July 31, 2014 12:00 am JST

Underdeveloped equity market stands in Laos' way

MASATAKA MAEDA, Nikkei senior staff writer

The Vientiane skyline: The Laotian capital is quieter and less developed than Hanoi or Ho Chi Minh City in neighboring Vietnam, but change is coming fast.

VIENTIANE -- Laos has been experiencing a development boom in recent years, with ongoing construction seemingly everywhere in its capital city. But the country's equity market is still underdeveloped, and it will likely take some time for Laos to achieve fully sustainable economic growth.

     Vientiane, the capital, has seen a jump in the number of cars and fashionable restaurants, giving the impression that some of the fastest economic growth in Southeast Asia is happening here. A gigantic international conference hall, built with funds from China, is sure to impress many visitors. However, only the third company in the country went public at the end of last year. "Trading volume has not grown as much as expected," said Dethphouvang Moularat, chairman and CEO of the Lao Securities Exchange.

Still nascent

The Lao Securities Exchange began trading in January 2011. The first two companies that listed on the bourse were EDL-Generation and Banque Pour Le Commerce Exterieur Lao, or BCEL, both of which are state-owned.

     Hydropower generation on the Mekong River has been a powerful tool for bringing in foreign currency. Bounoum Syvanpheng, managing director and CEO of EDL-Generation, said, "Listing on the bourse improved our management system and transparency." He also stressed his company's high growth potential, saying only about 10% of the country's total water resources have been tapped. The company also plans to issue bonds in Thailand and Laos.

     Lao World went public last December, becoming the first private company to do so. It operates a huge commercial complex in the capital that houses an international exhibition hall, bowling alley, movie theater and supermarket. But its shares change hands only once every few days and in only small amounts. A gas station operator is expected to go public in August.

     Dethphouvang has been trying to boost trading volume by encouraging more companies to list on the exchange. But progress has been much slower than the bourse's CEO planned. Even if candidate companies clear the financial criteria for listing, corporate governance stands in the way. The exchange has three requirements in this area: Companies must set up a board of directors, create an internal audit committee and introduce external auditing. However, "both state-run and private companies have refused to comply with these requirements because they are unwilling to disclose the details of their businesses," Dethphouvang said.

Elegant but empty

Laos completed the National Convention Center in September 2012 on 20,000 sq. meters of land. It offers conference rooms in all sizes and for all purposes, such as a large banquet hall with a capacity of more than 2,000 people and a round-table conference room designed for full-scale international meetings. The first conference held at the $80-million center was the ninth Asia-Europe Meeting (ASEM) summit on Nov. 5-6, 2012. Since then, however, the facility has been used only a handful of times a year, according to one of the ushers. It is clear that it is too large for Vientiane now. The 50 luxury villas built near the Mekong River to accommodate national leaders participating in the ASEM summit have also seen little use since then.

     The convention center was built mostly with money and labor from China. In lieu of payment, Laos is believed to have granted long-term rights to develop and use vast tracts of land. Shopping malls and office buildings are going up all over the city. Signs hung at these construction sites show that many of the projects are being carried out by Chinese companies. A Japanese working in the country said: "Laos' economy has kept growing at a remarkable rate of about 8% a year, but attention needs to be paid to the level of China's involvement in the country."

     The government aims to raise per-capita nominal gross domestic product 240% from 2013 levels to $5,000 in 2025, but will Laos be able to keep its rapid economic growth going? An increasing number of foreign companies are setting up factories in the country, attracted by low labor costs. Japanese companies are particularly welcomed by locals because they work on projects in the medium to long term, putting great effort into training workers and transferring technology.

     Somchith Souksavath, the dean of the faculty of economics and business management, National University of Laos, said, "The key to Laos' economic development is how much it can improve the quality of its human resources using the money earned from exports of its natural resources."