1. Economic and political context of Viet Nam
Since the Doi Moi reforms in the 1980s, Viet Nam has emerged to become one of the most dynamic economies in the Southeast Asia region, mainly thanks to its export-oriented, foreign direct investment-led economic model. This chapter summarises how Viet Nam is undertaking reforms to further encompass trade and investment liberalisation and how the country is further integrating within global capital markets.
1.1.1. Economy
The Vietnamese economy has seen remarkable growth in the last 30 years, transforming itself from one of the poorest in the world into a lower middle-income country. GDP per capita has multiplied almost six-fold over the course of 34 years, doubled every decade, making Viet Nam one of the fastest growing countries in Southeast Asia (OECD, 2020[1]). Viet Nam acceded to the Association of Southeast Asian Nations (ASEAN) in 1995 and the World Trade Organisation in 2007. With the coming into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the EU-Viet Nam Free Trade Agreement (EVFTA), and the Regional Comprehensive Economic Partnership (RCEP) within the last three years, Viet Nam is expected to integrate even deeper into global supply chains.
Since the Doi Moi reforms in 1986, the Vietnamese economy has been restructured from agriculture-centred production to a modern, foreign direct investment-led manufacturing economy. Internationalisation has been swift. Exports have expanded at a rate of 106% over the last five years, and as of 2020, Viet Nam’s share of trade (export and import) to GDP is 200%, one of the highest in the world. The country is also an important destination for foreign direct investment as USD 3 billion worth of FDI is registered on average per month as Viet Nam become a central manufacturing and assembly hub in several global value chains (World Bank, 2022[2]). Since 1990 Viet Nam has attracted average foreign-direct-investment inflows worth 6% of GDP each year, exceeding twice the global level (OECD, 2020[1]).
The recently signed international trade and investment agreements have as one of their goals to subject previously shielded domestic sectors (e.g. finance; retail) to foreign competition and bolster those sectors of the Vietnamese economy that focus on domestic demand. This could trigger transformation of the sectors and allow a broadening of inward FDI from setting up low-cost production facilities in Viet Nam, to more broadly based commercial strategies taking advantage of Viet Nam’s large home market. A short-term effect would be enhanced consumer welfare through cheaper supply ranging from staple food to pharmaceuticals, whereas Vietnamese entrepreneurs are expected to benefit in the longer run.
Key challenges for maximising the benefits from foreign corporate presence is upgrading domestic firms to capture a greater part of the corporate value chains and move to more high-tech and more value-adding activities. Regarding SOEs in general, and their linkages with the emerging private enterprise sector in particular, it remains somewhat limited by the dominance of SOEs in a number of sectors, including the extractive industries, electricity, telecommunication and finance. Further reform is foreseen mostly through equitisation of more companies.
1.1.2. Government
After the end of the Viet Nam War the country was structured along the Soviet model of organisation of the state and the economy, endorsing a planned economy with collectivisation of agriculture, strong capital accumulation, and a rapid industrialisation driven by SOEs. However, the initial pursuit of central planning and self-reliance as principles of economic management quickly proved untenable. The Communist Party as Head of the government decided to introduce Ðổi Mới reforms in 1986 in which the market is the organising principle of the economy. Today’s system is referred to as a law-ruled socialist market economy. The 2013 Constitution designated the state to play the leading role, providing favourable environment for the private sector on the basis of respecting market rules.
The political and administrative organisation remains socialist with the Communist Party of Viet Nam as the supreme institution (OECD, 2020[1]).The 2013 Constitution and the Land Law 2013 gave power to the State to perform ownership rights as representative of the people. As such, the State remains the owner of the land. Individuals, enterprises, or organisations are granted “land use rights certificate” in accordance with the law. Foreigners can retain the land use rights up to 50 years while local can retain indefinitely (Quoc Thai, 2021[3]).
The division of powers of state is as follows. The Communist Party, through its General Secretary, leads the State’s ideological and political trajectory. The National Assembly is the highest-level representative body of the people, with its members elected by the citizens every five years. The State President is the Head of State, elected by the National Assembly from among its deputies. The Prime Minister is the Head of Government, which in addition to him/her consists of Deputy Prime Ministers, Ministers and other high-ranking Party members. The government has the same five-year term of office as the National Assembly.
As for the Communist Party, together with the General Secretary, a four-member collective leadership known as the “four pillars” constitute the Politburo. A new Politburo Cabinet was elected during the 13 National Congress of the Communist Party of Viet Nam and the National Assembly Congress, concluded in February and May 2021, respectively. The Party General Secretary remains Nguyen Phu Trong, the primer Prime Minister Nguyen Xuan Phuc becomes the State President, the new Prime Minister Pham Minh Chinh was elected, and the primer Deputy Prime Minister Vuong Dinh Hue becomes Chair of the National Assembly.
1.1.3. Legal system
Vietnamese legal system bases on civil law which is laid out in the 1992 Constitution of Vietnam. The Constitution is the fundamental law of the State and has the highest legal effect, amendable only by the National Assembly upon at least two-thirds of its total parliamentarians. Over the last 30 years, there had been three amendments to the Constitution, including promulgating the 1992 Constitution to replace the 1980 Constitution; amending and supplementing the 1992 Constitution in 2001 and promulgating the 2013 Constitution (OECD, 2020[1]).
The Vietnamese law system includes three fundamental elements: 1) legal norms (elementary unit of the system), 2) legal classes (group of legal norms that have the same features and regulate a group of correlative social relations), 3) legal branches (system of legal norms that have the same specialities to govern a sort of social relations in a certain field of society). The judiciary system includes the Supreme People’s Court, local People’s Courts, Military Tribunals and other tribunals established by law. Various legal branches specialise in fields of law including (but not limited to) finance, labour, commercial and administrative law.
1.1.4. Business environment
Vietnamese business environment has improved over the last years. The World Economic Forum’s 2019 Global Competitiveness Index ranks Viet Nam 67 out of 141 economies, jumped ten places compared to the previous year, becoming the most improved country of 2019 (OECD, 2020[1]). Viet Nam’s Global Competitiveness Index score reached the all-time high at 61.543 Score in December 2019 (OECD, 2020[1]) (see Figure 1.2).
At the same time, Viet Nam remains behind several of the other Southeast Asian countries such as Indonesia, Thailand, and Malaysia, particularly in terms of sub-indicators such as the ease (or the opposite) of starting a business, paying taxes, resolving insolvency and trading across border. Viet Nam only scores 85.1 on a scale of 100, ranks 115 at the Starting a Business Score, for example. It is further reported that paying taxes in Viet Nam would take businesses 384 hours, compared with 64 hours in Singapore, 174 in Malaysia and 191 hours in Indonesia. In the World Bank’s Doing Business Index 2020, Viet Nam scored lower than Indonesia, Malaysia and OECD high income countries in terms of protecting minority investors.
The government has taken some recent steps to improve. Viet Nam has seen some improvement in efficiency of legal frameworks, notably linked to structural reform efforts to boost FDI. These should allow firms to reduce their tax payments and to accelerate their trade procedures. With the CPTPP taking effect on 14 January 2019, the EVFTA came into force in August 2020, and the RCEP entered force on 1 January 2021, Viet Nam is undertaking reforms to further encompass trade and investment liberalisation and facilitation.
Note : 2020 and 2021 data is not yet available in public domain.
Source: The Global Competitiveness Report 2019, World Economic Forum, https://www.weforum.org/reports/global-competitiveness-report-2019/
1.1.5. Capital markets
In 2000, Viet Nam’s first stock market officially came into operation through the establishment of the Ho Chi Minh City’s Stock Trading Centre (HOSE), followed by the Hanoi Stock Trading Centre (HNX) establishment in 2005. Both centres were upgraded to stock exchange centres in 2007 and 2009, respectively. The market capitalisation of HOSE in 2020 surpassed USD 170 billion while HNX retained a fraction below USD 10 billion. One of the main reasons for the significant gap being Ho Chi Minh City’s reputation as a more dynamic and vibrant market that attract big companies’ listing; whereas the political capital Hanoi tends to attract the listing of smaller companies.
Viet Nam’s equity markets have grown briskly in recent years, with the overall market size expanding from less than 40% of GDP in 2011 to 104% of GDP in 2020. But the markets are still small compared with regional peers and other countries (Figure 1.3). Viet Nam in essence remains a bank-based economy with its securities sector accounting for a relatively limited 32% of total financial assets, while credit institutions holding another 67% (OECD, 2020[1]).
Source: Author calculations based on the World Federation of Exchanges database https://www.world-exchanges.org/our-work/statistics (Market capitalisation). World Bank national accounts data, and OECD National Accounts data files (GDP).
Moreover, a recent OECD study on Asian equity market pointed out that Viet Nam is not yet well integrated within global capital markets. Capital markets are still not sufficiently developed to effectively channel resources into the domestic private sector, and the bond market is predominantly titled towards public sector borrowing. While other ASEAN economies account for a certain portion of share in the MSCI Emerging Market Index (MSCI EM Index), Viet Nam is still considered a “frontier market” without presence in the Index (OECD, 2019[4]). At the same time, the number of Vietnamese listed companies is quite large by regional standards (Figure 1.4). So as markets mature and the valuation of listed companies presumably rise the size and importance of the equity market is expected to grow, supported by the government’s target to reach emerging market status by 2025 and the new Securities Law, which is expected to allow for public companies to increase the foreign ownership limit (FOL) to 50% or above, or to remove it when given approval by the State Securities Commission except for sectors that are important to national security. It is also notable that individual investments or retail investors boomed in the stock market in recent years, with nearly 400 000 new trading accounts opened in 2020 alone (VN Economy, 2021[5]).
Source: World Federation of Exchanges database https://www.world-exchanges.org/our-work/statistics
Continued state ownership is a defining feature of the equity markets. While it is a common phenomenon that stock exchanges operating in advanced economies have transformed to become listed on their own exchange, stock exchanges in Viet Nam are still run as state-owned institutions. Public sector is an important owner of large listed companies with holding being 28% of the capital in Viet Nam’s 100 largest listed companies. Private corporations hold 30% of the capital. Institutional investors only hold 6% and foreign investors’ ownership hold 8.3% (Van&Nghia, 2021[6]).
Finally, an alternative market place called the UPCoM (Unlisted Public Company Market) was launched by the MOF, SSC and HNX in June 2009 with ten initial companies to regulate “over the counter” shares and convertible bonds of unlisted public companies. The aim of UPCoM is to ultimately establish a formal market for the trading of shares of unlisted companies and to reduce the informal “over the counter” market. Admission of a public company’s shares or convertible bonds for trading on UPCoM is obligatory for all public companies. Shares of public companies are required to be registered with the Viet Nam Securities Depository (VSD) (OECD, 2019[7]).
References
[1] OECD (2020), Multi-dimensional Review of Viet Nam: Towards an Integrated, Transparent and Sustainable Economy, OECD Development Pathways, OECD Publishing, Paris, https://doi.org/10.1787/367b585c-en.
[7] OECD (2019), Corporate Governance Frameworks in Cambodia, Lao PDR, Myanmar and Viet Nam, https://www.oecd.org/daf/ca/Corporate-Governance-Frameworks-Cambodia-Lao-PDR-Myanmar-Viet-Nam.pdf.
[4] OECD (2019), Equity Market Review of Asia 2019, OECD Capital Market Series, OECD Paris, http://www.oecd.org/daf/ca/oecd-equity-market-review-asia.htm.
[3] Quoc Thai, L. (2021), “Entire People Ownership Regime on Land and the Nature of Land Use Rights in Vietnam”, International Journal of Scientific Research and Management, Vol. 9(07), pp. 349–358, https://doi.org/10.18535/ijsrm/v9i7.lla01.
[6] Van&Nghia (2021), “Impacts of ownership structure on stock price synchronicity of listed companies on Vietnam stock market”, Cogent Business & Management, https://doi.org/10.1080/23311975.2021.1963178.
[5] VN Economy (2021), Dung ky vong goi ty UDS kich thi truong chung khoan bung no, https://vneconomy.vn/dung-ky-vong-goi-ty-usd-kich-thi-truong-chung-khoan-bung-no.htm (accessed on 28 September 2022).
[2] World Bank (2022), Economic Update for Viet Nam, https://www.worldbank.org/en/news/press-release/2022/08/08/vietnam-s-economy-forecast-to-grow-7-5-in-2022-new-world-bank-report-says.