The Mekong dilemma

By HANIM ADNAN

DUBBED the last frontier markets in Asia – Vietnam, Cambodia, Laos and Myanmar – hold positive long-term prospects in attracting more foreign direct investments (FDIs), but they will need to address the challenge of managing their economies well, especially during the current global economic slowdown.

Most economists contacted by StarBiz are projecting that the Mekong countries' gross domestic product (GDP) would decline this year. There will be slower FDIs and several mega investment projects would have to be put on hold as part of the respective governments' monetary policy battle to contain rising inflation lead by higher fuel and food prices.

Singapore-based Fortis Bank senior economist Joseph Tan said there would be increasing investment risks in the Mekong countries this year after having posted sound economic growth and strong FDI inflows over the past five years.

“Like the rest of the world, higher inflation in the recent months will challenge these governments' monetary policy although part of the inflation was imported through the depreciating US dollar,” he said.

The shortcoming of the Mekong countries was in their inexperience in macro economic management, he said.

While the countries' prospects remain positive due to abundant natural resources, competitive labour cost and young population, Tan said the main question would be how well these countries could undertake integration with the world's economy.

Vietnam and Cambodia have ascended to join the World Trade Organisation, but Myanmar and Laos are perceived as continuing to have difficult internal policies and international relationship problems.

“Many are also questioning the lack of transparency in terms of economic-related data collected in these countries,” Tan said.

Vietnam

Asian Development Bank (ADB) said in its latest report that Vietnam's inflation was expected to hit 18% in 2008 from 12% in 2007, while its GDP would drop to 7% from 8.4% last year.

Singapore-based Asian Forecasting Group action economics director David Cohen said these figures would create uncertainties to investors.

“However, I believe Vietnam in the mid-to-long term will continue to attract FDIs given its liberalisation in the manufacturing and services sectors, as well as its close proximity to China.”

In 2007, Vietnam's FDIs hit a record US$23.1bil. Despite the rosy FDI figures, Standard & Poor's, however, lowered its 2008 outlook for the country early last month citing “widespread and economic distress.”

In efforts to stem inflation, which started in 2007, the Government raised the benchmark interest rates and reserve requirements early this year.

ADB said while inflation would pose problems in terms of infrastructure and skills constraint, private industrial manufacturing was growing fast. The service sector such as trade, finance and tourism were also expanding.

Malaysia is one of the top 10 investors in Vietnam over the past five years with interest mainly in real estate and property as well as manufacturing.

Deloitte Vietnam senior tax manager Kevin Lam recently said there were 323 projects by Malaysian companies valued at US$1.86bil, excluding the US$10bil and US$2bil investments committed by Berjaya Group and Gamuda Bhd respectively.

He said Vietnam's accession into WTO had stimulated the property boom where prime land can cost up to US$15,000 per sq metre. To-date, Hanoi, Ho Chi Minh City, Hue, Da Nang and Hai Phong were among the focus of international real estate investors.

Of late, the government is also trying to attract foreign investment into onshore mining and extraction with China as its end consumer.

Cambodia

Cambodia has become the destination of FDIs after its first-ever general election in 1993.

Based on approved foreign-invested projects, the majority of FDIs came from Asia, particularly Malaysia, Taiwan and China, which accounted for about 60%.

The garment, tourism, infrastructure, construction and agriculture sectors are drivers of investments into Cambodia currently.

The Government is also looking at building more hydro power plants to handle its energy needs.

The Cambodian electricity prices – the highest in the region – remain a major obstacle in attracting FDIs.

It is four times more expensive than Thailand and Vietnam and the demand for electricity, which is growing 15% per year is also putting pressure on the country's fragmented power system.

An economist with a bank-backed brokerage said Cambodia's GDP was expected to ease to 7% in 2008 and 2009 mainly due to a fall in garment exports given intense competition from Vietnam and China.

While Cambodia's potential exploitable oil and gas (O&G) deposits remain uncertain, he also expects the exports and tourism sectors to be vulnerable to global economic sentiment.

“As Cambodia is slated as one of the fastest growing economy in South East Asia this year, I expect FDIs to grow but the question is whether it will come primarily from the east or western nations,” he added.

On the back of rising inflation, potentially weaker garment exports and slower construction and tourism sectors this year, the economist said the challenge for Cambodia would be to diversify its sources of growth.

The domestic risks would be bad weather, which could lower agriculture production.

Also, any sudden reversal in rapidly rising land prices and real estate speculation could prompt a generalised slowdown in bank lending, temper construction activity and impede other investments.

Currently, Malaysia is one of the largest foreign investors in Cambodia with investment worth over US$20bil.

There over 200 Malaysian companies operating in Cambodia, out of which about 90 companies are Malaysian-owned and the remaining joint ventures.

Malaysian investment in Cambodia are in the area of banking, logging and wood processing, hotel, textiles and garment, transportation and forwarding, plantation, construction, education, power, petroleum and services.

Major Malaysian companies operating in Cambodia include Malayan Banking Bhd, Public Bank Bhd, Petroliam Nasional Bhd, Muhibbah Engineering Bhd, YTL Corp Bhd and the Sunway Group.

Myanmar

It is interesting to note that over 90% or US$474.3mil of FDIs in Myanmar in 2007 was funnelled into the O&G sectors, according to its Ministry of National Planning Development report.

However, there were no new investment in mining, real estate, hotel and tourism, transport, power and the industrial sectors in 2007.

At the same time, Western countries either ban or discourage investment in Myanmar as a way of pressuring its ruling junta to improve poor human rights record and hand over power to a democratically elected government.

Asean countries as well as China, India and South Korea have invested heavily in Myanmar with interests in power at over 43%, O&G 21% and manufacturing 11%.

Malaysia is the fourth largest investor in Myanmar with about US$660.7mil invested mainly in real estate and property, O&G and manufacturing. It is also the largest real estate and property investor in Myanmar.

Last year, sources close to the Myanmar Ministry of Energy were quoted as saying that Malaysia's Rimbunan Retrogas Ltd would be granted the rights to undertake the A-5 deep-water block off the western Rakhine coast.

Laos

Laos, one of the few remaining one-party Communist states, began decentralising control and encouraging private enterprise in 1986. The results were striking with growth averaging 6% per year in 1988 to 2007, except during the short-lived drop caused by the Asian financial crisis in 1997.

Economists said the economy would continue to benefit from aid from international donors and foreign investment in hydropower and mining.

ADB in its report said Laos' GDP would improve to 8% in 2008 from 7.5% in 2007. The Laotian economy has grown by more than 7% for the past two years, driven by foreign investment in the development of the hydroelectric power industry, fast expanding gold and copper mining activities, and a rapidly growing tourism industry.

The latest local company to venture into Laos is Rohas Euco Industries Bhd, which will jointly invest in a US$100mil Nam Sane 3 hydropower project in Xieng Khuang province.

From 1992 to 2007, about 60 projects/businesses with Malaysian investments have been approved in Laos. The total value is estimated at US$600mil with investments in agriculture, garment manufacturing, wood industry, trading, hotel, restaurant and education.