Making the most of the Mekong
Emerging markets that share the Mekong hold rich potential but they need to be drawn more fully into the Asean integration process.
As the Asean single market draws closer, countries in Greater Mekong Subregion (GMS) expect to see substantial opportunities and benefits alongside other member states in Southeast Asia.
Particular attention is being paid to the CLMV group that includes Cambodia, Laos, Myanmar and Vietnam, which share the Mekong with GMS members Thailand and southern China. The CLMV countries are new investment frontiers that registered $13 billion in foreign direct investment in 2012, according to World Bank statistics.
However, many investors seeking to gain a foothold in the CLMV countries also need a presence in the more advanced economies of Thailand or China if they want to serve the wider Mekong region.
Asean today is the seventh largest economy in the world with a population of 618 million and a combined GDP of about $2 trillion.
“One of the elements that has helped the economy to prosper is the demographics,” Andreas Vogelsanger, CEO of the Asia Frontier Capital Vietnam Fund, told Asia Focus in a recent interview.
“If you see strong growth in the population segment aged 40-45 years old, that’s the key ingredient. For Vietnam, the population is shifting and the curve in that segment is really steep and trending upward until 2045-50 as the population is getting older.”
To top this off, the growing middle class in frontier markets is spurring a new type of consumer-focused economic growth, he said. Mr Vogelsanger noted that in Vietnam, monthly salaries have been climbing steadily and have now reached $117, so there is still a long way to go before they reach the current average of $470 in China.
All these factors are making the CLMV countries highly attractive to investors, but such investments tend to come with a higher level of risk. For financial investors, listed equities are preferable to acquiring stakes in non-listed companies, especially when it comes to governance and transparency.
“Vietnam has 679 companies listed [on two stock exchanges], while Laos and Cambodia only have a handful. Myanmar will start its stock exchange in 2015,” says Mr Vogelsanger.
“And of course, if you are investing in frontier markets you have to be aware that the liquidity in these stocks can be an issue. It is therefore important to diversify your investment over many stocks, especially in the small-cap segment. This is how we invest and it allows us to unwind our holdings quickly should that be necessary, and we also don’t have a concentrated risk in any of our holdings.”
One concern related to Asean integration has been the development of infrastructure. While there has been a focus on road transport in particular to link the countries in the region, the CLMV countries still lack many basic necessities.
“Many of them don’t have electricity, proper healthcare and clean water,” said Jirapun Pongpanite, CFO of General Electric Thailand. “Once we are able to satisfy these needs, the middle-class population will rise tremendously and as their social status is lifted, they will travel more often.”
The demand for energy rises in line with population growth, he said, citing the example of Thailand. “We see shortages of electricity every year [in Thailand] as usage exceeds the availability of the energy supply. Now it is important to look into renewable and waste energy that will help fulfill these rising demands,” he said.
“In Asean, modular distributed power is another attractive business that should be looked into as the size of the power plants is smaller, making them more convenient to fund and operate.”
Mr Jirapun said that in Myanmar where infrastructure is weak, there are huge opportunities as the natural resources are untapped and the country shares borders with three powerful neighbours: China, India and Thailand.
“Myanmar is a springboard,” he said. “Most visitors are there for business purposes and as everything is more fungible, the mobilisation of capital and labour is much easier.”
Mr Jirapun believes that eventually, the people in Myanmar will pressure the government to improve infrastructure to improve their living conditions, especially now that they have access to the internet and see how the rest of the world lives.
Cambodia is another country that is experiencing a boom, notably in real estate, according to Mr Vogelsanger. “A lot of foreign investment, especially from China, Vietnam and Thailand, is going into Cambodia. If you look at Phnom Penh, you will find new buildings being built on every block,” he said.
“A lot of money is being spent on construction of factories. There is a very business-friendly climate in Cambodia as it is very open to FDI and that’s a huge advantage for investors.”
Laos, meanwhile, has demonstrated huge potential for hydroelectric power with 13 dams operating or under development and more planned. “Although it is not a consumer story as the country has a population of only 6.6 million, what is happening there is that the government is encouraging bigger infrastructure and agriculture projects, so we might see some positive surprises from Laos,” said Mr Vogelsanger.
Li Yao, the CEO of the China-Asean Investment Cooperation Fund (CAF), a private equity fund focusing on infrastructure and energy investments, also sees positive momentum for Asean integration. However, in addition to being commercially viable, investments must be socially acceptable.
“When you do business, you should follow standards such as corporate governance, social responsibility and sustainability,” he said. “It’s a way to brand a country to promote its image and spread its values to be shared with others. In the end, you will be able to build up trust among investors and be recognised at a premium over competitors.”
Citing an example from Thailand, CAF acquired 10% of National Power Supply Plc (NPS) last year and it has helped improve the energy structure by diversifying from coal to natural gas and renewable energy sources through more investment and better use of technologies.
However, Mr Li also observed that over the past few years of political drift, Thailand had fallen a little bit behind some of its peers. “I have a sincere hope that Thailand can continue the pragmatic approach to economic growth and reduce poverty,” he said.
“Political stability is important. People should work hard and focus on business and the economy to improve efficiency. I really hope that Thailand can continue to lead Asean as a mature leader in the GMS.”
While trade liberalisation and infrastructure development will extend the collective growth of the Asean and GMS region, countries will need to do more to share resources and specialisations as well as infrastructure financing in the coming years.
“It will take more than 10 years before all infrastructure will be well-established and there should be methods of optimising energy usage for countries in the region through collaborative efforts,” said Mr Jirapun of GE.
“It is also important for Asean countries to build up good relations with China because China is very strong. The GMS is one of the most promising areas among the world’s emerging markets and [members] should keep up the momentum for the next step,” added Mr Li.