Tag Archives: southeast

Laos’ economic growth rate revised to 6.6%, floods dampen prospects

Students in Laos

Anyone who has been flicking on screens to news of floods in Laos, extreme weather-related disasters in the region and trade frictions beyond will not be surprised to hear that such developments have subdued economic growth somewhat.

Multilateral lender Asian Development Bank agrees. Its update of its flagship annual economic publication, Asian Development Outlook (ADO) 2018 has economic growth for the Lao People’s Democratic Republic (Lao PDR) is expected to moderate in 2018.

ADB projects Lao PDR’s gross domestic product (GDP) to grow by 6.6% in 2018 and 6.9% in 2019, revised down from its April estimates of 6.8% for this year and 7.0% for next.

According to the bank’s analysis, weather-affected sectors like agriculture and mining outputs are forecast to underperform, with growth set to trend lower than previously forecast in April.

Agriculture is expected to grow by just 2.0% this year and mining outputs projected to decline by 2.0%.

Economic expansion related to electricity generation, construction, and services will partially offset these adverse effects, the bank asserts.

Electricity generation is expected to increase by 8%.

According to the ADB, construction is benefiting from foreign direct investment in hydropower and transport projects.

These include the railway line from Vientiane to the border with the People’s Republic of China now under construction.

A sharper depreciation of the Lao kip against the US dollar in the open market, compared with the official exchange rate from January 2018 to July, points to continued vulnerability to stress in external payments, the Bank states.

Inflation is forecast to be 2.5% in 2018 and 3.1% in 2019, about half a percentage point higher than ADO 2018’s projections.

The current account deficit in percent of GDP is projected at 13.8% in 2018 and 13.0% in 2019, lower than the April estimates of 14.9% and 13.7%, respectively. Despite Lao PDR’s expected improvement in the current account deficit, net international reserves are forecast to remain below $1 billion by December 2018, covering only 1.5 months of imports due to a large trade deficit weighing on the balance of payments.

Downside risks to the outlook in the near term include external payments vulnerability and the possibility of recurrent natural disasters.

With a stated commitment to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty, ADB was established in 1966. The multilateral lender is owned by 67 members including 48 from the region.

In 2017, ADB operations totaled $32.2 billion, including $11.9 billion in co-financing.

China Is Transforming Southeast Asia Faster Than Ever

China’s investment is transforming its smaller Southeast Asian neighbors like never before while helping turn Cambodia, Laos and Myanmar into bigger destinations for its exports.

That’s driving some of the world’s fastest economic growth rates and providing Chinese companies with low-cost alternatives as they seek to move capacity out of the country. It’s also helping Asia’s largest economy and nations in its orbit adapt to what looks more and more like a new era of waning U.S. commitment to the region from a more inward-looking administration of President-elect Donald Trump.

“China’s definitely looking at these countries in general as an area where it can sell products and get good return for its investments,” said Edward Lee, an economist with Standard Chartered Plc in Singapore. “China itself is getting more expensive for its companies, and that’s reinforcing this trend.”

China is investing in everything from railroads to real estate in Cambodia, Laos and Myanmar — the frontier-market economies of the Association of Southeast Asian Nations.

China Minsheng Investment Group and LYP Group, headed by Senator Ly Yong Phat, signed a $1.5 billion deal last week to build a 2,000-hectare city near Cambodia’s capital, Phnom Penh, with a convention center, hotels, golf course, and amusement parks, the official Xinhua News Agency reported. The spending equals roughly one-tenth of the country’s $15.9 billion gross domestic product.

Belt, Road

In landlocked Laos, work started last year on the China-Laos railway, which will stretch 414 kilometers (257 miles) from the border to the capital, Vientiane. The project, part of Chinese President Xi Jinping’s One Belt, One Road initiative, will cost $5.4 billion, according to Xinhua. Xi met last week with Lao Prime Minister Thongloun Sisoulith in Beijing, where he pledged stronger ties.

Myanmar, which is liberalizing its economy and adopting market reforms after a transition to democracy, is forecast by the International Monetary Fund to expand 8.1 percent this year, the fastest in the world after Iraq. De-facto leader Aung San Suu Kyi has been quick to engage China since taking office this year, including visiting Xi in Beijing. China is its largest trading partner, accounting for about 40 percent of Myanmar’s total last year, and is building a special economic zone, power plant and deep-water seaport on the west coast.

For an explainer on China’s Silk Road, click here

Cambodia’s economy is projected to grow 7 percent this year, while Laos is set for 7.5 percent expansion. Myanmar’s currency, the kyat, was Asia’s top performer in the first five months of the year, but has weakened about 10 percent against the dollar since June as the U.S. currency strengthened

As Sino-Cambodian relations have flourished, so has trade, with two-way commerce climbing to $4.8 billion last year. That’s more than double from 2012, the year Cambodia warmed up to Beijing by opposing mention of China’s assertiveness in the South China Sea during a regional summit in Phnom Penh.

Most Chinese money flowing in to Cambodia, Laos, and Myanmar is lending on highly concessionary terms to finance construction projects run by Chinese firms, especially in Laos, said Derek Scissors, Washington-based chief economist at China Beige Book International, who specializes in studying the country’s foreign investment. Chinese construction and investment since 2005 equal about 15 percent of Lao GDP, which it couldn’t have financed from other nations, he said.

“The power sector is basically Chinese-built, bringing electricity to the majority of the population,” while China built several hydroelectric plants to increase electrification, Scissors said. “There were grand plans for Myanmar, but investment and construction actually realized is more conventional, in the energy and mining sectors.”

Garments, Shoes

Cambodia, Laos and Myanmar are becoming more incorporated with China’s supply chains, buying intermediate goods from its factories and selling consumer items such as garments and shoes that are often made by companies owned or funded by China. Its imports from the three Southeast Asian economies more than doubled in the past five years, IMF data show.

Such dependence on China isn’t without risks. Beijing accounts for the largest chunk of foreign investment in Cambodia and also about 43 percent of the country’s total debt stock, mostly in loans from Chinese development banks to Cambodia’s government, according to the IMF. Similarly, China’s railroad in Laos equals about half of its $10.5 billion 2015 GDP.

“This reliance on a narrow production and export base has many downsides,” the IMF said in a recent report. “A majority of Cambodian garment factories concentrate on cut-make-trim processes, which are at the bottom of value chain and also small part of the overall production. As a result, firms in Cambodia have limited leverage and autonomy.”

Cambodia has gained particular appeal for Chinese manufacturers seeking to relocate, which aligns with China’s strategy to export industrial capacity through initiatives such as One Belt, One Road. Cambodia’s $121 average monthly wage is just a fifth of China’s $613 average, according to the International Labour Organization in Geneva.

The biggest risk for frontier Asean economies is that Chinese inflows create “extractive” elites who entrench themselves in power, said Song Seng Wun, an economist at CIMB Private Banking in Singapore.

“These economies are getting a lot of money and opportunity from China,” he said. “If wealth is concentrated in the hands of a few, that may lead to problems and instability. The key here is developing a middle income group that Chinese companies will be targeting as a consumer.”

Source: Bloomberg Markets

Changing Mekong Currents Compound Dam Anxieties in Southeast Asia

The government of Laos officially submitted the Pak Beng Dam to the Mekong River Commission in mid-November and has begun preparatory work around the future dam site. While this announcement appears to indicate that the government of Laos and international funders for more than 100 hydropower projects are continuing to move full steam ahead despite serious concerns from downstream countries and affected communities, emerging financial risks and regional shifts are increasingly impacting the risk calculus for future projects.

There are three regional factors disrupting the terrain for investment in large hydropower dams in mainland Southeast Asia. The first is the emergence of Myanmar as a competitor for energy sector investment. Myanmar is an underdeveloped country with significant hydropower potential of up to 100,000 megawatts (MW), nearly four times that of Laos. Western sanctions and domestic instability previously prevented hydropower from moving ahead in Myanmar, and as a result the Salween and Irrawaddy remain largely undisturbed.

Although internal political issues in Myanmar raise questions about the speed and extent of development that is politically feasible, investors are interested. The IFC is supporting a country-wide Strategic Environmental Assessment for hydropower development, and there have been a plethora of Thai-Chinese joint projects in the Salween River Basin announced in recent years. These projects will compete strongly for financing that previously may have flowed towards projects in Laos.

The second trend is the economic slowdown in China. China’s role in designing and constructing more than half of all large dams globally means that it would previously have been a likely replacement for any loss of funding from ODA donors or MDBs. However, there is emerging evidence that China’s economic slowdown may impact the ability of Chinese developers to get financing for large infrastructure investments abroad. Chinese banks were previously given political mandates to support projects abroad in strategic sectors such as hydropower, mining, and fossil fuels. Even in cases where financing analysts recognized high project risks, such as the Myitsone Dam in Myanmar, the political mandate and the influence of large investment companies meant that loans gained approval.

While supporting unprofitable projects was possible in years of fast growth, the central government is increasingly concerned over China’s rising stock of non-performing loans. As year-on-year growth forecasts drop to a range of only 6.5-4.5 percent for 2016, financial institutions in China are increasingly under pressure to rein in bad debt. China’s debt issue is now widely recognized, and concerns over debt prompting a recessionhave prompted greater consideration of risks by Chinese regulators.

This may lead to a drop in support for risky projects such as hydropower projects, where profit margins are returned over long periods of time, subject to shocks in electricity pricing and demand, and face long term maintenance costs. Anecdotal evidence shows this is already happening: China Export-Import Bank has a hold on loans for six hydropower projects in Myanmar until political issues over the Myitsone Dam are addressed. In Laos, Chinese developers are postponing the construction of some tributary dams due to the inability of Chinese banks to follow up on funding the continued development of projects.

This raises the question: if China becomes unwilling to fund the controversial and potentially risky projects on the Mekong mainstream, who will? All of the signed MOUs for mainstream Mekong hydropower are build-own-operate-transfer (BOOT) projects. Neither Laos nor Cambodia has the financial strength to finance such large projects themselves. Practical concerns over losing money have led many Chinese hydropower companies to shift from the BOOT model, where they have to take on loans directly, towards a sub-contracting model that allows Chinese companies to avoid long-term ownership and management risks while continuing to export the design, procurement, and construction of dams.

This appears to be what happened with the Don Sahong Project, which is owned and financed by a Malaysian company called Mega First but will be built by Sinohydro. In other cases, Chinese firms may projects into joint ventures to share the risk: the Pak Beng project, which has been on the books as a Datang Hydropower project for years, has apparently shifted to a joint venture with a Thai company.

Finally, the severe drought in 2016 has highlighted the need for a more coordinated approach to water management throughout the basin. Food security and livelihoods have been impacted throughout the region and particularly in Vietnam’s Mekong Delta, with up to half of the Delta’s paddy affected by encroaching salinization during the worst drought recorded in 90 years. In Thailand the 2016 drought prompted the government to announce intensive irrigation plans to draw water from the Mekong tributary system when reservoirs ran dry. This stirred regional controversy, as the diversion of water was done without consultation through the MRC and in the face of concerns from Vietnam and Cambodia.

The extreme challenges posed by the drought and growing recognition of emerging political and financial risks have brought the issue of optimization of resources to the forefront of the conversation about regional development. Climate change predictions anticipate more flooding and more drought in coming years, making optimization planning vital if Mekong countries want to efficiently operate cascades in an uncertain water future. According to one senior engineer at the Mekong River Commission, these risks mean Laos will likely only end up building five of the nine proposed dams, including Xayaburi and Don Sahong. This is not unanticipated—globally, most river basins do not proceed with construction for all proposed hydropower projects. This raises questions as to which planned projects will ultimately be built.

The time seems ripe for Laos to consider alternative development options and better cumulative project analysis to ensure that it makes the best decisions about which projects will move forward. There are emerging models and analytical tools that can explore multiple development scenarios and compare the benefits and costs across a variety of sectors, such as The Nature Conservancy’s Hydropower by Design concept. Utilization of these tools could help Lao decision-makers explore different development options that would provide similar amounts of power with differing levels of social and environmental impacts.

It is clear that the government will not end up with a hundred percent of the planned projects currently on the books and considered in its revenue plans. The earlier Lao officials start to consider alternative development scenarios, the higher the likelihood that high-revenue, low-impact options will remain on the table and the more strategic their decisions about which projects to pursue will be.

Courtney Weatherby is a research associate with the Southeast Asia program at the Stimson Center, a Washington, D.C.-based think tank.

Source: The Diplomat

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Pokémon Go Players in Southeast Asia Have Been Warned to Avoid Land Mines

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Kerry Urges Southeast Asia Unity on South China Sea Disputes

VIENTIANE, Laos — U.S. Secretary of State John Kerry on Monday urged the divided nations of Southeast Asia to forge a consensus on how to address disputes with China in the South China Sea, appealing to the 10 countries to embrace a rules-based international system to resolve those differences peacefully.