Although 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:
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.
Country snapshots for all of AFC’s markets can be found on our website at www.asiafrontiercapital.com
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.
Source: The Economist
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.
In line with our process of being on the ground in the countries we invest in, AFC’s Contributing Writer, John Enos, travelled to Laos in August to cover the country’s development from the ground.
Perhaps the best indicator that you have arrived in a frontier market still overlooked by investors is that the taxi drivers waiting around the airport arrivals hall seem to be surprised that you are interested in their services. At Vientiane’s tiny Wattay International Airport, which receives only a handful of international flights a day from Bangkok, Hanoi, Seoul, Kuala Lumpur, and Kunming, I probably could have picked up my backpack and walked or bicycled into town. It was drizzling lightly and I didn’t know exactly where I was going, so I followed the taxi driver, who still seemed incredulous that he already had one customer before lunchtime!
Laos’ official name is the Lao People’s Democratic Republic, otherwise known as Lao PDR. The joke among travelers and expats is that Lao PDR actually stands for Lao, Please Don’t Rush. This becomes clear to any newcomer almost immediately upon arriving in Laos, whether it is by air at Vientiane’s small airport or by bus over the Thai/Lao Friendship Bridge connecting Udon Thani in northern Thailand with Vientiane. Coming from the big city hustle and bustle of Bangkok or the chaotic traffic of Ho Chi Minh City or Phnom Penh, Vientiane seems like a capital city that is still awakening from a deep afternoon nap.
The main thoroughfare in downtown Vientiane is lined with haute cafes, tour agencies, and high-end gift shops, but despite the increasing number of luxury SUVs backed up on the street, the main road still only has one lane of traffic in each direction and can easily be crossed on foot, with no stoplight. In the late 19th century, the territories of Luang Prabang and Vientiane were added to French Indochina, and the Gallic influence in Laos can still be felt to this day, from the abundance of quaint Parisian cafes serving fresh croissants to various French names one comes across, such as the national electricity corporation, Electricite du Laos.
Although Vientiane is small, walkable, and roughly mapped in a grid-like fashion, I found myself continuously getting lost on foot. I blame a combination of my lack of a background in French and the fact that Lao names are nearly impossible to pronounce and can be spelled a multitude of ways. Several times a day I’d find myself chasing down an unsuspecting Laotian to ask if he could direct me to Rue Setthathilath or Rue Nokeakoummane or how far it was to the intersection of Quai Fa Ngum and Rue Chanthakhoumane? Now imagine asking for these directions while dripping sweat in the 34 degree Celsius Laotian heat and you can quickly understand my frustration at having learned no words of French, Lao, or Vietnamese in school.
In many ways, Vientiane is quite similar to Phnom Penh, the larger capital of Laos’ southern neighbor, Cambodia. Both cities are adjacent to a river, and the promenade along the riverbanks is a gathering spot in both Vientiane and Phnom Penh for old men to drink, young children to frolic, and middle-aged women to do sunset calisthenics en masse. Strolling along the banks of the Mekong River in Vientiane, one soon reaches the massive statue of Chao Anouvong. Anouvong was the last monarch of the Lao Kingdom of Vientiane who is a famed hero in Laos for leading the Laotian Rebellion in the 1820s against the Siamese to gain complete independence from Thailand.
Anouvong, Leader of the Lao Rebellion
In Laos, of course, the drink of choice is inevitably Beerlao, the fabled lager that has a reputation so prominent that the company’s marketing director and head of international sales once told a reporter in an interview that when he visited international beverage distributors, even in Asia, many of them had heard of his beer but had not heard of his country! It is unclear when Beerlao’s immense popularity took off, but seasoned expats and gap-year backpackers helped to create a customer base for the lager that stretched far beyond the quiet streets of Luang Prabang or the bacchanalian banks of the Nam Song River in Vang Vieng, long a mecca for hard-partying travelers looking to discover the hedonistic side of the country.
Beerlao is brewed by the Lao Brewery Company, which was nationalized in 1975 when the Lao PDR was officially established, and in the early 2000’s, Danish brewing giant Carlsberg and its Thai partner each acquired a 25% stake in the company. Although the beer was originally based on locally-grown jasmine rice, Beerlao has since rolled out a number of new products, including Beerlao Dark and Beerlao Gold.
A bottle of the extraordinary lager goes for about 10,000 Kip in Vientiane, roughly USD 1.25, and it is easy to see why the locals are so proud of their national tipple and why the company enjoys a market share of 99% of the beer sold domestically.
Enjoying the legendary Beerlao Dark Lager for a bit over a dollar a bottle
Apart from the plethora of farangs (Lao word for foreigner) and visa runners that I saw swigging Beerlao, one other thing I noticed in Vientiane was the abundance of Japanese businessmen, which I certainly did not recall seeing when I had previously visited the city two years prior. I counted upwards of 10 Japanese restaurants in the tiny capital, many of which had menus in Japanese, with pretty Lao staff courting customers on the sidewalk with catch phrases in Japanese, all of which were lost on me. As discussed in the country report on Laos also in this newsletter, Japan is increasingly focusing on peripheral Southeast Asian countries as part of its geopolitical strategy to counter China’s influence in the region, and Japanese businesses seem to be welcoming this effort by expanding production facilities in Laos due to the country’s close proximity to Thailand, which is a long-standing trade partner of Japan, and Laos’ low labor costs.
But despite the recent increase in foreign businessmen and the usual backpackers and Thai visa runners, Vientiane remains a pleasant, quiet town still very much connected to the traditional Lao way of life. Buddhism is the main religion in Laos and has shaped much of the culture, but animist traditions and belief in traditional spirits is still an integral part of Laos’ national psyche and one can sense the deep impact that both Buddhism and Animism have had on Laos through the country’s food, culture, and even clothing. One of the most interesting and unusual moments of my trip was when I was walking next to one of Vientiane’s few recently-opened shopping malls and stumbled upon a woman sitting on the sidewalk hawking herbs, roots, and all sorts of other unusual leaves and bits of bark. A young Lao bypasser seemed interested in my curiosity, and after a short conversation with the old woman selling the goods, he explained that the wares were all key ingredients for various traditional medicines. According to one study, over 70% of Lao households still use traditional medicine! I found this scene quite enthralling on my last day in Vientiane, and the sight of an old woman peddling medicinal ingredients speaks volumes of Laos’ continued close connection to the country’s traditional culture and beliefs.
A variety of roots, herbs, leaves, and bits of bark being hawked
on a Vientiane sidewalk for use in traditional Lao medicine
I hope that even with the rise of Beerlao’s fame or the country’s attractiveness to foreign companies, the unique cultural heritage of Laos remains intact!
Sorry, comments are closed for this post.