- About Us
- What We Do
- Sector Expertise
- Contact Us
Dr Nick J Freeman
Having recovered from the impact of the Asian financial crisis and some ill-advised monetary policies in the late 1990s, the Lao economy has regained some degree of stability. According to official figures, Laos registered GDP growth of 5.7 per cent in the fiscal year ending April 2002.
Looking ahead, a critical element in the country’s economic reform process is going to be the restructuring and recapitalisation of the country’s three state-owned commercial banks (SOCBs), which together account for over 65 per cent of total banking assets. All three are loss making; have non-performing loan levels in excess of 70 per cent of total loans; have negative capital adequacy; and, are effectively insolvent. Two of these SOCBs - Lao May Bank and Lane Xang Bank - are to be merged into a single entity. The third, Banque pour le Commerce Exterieur Lao, the country’s single largest bank by far, also requires radical restructuring.
The plan is for these banks to be restructured in stages, as part of a performance-related recapitalisation programme agreed with the World Bank and Asian Development Bank. By forming new entities, the two new banks will not inherit the hidden off-balance-sheet liabilities of the old banks, the extent of which is unknown. Instead, the new entities will 'cherry-pick' from the most valuable of the fixed and performing assets of the former banks, and re-hire roughly half the existing staff. Foreign advisers will also be attached to the banks on a full-time basis, to help ensure the implementation of the restructuring and business plans. A carrot-and-stick approach will also be used in an attempt to motivate the banks’ management and staff to implement these plans. Carrots will include the provision of: recapitalisation bonds, performance bonuses, continuation of contracts for existing management, and regulatory forbearance; the sticks will comprise the withholding of the same.
This is the second round of banking consolidation to occur in Laos since 1998, when six state-owned banks were merged into the Lao May Bank and the Lane Xang Bank. This followed a recapitalisation program for the state-owned commercial banks in 1994. But by 1996, and well before the Asian financial crisis struck, the state-owned banks were again in poor financial shape. One of the lessons learnt from that earlier experience is that up-front capital injections are probably not effective. Therefore, this time the recapitalisation process will occur in three stages, over a four-year period, in tandem with a series of points-based performance reviews. Points awarded for meeting both qualitative and quantitative goals will be translated into capital injections into the new bank entities.
The aim is that by 2006, Laos’s state-owned commercial banks will have attained positive capital adequacy, and will have internal capabilities that will allow them to become profitable, or at least solvent. But much will depend on making these state-owned banks more autonomous from the government, and ending their role as policy lenders. It will also require changes to the state enterprise sector, now comprising roughly thirty state-owned firms. Several of these firms are not run on commercial terms, and the losses incurred are then passed on as NPLs to the state-owned commercial banks. Perhaps 80 per cent of all NPLs in Laos are derived from loans to state-owned enterprises.
WATCHPOINT: This bank restructuring process is expected to be completed by the end of 2006, so expect credit to be in relatively short supply in Laos until then.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
Jan 16 2017 — Portfolio Investment in Asia 2017
Jan 16 2017 — COMPARATIVE OPERATING COSTS IN ASIA 2016
Jun 16 2016 — Emerging Markets As Investment Targets