Previous Quarterly Editions
Expropriation Risk: 64 63 63 64 ▲Political Violence Risk:51 51 51 51 ►Terrorism Risk:15 16 15 16 ►Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ►Sovereign Default Risk:57 57 57 57 ►
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Laos remains an avowedly communist state and the governing Lao People’s Revolutionary Party (LPRP) has held complete political power since 1975. The country is closely allied to its immediate fraternal neighbours, China and Vietnam. Since 1975, Hanoi enjoyed a dominant hegemonic hold over Laos, bolstered by a shared military bond and personal leadership connections. But recent decades have seen Vietnam’s influence in Laos diluted by increasing overtures from Beijing, including China’s ability to out-spend Hanoi.
While Vietnam and China ostensibly share ideological principles, they are rivals in seeking to dominate the small, but geo-strategically important Laos. The LPRP recognises this rivalry and seeks to keep engagement open with other centres of regional and international power, including Bangkok and Washington, while leveraging Laos’s membership of the Association of Southeast Asian Nations (ASEAN), to avoid one actor dominating in Laos.
Recent years have seen Sino-Vietnamese rivalry over Laos tilt more towards China, given China’s greater resources for influence. One example is the new Laos-China railway that links the Yunnan capital of Kunming with the Laos’s capital, Vientiane, a key component of China’s Belt and Road Initiative. The intention is that the railway will connect with an upgraded railway line in Thailand, thereby linking Vientiane to Bangkok, and onwards to Kuala Lumpur and Singapore. In this regard, Laos serves as an ASEAN entry point for China, bypassing the more complicated relationship Beijing has with Vietnam.
While Western development partners, both bilateral and multilateral, also provide relatively significant aid to Laos, China’s economic influence is the most striking, and the opaquest. A growing concern is that Laos’s debt servicing commitments to China are verging on dependency, and potential political subservience, allowing for the fact that the LPRP dominates within Laos – there is no organised opposition and limited civil society. Laos’s political position will not change soon, despite some discontent over the LPRP’s macroeconomic management.
It is likely Laos will continue to be an ‘East-leaning’ state, while keeping ‘Western’ development partners sufficiently engaged at least partially to counter-balance China. While Laos does offer some investment potential, notably around hydropower and mineral extraction for Western companies, the risks and challenges of operating in a less-than-benign business environment tend to exceed potential rewards. Consequently, the West appears content with maintaining a ‘watching brief’ in Laos, sharing some of Vietnam’s geo-strategic concerns about a Laos increasingly under China’s control, but insufficiently motivated to adopt a more strident position.
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 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. 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. Protection of intellectual property rights is sub-optimal.
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, including social media monitoring. With a political system that is highly authoritarian and a security apparatus with a poor human rights record, there is little 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 organisations are believed to be operating in Laos, despite its porous borders. Given the extensive security apparatus, and a paucity of high-value targets, international terrorist organisations are unlikely to target Laos. It is conceivable if the post-coup situation in neighbouring Myanmar deteriorates further, some armed militia could establish bases inside Laos. Yet this seems unlikely, given the remoteness of this Laos-Myanmar border area.
Popular use of the domestic banking sector, as well as faith in it, 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 unconvertible Lao kip.
In September 2021, the kip began to depreciate against the U.S. dollar, and has subsequently declined from around 9,600 to about 15,750 by late August 2022. Given Laos’s dependence on imports for a range of essential products, the kip’s depreciation has fuelled domestic inflation, with the price of petrol up around 70% year-on-year, and diesel prices up around 95% year-on-year. The margin between the official exchange rate and the unofficial rate offered by money changers has also widened.
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.
It is widely expected that Laos will graduate to developing country status in 2026. This will reduce some of the country’s tariff relief benefits.
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 on opaque government-to-government debt financing agreements with Beijing, as well as long-term soft loans from various development finance institutions. If Laos does graduate to developing country status, the country may no longer be eligible for some of the preferential lending terms that it currently enjoys.
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, while Fitch downgraded Laos from CCC to CCC-. Fitch also announced that it would be haltering coverage of Laos in September. These recent downgrades reflect increasing concern about Laos’s foreign exchange reserves, and therefore its ability to meet its debt obligations, given the economic impact of the pandemic, as well as a deteriorating macro-economic backdrop. In June 2022, the country encountered petrol shortages and some rationing at the pumps, as access to foreign exchange to pay for imports became scarce.
The World Bank cautions 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 two and a half 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’s most recent ‘Article IV’ staff report on Laos was conducted in late 2021, but the LPRP did not give its consent for the report’s publication.
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