Previous Quarterly Editions
Expropriation Risk: 64 64 64 63 ▼Political Violence Risk:49 48 48 48 ►Terrorism Risk:16 15 15 13 ►Exchange Transfer and Trade Sanction Risk: 73 73 73 73 ►Sovereign Default Risk:65 65 65 73 ▲
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Protest intensity to date* 2022 2023 Low LowUnrest risk in 2024**Cost of living: HighAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Laos is currently in a state of debt distress, as the International Monetary Fund (IMF) has noted. The public debt-to-GDP ratio is at 92%, and its external debt-to-GDP is at 97%, of which China is the largest lender by far. As a share of government revenues, 50% is needed to service the country’s public debt — significantly greater than the more modest amounts spent on social goods such as education and health.
The near-term risk of nonpayment for both private sector and public sector creditors is elevated. This debt profile has contributed to, and is also exacerbated by, a marked decline in the value of the Lao kip, which has depreciated by 20% against the U.S. dollar in the past year and by 51% over the past two years.
This has helped drive up inflation, which peaked at 41.3% year on year in February 2023, and was still elevated at 26% in August of this year. In the mid-2022, long queues emerged outside those petrol stations that remained open when importers struggled to access the foreign exchange to import fuel, forcing the government to step in. More recently, in late August 2023, the prime minister, Sonexay Siphandone, issued a lengthy order to all government agencies and ruling party organizations on “increased efforts to resolve the critical economic-financial issues and issues concerning inflation, currency exchange rates, the price of goods and foreign debt.”
In the prime minister’s order, the central bank and the ministries of security, finance, industry and commerce, and investment and planning, among others, were all given quite specific tasks aimed at addressing the current difficulties pertaining to inflation, the foreign exchange market and debt. The problem, however, largely stems from incautious borrowing by the government over the past decade or more, intended to fund a number of large, capital-intensive infrastructure projects, most notably in the hydropower sector but also including the Lao-China high-speed railway, which opened to much fanfare in December 2021.
The precise scale and terms of a large portion of this debt is opaque, as this is debt owed to China, details of which are not in the public domain and are almost certainly the subject of annual negotiations and renegotiations. Recent years have seen the Lao government sell off various state assets in a bid to raise funds, including the domestic power transmission system.
With no opposition parties allowed to challenge the Lao People’s Revolutionary Party’s monopoly on power, since 1975, there is no immediate political threat to the government, and any public protests would be met with a rapid and tough response from the internal security apparatus. Nonetheless, public unhappiness, particularly with regard to inflation, has simmered for some time, and the credibility of the government, as well as its legitimacy, is questioned by some, even if there is no permitted outlet to express this.
The IMF, World Bank, Asian Development Bank and other “Western” donors have limited scope to help Laos address the debt crisis, as this is largely confined to Sino-Lao relations. It is not inconceivable that Laos will default on its external debt obligations. Only Moody’s currently provides a sovereign credit rating for Laos, of Caa3, with a stable outlook.
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Laos’s government wants foreign direct investment, which serves as a check on forcible expropriations that would have a negative effect on (already fragile) foreign investor sentiment. The legal system is weak, however, as are state agencies’ institutional capacities to enforce legal decisions.
Meanwhile, politically connected individuals often seem to flout laws and regulations, while corruption is endemic at all levels of government as well as in parts of the private sector. Thus, Laos’ ability to create a fair, consistent and benign environment for both businesses and the general public is undermined. Protection of intellectual property rights is also suboptimal.
TREND ►
The risk of political violence is low. The ruling party has little tolerance for dissent and operates a vigilant and uncompromising internal security apparatus. The official media is closely controlled, and there is at least some social media monitoring.
With a political system that is highly authoritarian and a security apparatus with a poor human rights record, there is virtually no active opposition in Laos. Sporadic violence therefore tends to relate to narcotics, smuggling and other illicit activities.
The terrorism risk is relatively low. No active terrorist organizations are believed to be operating in Laos, despite the landlocked country’s porous borders, including its border with Myanmar. Given Laos’ extensive security apparatus and a paucity of high-value targets, international terrorist organizations are unlikely to allocate assets to Laos.
Domestic armed opposition to the current government, with its origins in the pre-1975 civil war, notably among ethnic Hmong that worked with the United States and Thailand to prop up the royalist government, have largely been eradicated.
Popular use of, and faith in, the domestic banking sector is limited. Several systemic banking crises, bouts of hyper-inflation and erratic currency fluctuations since the 1970s mean there remains a common preference for gold, U.S. dollars and the Thai baht as long-term stores of value, rather than the Lao kip — which cannot be traded outside of Laos.
In-country convertibility of the Lao kip with other currencies does come with elevated risk, particularly when foreign exchange reserves are low. Although technically illegal, some foreign exchange providers use an exchange rate that deviates from the official rate set by the central bank.
Laos is not the subject of any major trade sanctions, nor is it likely any would be imposed unless there was a significant deterioration in the country’s political or human rights conditions. The country has been a member of the World Trade Organization since 2013 and benefits from the European Union’s “everything but arms” scheme for less-developed countries, under which Laos’ exports are duty and quota free. It remains to be seen what impact the European Union’s recent move to prohibit the import of some commodities associated with deforestation and forest degradation will have and where Laos’ track record has been less than exemplary.
It is anticipated that Laos will graduate to developing country status in 2026, having been originally scheduled for 2024 but pushed back by two years because of the adverse impact of the COVID-19 pandemic. When this shift occurs, the graduation will reduce some of the country’s tariff relief benefits as well as have a bearing on grants and the preferential lending terms of development assistance that can be provided to Laos.
Laos’s aggregate public debt is thought to be around US$13 billion to US$15 billion. Except for some small, un-rated, baht-denominated bond issues, Laos’ government has yet to tap international financial markets.
The government has instead relied considerably on opaque government-to-government debt financing agreements with Beijing as well as long-term soft loans from various development finance institutions. When Laos does graduate to developing country status, the country will no longer be eligible for some of the preferential terms that it currently enjoys for development assistance.
In 2019, Moody’s and Fitch commenced ratings coverage of Laos. In mid-2022, Moody’s dropped its rating for Laos from Caa2 to Caa3 (with a stable outlook), where it has since remained, while Fitch downgraded Laos from CCC to CCC–. In October 2022, Fitch suspended all coverage of Laos. This was a function of the deteriorating macro-economic backdrop in Laos, along with increasing concerns about the country’s foreign exchange reserves, and its ability to meet its debt obligations, thereby making the prospect of any future sovereign issue very remote.
Tellingly, the Lao government did not give its consent for the findings of the IMF’s late 2021 ‘Article IV’ assessment of the country to be put in the public domain; however, the findings of the latest Article IV consultation conducted by the IMF in early February 2023 have been released.
The World Bank cautions that Laos faces considerable risk of external debt distress. Aggregate public and public-guaranteed debt servicing (of around US$1.3 billion per annum in the next few years) is expected to be equivalent to half of total state revenues and 2.5 times greater than the national budget for health and education spending. This is attributed in part to the high interest rates and amortization of the country’s commercial debt (both bonds and loans).
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