Previous Quarterly Editions
Expropriation Risk: 60 61 64 64 ► Political Violence Risk: 48 48 49 50 ▲ Terrorism Risk: 15 15 15 16 ▲ Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 56 57 57 57 ►
TREND ►
It has been announced that the commencement date for railway traffic on the 420km Lao-China railway will be December 2, 2021 (Laos’s national day). The track is complete, the eleven stations in Laos are in various degrees of completion, and the rolling stock is scheduled to arrive shortly to begin trials. Trains will run south from Kunming, the capital of China’s Yunnan province, to the Lao capital of Vientiane, passing through northern Laos, including the towns of Luang Prabang and Vang Vieng.
In addition to bringing a greater number of Chinese tourists to Laos, the railway has the potential to transport a greater volume of Lao goods to China -- two developments that could provide important fillips to the post-pandemic economic recovery process in Laos. The economically important travel and tourism sector in particular has been in forced hibernation since Laos’s borders were effectively closed in March 2020. Both the industry and agriculture sectors have been able to register positive growth throughout the pandemic, and this has helped partially to offset some of the contraction in the services sector. In the first half of 2021, Laos was able to increase its exports of cassava, bananas, buffalos, rubber and coffee. However, it is electricity and mining that continue to be Laos’s major sources of foreign exchange earnings, and these should benefit from the global rise in most commodity prices.
There is a fairly pressing need for Laos’s economy to revive as soon as feasible, if only for the government to service its significant debt obligations, including its 30% financial contribution to the USD5.9bn railway. The country’s fiscal deficit is expected to be 4.7% of Gross Domestic Product (GDP) in 2021, but it is the public and public-guaranteed debt level -- of approximately USD13.3bn, or around 70% of GDP -- that is most critical. The largest debt guarantee obligations pertain to the state power monopoly, EDL. Almost half of the country’s external debt is owed to China.
The World Bank has cautioned that the risk of external debt distress is “high”, with ratings agencies recently downgrading the country. In May 2021, Laos’ foreign exchange reserves were estimated to be around US$1.2bn; roughly the same figure needed each year to service its debt obligations.
In mid-August, the World Bank adjusted down its GDP forecast for Laos in 2021, from 4% to 3.6%, albeit still up from 0.5% growth in 2020. For 2022-23, the World Bank envisages GDP growth of between 4% and 5%, still well below the 6-7% growth rates recorded between 2015 and 2019. The value of the local currency, the kip, has weakened against the US dollar, and consumer prices are starting to trend upwards. The global rise in various commodity prices is serving to inflate Laos’s import bill.
Depreciation in the value of the kip also exacerbates Laos’s debt servicing obligations, of which over half is denominated in US dollar. A second wave of COVID-19 struck Laos in April and has triggered a resumption of various lockdown measures and public health protocols. As of late August, Laos had less than 14,500 confirmed cases of COVID-19, and just twelve fatalities attributed to the virus. The government plans to have roughly half of the adult population vaccinated for COVID-19 by end-2021. To date, Laos has received slightly over 4.4 million vaccine doses from various donor sources, and almost 1.25 million of its population had received two doses by early August.
Laos’s government is keen to attract foreign direct investment and is therefore hesitant to enact forcible expropriations that might have a deleterious effect on investor sentiment towards the country. However, the calibre of the legal system is weak, as 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 also far from optimal.
TREND ▲
The risk of political violence is low. The ruling Lao People’s Revolutionary Party (LPRP) has scant tolerance for dissent and operates a highly vigilant and uncompromising internal security apparatus. The media is closely controlled, and social media use is also 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 remains 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, there is little active or popular opposition in Laos. Sporadic acts of violence therefore 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 (240km) border -- deteriorates further, some armed militia could establish bases inside Laos. Yet this currently seems unlikely, given the remoteness of this 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 of, and faith in, the domestic banking sector is limited, but is also gradually improving. A number of systemic banking crises, bouts of hyper-inflation and erratic currency fluctuations since the 1970s means that there remains a common preference for gold, US 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 (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 deteriorations in political or human rights conditions. The country has been a member of the World Trade Organization since 2013, and currently benefits from the European Union’s ‘everything but arms’ scheme for less-developed countries, under which Lao exports are duty and quota free. However, it is widely expected that Laos will graduate from Least Developed Countries (LDC) status in the next few years.
Except for some small, un-rated and baht-denominated bond issues, the Lao government has yet to tap international financial markets. Vientiane 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 LDC 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 (with negative outlook), 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 COVID-19’s impact on the economy.
In late 2020, EDL 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 in the public domain, some observers suspect the deal is partially in lieu of Laos’s debt commitments to China.
The World Bank cautions that Laos faces “a high risk of external debt distress”. Aggregate public and public-guaranteed debt servicing is expected to account for 20% of export earnings in 2021, and 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).
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