Laos’ Trade Dam Breaks
The Mekong region received further frontier investor notice as Laos, with hydropower ties to neighbors China and Thailand and a startup stock exchange entered the final stage of WTO accession which could catalyze foreign entry. A US business delegation visited several months ago as diplomatic cooperation still centers on missing soldier searches from the 1970s Indochina war. According to the IMF commodities and construction will fuel 8 percent GDP growth this year on inflation half that number. The fiscal gap is down to 3 percent of output, but credit is up over 40 percent as state banks sustain high local government lending. The current account deficit is 20 percent of GDP and has been covered by energy FDI and aid, but reserves have tumbled to only two months’ imports. The amount falls short for low-income economies especially with dollarized financial systems, the Fund cautions. Currency stability must also be maintained with the Thai baht, placing priority on forging an interbank foreign exchange market. Inflation targeting could facilitate the effort with Treasury securities used for liquidity management. The central bank which lacks formal independence currently tries to limit money supply expansion to 25 percent within a 5 percent kip fluctuation band. Bank oversight is “rudimentary” and the three main state-owned institutions still do not meet minimum standards after recapitalization. NPLs are understated and connected lending is widespread and has propelled a real estate boom. On the budget front an extra one percent in revenue will be required to pay for civil service salary hikes. On external debt the distress risk is moderate on pledges to reach a 35 percent of GDP ratio by 2015 and confine commercial project borrowing to proven rate of return criteria. Along with WTO accession, tariffs will be reduced under the ASEAN free trade agreement and comprehensive business and regulatory overhauls will be contained in a new investment promotion law. A “rainy day” fund from mining proceeds is under consideration to cope with regular flood damage.
In Thailand after last year’s record deluge choked the supply chain auto and electronics manufacturers have hesitated to return despite a package of tax incentives. Operations have relocated to China and the Philippines despite an additional $10 billion for flood walls and dredging facilities which will again be tested as the rainy season commences. Stocks have gained 20 percent as premier Asian performers as rebuilding-driven GDP growth exceeds 4 percent and benchmark interest rates are eased. A minimum wage increase proposed by premier Yingluck during her campaign has not passed through to inflation, although a $15 billion subsidy for rice has proven less benign as large inventories remain unsold with world competition. The policy has been challenged in constitutional court as public debt/GDP at a watershed 45 percent redirected Yingluck’s original cabinet course.
