Courtesy of Thomas Hugger at Asia Frontier Capital
One of the few remaining one-party communist states, the Laotian government’s attempts to decentralize control of the economy and encourage private enterprise starting in 1986 have resulted in an annual growth rate of 6% from 1988-2008. Laos’ economy has maintained consistently high GDP rates through 2012 due to strong growth among its main trading partners in the region, particularly China. High prices on the global commodities market have improved foreign interest in Laos’ extractive sector prospects, and foreign mining companies are increasing production and looking to attain additional concessions. Laos looks to benefit from an increase of agriculture production, which accounts for 33% of GDP and employs 75% of the population, as large swaths of land have been leased to foreign investors for greater agricultural development. Laos is looking to complete two massive railway projects in the coming years – costing upwards of USD 12 billion – with the intention of connecting China, Thailand and Vietnam via Laos. These new railway lines should significantly boost trade and tourism for the country which presently has only 3.5km of operating rail.
Stock Market Overview
The Lao Securities Exchange (LSX) was founded in January 2011 with technical and financial support from South Korea. LSX, headquartered in Vientiane, currently lists 3 companies; EDL Generation-Public Company – a subsidiary of the state-owned energy company Electricite du Laos, Banque Pour Le Commerce Exterieur Lao (BCEL) – the country’s largest bank and Lao World – a property services company. LSX has a total market capitalization of US$ 1.2 billion as of September 2014.
Tiny Laos is drawing interest from Asia’s largest economies – China, Japan, and South Korea – due to its strategic location, natural resources, and low cost of labor. But much of Laos’ rising significance is due to the changing landscape of Asian politics, as China and Japan jockey for geopolitical influence and trade in Southeast Asia. Building ties with once-ignored countries like Laos is increasingly becoming part of the political and economic calculus for both Beijing and Tokyo.
In the aftermath of the sovereignty dispute between China and Japan that occurred in April of this year over the Diaoyu / Senkaku Islands, Japan decided in July to lift the ban on its armed forces fighting overseas. The move was significant, as it marked the first change to Japan’s 70-year-old pacifist constitution and also demonstrated how the rising might of China is increasingly making some of its regional neighbors uneasy.
In addition to competing over sovereignty and fiercely-contested territory, China and Japan are also going head to head to build economic influence in Southeast Asia, ranging from large investments in infrastructure projects to ambassadorial tours promising fruitful partnerships with up-and-coming nations in ASEAN. Japanese Prime Minister Shinzo Abe has visited all 10 ASEAN member countries since assuming office in December 2012, and Japan’s recent focus on Laos can surely be seen as a harbinger for the type of strategy that Tokyo will continue to employ across the region.
Japan’s plan to counter Chinese ambitions focuses on bolstering aid and investment in Laos, Vietnam, Cambodia, and Myanmar, all countries that have traditionally maintained close links with Beijing. Laos, however, shares many cultural similarities to Thailand, a country in which Japan has invested heavily and which continues to be a strong trade partner for Tokyo. Japan hopes to leverage its successful track record in helping to develop Thailand’s economy and infrastructure to pivot into Laos to gain access to the country’s low wages and untapped opportunities, in addition to its own political agenda of countering Beijing’s influence. Japanese companies like Toyota and Nikon, for instance, have recently opened production and assembly facilities in Laos, and Japanese investment in Laos has recently grown by nearly 15x, from USD 27.5 million in 2012 to USD 406 million in 2013. This uptick is visibly evident on the streets of Vientiane, Laos’ sleepy capital city of around 800,000, where Japanese businessmen are a common sight and an unsuspecting visitor might be surprised to find 12 Japanese restaurants in Vientiane alone!
Japan is hoping that its renewed push for investment and trade links with countries like Laos and Myanmar is coming at just the right time, as an increasing number of Asian countries have recently begun expressing concern over their economies becoming far too dependent and intertwined with China.
In Myanmar, China was historically embraced by the former junta as a key trading partner and investor, but hostile attitudes towards China have grown, as many people in Myanmar see Beijing as only interested in the country’s resource and energy potential and the opportunity to build oil and gas pipelines across Myanmar to Kunming in Yunnan Province. Others believe that China is directly to blame for the longevity of the military government’s rule, as its status on the UN Security Council allowed Beijing to block any Western interventions into Myanmar. The statistics speak for themselves on the fraying relationship between Myanmar and China: Chinese investment in Myanmar dropped from USD 12 billion between 2008 and 2011 to just USD 400 million for the 2012-13 financial year.
Like Myanmar, Laos has also had historically strong economic ties with Beijing – China is one of the country’s largest trading partners alongside Thailand and Vietnam. China’s interest in its southern neighbor is principally due to Laos’ strategic location and natural resource potential, from hydropower projects to reserves of gold, silver, copper, and potash. China’s headline project in Laos is certainly its proposed 418 km high-speed railway connecting Kunming to Vientiane, which comes at a price tag of a whopping USD 7.2 billion, accounting for more than 60% of Laos’ USD 11 billion GDP. The Renminbi-denominated loan to finance the project is so large that some economists have speculated that Laos might even consider pegging its currency, the Kip, to the yuan to hedge against any increases in the debt burden due to currency fluctuations.
But despite China’s grandiose infrastructure plans, wariness of Beijing’s motives is increasing in Laos, as the proposed railway project would involve 5 million metric tons of minerals, mainly potash, being exported from Laos to China every year until 2020, in addition to numerous other timber, agricultural, and mining concessions. In addition to saddling the Laos government with a comparatively enormous debt burden, another criticism of the project is that it is unclear how it will stimulate Laotian job growth or economic opportunities – the 5-year construction of the railway will rely on bringing in 50,000 Chinese workers instead of sourcing laborers from the local population, one-third of whom live below the global poverty line of USD 1.25 / day.
The Lao Securities Exchange (LSX), established in 2011, remains very small and currently lists only three companies: Electricite du Laos Generation Public Company (EDL-Gen), Banque Pour Le Commerce Exterieur Lao (BCEL), and Lao World Public Company (LWPC). PetroTrade, a major fuel distributor in Laos with 106 fuel stations nationwide, announced plans in to prepare for a listing on the LSX in Q4 2014. PetroTrade is looking to raise capital to help build two additional fuel storage facilities, one in Champassak province able to store 700,000 liters of fuel for general vehicle supply, and one in Vientiane able to hold 1.3 to 1.5 million liters of aviation fuel. A successful listing would make PetroTrade the fourth stock on the exchange and help to grow the market capitalization and liquidity of the bourse.
There are several companies listed on overseas exchanges that have operations in Laos, including PanAust, a Brisbane-based copper and gold mining and exploration company listed on the Australian Securities Exchange (ASX), MMG Limited, a Melbourne-based mining company that operates the open-pit Sepon copper mine in Laos and trades on the Hong Kong Stock Exchange (SEHK), Kolao Holdings which trades in Seoul, South Korea and is a car distributer, and Asia Potash Group, a Sichuan-based company that operates potash mines in Laos and has announced plans to list on the SEHK.