam, the country's power monopoly.
It urgently needs money to double power generation by 2010 but the slowly reforming state-owned firm is unlikely to complete all the preparations needed to tap foreign markets for several years, analysts say.
Portfolio buyers wanting to invest onshore, either in stocks or domestically traded government bonds, must first bypass regulatory hurdles that impede market access.
Foreigners without representation in Vietnam must either invest through one of the few funds operating in the country - Dragon's VEIL fund (capitalized at around US$124 million) is the largest.
Others include Vinacapital's Vietnam Opportunities Fund (around US$92 million) and PXP's US$24 million Vietnam Fund - or must give power of attorney to a Vietnamese broker to transact trades on their behalf.
Because domestic brokers have no track record, "no serious investor is going to do that," said Shrimpton.
Even if buyers do navigate entry into the market, the ruling allowing them a 49 percent stake in listed firms still leaves them with few investment options.
Most Vietnamese shareholding companies are traded unofficially on an over-the-counter market that requires no transparency. The official exchange is capitalized at only around US$400 million, but the OTC market cap is thought to be at least six times that.
"It would be an adventurous investor" who would trust their money to an unknown broker just to access a US$400 million market, Shrimpton noted.
Efforts to list OTC-traded companies have so far failed. While Vietnam is undeniably liberalizing the rules that govern foreign portfolio investment, future change will be incremental.
Dow Jones Newswire - November 1st, 2005.
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