VZCZCXRO2210
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHVN #0662/01 3571019
ZNR UUUUU ZZH
R 221019Z DEC 08
FM AMEMBASSY VIENTIANE
TO RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/SECSTATE WASHDC 2335
RHEHNSC/NSC WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 VIENTIANE 000662 
 
SENSITIVE 
SIPDIS 
 
STATE FOR USTR BISBEE 
COMMERCE FOR HPPHO 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LA
SUBJECT: FINANCIAL CRISIS BEGINS TO ERODE PILLARS OF LAO 
ECONOMIC GROWTH 
 
¶1.  (U) Summary:  The weak integration of the Lao banking 
system with the international financial system initially 
cushioned the impact of the global financial crisis on 
Laos--there are no tranches of subprime debt in the Lao 
central bank.  However, as the non-financial downturn has 
spread globally, Laos has begun to register its impacts, with 
the collapse of copper prices weighing heavily on exports and 
future government budgets, and with uncertainty about power 
demand, especially in Thailand, leading to the suspension of 
several major hydropower projects and questions about the 
pace of future expansion within the sector.  The IMF has in 
recent months twice downgraded its expectations of future Lao 
growth and continues to emphasize the downside risk, and the 
World Bank now projects 2009 Lao economic growth at 5%.  The 
Government of Laos (GOL), which only a month ago was 
predicting 8% growth in 2009, now appears to recognize the 
good times are coming to a halt.  End Summary. 
 
--------------------------------------- 
COMMODITY PRICE COLLAPSE CUTS BOTH WAYS 
--------------------------------------- 
 
¶2.  (U) As the global financial crisis began to freeze credit 
and push down the stockmarket in the United States, the GOL 
and many of the international financial institutions that 
support government spending downplayed its local relevance. 
The Lao Central Bank proudly noted that it had not purchased 
any subprime securities.  Even as the crisis spread to Europe 
and Asia it was widely believed that Laos, with a banking 
system only weakly integrated into the global credit network, 
could escape a serious economic downturn.  The fall of 
commodity prices, in particular copper, reminded the GOL that 
Lao economic integration has outpaced Lao financial 
integration into the global economy. 
 
¶3.  (U) As the price of oil has fallen, so has the Lao bill 
for imported petroleum products.  According to the IMF, the 
positive balance of payments effect from lower oil prices 
should help offset the collapse in copper prices, previously 
the single highest value export from Laos.  While the country 
as a whole might benefit from lower energy prices, the 
government is expected to see a loss in tax revenue equal to 
at least 1% of GDP from lower petroleum imports and mining 
exports.  In recent years, the GOL has received substantial 
tax payments from Oz Minerals (previously Oxiana) and its 
Sepon gold and copper mine.  Since 2003, Oz has paid the GOL 
over $230 million, with $135 million alone coming in FY 2007. 
 Oz believes its taxes funded about 20% of the government 
budget in FY 2007.  In September 2008, Oz General Manager in 
Laos Peter Albert publicly asserted that, if prices and 
profitability stayed high, Oz Minerals alone would contribute 
almost $2 billion to the government by 2020, dwarfing the 
expected $300 million contribution from the Nam Theun II 
hydroelectric dam, often described as a project key to future 
Lao economic development. 
 
¶4.  (SBU) Peter Albert was recently laid off from Oz Minerals 
and the company may soon be forced to sell off large chunks 
of assets to stay alive.  Richard Taylor, Oz Mineral's 
strategic analysis manager in Laos, told econoff December 19 
that the company, which asked for a voluntary suspension of 
share trading in Australia through December 29 while it tries 
to refinance debt, had put itself up for sale as successful 
refinancing is unlikely.  Mr. Taylor noted that the company 
is also temporarily putting off finishing a three-quarters 
complete $200 million expansion of its successful Sepon mine 
to conserve cash, although he expects the expansion to move 
forward in 2010.  He believes the GOL is now coming to grips 
with the reality of the global recession and examining ways 
to minimize its impact on Laos.  With copper prices falling 
almost daily, and currently around $1.30/lb, he sees Oz 
making 2009 tax and royalty payments of about $20 million - 
far below government expectations. 
 
¶5.  (U) Phu Bia Mining, another Australian copper and gold 
mining firm which began exporting copper concentrate in 2008, 
has also been forced to lower expectations of future tax 
payments.  With copper at $3/lb, 2009 tax and royalty 
payments were expected to be approximately $85 million and 
2010 payments $110 million.  With copper prices falling, Phu 
Bia circulated a briefing noting that copper at $1.75/lb 
meant expected tax payments for 2009 production would fall to 
$12 million.  As copper prices continue to fall, the company 
has announced it will delay its planned expansion and focus 
on maintaining profitability.  The World Bank, in its 
 
VIENTIANE 00000662  002 OF 003 
 
 
November Economic Monitor for Laos, projected mining tax and 
royalty payments of around $60 million in 2009 for Laos. 
However, this was predicated on $1.50/lb copper. 
 
---------------------------------- 
UNCERTAIN OUTLOOK FOR POWER SECTOR 
---------------------------------- 
 
¶6.  (U) Rumors of major power projects running into financing 
difficulties have circulated recently in Vientiane.  On 
December 17, the Director General (DG) of Investment 
Promotion in the Ministry of Planning and Investment, 
Houmpheng Souralay, said that developers of a planned 1,800 
MW lignite plant in Hongsa, Xayaboury province, were halting 
the project due to the global recession.  DG Houmpheng also 
announced that a number of large planned dam projects, 
including the 440 MW Nam Ngum 3, 523 MW Nam Theun 1, 278M W 
Nam Ngiep 1, and 1100 MW Nam Ou projects would be "suspended" 
due to financing difficulties and as a result of as yet 
unsuccessful attempts to revise the companies' power purchase 
agreements, primarily with the Electrical Generating 
Authority of Thailand (EGAT). 
 
¶7.  (SBU) In July 2008, the Ministry of Energy and Mines and 
the Lao State Holdings Enterprise (LSTE) began publicly 
discussing a need to renegotiate power purchase agreements 
(PPA) with EGAT to take into account the rise in materials 
costs, and the subsequent effect this would have on dam 
profitability, and price rises in alternative (natural gas 
and oil-fired) energy.  EGAT reportedly agreed to renegotiate 
the PPAs, but has made little effort to do so.  A former 
consultant to EGAT told econoff he believes there will be no 
new PPAs until the Thai government enjoys real stability and 
Thai electrical demand begins to rise.  Dr. Somboun Manolom, 
General Manager of the LSHE, told the Embassy on December 17 
that a wide range of planned projects would be delayed at 
least 1-2 years as EGAT is already projecting at least a 5% 
decline in Thai electricity demand in 2009.  Dr. Somboun 
confirmed, however, that eight dams currently under 
construction will be finished, as they already have PPAs in 
place.  Three of the eight, the 1088 MW Nam Theun II, the 615 
MW Nam Ngum 2, and the 280 MW expansion of the existing 
Theun-Hinboun dam, are designed primarily for export to 
Thailand.  A fourth, Xekaman 3, is designed for export to 
Vietnam, while the remaining four (ranging from 2.4 to 120 
MW) are for satisfying Lao internal demand. 
 
-------------------- 
TOURISM IN 2008 FLAT 
-------------------- 
 
¶8.  (U) In December 2007, the New York Times ranked Laos as 
the #1 "Place to Go in 2008."  The GOL took notice, 
projecting that over 1.8 million tourists would visit in 
2008, up from about 1.6 million in 2006.  Tourism accounted 
for about 8 percent of GDP and generated about $233 million 
in revenue during 2007.  On December 8, the Lao National 
Tourism Administration (LNTA) announced that 2008 numbers 
were running only 3 percent ahead of last year through 
October, and that about ten percent of tourists had canceled 
visits since the start of the financial crisis. 
Additionally, package tour bookings in the first half of 2009 
are running fifty percent below 2008, according to the Lao 
Association of Travel Agents.  The closure of Bangkok's 
international airport in late November-early December briefly 
curtailed the number of visitors who could reach Laos from 
abroad and likely helped push total 2008 arrivals below that 
of 2007. 
 
------------------------------------ 
IMF RATCHETS DOWN GROWTH PROJECTIONS 
------------------------------------ 
 
¶9.  (U) Benjamin Bingham, the IMF representative for Laos 
(based in Hanoi) told a November 24 gathering of donors and 
GOL luminaries at the UNDP-sponsored Round Table 
Implementation Meeting that the IMF was forecasting a 5.75% 
growth rate for Laos in 2009, down from about 7% in 2008.  He 
emphasized the large degree of uncertainty about the 
projections and stressed that most risk was on the downside. 
Just a month earlier, at a World Bank gathering, Mr. Bingham 
and the senior World Bank economist for Laos, Katia 
Vostroknutova, had presented a much more optimistic picture 
of the Laos economy's reaction to the international crisis. 
 
 
VIENTIANE 00000662  003 OF 003 
 
 
¶10.  (U) In its November Economic Monitor, the World Bank 
projected 2009 growth in Laos at the "Low" end of about 5%, 
returning to about 6 percent over the period 2010-2013.  This 
is not far from the average growth rate of 6.5% over the last 
two decades, and assumed the delays in most large power 
projects, zero growth in tourism in 2009, and an average 
annual two percent growth in agriculture, and four percent 
growth in services.  In a December 19 meeting, the World Bank 
held to its projections, which include an uptick in 2010 to 
six percent GDP growth as the Nam Theun II project comes on 
line. 
 
------- 
COMMENT 
------- 
 
¶11.  (SBU) After initially appearing to adopt a dismissive 
attitude towards the financial crisis, the GOL has begun to 
show greater concern and more dispatch.  According to senior 
mining industry members, the Government met last week at the 
ministerial level to discuss appropriate policy responses. 
Robert Allen, General Manager for Country Affairs at Phu Bia, 
noted that the GOL suddenly agreed to a number of 
long-standing requests from the company, including an 
agreement to lower electricity prices.  When the local 
English-language newspaper printed an article stating that Oz 
Minerals would be cutting over 50% of its staff (not true, 
says Oz), six separate ministers called the company to 
discuss its situation. 
 
¶12.  (SBU) The loss of mining revenue and slowing of foreign 
investment will hurt the budget and slow GDP growth, but are 
unlikely to present any real challenge to GOL legitimacy. 
The mining sector, in particular, is quite new to Laos and 
essentially provided windfall revenue during the run up in 
commodities prices worldwide; most of that revenue was 
reflected in increased urban standards of living, with less 
influence on the rural majority.  With the mining windfall 
ended for the time being, there will be more pressure from 
parts of the GOL bureaucracy to expand economic reform, as a 
means of attracting broader foreign investment.  Rapid change 
is far from the norm here, however, and we expect reform to 
continue at a gradual pace.  There will also almost certainly 
be more appeals to the donor community, including to rising 
donor China, to help Laos through this more challenging 
economic patch. 
 
 
HAYMOND