Previous Quarterly Editions
Expropriation Risk: 60 60 61 64 Political Violence Risk: 48 48 48 49 Terrorism Risk: 15 15 15 15 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 56 56 57 57
TREND ►
In January 2021, the ruling Lao People’s Revolutionary Party (LPRP) held its five-yearly party congress, followed in February 2021 by elections for the National Assembly. Consequently, a new leadership line-up was unveiled to the public, in a country where the political process is highly opaque and dominated by a party that has been in power since 1975.
The former foreign minister and prime minister, Thongloun Sisoulith (aged 75), was confirmed as general secretary of the LPRP’s politburo, and state President, replacing Bounnhang Vorachit (aged 83). The new prime minister is Phankham Viphavanh (aged 70); previously a Vice-President and minister of education. Phankham is now ranked second in the politburo, after Thongloun.
There were four new entrants to the 13-person politburo, and 33 new entrants to the LPRP’s central committee. Several new cabinet appointments were also unveiled, including the appointment of three women to ministerial positions. Xaysomphone Phomvihane has replaced Pany Yathotou as chair of the National Assembly with the latter, an ethnic H’mong, becoming one of two Vice-Presidents of Laos.
Until early April 2021, Laos had only 49 confirmed cases of COVID-19 infection, and no fatalities, but a spike that month has resulted in the number of cases jumping to 1,230 by early May 2021, and a stringent lockdown was instituted. The Lao economy has been affected significantly by various lockdown measures, including the closure of borders to passenger traffic. Consequently, Laos’s hospitality and tourism sector has been particularly affected, and the overall economy probably contracted by around 2-3% in 2020.
Even prior to COVID-19, there were growing concerns around Laos’s external debt situation. Managing this will be a priority of the new government, which in turn necessitates a return to robust economic growth. Construction of the country’s first major railway line, from the China border in the north to Laos’s capital Vientiane, is reported to be 80% complete and may enter commercial service by end-2021. The single-track line is part of China’s Belt and Road Initiative, and the Lao government’s funding obligations for the line have compounded its sovereign debt woes.
In 2020, it was announced that the Lao state-owned power monopoly, EDL, which is believed to have aggregate debt obligations of around USD5bn, sold a controlling equity stake in its domestic transmission system to a Chinese state-owned enterprise, for an undisclosed sum. It is widely believed that this was done to offset some of the country’s debt obligations to China.
Recent years have seen Laos erect a series of hydropower plants along the Mekong River and its tributaries, to generate electricity for export and as a source of foreign exchange earnings. But increasing pressure from neighbouring Thailand, Cambodia and Vietnam, all of which have been adversely affected by the marked reduction in the Mekong’s downstream flow of water, is making this more difficult. Laos’s leadership has always been careful in navigating between the competing hegemonic aspirations of its ideological allies in both Hanoi and Beijing, although the latter is now clearly in the ascendant.
TREND ▲
Laos’s government is keen to attract foreign direct investment and would therefore be extremely hesitant to enact forcible expropriations that could have a deleterious effect on investor sentiment towards the country.
However, the calibre of 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 in Laos. Thus, state agencies’ institutional capacity to create a free and fair enabling environment for business is significantly undermined. Protection of intellectual property rights is far from optimal.
The risk of political violence is low. The ruling LPRP has little tolerance for dissent and controls a vigilant and uncompromising domestic security apparatus. The media is closely controlled and the use of social media is monitored.
While some pro-royalist remnants did continue with isolated acts of banditry in subsequent decades after 1975, these are now extremely rare. A small diaspora of overseas Lao communities is vehemently opposed to the LPRP regime, but they have little capacity to instigate acts of protest.
Although the political system is highly authoritarian and the security apparatus has a very poor human rights record, the opposition in Laos is not very active nor is it popular. Occasional acts of violence tend to relate to narcotics, smuggling and other illegal activities rather than politics.
The terrorism risk is 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 border, deteriorates further, some armed militia could establish bases inside Laos. But this currently seems unlikely, given the remoteness of the border area.
The Lao kip is not freely convertible outside Laos and use of the US dollar and Thai baht is common in Laos. Popular use, and faith in, the domestic banking sector is limited, but gradually improving. A number of systemic banking crises, bouts of hyper-inflation and erratic currency fluctuations since the 1970s means that there is a common preference for gold, US dollars and the baht as long-term stores of value.
Laos also 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 (possibly except for Myanmar). Laos is not the subject of any major trade sanctions, nor is it likely that any would be imposed on it unless there were some significant deterioration in political or human rights conditions.
Except for some small, un-rated baht-denominated bond issues, the Lao government has yet to tap international financial markets. It has instead relied on highly 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 2025, at which point it may no longer be eligible for some of the preferential lending terms that 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 take place, and in 2020 Moody’s dropped its rating for Laos from B3 to Caa2, and Fitch downgraded Laos from B- to CCC.
These recent downgrades reflect increasing concern about Laos’s ability to meet its debt obligations, particularly given the China railway project and COVID-19’s impact, although the precise extent of the country’s aggregate debt commitments is not in the public domain. Foreign exchange reserves are estimated to be around USD1bn or so, and the economy may be facing annual debt payment obligations of about that figure for the next few years.
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