Vietnam waits for major upgrade to its $200 billion stock market

Vietnam's long wait for emerging market status could soon be over.

The Southeast Asian nation is currently classified as a frontier market and has been on the FTSE emerging market watchlist since 2018. Global index provider FTSE Russell confirmed earlier this month that it has retained the country on its watchlist.

The agency highlighted the Vietnamese government's support for market reforms and recommended more meetings between both local authorities and foreign investors. An upgrade to emerging market status could see global funds pouring billions into Vietnam's financial market which currently has a market value just north of $200 billion.

Speaking to CNBC's "Street Signs Asia" before the confirmation, Maybank Investment Bank Vietnam's Head of Equity Research Thanh Quan Trong said that the FTSE upgrade for Vietnam to emerging market status could come as early as September 2025.

That's a similar target also set by Vietnam's Prime Minister Pham Minh Chinh's earlier this year, with FTSE Russell recommending the country sticks to its current pace of reforms if it is to meet that deadline.

"We are seeing good progress in Vietnam fixing the regulatory bottlenecks to get the market upgraded to emerging market status," Trong told CNBC.

The Vietnamese government is "putting focus on the economy again," which he says brings "upsides" through projections of at least 6.2% GDP growth next year. Indeed, the World Bank projects GDP to grow 6.5% in 2025 "driven by increasing global demand and restored domestic consumer confidence."

According to Vietnam's Institute for Economic and Research Policy, GDP growth in the fourth quarter of 2024 is expected to hit 7.4%, reaching the 7% target set by the government.

Trong is not alone in painting a broader positive assessment for Vietnam's medium to long-term prospects.

Christine Phillpotts of Ariel Investments told CNBC "countries like Vietnam … are relatively well positioned" because they are less reliant on foreign capital or have lower foreign debt. As such, Vietnam has become a relatively safer place to invest, she said.

Vietnam's government is hinging its bets on developments in AI, playing to its strength in assembly, testing, and packaging capacities as it meets global demand for chips. The country's national strategy includes ambitions to develop into ASEAN's center for research and development of AI solutions by 2030. The country, for example, has already attracted a $1 billion investment from South Korean manufacturing extending to 2025.

Vietnam's chip capabilities have it competing against near neighbor Malaysia, attracting global semiconductor firms. The southeast Asian nation is already home to large manufacturing hubs for Samsung and Foxconn.

Despite its own internal political wrangling, the country has already benefited from the trade spat between the U.S. and China as firms seek to best protect their supply chains. Indeed, Vietnam looks set to continue solidifying its position in the global manufacturing supply chain.

"It has a geographical advantage of being in close proximity to China on one hand while having open access to export markets in developed countries on the other hand. The latter is thanks to having numerous free trade agreements," Helmi Arman, chief economist for financial research group Citi, told CNBC.

Vietnam's politically neutral status gives it an advantage to "capitalize on the dynamics in relations between the U.S. and China" by attracting investment from Chinese parented companies for re-exporting to the U.S., added Arman.

"Overall, Vietnam is doing pretty well at the moment. In some ways its related to the slowdown in China, because there's a lot of China+1 going on. Companies are hedging their bets and shifting expansion into Vietnam. That's weighing on China and good for Vietnam's economic growth figures," Bill Hayton, associate fellow at the Asia-Pacific program for U.K.-based think tank Chatham House, told CNBC.

On the flip side. Vietnam's skilled labor shortage and infrastructure concerns, particularly long held worries over the stability of its power supply, are hurdles for foreign investors.

Meanwhile, sweeping reforms have seen a government crackdown on corruption. Described as a "blazing furnace" by local media, the crackdown has resulted in the arrests of officials accused of taking bribes.  

"There might be some short-term turbulence, but the long-term result will be less corruption, which can only be good for a country," said Boris Hall, a Vietnam-based lawyer at law firm Baker & McKenzie. Hayton said the anti-corruption campaign is even scaring officials so much that "they fear to agree to anything, which has held up infrastructure deployment."

Vietnam ranks 83rd out of 180 countries in Transparency International's 2023 Corruption Index, scoring higher compared to competing Asian neighbors Thailand, ranked at 108, Cambodia at 158 and Laos at 136.

Despite Vietnam taking advantage of the U.S. and China fallout, Hayton sees the Southeast Asian nation being "at the mercy of global developments," such as the Russia-Ukraine war as well the unfolding crisis in the Middle East. The U.S. elections in November could also have a negative ripple effect in Vietnam.

"An even more aggressive stance on foreign trade policy from a potential Trump administration could potentially alter regional and global supply chain architectures, thereby affecting the flow of investment into Vietnam," said Arman.