Indochina’s Pressed Post-Conflict Advantage
Indochina region markets Vietnam and Thailand were not as battered as Morgan Stanley Capital International respective frontier and core counterparts in 2018, while tiny Cambodia with a few listed stocks was up over 30%, as investors single out the area for high growth and value this year. They believe beyond China trade diversification and consumer and tourism inroads can generate outperformance despite serious political and banking system bottlenecks, and that Vietnam in particular benefits from dedicated public and private equity funds sitting on cash. Valuations there trail Asian neighbors, with single-digit price-earnings ratios often applying to second-tier companies.
Cross-border infrastructure ties, such as a planned expressway between the capitals Phnom Penh and Ho Chi Minh City, and development projects in Laos are increasingly visible with Chinese natural resource and small business interest. Beijing is funding airport construction along the Thai-Cambodia border resort town of Poipet, and the $6.5 billion Lao-China railway which will drive the debt/gross domestic product ratio to 70%, according to the World Bank. Near-term attractions depend on continuing solid Chinese investment and tourism inflows, and involve heavy governance and sustainability tradeoffs, even the most bullish advocates acknowledge.
Cambodia’s GDP growth will again be 7%, but a real estate boom, with prices in the capital approaching Bangkok’s, and runaway 20% credit expansion are among dangers listed in the International Monetary Fund’s November Article IV report. Economic performance in 2018 was “strong” across garment exports, tourism and construction on 2.5% inflation, but the fiscal and current account deficits rose to 2% and 10% of output, respectively. Reserves cover little more than three months imports, half the regional average, and the managed exchange rate and high dollarization constrain competitive and policy space. On the budget, the Fund recommends tying public service wage increases to performance, and raising land and corporate and individual income taxes.
While government debt is low at 30% of GDP, public-private partnerships may mask contingent liabilities and deal incentives should be rationalized. Macro-financial risk on the other hand is an immediate concern, with the average bank loan-to-deposit ratio at 100% and non-performing assets “understated” amid rising corporate and household leverages. Real estate credit spiked 35% annually in recent years, with looser and unregulated mortgage conditions. Loan to value limits are overdue in this category and tighter capital, liquidity and foreign exchange exposure treatment should be in place broadly as international financial reporting standards are introduced this year, the IMF urges.
Micro-finance institutions remain subject to an interest rate cap, and lax money laundering procedures may harm correspondent bank relationships, as headquarters come under official and shareholder pressure for links with the ruling Hun Sen regime and allies implicated in political and human rights infractions. Local currency use could be further promoted through government payments in riel and capital market development, both corporate bonds and equities. Land registration and a commercial court will facilitate small business borrowing, and an anti-corruption unit has been formed with investigations underway, but lacks practical independence and a track record fostering transparency and integrity, the review concludes.
Vietnam too is on track for repeated 6.5-7% growth, on the back of free trade agreements with the European Union and through the revived Trans-Pacific partnership without the US. However manufacturing exports slowed at year-end in line with the global cycle, and the trade surplus of over $5 billion though the third quarter will likely shrink. Non-resident capital outflows in turn h eroded the estimated $65 billion reserve position, and prompted central bank intervention to preserve the currency band against the dollar. Small 1-2% devaluation may be triggered in the coming months, but monetary authorities must also contend with projected 4-5% inflation and state bank cleanup where sudden rate moves can upset balance sheets and franchises. Further consolidation and tightening and possible stock exchange divestitures could lure wary investors, already noting steep bank valuations against regional peers.
Thailand’s central bank signaled hiking despite negligible 1% inflation against the backdrop of direct and portfolio investment outflows, as the current account surplus and growth fall to the 4% range. Government infrastructure spending is expected to be the main economic driver and a potential vote-getter in this long-promised election year, with military-backed candidates and exchange-listed materials and construction firms aided by the building binge.
