Vietnam enacts business reforms to attract FDI

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Investment regulation reforms and the removal of foreign-ownership caps in several industries may help spur capital investment as well as bolster confidence in the Vietnamese economy.

Effective from July 1, the revised Investment and Enterprise Law includes measures such as a reduction in the number of prohibited sectors for businesses, from 51 areas to six. Regulatory and investment requirements have also been eased in order to attract greater private-sector investment, both domestically and from abroad.

The easing of business regulation will also include a streamlining of the foreign investment registration process, which will now take 15 days, rather than the previous 45. In a separate move, the government will allow overseas investors to increase holdings in certain industries, creating more opportunities to invest in state companies.

Seeking higher FDI profile

According to the planning and investment minister, Bui Quang Vinh, the reforms will raise the country’s profile as a FDI destination, with the full effect of the liberalisation and support programme being felt as early as next year.

“In Vietnam, we are offering more incentives in areas such as taxes and land to lure foreign investors,” the minister told Bloomberg in June. “We aim to be among the top four ASEAN countries for FDI by 2016.”

The reforms come at a time when FDI commitments have been slowing, putting government targets at risk. The government forecasts FDI commitments of as much as $23bn this year, up from $21.9bn last year, with FDI disbursements at $12.3bn. But according to data issued by the Foreign Investment Agency, FDI fell by 8% in the January-July period to $8.8bn. Despite a decline in total FDI, actual investments rose by nearly 9% to $7.4bn, with real estate, manufacturing and retail accounting for $3.5bn.

Stocking up

Another measure likely to attract investor interest is the lifting of limitations on foreign ownership of stocks, allowing foreigners to take 100% of voting shares in companies trading on the local bourse.

At the end of June, the government announced it would remove the 49% ceiling on share ownership for foreign investors in many sectors, allowing them to have full voting rights in businesses in a number of industries. However, one sector where limits will remain unchanged is banking, where the 30% foreign-ownership cap will be maintained.

The new stock-ownership measures have been one of the factors driving up share values in recent months, as local investors increase their holdings in anticipation of a wave of demand for Vietnamese shares by foreign buyers beginning in September. The benchmark index has risen by 11% so far this year, in contrast to the MSCI Southeast Asia Index, which fell 12% in the same period.

“The liberalisation of the foreign ownership limits is a hugely significant event for the development of Vietnamese capital markets,” James Bannan, manager of the Frontier Markets Fund at Coeli, told Bloomberg. “The next critical step in opening up the markets is for the government to sell down its ownership interest in a large number of listed companies.”

The government’s decision to remove the share-ownership cap may have been prompted by lower-than-expected sales of state-owned company shares. According to the Ministry of Finance, shares in only 43 of the nearly 300 firms targeted for privatisation had been sold by the end of May, in part due to the low levels of holdings being offered and the share-ownership ceiling.

The opportunity to own a larger stake in the state firms being sold should prompt greater foreign and domestic interest in the privatisation programme, speeding up the divestiture process and spurring economic growth. “We should sell shares at larger proportions to make it more attractive, since investors would want to hold the stakes big enough to allow them to be involved in the companies’ management,” Vinh added.

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