Indochina Finds It’s Not Immune to Asia Crisis

Government officials in Indochina were almost smug when Asia’s economic miracle evaporated last summer in clouds of red ink, bankrupt companies and crashing stock markets.

“We’re immune,” they declared, and at first glance there was good cause to believe that the mini-economies of Vietnam, Laos and Cambodia were. None of the countries has a stock exchange. Their currencies are nonconvertible. Their industries are, to varying degrees, state-run and unconcerned with the bottom line.

To some extent the officials were right. The vast majority of the region’s more than 90 million people are poor, rural and agrarian. In what is referred to here as Buddhist justice, this section of the population never benefited from the neighboring “tiger” economies--but it hasn’t suffered in the downturn, either.

Still, for reasons at least partly related to the economic crisis in Asia, Indochina today finds itself in a precarious position, with rickety financial institutions, sickly tourist industries, sagging exports and second thoughts about the merits of Western-style free-market economies as embraced by troubled Thailand, Malaysia and Indonesia.

Indochina’s largest foreign investors are from the very Asian countries that are trying to get their own houses in order, among them South Korea and Malaysia. Many investors were willing to overlook Indochina’s poor infrastructure and highly regulated business climate because of its cheap start-up, overhead and labor costs. Now, with the cost of doing business dropping elsewhere in Asia, Indochina doesn’t look like so much of a bargain.

“Why build a garment factory in Cambodia with poor transportation, communication and water infrastructure and pay a worker $1.50 a day,” asked a Western economist, “when you can build as cheaply in Thailand and have adequate transportation, communication and water and pay a worker $2?”

In Vietnam, an overvalued local currency has made exports, such as textiles and shoes, more expensive in neighboring countries where currencies have tumbled. The regional crisis, economists say, has cut the value of Vietnamese exports by $500 million from levels predicted a year ago.

Doing business in Vietnam--where the government has liberalized the economy but retains substantial control--was a dicey proposition in the best of times. The slow pace of reform has prompted the departure of some Western investors, a bad omen in a country where, according to the World Bank, the banks are owed twice as much in uncollectable loans as they have in capital and are in effect bankrupt.

Chrysler pulled out of Vietnam last year, and Procter & Gamble’s Vietnam unit is on the brink of shutting down. The unit--70% owned by the U.S. company, 30% by a state-run local partner--is facing a cash shortage, aggravated last month when the state-owned central bank advised commercial banks to stop lending money to the P&G; operation.

In an attempt to appease disillusioned investors, Prime Minister Phan Van Khai this month promised to improve the climate for doing business. “We are fully aware,” he told foreign investors, “that we should and must continue to improve the environment to continue the improvement of the competitiveness of the market economy.”

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Laos, which like Vietnam has a Communist government, has embraced a free-market economy with more enthusiasm than its two Indochinese neighbors. It privatized all but a handful of about 600 state-owned enterprises and, at the request of the International Monetary Fund, agreed to an independent audit of its banking system.

But inflation is running at 26% a year in Laos, and the Laotian currency, the kip--which has the misfortune to be tied to the Thai baht, the currency that touched off Asia’s crisis last summer--started falling even before the baht did. One U.S. dollar used to buy 1,200 kip; now it buys 2,400.

This has created an unusual situation. Foreign aid and grants are an underpinning of the Laotian economy, and hundreds of Laotians in Vientiane, the capital, who work for the international agencies are paid in U.S. dollars. Their purchasing power is suddenly greater than ever before.

In both Laos and Cambodia, the collapse of the baht means that Thai goods are increasingly cheap. Cambodia, for instance, produces cement, but Cambodian cement is now more expensive in Phnom Penh, the capital, than Thai cement. Economists consider increased exports to Thailand critical to Cambodia’s development.

“We need to export to gain hard currency,” said Bit Seanglim, senior economic advisor to Cambodia’s Finance Ministry. But right now, he said, Cambodia doesn’t have much to export to Thailand besides wood products, such as furniture.

All three countries in Indochina have embraced tourism as a foreign-exchange earner, and all have been hurt as the numbers of tourists from neighbors such as Hong Kong and Thailand have sharply declined, even though weak local currencies translate into bargains for foreigners with U.S. dollars or French francs.

After six years of growth, Vietnam Airways carried 2.6 million fewer people in 1997 than in ’96. On March 25, KLM, the Dutch carrier, will suspend its twice-weekly flights from Vietnam’s Ho Chi Minh City (formerly Saigon) to Amsterdam, citing insufficient demand.

The $70-million, 18-story Sheraton hotel in Hanoi has pushed back its opening, once planned for December 1997, by at least three months, and a five-star Thai-financed hotel on the shores of Hanoi’s West Lake was abandoned late last year, just weeks before completion. Hanoi newspapers said the investors ran out of money. Hanoi’s newest five-star hotel, the Swiss-owned Horison, is said to be running at an occupancy rate barely above zero since it opened in December.

“Has the regional crisis hurt Indochina?” asked Kao Kim Hourn, director of the Cambodian Institute for Cooperation and Peace. “The basic answer is yes. This is a very inter-developed world. Even if Cambodia is not fully a part of the global process, we are not isolated from it, either.”