Vietnam Stock Market and Implicit Risks

 

 

The Vietnamese stock market, which began operation in 2000, has become a long-term capital mobilisation channel for investment and development. As of late 2006, a total of 193 companies were listed on the stock market, with a combined market capitalisation of some US$14 billion, accounting for 23 per cent of 2006 GDP. In addition to stocks, the market also has other financial tools, like VF1 and Prudential fund certificates.

 

The number of intermediary financial organisations and investors also soared. To date, 55 securities companies, 16 fund management companies and six custodian banks are in operation. The number of retail investors increased sharply to some 130,000 transaction accounts, including around 2,000 accounts of foreigners holding 25-30 per cent of listed shares.

 

In the past year, the VN-Index more than trebled. Since November 2006, the VN-Index nearly doubled and trading volume quintupled. On the OTC market, trading volume and securities price are also rising very sharply, especially securities issued by commercial joint stock banks.

 

 

Although market capitalisation was equal to 23 per cent of GDP, market size was still much smaller in than regional countries (some 30-40 per cent of GDP on average), Mr Truong Hung Long from the Department of Finance and Banking under the Ministry of Finance told the seminar. He said increasing market capitalisation resulted from not only the large issue of new main stocks like Sacombank, ACB, Bao Minh (Insurance) and Pha Lai Thermoelectricity, but also the price rise of shares issued by listed companies and future listed companies.

 

However, apart from several big companies which have stable business operation and growth, the majority of listed companies are small elements in the national economy and are not representative of industries that significantly contribute to the Vietnamese GDP. Long said this is the reason for the sharp increase of VN-Index. In addition, intermediary financial and market supporting organisations have limited financial and professional capacities. This impacts the market penetration of market oriented companies, and the operational networks of securities companies only focusing on major cities.

 

Mr Do Ngoc Huynh, chief of Policy Advisory Group (PAG) under the Ministry of Finance, said the stock market concentrates risks of the economy, from micro risks related to investor behaviour and business results of listed companies, to macroeconomic risks related to exchange rate, inflation and economic growth. He expressed his fear of the stock market bubble resulting from imbalanced supply and demand and speculation psychology, not based on actual economic or profit capacity of listed companies. According to Huynh, the short-term sharp rise of VN-Index is an abnormal phenomenon. These, in combination, are sensitive factors to social and economic development.

 

At present, a considerable proportion of investors and policymakers believe the stock market boom is in line with expectations of Vietnam’s post-WTO economic growth, in addition to increasing foreign investment capital inflows. However, Long said, the increase of capital flows in the integration process is reversible, leaving potential serious imbalances in the economy, especially in the banking system. This would cause huge impacts when capital inflows are from private sources and when the economy is unable to absorb new capital inflows, while management over capital inflows at macro levels and forecast activities are unable to keep up with new development.

 

According to its WTO entry commitments, Vietnam will allow the establishment of representative offices and joint ventures with 49 per cent foreign investment capital immediately after admission. Five years after admission, it will permit the formation of wholly foreign-owned securities companies and the setup of branches of securities service companies specialising in asset management, investment fund management, custody and other securities-related activities. Long said domestic securities are easily acquired, merged, or go bankrupt if they are not strong enough. Additionally, integration will increase speculation activities and control over Vietnamese companies by foreign entities.