Previous Quarterly Editions
Expropriation Risk: 64 64 64 63 ▼ Political Violence Risk: 49 48 49 50 ► Terrorism Risk: 15 15 16 15 ► Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 57 57 57 57 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
The impact of climate change on landlocked Laos could be considerable, even though the country’s carbon and greenhouse gas emission levels are relatively low, with Laos ranking as the world’s 133rd largest carbon emitter, 0.01% of the global total. The World Bank estimates Laos faces warming of 3.6 Celsius by the 2090s against the baseline conditions over 1986–2005, under the highest emissions pathway (RCP8.5).
Laos is regarded to be among the most vulnerable countries to projected climate change trends, as its citizens face significant climate-related hazards, including drought, heatwaves and localised flooding, that are further exacerbated by poverty and malnourishment, particularly in some poor and marginalised communities. Without the introduction of climate policies, the population annually exposed to river flooding in Laos is projected to double to more than 80,000 people by the 2030s. With inequality widening in Laos, the impact of climate change is likely to fall disproportionately on the poorer and more marginalised rural communities.
As a single party state, the prospect of green political parties being allowed to form is not an option, although growing concerns around climate change by citizens may propel the government to make some moves towards adaptation and mitigation, backed and underwritten in large part by the international development community. Reforestation is one possibility in this space. Climate change-related initiatives by civil society and private sector actors may also burgeon, in the absence of a more emphatic stance by the government.
In 2010, the government unveiled a national strategy on climate change, followed by a Climate Change Action Plan for 2013-2020. In 2019, the government also issued a Climate Change Law, along with an implementing decree, having conducted a technology needs assessment two years earlier.
In July 2020, Laos submitted its first update report to the United Nations Framework Convention on Climate Change (UNFCC), followed by its Nationally Determined Contribution to the UNFCC in early 2021. While a Department of Climate Change sits inside the Ministry of Natural Resources and the Environment, , implementation and enforcement of policy documents in Laos tends to involve political intentions becoming significantly diluted by a combination of corruption, insufficient funding and institutional capacity weaknesses in the relevant implementing bodies.
Both the country partnership strategy of the Asian Development Bank and country partnership framework of the World Bank contain elements pertaining to adaptation and mitigation, including a National Strategy on Climate Change, and a green growth plan. The desire of the Lao government to keep the international development partner community engaged, and its need of their funding support for numerous projects, means they will need to make some efforts in this space.
Laos’s economy is highly dependent on hydropower as a source of foreign earnings, and so the impact of climate change, among other factors, on the flow of water in the tributaries of the Mekong River, where most of the hydropower plants are located, is a concern to the government. Some of the electricity generated by these plants is now being used to power crypto-currency mining by companies that relocated out of China when the practice was banned in 2021.
Overall, the prospect of climate change and its effects driving significant political change is remote. However, while the government’s track record on climate change issues is relatively poor, the pressure being exerted by the country’s development partners to mainstream climate change issues into their own programmes means some positive strides are being made and should continue. Laos was not one of the 64 countries included in the Climate Change Performance Index (CCPI) of 2022, but ranked 137th in the latest iteration of the ND-GAIN index of countries’ vulnerability to climate change and their readiness to improve resilience.
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Laos’s government is keen to attract foreign direct investment and is therefore hesitant to enact forcible expropriations that might have a negative effect on investor sentiment. However, the legal system is weak, as is its ability to enforce legal decisions. Politically powerful individuals and connected families can act in ways that would be deemed illegal in other countries, and corruption is endemic. Thus, state agencies’ capacity to create a free and fair business environment is undermined. Protection of intellectual property rights is suboptimal.
The risk of political violence is low. The ruling Lao People’s Revolutionary Party (LPRP) has scant tolerance for dissent and operates a vigilant and uncompromising internal security apparatus. The media is closely controlled, and social media use is monitored.
While some pro-royalist remnants did continue with isolated acts of banditry after 1975, these are now extremely rare. A small diaspora of overseas Lao communities remains vehemently opposed to the LPRP, but they have little capacity to instigate protests.
Although the political system is highly authoritarian and the security apparatus has a poor human rights record, there is little active or popular opposition in Laos. Sporadic acts of violence tend to relate to narcotics, smuggling and other illegal activities, rather than politics.
The terrorism risk low. No active terrorist organisations are believed to be operating in Laos, despite its porous borders. Similarly, no international terrorist organisations would target Laos for activities, given the extensive security apparatus and a paucity of high-value targets.
It is conceivable that if the post-coup situation in neighbouring Myanmar, with which Laos shares a short border, deteriorates further, some armed militia could establish bases inside Laos. Yet this seems unlikely, given the remoteness of this border area.
The Lao kip is not freely convertible outside Laos, and use of the U.S. dollar and Thai baht is common in Laos. Popular use of, and faith in, the domestic banking sector is limited, but improving. 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 baht as long-term stores of value.
Laos relies on the export of various hard and soft commodities for foreign exchange earnings, which are also subject to price fluctuations. Consequently, risks around foreign exchange transfers in Laos are higher than in most neighbouring countries. In September 2021, the kip began to depreciate against the U.S. dollar, from around 9,600 in mid-September to around 11,400 in mid-February 2022.
Laos is not the subject of any major trade sanctions, nor is it likely any would be imposed unless there were some significant deteriorations in Laos’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 Lao exports are duty and quota-free.
It is widely expected Laos will graduate to developing country status in 2026 though, as with Bangladesh and Nepal, the date has been pushed back from 2024 due to the impact of the pandemic. This status change will reduce some of the country’s tariff relief benefits.
Except for some small, un-rated, baht-denominated bond issues, Laos’s government has yet to tap international financial markets. The government has instead relied on opaque government-to-government debt financing agreements with Beijing, as well as soft loans from various development finance institutions. Laos aspires to graduate out of Least Developed Country status by 2026, at which point it may no longer be eligible for some of the preferential lending terms it currently enjoys.
In 2019, in anticipation of an inaugural sovereign bond issue, Laos commenced ratings coverage by Moody’s and Fitch. However, that bond issue has yet to happen, and in 2020 Moody’s dropped its rating for Laos from B3 to Caa2 with negative outlook, with Fitch downgrading Laos from B- to CCC. These recent downgrades reflect increasing concern about Laos’s ability to meet its debt obligations, particularly given COVID-19’s economic impact.
In late 2020, the state’s energy firm Électricité du Laos inked a 25-year concession agreement for a Chinese state-owned power company to manage the high-voltage elements of the national power grid in Laos, including all electricity exports. While details of the agreement are not public, some observers suspect the deal is partially in lieu of Laos’s debt commitments to China.
The World Bank cautions that Laos faces considerable risk of external debt distress. Aggregate public and public-guaranteed debt servicing is expected to account for 20% of export earnings in 2021, and to be 2.5 times greater than the national budget for health and education spending. This is attributed in part to the high interest rates and amortisation of the country’s commercial debt, both bonds and loans. The International Monetary Fund last released an Article IV report on Laos in early August 2019.
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