By Thien Ly

So far this year the State Bank of Việt Nam has bought over US$10 billion in foreign exchange, increasing the country’s reserves to a record high of more than $40 billion.

The figure is up sharply from $28.6 billion (equivalent to 1.9 month of imports) late last year. 

One of the reasons for the huge foreign exchange buying is banks’ massive liquidity.

For instance, as of late July broad money supply was VNĐ7,489 trillion ($334.33 billion), a 12.5 per cent increase from the end of 2015. Of the figure, 74.9 per cent was in the banking sector.

In the period, bank deposits rose 11 per cent while lending grew at only 9.2 per cent.

To mop up some of the money, the central bank has consistently bought the greenback and also stepped up issuance of short-term treasury bonds in đồng.

It has also mobilised more than VNĐ128 trillion through open market operations, buying $97 million equivalent on September 9 and $101 million three days later. 

Through all these measures, the đồng has remained steady against the dollar at VNĐ22,300-22,350.

In addition, credit default swap (CDS) rates tended to slightly decrease and forward rates have remained unchanged for several months. From these, the conclusion is the current exchange rate is rather stable.

Another reason for the foreign exchange rate stability is the plentiful availability of the greenback.

By August 20 disbursements for the year by foreign investors topped $9.8 billion, an 8.9 per cent rise from the same period last year.  

Meanwhile, demand for foreign exchange has shown no signs of increasing because imports have tended to go down in recent months. As of August 15 imports for the year were $102.36 billion, down 0.4 per cent year-on-year.

All this means there will not be too much pressure on the foreign exchange market during the rest of the year.

Analysts expect no volatility in exchange rates during the period. 

But they said the Government and the central bank should identify the targets that need to be given priority and regulate exchange rates based on them.

They suggested that the central bank should consider greater use of derivatives such as options to create tools to support risk prevention and management.

By doing this, it would also diversify the financial tools available in the market, bringing it in line with the rest of the world, they said.

Firms hail new decree

The long-awaited Government Decree No 60/2015/NĐ-CP providing guidance for a number of articles in the Law on Securities, especially foreign participation in the stock market, was issued in June last year.

One of the most welcome points in the decree, which took effect this month, is the removal of the 49 per cent cap on foreign ownership of public companies.

But it lists certain cases where foreign ownership will still be restricted, such as certain sectors under Việt Nam’s international treaties and those restricted under the Law on Investment.

If specific foreign ownership caps for such sectors have not been announced yet, they will remain at 49 per cent.

Many securities experts hail Decree 60 since it provides a complete policy framework for attracting foreign investment.

After the decree took effect, many companies have begun increasing their foreign ownership.

In May Việt Nam Diary Products Joint Stock Company (Vinamilk) decided to scrap the 49 per cent limit at its annual shareholders meeting.

It also eased the criteria for choosing foreign investors to create more favourable conditions for the imminent divestment by the Government.

After the foreign ownership limit went at Vinamilk, many foreign investors vied with each other to invest in the company, most of them exchange –traded funds (ETFs).

An ETF is an investment fund traded on stock exchanges, much like stocks, that holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day.

The FTSE ETF Fund, for instance, has announced it has added VNM and HSG to its portfolio.

Nguyễn Hữu Bình, head of the research division at the Việt Nam Investment Securities Company (IVS) said V.N.M ETF will also put VNM into its category .

Foreign investors own 48.72 per cent of VNM, with the State Capital Investment Corporation, Việt Nam’s sovereign fund, owning 45.06 per cent.

It is expected that the two ETFs might buy 10 million shares of VNM, which will have a positive effect on the share as well as the VN-Index.

Market observers said to raise money to buy VNM, the ETFs had to sell some of their blue chips since its price is high.

Domestic Medical Import-Export Company (Domesco, or DMC) is also in a similar situation.

It said recently it has completed necessary procedures to allow foreign investors to own 100 per cent of the company.

Soon after the information was released, Abbott, through CRF International SPA (Chile), a subsidiary, registered to buy two million shares.

What is the likely outcome if foreign investors are allowed to buy 100 per cent of Vietnamese companies?

Recently VNM shares were relentlessly sold by foreign investors.

An analyst from MB explained that foreign investors who have kept VNM shares for several years found it is high time for them to sell and book profits since the price has risen to record levels after the foreign ownership cap was scrapped.

The large sums of money they will get from selling VNM will help them restructure their portfolios by buying other potentially lucrative stocks like Sabeco and Habeco.

However, pharmaceutical companies such as DMC may have the most things to say after the foreign ownership limit was lifted there.   

Grant Thornton’s healthcare and pharmaceuticals industry survey carried out in July shows the pharmaceutical industry ranked third in the list of most attractive sectors behind only retail and food and beverages.

Institutional investors and foreign strategic investors greatly appreciate the pharmaceutical industry thanks to its growth potential given that consumers are paying more attention to healthcare, food safety and the environment.

The prices of shares in this sector have gone up sharply this year.

DHG has risen by 65.4 per cent, TRA by 78.8 per cent, and Domesco by 191.3 per cent.

After DMC shareholders voted to scrap the foreign ownership limit, many other drug companies are expected to follow suit.

But there are conflicting opinions about the benefits of lifting the foreign ownership cap.

Leading pharmaceutical companies like DMC, DHG, IMP and TRA always interest foreign investors since they have a nation-wide distribution network, which is considered a very important factor for foreigners to quickly integrate into the Vietnamese market.

Many experts have in fact expressed concern that local drug companies could be snapped up by foreign investors with the removal of the ownership cap.

They fear many big Vietnamese brands could be wiped out as a result of this decision.

They cite the example of DMC. They point out that Abbott succeeds in buying the two million shares, its ownership ratio will increase to 51.7 per cent and turn the company into its subsidiary.

DMC shareholders alone have registered to sell 750,000 shares.

Other experts are happy to have foreign investors fully owning domestic companies, saying this will improve funding, management and technologies.

They say the most important goal is to provide consumers with high quality products at reasonable prices, and allowing 100 per cent foreign ownership will help realise this.      

This will also result down the line in creating employment and fostering economic growth, they add. — VNS