Vietnam’s upgrade to emerging market status, explained

The recent decision by the index provider FTSE Russel reflects the country’s maturing market conditions and improved regulatory climate.

A major index provider, FTSE Russell, announced earlier this month that it would upgrade Vietnam from frontier market to secondary emerging market status in 2026, pending completion of a final review. This marks an important step in the development of Vietnam’s domestic capital markets, as it will place Vietnam on similar footing as other countries with emerging market status such as China, Indonesia and the Philippines.

It is essentially a signal to investors that market conditions in Vietnam are maturing, with an improving regulatory climate that places less restrictions on capital mobility and foreign ownership. Analysts estimate the upgrade could attract several billion dollars in fresh investment flows. Following the announcement, the benchmark index hit a record high.

These are positive signs for Vietnam, where economic growth has remained strong despite global headwinds and trade tensions. Yet when markets opened this week, they had a surprise in store. The stock market experienced a major sell-off on Monday, contracting by more than 5 percent and making it the biggest single-day drop in 25 years. How can we make sense of this?

First of all, let’s consider what Vietnam’s upgrade to emerging market status means in terms of the country’s economic trajectory. In recent decades, the Vietnamese economy has posted strong and consistent growth. GDP per capita doubled between 2012 and 2024. And even now, despite everything going on in the world, the economy continues to grow strongly.

Vietnam has achieved this high level of growth using a fairly conventional model of export-led industrialization that relies heavily on foreign investment. Big overseas firms, like South Korea’s LG for instance, build production facilities in Vietnam with an eye toward exports. We see lots of evidence that this strategy is working. Vietnam consistently records large foreign investment inflows, and it has overtaken Thailand as the region’s export powerhouse, especially in electronic goods.

As an economy reaches a more mature level of economic development, however, it becomes risky to rely too heavily on foreign investment to drive growth. The deepening of domestic capital markets is an important enabling condition for domestic firms, and the economy more generally, to expand in a sustainable way.

The ability to raise money on domestic stock or bond markets provides firms with more options when they need capital and it spreads the risk around more evenly. An upgrade to emerging market status thus sends a signal about where Vietnam is in its developmental pathway, as firms are reaching a point where they require and are ready for deeper domestic capital markets.

Why then did investors start dumping Vietnamese stocks this week?

There are a couple of possible explanations. One is the recent news that Novaland, a large publicly traded real estate developer, is under the microscope for misusing bond proceeds. When promoting your capital markets as safe and open places for doing business, corporate governance and regulatory oversight start to take on greater importance and can weigh on investor confidence.

Another is that Vietnamese equities have already risen sharply in 2025. Before Monday’s sell-off, the benchmark index was up more than 30 percent since the beginning of the year. A lot of this has been driven by Vingroup, Vietnam’s most valuable publicly traded company by a wide margin. Vingroup is heavily involved in the real estate sector and is currently the driving force behind a wildly ambitious and, for now, extremely unprofitable attempt to become a global EV-maker. Vingroup’s stock price is up by around 380 percent for the year.

There have also been some cautionary signals coming from the real estate sector these days, including skyrocketing prices and a highly leveraged banking sector. When taken together, the sell-off may simply have occurred because investors saw an over-heated stock market and the makings of real estate bubble and decided a 30 percent return since the beginning of the year was just fine, emerging market status or not.

It also illustrates how managing the risk of corporate malfeasance, misallocated capital, and asset price inflation becomes more acute and complex as domestic capital markets mature, something Vietnamese regulators will need to watch closely.

By James Guild – The Diplomat – October 21, 2025