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Laos' once-fragile economy gets boost from neighboring nations

Reuters - December 18, 2011

Martin Petty, Vientiane, Laos The Japanese cars and sport utility vehicles that clog the streets of Laos' once sleepy capital are testament to the changes quietly under way in a county once seen as a basket case isolated for decades behind Asia's bamboo curtain.

Shopping malls are under construction, mobile-phone shops and modern coffee houses with Wi-Fi are popping up in Vientiane, the bicycles that thronged roads lined with golden temples are rarely seen, replaced by imported motorcycles and cars.

These are some of the fruits of a quiet economic boom that's steadily transformed a secretive country little known in the West beyond the tales of backpackers and Vietnam War veterans.

Nominally communist since the overthrow of a US-backed government in 1975, the former French colony is courting neighboring China, Vietnam and Thailand to develop resources and infrastructure, and they are piling in, indifferent to the risk aversion that keeps Western firms on the sidelines.

A big Thai-led dam project was suspended this month pending environmental surveys, but other Thai-built hydropower projects are underway across Laos's network of waterways. Vietnamese agribusinesses are proliferating and Chinese firms are pouring into the mining and transport sectors.

Little has changed in Laos' one-party political system and its rulers are trying to emulate the market-based authoritarianism of China and Vietnam with pro-business reforms, with some success.

The once fragile economy has grown an average 7.9 percent a year since 2006. Asian Development Bank country director Chong Chi Nai said that the mountainous, jungle-clad country was becoming an economic success story, but growth should not be its sole focus.

"The challenge for Laos is not the amount of funds coming into the country, but whether these funds are invested in a responsible and environmentally sustainable manner," he said. "But there's no doubt Laos is on the right track."

International financial institutions forecast economic growth of between 8.1 and 8.6 percent this year one of Asia's highest growth rates fueled by hydropower production, copper and gold mining, tourism and domestic consumption.

Laos' $7.5 billion economy is dwarfed by its neighbors, 790 times smaller than China's, a 14th of the size of Vietnam's, and roughly two percent of Thailand but it has more than doubled since 2006, as has GDP per capita, which jumped from $600 to $1,200, according to World Bank data. But it's still off the radar to Western companies concerned about regulation, labor capacity, a lack of transparency and Laos' very cozy political and business ties to its neighbors.

Urban Laos is modernizing fast, with 19 commercial banks and new special economic zones offering tax breaks.

The mobile-phone sector is thriving, with its five operators boasting a staggering 10 million users among the 6.4 million population, suggesting many customers use several numbers.

A $7 billion Chinese-led high-speed railway linking China with Thailand is planned. State carrier Lao Airlines last month expanded its fleet of eight propeller planes with the $91 million purchase of two Airbus A320 aircraft.

Perhaps its most significant leap was a stock exchange launched in January, a $20 million venture with Korea Exchange, Asia's fourth-largest bourse operator.

Only its top lender, Banque Pour Le Commerce Exterieur Lao (BCEL), and Electricite du Laos Generation Company (EDL-Gen) have listed on the Lao Securities Exchange (LSX) and trade is too sparse to interest funds, though private equity funds are starting to take notice.

LSX chief executive officer Dethphouvang Moularat said the priority was to educate skeptical firms about regulation to make them more competitive and boost investor confidence.

Internet and mobile-phone provider Enterprise of Telecommunications Lao (ETL) and cassava and tapioca firm Lao-Indochina Group are expected to list in early 2012. Lao Airlines, diversified Lao World Group and Lao Brewery Company a 50-50 joint-venture between a state firm and Danish brewery Carlsberg would also join.

"These enterprises are becoming aware that the benefits of listing on the LSX are greater than the risk they may take," Dethphouvang said in an e-mail.

For now, the boom is fueled by mining and hydropower, accounting for 80 percent of foreign direct investment and half of gross domestic product growth. Export revenue from copper and gold from Laos's two big mines was projected to reach $1.3 billion and $240 million respectively this year, double the 2009 figure, according to the International Monetary Fund.

Thai firms dominate hydropower. With dozens of new dams, Laos aims to become the "Battery of Southeast Asia", providing 8 percent of its power by 2025, with the potential to generate 28,000 megawatts (MW). Half of that is committed to neighbors by 2015.

Output doubled in March 2010 with the start of the $1.45 billion, 1,086 MW Nam Theun 2 hydroelectric dam, a joint venture between Electricite de France, Lao Holding State Enterprise and Thailand's Electricity Generating.

Thai miner Banpu and Ratchaburi Electricity Generating Holding each hold 40 percent stakes in the $3.7 billion, 1,800 MW Hongsa Lignite thermal power plant set to be Laos's largest power station when completed in 2015.

But these plants are prime targets for environmentalists. Laos recently bowed to pressure from Cambodia and Vietnam and shelved the $3.5 billion, 1,260 MW Xayaburi Dam on the Mekong River, in which Thai builder CH Karnchang, has a 57 percent share and Thai state-run EGAT, has 12.5 percent. Japanese experts will investigate the potential dangers of Xayaburi, which activists say could impact 60 million people, wipe out fish species and block fertile silt from flowing to Vietnam, the world's second-biggest rice exporter.

Economists are bullish about Laos' potential but say much needs to be done. Corruption, rudimentary regulation and limited skilled labor have put the country second-bottom in East Asia and the Pacific, ahead of East Timor, in the World Bank's Doing Business survey.

The IMF says Laos had made "impressive progress" but needed proper data, banking supervision and streamlining of procedures.

Bounthavy Sisouphanthong, vice minister for planning and investment, takes issue with the low ranking and says attention should be paid to political and economic stability, reforms initiated and incentives available for investors.

"Growth is here, we've increased our FDI but we're still ranked low and we need to change that," he said. "There may be a negative perception, of slow progress and difficulties in investment, but this is changing."

That perception suits China, Thailand and Vietnam, Laos' biggest sources of FDI. Official data since 2000 shows Vietnam has invested $2.77 billion, China $2.71 billion and Thailand $2.68 billion, and they have little competition. Critics say that's because too many projects are agreed opaquely and informally, through incentives and lobbying of the political elite arrangements that frustrate Western firms.

Vietnam has a foot-in because of its close political relationship, but China appears to be using its wealth to muscle in on Hanoi's turf. China sees Laos as its gateway to Southeast Asia's 600 million people and $2 trillion GDP, and bilateral trade with Laos has grown 40 percent to $1.1 billion annually since 2009.

"The politics of Laos is the politics of patronage. They like to play China and Vietnam off each other," said Ian Storey, a Laos expert at Singapore's Institute of Southeast Asian Studies. "Vietnam still has the inside track politically. What Laos does is try to balance its relations with Vietnam and China, not favoring one over the other, and get benefits from both."

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