Index Trend Previous Quarterly Editions
Expropriation Risk: 64 ► Political Violence Risk: 48 ▼ Terrorism Risk: 15 ► Exchange Transfer and Trade Sanction Risk: 73 ► Sovereign Default Risk: 65 ►
Overall Risk Temperature TREND ►
Special topic: Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Low Low Low Low
Cost-of-living protest risk in 2023* Medium 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 calculations, see the introductory essay.
Laos’s inflation rate and the country’s precarious external debt position have both had an impact in the last year, just as the government has sought to revive an economy that slowed down considerably during the COVID-19 pandemic.
In September 2021, the Lao kip started to depreciate against the U.S. dollar, declining from around 9,600 to about 16,900 by late March 2023. In addition,
the margin between the official exchange rate and the unofficial rate offered by money changers widened, reflecting both the volatility in the exchange rate and demand from Lao individuals to convert savings into a more robust currency than the kip.
Given Laos’s dependence on imports for a range of essential products and input supplies, the kip’s depreciation further exacerbated the domestic inflation rate, as global price rises in various commodities was ‘imported’ into the country. The year-on-year inflation rate jumped from 12.8% in May 2022 to 30% by August 2022, and has subsequently reached 41.3% in February 2023.
Probably the most pronounced impact was seen in the summer of 2022 when petrol prices rose by roughly 70% year-on-year and shortages at the pumps led to long lines of cars queuing and the imposition of petrol rationing. The apparent reason for the shortages was a lack of foreign exchange available for importers to buy fuel.
Public spending in Laos has tended to be modest, and so the scope for introducing austerity measures is limited. However, the government is apparently exploring the possibility of reducing various price subsidies in place for decades, potentially replacing them with more targeted measures to support poorer individuals and disadvantaged communities in a bid to lessen state expenditures.
Anecdotal evidence suggests disquiet amongst Lao citizens at the perceived poor handling of the economy has been simmering under the surface. However, given the hegemonic power of the ruling Lao People’s Revolutionary Party (LPRP), and the uncompromising stance of the internal security apparatus to any – real or perceived – expression of protest, there have been no public demonstrations or riots.
There is also no prospect of a coup, as the Lao military leadership is closely intertwined with that of the LPRP. While elections for the National Assembly occur every four years, no parties other than the LPRP can stand for election. There is also little prospect of Lao citizens voting in protest against a leadership that has ruled since late 1975.
Nonetheless, mid-2022 cabinet changes saw the central bank governor, the head of the state audit and the minister for industry and commerce all replaced, and two additional deputy prime ministers appointed, taking the total to five deputy prime ministers.
At the same time, the government unveiled an eleven-point plant intended to help stabilise the economy. Roughly six months later, in early January 2023, the prime minister ‘resigned’, and was replaced by Sonexay Siphandone, who is the son of Khamtay Siphandone, who was general secretary of the LPRP for almost 15 years, stepping down in 2006.
There have been some signs in recent months Laos’s economy and currency are beginning to stabilize and inflation may be about to peak. But the country’s debt obligations remain onerous, and Vientiane’s ability to meet them is largely dependent on being able to negotiate debt rescheduling with its single largest donor, China. It is likely Beijing will seek some things in return, whether political or economic in nature, or both.
Expropriation Risk 64 (Significant) TREND ►
Laos’s government wants foreign direct investment, which serves as a check on forcible expropriations that would have a negative effect on investor sentiment. However, the legal system is weak, as are state agencies’ institutional capacities to enforce legal decisions.
Meanwhile, politically connected individuals can act in ways that would be deemed illegal in other countries, and corruption is endemic. Thus, Laos’s ability to create a fair, consistent, and benign business environment is undermined, and intellectual property rights protection is also sub-optimal.
Political Violence Risk 48 ( Medium) TREND ▼
The risk of political violence is low. The LPRP has little tolerance for dissent and operates a vigilant and uncompromising internal security apparatus. The media is closely controlled, and there is at least some social media monitoring.
With a highly authoritarian political system 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.
Terrorism Risk 16 (Very Low) TREND ►
The terrorism risk is relatively low. No active terrorist organisations are believed to be operating in Laos, despite the landlocked country’s porous borders. Given Laos’s extensive security apparatus, and a paucity of high-value targets, international terrorist organisations are unlikely to target Laos.
Domestic armed opposition to the current government, with its origins in the pre-1975 civil war, notably among ethnic Hmong that broadly worked with the U.S. and Thailand to prop up the royalist government, have largely been eradicated.
Exchange Transfer and Trade Sanctions Risk 73 (Medium-High) TREND ►
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. Therefore, in-country convertibility of kip to other currencies does come with elevated risk, particularly at times, such as in 2022, when foreign exchange reserves are low.
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’s exports are duty and quota-free.
Laos expects to graduate to ‘developing country’ status in 2026, having been originally scheduled for 2024, pushed back by two years because of the adverse impact of the COVID-19 pandemic. The shift in status will reduce some of the country’s tariff relief benefits, as well as impact grants and the preferential lending terms of development assistance that can be provided to Laos.
Sovereign Default Risk 65 ( Medium-High) TREND ►
Laos’s aggregate public debt is thought to be around USD13 billion to USD15 billion. 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 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 in 2022, along with increasing concerns about the country’s foreign exchange reserves, and therefore its ability to meet its debt obligations.
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. It remains to be seen whether the findings of the Article IV consultation conducted by the IMF in early February 2023 will be released.
The World Bank cautions that Laos faces considerable risk of external debt distress. Aggregate public and public-guaranteed debt servicing (of around USD1.3 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 amortisation of the country’s commercial debt, both bonds and loans.
