Lao bourse needs more transparency, openness

THE fledgling Lao Securities Exchange (LSX) has kept its scoreboard ticking with new listings and reforms since it was launched almost 10 years ago.

Now, the Laotian government is amending the securities law in order to liberalise trading rules. It is expected to soon revise the law on securities to improve operating conditions for state-owned and private companies so that they can raise funds from the LSX.

The governor of the country's central bank Sonexay Sithphaxay, stated early this month that the revised law would also encourage individuals and enterprises to invest in stocks and raise the investor community's confidence in investing. The Vientiane Times reported that the amendments would facilitate cooperation between the LSX and foreign stock markets that would help develop the Lao stock and bond markets.

It is not clear yet what shape and form the amendments would take. Since its opening in 2010, the LSX has functioned under the purview of a decree issued by the Prime Minister's Office, which was formalised into law in 2012.

In a sign of its determination to globalise its market, the Lao government has enlisted Standard Chartered, JP Morgan and Credit Suisse to arrange its international bond debut. At home, the 11 LSX-listed companies have raised over 6.7 trillion kip (about S$1.01 billion).

But for a market that relies on foreigners to buy half the listed stocks, the LSX still imposes a complex range of restrictions on foreign holdings.

The Lao bourse wants to increase the number of listed companies to 25 by next year. It may not get close to the target.

The LSX has, nonetheless, made itself attractive by waiving capital gains and dividend taxes on both individual and corporate foreign investors. It is also developing new financial products like provident and mutual funds and encouraging more asset management companies to emerge.

The growth of the LSX could have been faster if restrictions on foreign ownership were eased. While neighbouring countries are among the easiest places in the world to invest, Laos is one of the hardest.

Foreign investors who wish to invest in the LSX must comply with the following rules: They must designate their own representative, a broker located in Laos. Then they must get an investment Identification Card and certificate from the LSX-Market Operation Department.

After receiving a foreign investor's ID, the foreign investors must open two types of accounts: an account at a correspondent bank in the capital city of Vientiane, and an account at a local securities company (BCEL-KT Securities, Lanexang Securities or Lao-China Securities).

To give an example of three Laotian companies: First, in the case of EDL Generation (EDL-Gen), foreign investors can cumulatively buy no more than 20 per cent of the firm's total shares. Within this 20 per cent limit, a foreign institutional investor can buy stock not exceeding 5 per cent of the total listed shares; a foreign individual can buy stock not exceeding 1 per cent of the total shares.

Secondly, in state-owned Banque Pour Le Commerce Extérieur Lao Public (BCEL), foreign investors can cumulatively buy stock not exceeding 10 per cent of the company's total listed shares. Within this 10 per cent ceiling, a foreign investor can buy stock not exceeding 1 per cent of the total listed shares.

Thirdly, in Lao World Public Company (LWPC), there are no limits on how stock much a foreign investor, including individuals and institutions, can buy.

Foreign investors are generally aware of the obstacles to the growth of the LSX, such as poor corporate governance and transparency of Laotian companies.

Many local companies, both state- and privately-owned, have declined to submit to the LSX their audited financial reports and other performance data because they are worried about these details entering the public domain.

The Lao bourse aims to ensure that listed companies deliver dividends on time. It is trying its best to educate domestic investors and boost trading volume.

It relaxed trading rules in April 2017, lowering on-site transaction fees from 0.3 per cent to 0.15 per cent and online transaction fees from 0.27 per cent to 0.135 per cent.

The LSX, headquartered in Vientiane, is 51 per cent owned by the Laotian central bank and 49 per cent by the Korean Exchange (KRX).

The connection with China is often inevitable. In June this year, the Vientiane Center Lao began trading on the LSX, becoming the first state enterprise from Yunnan province, China, and the 10th company to list on the bourse. Vientiane Center is a well-known shopping centre in Laos, and it is conducting a pilot project to implement the Belt and Road Initiative.

The bourse's fortunes, however, are fluctuating. The LSX Composite has decreased 172 points or 20.62 per cent since the beginning of this year. The Index reached an all-time high of 1,569.95 in March 2015. The LSX had a total market capitalisation of US$1.1 billion as of February 2019.

The future of the LSX is well supported by strong economic growth averaging 7.7 per cent over the last decade, according to the World Bank, with per capita income reaching US$2,460 last year. Economic growth in Laos is expected to recover to 6.5 per cent in 2019, from 6.3 per cent in 2018.

Despite uncertainty in the global economy, Lao economic growth is driven by the construction sector, investments in large infrastructure projects and a booming services sector.

Economic growth is expected to improve in 2019-2020 on the back of higher power generation, vast opportunities in the non-resource sectors from closer regional integration and reforms to doing business.

Until very recently, Lao economic growth was largely dependent on natural resources, which placed increasing pressure on the environment.

The depletion of natural resources took an economic toll on the country as did the adverse impact on human health from pollution and waste. Laos acted quickly to reverse these trends and began implementing reforms to support a greener and more inclusive growth.

The LSX must stay the course of urging companies to become more transparent with their financial records and opening the door wider to foreign investors.

It is hoped that the forthcoming amendments to the securities law will offer new liberal measures that send the right signals to foreign investors.