According to reports, the government of Vietnam is set to make an announcement on 1 July this year where it will remove its current limits on foreign ownership of banks and other companies.[i]
The current situation sets a limit of 30 percent foreign ownership of banks and 49 percent ownership of other public companies (the latter being similar to Thailand’s laws).
There are plenty of skeptics who suggest the decree will not be forthcoming in July and in fact will probably not happen at all before January 2016 when the Communist Party’s 12th Congress is set to take place. It will be at this Congress where new national leaders are selected, and doubters suggest the current regime will not be making too many radical decisions before then.
Nonetheless, a change is almost certain within a foreseeable time frame simply because Vietnam depends on foreign capital to spur growth. The top echelons in Hanoi are naturally concerned about losing control of its major state-run companies, such as Vietnam Oil and Gas and the dairy producer Vinamilk, but, equally, they recognize the need to attract further foreign investment to allow these major sources of revenue to expand.
Currently there are plenty of foreign investors, both financial institutions and individuals, with stakes in some of Vietnam’s key industries from steel, retail, petrochemical and financial services companies.
At present, foreign institutions own an estimated 10 to 15 percent of public companies in Vietnam. Yet, there is still enormous room for growth with foreign direct investors keen to acquire shares in the top 50 companies on the Vietnamese stock exchange.
That some kind of decree is forthcoming is almost certain, although the 1 July date is really only an educated guess. As many foreign investors have noted, this is not the first time an announcement has been predicted, and then failed to materialize.
As well, even after an announcement is made, the specific follow-up regulations will take time.
Some pundits suggest the government will impose restrictive voting rules on majority foreign shareholders to minimize potentially damaging managerial decisions.
Among prominent foreign institutions that currently hold stakes in Vietnamese shares are the U.S.-traded Deutsche Bank, and Dragon Capital, which owns a Ho Chi Minh City asset management firm and manages local equities funds.
As at the end of March this year, the British institution HSBC Global Asset Management ranked Vietnam in eighth position on its HSBC Frontier Markets Fund with 3.7 percent of the total investment of the fund’s total investment.
The financial services company Schroder, based in London, also counts Vietnam among its frontier markets equity fund.
Long-term confidence in the Vietnamese economic model was further supported recently when the private equity firm Mekong Capital, based in Ho Chi Minh City, announced that it would be making investments from its fourth fund in a matter of weeks.[ii]
According to reports the new fund will have a US$150 million target, and has so far raised almost 60 percent of that figure. The fund will have a 10-year life span and all investments will be limited to Vietnam.
Mekong Capital has been involved in a series of ventures in previous years, including Golden Gate, Mobile World and Phu Nhuan Jewelry.
Chris Freund, who heads Mekong Capital, said the plans are to invest in around 10 companies which look to be on the fast track to success over the next four years. The companies they are looking at will just be in the consumer sector, including restaurants, retail outlets, pharmaceuticals, healthcare and education.
Freund said that even when times have been tough in a macroeconomic sense at times over the last decade (eg, the 2008 GFC), consumer spending has grown year on year.
Even so, Vietnamese consumer spending has lagged in real terms behind the likes of China, Indonesia and Thailand, and Mekong Capital sees great and continuing growth potential into the future.
As more and more companies expand their retail outlets into the provinces, Mekong Capital expects the consumer spending numbers to continue to grow at annual double-digit numbers.
According to Freund, the biggest challenge is finding well-managed companies in which to invest their funds. Mekong Capital looks to hold a 25 to 35 percent stake in companies they perceive are well-managed and well-run. Freund said his teams look not just at the financial prospects of a company but just as much at the overall corporate ‘culture’ and management structure.
Since it first came into the Vietnam business marketplace, Mekong Capital has established three investment funds and between them they have invested in 26 companies. None of those investments exceeded 15 percent and, as at the start of June this year, Mekong Capital had fully exited 16 of those investments.
Freund said the company plans to exit at least two or three more of its existing 10 investments in coming months.
He noted that Mobile World was one of Mekong Capital’s greatest successes, having grown more than 15 times since they took a percentage of the business. Golden Gate was another major success, having returned investors nine times their initial outlay.
The biggest drawback at present to foreign direct investment, apart from the current percentage rules, is operational transparency.
At a recent meeting between the Minister of Planning and Investment and local and international investors, the minister ‘pledged to quickly remove the hurdles of procedures that delay the grant of an investment licence…’[iii]
The minister noted that some of the bigger European firms were finding it hard to penetrate the Vietnamese market because of a lack of transparency.
Nonetheless, the process for starting a business has been halved to just five steps and the total time taken to formulate the establishment is now down to six working days, where previously it was 31.
Even if the announcement lifting the limits on foreign ownership of public companies is delayed yet again, the reality is that Vietnam’s administration is continuing to move towards its ultimate goal of becoming one the strongest ‘tige’ economies in Southeast Asia.