VIETNAM FROM A FRONTIER MARKET TO AN EMERGING MARKET

1. VIETNAM FROM A FRONTIER MARKET TO AN EMERGING MARKET - WHAT YOU MUST
KNOW
Frontier market vs. Emerging market – How is it defined?
As a term invented in 1981 by then World Bank economist Antoine van Agtmael, an emerging market is
an economy that is thriving, a promising market with risks and rewards in the eyes of foreign investors.1
The term “frontier market” was coined 11 years later by Farida Khambata as a term used for smaller,
riskier and less accessible markets than emerging markets.2
According to the classification of Morgan Stanley Capital International (MSCI), in order to be classified as
an emerging market, one country has to satisfy a majority of indexes as “no major issues, improvements
possible” out of its eighteen different indexes for five market accessibility criteria.3
However, as of June
2022, despite its effort in concluding different international trade instruments for the past years, Vietnam
has not yet been recognized as an emerging market by the MSCI and is still classified as a frontier market.
This puts Vietnam at risks in meeting its self-established 2025 deadline to be an emerging market.4
Where does Vietnam stand now?
Currently, according to the MSCI, Vietnam has only established itself as a country with no issue on a certain
areas of market infrastructure and openness to foreign ownership while other indexes has shown that
improvements are highly needed for Vietnam to be upgraded to emerging market status, including foreign
ownership limit (FOL) level, equal rights to foreign investors, information flow, foreign exchange market
liberalization level, investment instruments.5
It is important to note that, there are four countries in the South East Asia (SEA) region that are established
as emerging markets by the MSCI, namely the Philippines, Thailand, Malaysia, and Indonesia since its start
date of collecting data back from 1987.6
Looking at the liberalization level of market access under the
WTO, Vietnam is on par with Singapore – the most developed country in SEA region. With the participation
in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and European
Union–Vietnam Free Trade Agreement (EVFTA) of Vietnam, Vietnam is way ahead of the four SEA
emerging markets in terms of international integration. Vietnam is the second country after Singapore
that has concluded an FTA with the European Union. Taking telecommunication services for example,
Vietnam is the most open country in terms of market access under the WTO since Vietnam allows the
joint venture of up to 70% foreign ownership while the Philippines, Thailand, Malaysia, and Indonesia only
allow joint ventures with an FOL of 30 percent. Under the EVFTA and CTPPP, foreign investors are allowed
to take control or even wholly own a telecommunication company in Vietnam. Vietnam’s better market
1
https://www.economist.com/special-report/2017/10/05/defining-emerging-markets
2
https://www.investopedia.com/terms/f/frontier-market.asp#:~:text=Key%20Takeaways-
,A%20frontier%20market%20is%20a%20country%20that%20is%20more%20established,frontier%20markets%20ar
e%20still%20investable.
3
https://www.msci.com/documents/1296102/8ae816b1-fa03-bae3-0bb4-1a3b2bf387bf?t=1656972645260
4
https://www.cnbc.com/2023/01/19/vietnams-market-risks-missing-upgrade-to-emerging-economy-status-
2025.html
5
https://www.msci.com/documents/1296102/2cfed30d-daff-2155-91cc-3476882b057c?t=1656973074509
6
Looking at the past market reclassification of the MSCI

2. access commitments could be found in other service sectors such as construction and education
compared to that of the Philippines, Malaysia, and Indonesia.
Although experts might believe that Vietnam is more developed than the four emerging markets in SEA
region in a wide array of indexes and that Vietnam is doing the best among the frontier markets, from the
MSCI’s point of view, it seems that they pay more attention to banking services and the indexes for
treatment for foreign investors as well as investment instruments. Currently, for banking services,
Vietnam only allows maximum 30 percent foreign ownership. Moreover, the foreign currency market,
information flow of the market, and investment instruments in Vietnam, according to the MSCI, are still
under development while they are already established as strong traits of the mentioned four countries.
Looking at the investment instruments index, while the MSCI does not make any assessment on Vietnam,
all of the four horsemen has been rated highest in the ranking of MSCI in this regard. This reflects the
frequently use of non-voting depositary receipt (NVDR) in the Philippines, Thailand, Malaysia, and
Indonesia. Meanwhile, it is still a debatable topic in Vietnam on whether NVDR or lower restrictions on
conditional business lines is the silver bullet for Vietnam and the definite answer has not yet been
concluded.7
With the introduction of the new law on investment, law on securities and law on investment
in the recent years without the concept of NVDR, it seems that the State will focus more on easing
restrictions on foreign investment in certain specific sectors, and, the best is yet to come.
To put the MSCI aside, reforms in Vietnam are not anticipated to happen anytime soon due to the mass
dot lo (“blazing furnace”) campaign of Mr. Nguyen Phu Trong, the General Secretary of the Vietnamese
Communist Party (VCP) in his effort to purge the VCP from corruption completely. From 2020 until now,
a large number of high-ranking officials and financial giants have been arrested due to bribery, corruption,
and fraud charges. It is undeniable that the recent infightings, with the hardest hit being the resignation
of the President – Mr. Nguyen Xuan Phuc, have also affected the Government’s decision. The infightings
and its aftereffects have significantly hindered relevant authorities from making any major decisions and
it appears that the change of law would only commence after all of the in-charge authorities regain their
confidence to reach a final resolution.
CTPPP, EVFTA and EVIPA
Despite the lack of investment instruments and the current FOL in Vietnam, it is crystal clear that Vietnam
is worth their investment in the eye of foreign investors due to its activeness in the participation in
international agreements. The EVFTA, CTPPP, and EVIPA (Investment Protection Agreement with the
European Union) were signed by Vietnam in just a period of three years, from 2018 to 2020. The
agreements with the world’s largest trading bloc – the EU – have cemented Vietnam’s position as a
potential destination for corporate giants from all over the world. While Vietnam is the only SEA country
having successfully concluded an FTA with the EU, Malaysia and Vietnam are the two SEA representatives
in the CTPPP. Thus, from an international trading and investment perspective, Vietnam is unmatched
when it comes to partnership and openness of market access. From a domestic perspective, Vietnam has
made its move by ways of replacing the Law on Securities to ease the last FOL in public listed companies
at 49 percent and allow the 100 percent FOL for non-critical business sectors.
On another note, the Investor State Dispute Settlement (ISDS) provision under the CTPPP and EVIPA also
plays an important role in Vietnam’s investment attractiveness since it provides the investors with high
7
https://vietnamnet.vn/en/foreign-funds-want-law-changes-to-further-invest-in-vietnam-E211545.html

3. standards of legal certainty and enforceability and protection.8
Under that provision, for investment
related disputes, the investors have the right to bring claims to the host country by means of international
arbitration. The arbitration proceedings shall be made public as a matter of transparency in conflict cases.
The final arbitration award is binding and enforceable without the local courts’ review of its validity. The
Government of Vietnam has to fully implement this commitment within five years from the entry into
force of the EVIPA.
Summary and action plan
During COVID-19, Vietnam’s economy saw a steady and positive growth of GDP – a rare sight for a frontier
market during an once-in-a-lifetime pandemic. However, as MSCI’s concerns have not yet been addressed
and some of the commitments in the CTPPP, EVFTA, and EVIPA have not yet been localized, legal reforms
are required for opener investment instruments and lower FOL for certain high-profile sectors. In other
words, regardless of the infighting settlement, the government will have to work harder and do their
homework under the current signed agreements to realize the emerging market status and ensure
investors that they will be rewarded generously once they decide to come to Vietnam. As the self-
established deadline is 2025, urgent actions are required since the procedures for amendments of the
laws can take years before it becomes effective. To accelerate the process, competent authorities are
recommended to engage and work closely with international commercial experts. It is believed that
Vietnam is on the right track but the authorities are not on it right now due to the infightings which are
holding back the reforms. It is advisable that, the state officials, with the support of external and
international entities, make decision for the long-awaited reforms to amend the law and therefore change
the view of international analysts and investors now or it would be too late. Duane Morris Vietnam LLC,
led by Dr. Oliver Massmann with almost 25-year working experience in Vietnam, could support the
Government in this process.
***
Please do not hesitate to contact Dr. Oliver Massmann at omassmann@duanemorris.com if you have any
questions. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
8
Chapter 9, CTPPP and Chapter 3, EVIPA