FII Tends to Rise

 

After the economic crisis in 1997, FII capital inflow to Vietnam tended to increase, but remained small value, particularly compared to foreign direct investment (FDI). Since 2001, several funds in Vietnam had an average capital of US$5-20 million each, smaller than the value in the 1991-1997 period and equal to only 1.2 percent of FDI.

 

In recent years, FII capital inflows in Vietnam have soared thanks to investments on the stock market by international financial groups. At the end of 2006, foreign investment funds injected US$2 billion worth of FII into Vietnam. According to the State Bank of Vietnam, financial investors have recently increased their portfolios in Vietnam. Although the amount is not high (about US$3-5 million per day), inflows have passed outflows. This is a good signal in comparison with FII flows in 2008, when foreign portfolio investors retreated from the Vietnamese market.

 

Dr Luu Duc Hai, an economist, said: FII flow into Vietnam shows investor confidence in the quick recovery of the economy and the stock market and this also plays an important role in balancing foreign trade. In 2009, the economic crisis caused foreign currency supply to fall 9 percent due to lower export value, overseas remittances to decline 15-20 percent and FDI to drop sharply from 2008. FII including investments in shares and debt instruments also decreased, from 8.6 percent of GDP in 2007 to 2 percent of GDP in 2009.

 

However, the Vietnamese stock index climbed 34.67 percent in the first six months of 2009, becoming one of world’s best performers, and rose 80.48 percent from the four-year low in late February. US investors are particularly interested in the Vietnamese market, especially the tourism industry. Hence, nearly 50 percent of FII in Vietnam came from US investors.

 

Based on the experience of developed countries in the region, quick inflows and outflows of FII adversely impact the market. As a result, the forecasting and analysis of investment flows will help the Government control and introduce practical policies to minimise financial risks, avoid excessive reliance on this capital flow and help it quantify impacts of portfolio investment flows on capital market development.

 

In fact, the Government now allows foreign investors to acquire 49 percent stake in Vietnamese companies, up from 30 percent, to attract more FII in the future. Foreign investors are expected to be allowed to acquire 100 percent in Vietnamese companies in 2012, expected to strongly draw capital into the Vietnamese stock market.

 

However, to increase attractiveness while controlling risks, according to Ms Pham Thi Thanh Binh from the Institute of World Economics and Politics, Vietnam needs to adopt groups of solutions. The country needs to raise foreign holding ratios as other regional countries have done, especially in the banking sector. Besides, the Southeast Asian nation needs to open more industries to foreign investors, accelerate the privatisation of state-run enterprises, enhance stock market transparency and stabilise macroeconomic performance. At the same time, Vietnam should widen the door for FII by introducing stimulus policies to encourage long-term operations of foreign investment funds.