Its financial ecosystem is still seen as fledging and shallow, while its stock market is still classified as a frontier market by MSCI
[HO CHI MINH CITY] As Vietnam accelerates efforts to establish an international financial centre (IFC) with an eye on positioning it among global hubs such as Singapore and Dubai, industry observers are raising red flags about critical missing pieces: a sound legal framework, and a financial market that would inspire investor confidence and attract capital inflows.
At the heart of the concern is whether Vietnam’s civil law foundation and its stringent financial controls can meet the complex demands of global investors and businesses without radical adaptation.
The South-east Asian nation is developing a dual-city IFC in the inland Ho Chi Minh City – now the economic heart of the country – and Da Nang, which is on the coast about 925 km further north.
Common law vs civil law: A strategic dilemma
In many of the world’s top financial hubs such as London, Singapore, Dubai and Hong Kong, common law frameworks are a cornerstone. Foreign investors are familiar with the principles, case-based interpretations and predictability in commercial disputes.
But Vietnam runs on a civil law system it inherited from the French legal tradition, in which laws are codified and judicial precedent plays a limited role in legal interpretation.
The country has drawn up a special legal framework at the level of a parliament’s Resolution for the dual-city IFC, but has not decided to adopt a fully independent legal system underpinned by common law.
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Nguyen Trung Nam, founder of EPLegal, said: “This may affect the familiarity, predictability and confidence of international investors.”
Among the prominent IFCs often cited by global experts as operating under a distinct common law framework, functioning independently of the national domestic legal system, are the United Arab Emirates’ Dubai, Kazakhstan’s Astana and Malaysia’s Labuan.
Raymond Lim, founder and chief executive at Singapore-based financial advisory firm Vanguard Financial Group (VFG), said: “(The application of common law) gives investors a lot of comfort in terms of knowing where they stand legally when they put money into the country, and if a dispute arises.”
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However, in addition to the complexity of designing a separate legal framework for the IFC, Lim and Nam said implementation would pose another challenge. Common law systems require not just legislation, but the expertise to interpret and apply it – namely, trained judges, arbitrators and lawyers.
“Most Vietnamese lawyers have no background in common law,” said Nam. “You would need to import an ecosystem of foreign legal professionals with high intellectual capital. That won’t be easy.”
Willie Tanoto, senior director at Fitch Ratings’ Asia-Pacific financial institutions ratings, an analytical group in Singapore, also warned of the risks of capital seepage and regulatory arbitrage between the two systems in a country.
In fact, under the approved Resolution, the Vietnam IFC is built with fewer restrictions and offers faster approvals than that of the existing legal framework adopted elsewhere in the country.
Foreign investors, for instance, are allowed 100 per cent ownership of IFC entities and are exempt from typical investment licensing requirements and foreign exchange controls. They can also freely transfer capital into the IFC and repatriate profits, capital and other lawful earnings in foreign currency without the need for prior approval.
“There will be strong incentives to try to cross the regulatory wall. That requires a careful design and implementation (to prevent abuse),” he said.
But not all experts believe that common law is a prerequisite. David Harrison, a partner at global law firm Hogan Lovells, said that well-crafted codified laws and regulations specific to the IFC can be just as effective.
“The main consideration for foreign investors is more the state of development of the legal system and its fair application through the courts,” he said. “Over time, a track record of jurisprudence and case law may naturally develop.”
While international arbitration for commercial disputes is gaining global acceptance, Vietnam has exhibited an unusually high rate of non-enforcement of foreign arbitral awards, with judgments subsequently annulled by local courts, usually on the grounds that they violate the fundamental principles of Vietnamese law.
A report by Frasers Law Company disclosed that 51 per cent of the petitions for the recognition and enforcement of foreign arbitral awards between January 2012 and early 2023 were either rejected or suspended.
In the finance ministry’s explanatory document for the guiding draft decree on the IFC, the government acknowledged longstanding foreign investor concerns about dispute resolution in Vietnam. To address this, plans are under way to set up a specialised court and an international arbitration centre for the financial hub.
“These institutions help build investor confidence that disputes will be resolved effectively, in line with international practices, and their legitimate rights will be protected,” indicated the document that has been open for public feedback since August.
However, EPLegal’s Nam, an arbitrator in the Vietnam International Arbitration Centre and deputy director at the Vietnam Mediation Centre, said that in the current design of the Vietnam IFC’s legal corridor, the longstanding issue of enforcement of foreign arbitral awards remains unresolved.
Even when enforcement is approved, it remains bogged down in civil execution processes locally.
“If it takes three years to enforce a judgment, investors will still walk away,” he said.
Underdeveloped financial markets
Beyond legal mechanics, investors need options for how their money can be deployed. Traditional models of IFCs therefore often possess a longstanding history of well-developed financial markets.
Vietnam’s financial ecosystem is still seen as fledging and shallow, characterised by a limited range of financial instruments, a lack of US dollar-denominated products, and underdeveloped capital markets that lack depth, liquidity and a sufficiently robust banking system.
Vietnam remains a notch below investment-grade in the sovereign credit ratings by major agencies, which limits the credit ceiling for domestic firms. Its stock market is still classified as a frontier market by MSCI, a leading provider of global equity indices.
“There are very few investment options. Vietnam has to think about how attractive it is in terms of opportunity for money to actually make more money here,” VFG’s Lim noted.
He believes Vietnam’s unique selling point lies in the growth potential of its local companies and the country as a whole. However, firms continue to face significant hurdles, including stringent approval processes for overseas expansion, limited openness to substantial foreign ownership and strict capital controls.
But Fitch Ratings’ Tanoto noted that Vietnam’s vision for an IFC under such circumstances is not without precedents. He pointed to Malaysia’s establishment of the Labuan IFC in 1990, at a time when the country kept to a more controlled exchange rate and tighter capital movement on the mainland.
The offshore IFC in Labuan – a federal territory of Malaysia on an island off the coast of Borneo – initially focused on serving Malaysia; it then gradually expanded its scope and eventually evolved into an IFC.
Tanoto therefore suggested that, at least in its early stages, Vietnam’s IFC could cater mainly to the local financial sector, rather than aim to become a third-party platform for global capital flows like New York and London; such a role could take the South-east Asian nation decades to achieve.
“At the start, it could be quite localised,” he said, while underscoring the importance of attracting credible international financial institutions over time.
“If you are able to bring in credible players as anchors, I think that actually improves the probability of (the Vietnam IFC) gaining critical mass,” he added.
