Banking in CLMV: Things to know before making an investment

ผู้เขียน: SCB EIC | Economic Intelligence Center

As business opportunities become more open upon the looming launch of the ASEAN Economic Community (AEC), the economies of Indochina, comprising Cambodia, Laos, Myanmar and Vietnam - often collectively called CLMV - are among the most attractive for Thai investors. At the onset of the journey for Thai companies looking to extend or relocate their production to these neighbouring countries, awareness of local financial service environment is critical to making the right business decision. Three important issues are being explored: What is the landscape of CLMV banking industry? How convenient is it with regard to fund transfer and foreign exchange? And, what kind of services can Thai banks provide for investors in CLMV?

First, banking access in CLMV is rather limited, which reflects the predominantly cash-based environment. Banking facilities in CLMV are limited both in scale and in scope, despite the numbers of commercial banks which are comparable to those in Thailand and Malaysia (Diagram 1). There are less than 4 physical branches per 100,000 adults in CLMV, which is quite few when compared to 11 in Thailand, Malaysia and Singapore.

The disparity between CLMV and the three more developed economies is even starker in terms of the access to automated teller machines (ATMs). The number of ATMs in Laos and Cambodia is around 15-18 times less than that of Thailand, even when population size is taken into account. In addition, the first ATM in Myanmar was only introduced to the Yangon public November last year.

Usage of cheques is not widespread either. In Myanmar, investors may have difficulty cashing a cheque from a different bank since the interbank cheque clearing system is not in place. It is therefore typical to see most transactions in CLMV carried out in cash.

Services offered by domestic banks in CLMV remain pretty much basic saving and lending products.  Commercial banks' lending rates in CLMV are fairly high compared to that offered in Thailand (Diagram 2). This partly results from relatively high inflation and credit risk.

Banking reform is likely to be the next hot topic in CLMV to cater for growth and emerging business requirements. The banking system in Myanmar needs major reform to establish international business services and connection to global financial systems. Meanwhile, the banking system in Vietnam needs restructuring given many banks are in difficult financial positions with sizable non-performing loans and depleting deposit base. Laos, on the other hand, has a very high interest rate spread which reflects the inefficiency of the financial system. This situation, if persisting, could discourage potential savers and impede credit extension. 

Secondly, regulations on fund transfer are now much more relaxed than before. The Bank of Thailand places no limitation whatsoever on the transfer amount for companies wishing to invest abroad, and allows as much as 100 million US dollars per year for individuals, provided the money is used for foreign investment with no less than 10 percent of ownership. In addition, fund transfers to CLMV can be made in baht denomination.

As for the fund transfer back to Thailand, there is no amount restriction by local authorities given all taxes have been paid. This includes the transfers of after-tax profits, income from technology transfer, as well as initial capital and interest. The transfer process is usually straightforward and, with the exception of Myanmar, often fast since international electronic payment system through the SWIFT network has been widespread in these countries.

Foreign exchange operations, except for Myanmar's, are generally liberalised. Cambodia has no restriction on purchase and sale of foreign currencies. In fact, Cambodia is a dollarised economy using more than 80% of business transactions in US Dollar, including deposits and lending. While Lao law does not encourage payment for goods and services in foreign currency, in practice, the Thai baht and US Dollars are the preferred currencies for import transactions.   

As for Myanmar, Kyat is currently not an internationally tradable currency and cannot be legally taken out of the country. Meanwhile, US Dollar is readily accepted at shops and is the main currency for international trade, along with Euro, Singapore Dollar, and Yen. Despite Thailand being the second largest trade partner with Myanmar after China, Thai Baht currently has no direct quote for Kyat. This means the transfer of Thai Baht into Myanmar has to be converted to US Dollars first before exchanging for Kyat.  

However, Thai investors should be aware of the fluctuation in the exchange rates and proactively manage the balance of CLMV currencies. As CLMV economies are prone to inflation and some often experience a balance of payments deficit, their local currencies tend to fluctuate more. Vietnamese Dong, for example, has 30% loss in value since the end of 2006 (Diagram 4), with dong devaluation by the State Bank of over 9% in 2011 alone. In contrast, Myanmar has had their currency floated lately and currency is expected to strengthen in the long term due to continuing capital inflows. However, Myanmar officials are determined to keep kyat weak for now in order to help their competitiveness.

Finally, the open atmosphere of banking businesses in Cambodia, Laos and Vietnam allows for healthy participation by Thai banks, along with other foreign commercial banks.  Their main purposes are often to serve corporate customers from home countries who are investing in CLMV through foreign branches, but some has gone as far as setting up a subsidiary to serve local customers. In terms of coverage, Thailand's biggest banks have relatively better presence in CLMV than those from Malaysia and Singapore (Diagram 3), thanks to the long-standing border trade and foreign investment from Thailand in these countries.

With strong presence of Thai banks, the relatively lower lending rate in Thailand, and ease of regulations on fund transfer on both sides, it is prudent to have funding arrangements in Thailand and channel these funds through the network of Thai commercial banks in these countries. Branches of Thai commercial banks are able to offer what businesses normally require in international trade transactions, including payments and foreign exchange, trade loans and the issuance of the letter of credit (L/C).

Although the market has not opened for foreign bank participation, Myanmar banking is fast changing.  At least four Thai banks are either in operation or have been granted the license to set up a representative office there. Recently, authorities expressed the intention to allow foreign banks to set up the joint venture with local banks by 2014 and to open full banking operations by 2015. 

Under the AEC, central banks across ASEAN countries are working together to drive financial service integration to support intra-region trading and investment activities. While full financial liberalisation under the AEC is not due until 2020, certain progresses have been made.   Authorities are negotiating the common standard of Qualified ASEAN Bank which will allow awarded banks to conduct businesses in every ASEAN member country. Payment system standard and integration are also being reviewed. In the meantime, the network of Thai banks in the region will facilitate the flow of goods and services through the regional supply chain, which will become increasingly relevant in the AEC era.

Click on the picture above to enlarge