The Prime Minister recently issued Decree 60, which will increase the caps for foreign stakeholding in local companies. Viet Nam News spoke with Chris Freund, partner at fund management firm Mekong Capital, about its likely impact on the stock market.
What do you think will be the impact of the decree on the Vietnamese stock markets?
There will be many positive impacts. More foreign institutional capital will be attracted to Viet Nam's stock market, valuations in the stock market will rise, trading liquidity will increase dramatically among foreign investors, there will be more opportunities for foreign private equity investors to invest in majority stakes in companies, it will be easier to sell companies in a trade sales to strategic investors, Viet Nam will get into the MSCI (Morgan Stanley Capital International) Emerging Markets Indexes which will attract even more capital to Viet Nam, etc. This is a significant change that significantly integrates Viet Nam with the global economy and global capital markets.
The speed of State-owned enterprise (SOE) equitisation has been slow. Do you think the new decree will help speed up the process?
Unfortunately not. Recently, in large equitisations, the government proposed to sell only very small ownership stakes, such a-s 3 per cent to 20 per cent. So even though the new decree allows for higher foreign ownership, the Government may choose not to sell large stakes to outside investors. I also think there is a lot of corruption in SOEs which is an obstacle to the equitisation process.
Do you think this is a big step towards international practices? Will it help attract more foreign indirect investment to the country?
Yes. The main areas in which Viet Nam has yet to achieve global capital markets standards are foreign ownership limits, the centrally controlled exchange rate, and the large amount of corporate equity which is owned by the state (and therefore run inefficiently). So removing the foreign ownership limits is a major step towards open capital markets.
n Do you see any move on the part of foreign investors, especially institutional, to tap the opportunity? And what about Mekong Capital? Can you tell us about your plans?
More foreign funds will hire an analyst in Viet Nam, more will visit here regularly. Since Mekong's funds are private equity, there is less direct impact on us, but it probably makes the process of selling investments even easier for private equity investors such as us. For example, we are holding shares of MobileWorld, PNJ and FPT, which are all at the 49 per cent foreign ownership limit. I would expect the valuations to rise and the liquidity to increase if foreign investors were able to own more than 49 per cent of any of those companies.
The positive changes that Decree 60 will bring to the Vietnamese stock market notwithstanding, which aspects still need to be improved?
Removal of the economic needs test (ENT) for retailers would also be very helpful. The ENT is a requirement that any company with more than 49 per cent foreign ownership must get case-by-case approval from local authorities to open a retail space of above 500sq.m, and it can be difficult to get the approvals. The ENT is a hidden barrier to foreign investment, and slows down the development of the retail sector in Viet Nam. And investing in retail in Viet Nam is very attractive because currently the markets are so fragmented with many small players. Also, the quality of management of most retailers in Viet Nam is quite low compared to international standards, even if compared to regional countries like Thailand, Indonesia or the Philippines. This provides a great opportunity for investors like us who can add value and help develop the management teams. By now, Mekong Capital has developed strong expertise in retail.
Do you expect a wave of foreign investment in Viet Nam after Decree 60 takes effect?
Foreign institutional investment in public equities will increase significantly. This, combined with the impact of TPP, could easily result in three to five times more foreign trading of Vietnamese securities. Instead of foreigners being 5-10 per cent of market trading per day, I would expect it could increase to 25 per cent like in Thailand.
With the regulations amended, does your new fund, Mekong Enterprise III, plan to own majority stakes in any enterprise?
Yes, removing the foreign ownership limit is great news. And yes, it opens up the possibility of MEF III holding more than 49 per cent of a public company, so this would make it easier for us to potentially do buyouts.
Furthermore, it also makes exiting easier because if our funds are a minority shareholder in a public company now, it will be possible to sell a majority stake of the company to a foreign strategic investor. —VNS