Vietnam Rethinks FII Boost

Vietnam Rethinks FII Boost

Vietnam has made significant achievements in attracting foreign direct investment (FDI), which currently represents one-eighth of the country’s gross domestic product (GDP). However, foreign indirect investment (FII) remains limited. Meanwhile, it is an urgent task for a developing country like Vietnam to capture both FDI and FII.

Mr Christ Freund, Managing Director of Mekong Capital said, "FII is the investment channel, which is realised via intermediary financial institutions such as investment funds.”

Talking about the real FII situation in Vietnam, Mr Nguyen Hoang Hai - Secretary General of the Vietnam Association of Financial Investors (VAFI) pointed out that foreign investors have so far poured in only US$200 million in direct investment in around 70 Vietnamese joint stock companies (operating under the Business Law). Most of the foreign investment institutions are small-sized funds, he said, adding that now there are only six operational funds with total capital of US$241 million. Another six funds prematurely terminated their activities in Vietnam and withdrew approximately US$250 million out of the US$390 million they mobilised to invest in Vietnam.

The representative offices of the two Japanese multi-national securities groups of Nomura and Daiwa have closed up shop after nearly five years of operations in Vietnam. A number of newly established funds (since 2001) are of a smaller scale than those in the 1991-1997 period, averaging US$5-20 million each. Fund managers expect to mobilise more capital into Vietnam but face numerous difficulties. Foreign individual investors now make investments in listed shares.

Economic analysts said that there had been few foreign strategic investors pouring their capital into Vietnamese enterprises (only in five privatised enterprises with an ownership ratio of under 20 per cent) despite the government having accelerated equitisation of State-owned enterprises (SOEs), even those in banking and insurance sectors, for more than 10 years.

Despite the government having established the stock market four years and privatised more than 1,500 enterprises, of which over 200 firms meet the requirements for listing on the stock exchange, FII has remained sluggish.

The FII capital source is equal to just 1.19 per cent (in 2002) of total FDI in Vietnam while the proportion in other regional countries ranges between 10 per cent and 15 per cent, Mr. Hai said, adding that the 30 per cent cap of foreign ownership in joint stock firms [listed and non-listed ones] has decreased the liquidity of shares, preventing local enterprises from raising capital. This is particularly problematic at a time when the Vietnamese bourse is still in its fledgling stages with few institutional investors and market founders. The number of individual investors is small and most of them are unprofessional in financial investment.

In the next three years, as many as 2,000 businesses will go public, which will generate a bountiful source of commodities for the bourse, Mr Hai said.

Concerning methods to boost FII development in Vietnam, Ms Pham Chi Lan, a member of the Prime Minister's Research Commission said that the government of Vietnam should primarily focus on five key matters.

Firstly, Vietnam ought to work out a clear and transparent policy system as part of Vietnam’s market economy development strategy to attract more FII. FII should be considered as a major type of investment in the new investment law, which is being drafted. The government of Vietnam must name prohibited and restricted fields/industries as well as limited proportion of FII among these fields/industries. At the same time, Vietnam should facilitate investors and investment enterprises to make decisions on ownership structure and management power in accordance with the Corporate Law. Furthermore, chapters on joint stock companies and enterprise structure conversion under the Corporate Law 1999 should be amended and made clearer to create favourable conditions for joint stock multiplication. Vietnam needs to improve its competitive mechanism, perfect its accounting and auditing system and establish a friendly investment environment to appeal to local and foreign investors.

Secondly, it is necessary to strengthen training activities and the management capacity of State-run enterprises. Thirdly, State-owned enterprises must be restructured while private businesses need to be extended, creating a level playing field between internal and external enterprises. Fourthly, it is essential to improve the banking system, credit institutions and promotion of the stock exchange. Open policies should be carried out to boost other capital market channels and financial services in Vietnam, enabling the private sector to further involve itself in these activities and offering more chances to overseas enterprises. Finally, Vietnam needs to strictly abide by international commitments and enhance cooperative relations in expanding the capital market and relevant services. Concurrently, the State should step up cooperation and investment in the unhindered and unrestrained spheres among domestic and foreign enterprises in various forms and directions.

• Kim Phuong