Korean Exchange system overhaul around the corner, illustration photo/ Source: freepik.com

Fresh updates from VNDirect Securities suggests a sunny horizon for Vietnam’s stock market, as the new Korea Exchange system (KRX) is poised to significantly uplift the market’s capabilities.

According to the brokerage, with the potential for liquidity surges up to $4 billion per session and expedited settlement periods from the current T+2.5 (in transactions executed within 2.5 days), it could be the catalyst for a higher capital turnover.

During testing in late August, the Ho Chi Minh Stock Exchange (HSX) announced an overview of the infrastructure upgrade roadmap, which revealed a positive outcome.

In particular, 25 of the 76 securities firms in Vietnam have seamlessly passed all test scenarios for the new system’s alignment and efficiency. Meanwhile, 36 firms have achieved more than 80 per cent completion, with the remaining 15 falling short of this benchmark.

“Leveraging the expertise of the KRX, the HSX has scheduled its final acceptance test for November. If all proceeds as anticipated, the KRX system will be ready for deployment by the end of this year,” a representative from the HSX revealed.

Meanwhile, Tran Hoang Son, director of VPBank Securities Market Strategy, expressed optimism regarding Vietnam’s market status upgrade.

“With the expected integration of the KRX system, Vietnam is on the brink of transition from a frontier to an emerging market,” he stated. “The advanced system will enhance market transactions’ fluidity and introduce new financial products. Furthermore, settlement cycles might be reduced from T+2.5 to as fast as T+2 or even T+0.”

Son also predicted that with the system approaching its final testing phase, there is strong potential for an upgrade by the FTSE to the status of a secondary emerging market as early as March 2025, culminating in a formal inclusion in the FTSE’s emerging market index by September that year.

“Upon this potential upgrade, the scale of passive capital inflow will hinge on Vietnamese stocks’ weightage within the emerging market index. We estimate a resulting inflow of approximately $12.5 million,” he said.

On the other hand, Vu Thi Chan Phuong, chairwoman of Vietnam’s State Securities Commission, said at a conference on August 29 in Hong Kong that two pivotal challenges of Vietnam’s stock market elevation include pre-transaction deposit requirements (prefunding) and foreign ownership limits.

“While awaiting the system’s introduction, interim technical solutions are being explored to alleviate foreign investor concerns about pre-transaction deposits. In the long term, implementing it is imperative,” she noted.

Son from VPBank Securities believed that a key hurdle, linked to payment compensation without transparency and advance payment, will be contingent upon the new KRX system’s successful rollout.

“If the KRX system becomes operational in 2023, Vietnam might find its way onto the MSCI’s watchlist for upgrades during its annual review in June 2024, with an official emerging market status by June 2025 and inclusion a year later,” Son said.

On the macro level, the integration of the system is expected to greatly enhance the efficiency and capacity of Vietnam’s stock market operations. With the final testing phase approaching, market players are keenly observing the developments, hopeful that the new system will usher in an era of accelerated growth for Vietnam’s financial markets.

Lyndon Chao, managing director of the Asian Securities and Financial Markets Association’ Equities and Post Trade Division, expressed confidence in Vietnam’s economic landscape.

“Vietnam, undoubtedly, is one of the most rapidly expanding economies in Asia and perhaps leads the race globally. The shifts in global supply chains and the burgeoning middle class put Vietnam in an advantageous position,” said Chao.

“Given Vietnam’s strides in stock market reforms, it emerges as an attractive hub for future investments in the region, making it a more accessible terrain for global fund managers.”