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4 Jan 2007

International Economy

Trend of Indo-Chinese economy in 2007(Current Issue No.1937)

The trend of Indo-Chinese economy is stellar in 2007 from the projection that the economy of Laos, Cambodia and Burma will grow on average around 6.6 percent, 6.5 percent and 5.5 percent respectively compared with their projected growths in 2006 of 7.3 percent, 5.0 percent and 7.0 percent respectively. Factors that support the economic growth of Laos, Cambodia and Burma in the Year of the Pig are the expansion of exports, FDI (Foreign Direct Investment) and tourism. Meanwhile, risk factors that should be carefully watched in 2007 are the soaring oil price, the probability of higher inflation including a number of trade barriers imposed by key counter-trade countries, e.g., the US, the EU, etc. In 2007, positive factors for the economy of Indo-Chinese countries are as follows: -
1. Exports exhibit a steady growth – Exports of Cambodiahave grown steadily in the 2-3 years after the country entered the membership of WTO in October 13, 2004. This status enabled Cambodia to export more goods to key markets such as the US and the EU so benefiting from the tariff reductions granted by these two markets, i.e. the exports of garments and textiles which are the top export goods of Cambodia that benefited from WTO' cancellation of textile quota since January 1, 2005 where, in this year, Cambodia' aggregate exports grew 14 percent to USD2,821 million from USD2,476 million in 2004 . Also there is an indication that Laos' exports in 2007 will continue growing steadily.
For Laos, the US conferring the NTR (Normal Trade Relation) status in December 2004 reduced the tariff rate that the US collects from Laos' export goods. It is projected that the US' tariff reduction and the GSP that Laos still receives from other countries, which are significantly the EU, Japan and Canada, will enable Laos' exports in 2006-2007 to continue growing, particularly Laos' garment exports which are clearly the country's top export goods. Moreover, exports from Laos to Thailand, which is its number 1 export market, representing more than 35 percent of Laos' total exports, also show a steady growth trend. For Burma, its exports show a trend of expanding steadily as a result of a higher demand for energy, natural gas, wood products, fishery products and agricultural produce from Burma' counter-trade countries. Burma is a country that posts a steady trade surplus. The no. 1 export goods is natural gas, representing more than 30 percent and is exported solely to Thailand.
2. FDI (Foreign Direct Investment) flows in steadily – Cambodia has fertile natural resources which include pulp, oil palm, rubber, oil and natural gas so it is an attractive source for foreign investors to set up goods manufacturing factories. China is the foreign investor whose investment value is highest. Foreign investors of other nationalities in Cambodia whose investment values are high respectively are Taiwan, Russia and Thailand. For Laos, in the first 9 months of 2006, Thailand was the investor whose investment value was highest with a total of 30 projects, of which the aggregate total value was more than USD650 million. Sectors on which Thailand poured particularly high investment are electrical power, telecommunications, hotels & tourism and industry-handicrafts. Other countries whose investment values are also high, but trail behind Thailand, are Vietnam, China, South Korea, Singapore and Taiwan respectively. The sector in which foreigners invest highest is the production of electrical power, which accounts for more than 80 percent of the total investment value in Laos. For Burma, the business category that foreigners invest in most heavily is oil and natural gas drilling, which is the investment that creates the principal income to the country. Concerning foreign direct investment, in the fiscal year 2005-2006 (April 2005-March 2006), FDI in Burma totaled USD6,065 million, which was considered the period during which foreign capital flowed the most into Burma since the country opened for foreign investment in 1988. Notably, almost all this foreign investment is from Thailand, of which the highest investment is more than USD6,030 million on the dam construction project for electricity production.
3. Income from tourism boosts economic growth – The number of foreign tourists in Cambodia, Laos and Burma is expected to rise in 2007 following the rising trend of foreign tourists in last 3 years. Particularly noteworthy is the number of foreign tourists in Cambodia and Laos which grew 34.7 percent and 22.4 percent respectively in 2005. However foreign tourists in Burma rose less than 1 percent in 2005 against 2004which was clearly due to internal political change in Burma and the relocation of the capital at the end of 2004. The effect of this was that foreign tourists decelerated their travel to Burma in 2005 to wait and see what the internal security situation would be as a result of these internal changes. In 2007, indications are that the number of foreign tourists in Cambodia, Laos and Burma will increase due to the ASEAN measure that pushes for the exemption of visas for people from ASEAN countries who travel within ASEAN to boost intra-regional tourism, including the domestic measures of Cambodia, Laos and Burma that are aimed at steadily attracting foreign tourists to create more income for the country.
KASIKORN RESEARCH CENTERis of the view that despite the indications that exports, FDI and tourism of Cambodia, Laos and Burma will further grow in 2007, which are key driving forces for economic growth of Indo-Chinese countries, however, some points need to be carefully watched in the Year of Pig. Factors that may affect the economic growth of Cambodia, Laos and Burma are the economic deceleration of key export markets, e.g., the US, the EU, China and Japan, which will respectively slow down exports of Indo-Chinese countries to these markets and the pressures from high oil price and soaring inflation. Other factors are the intensifying competition for exports of garments and textiles in 2007 due to Vietnam becoming a full WTO member on January 11, 2007. This will give more opportunity for Vietnamese garments and textiles to expand their markets because these goods will not be subject to quota restrictions anymore. Also there are problems in terms of Cambodia and Laos posting steady trade deficits and political and human rights problems in Burma, which could make the country continue suffering from economic sanctions by the international community.

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International Economy