Laos battles mounting debt, inflation as it prepares for Asean chairmanship

[BANGKOK] As Laos gears up to assume the chairmanship of the Association of Southeast Asian Nations (Asean) on Jan 1 next year, the government is busy dealing with some serious economic challenges at home.

Laos, which joined Asean in 1997, is one of the most indebted countries in the region and the only Asean member state to have had its sovereign rating downgraded during the Covid-19 period. It also has the region’s most devalued currency, the highest inflation rate, and the lowest budget expenditure on essential services such as education and health.

Laos’ most serious issue at the moment is its mounting public debt, which has ballooned over the past decade as the country migrated from least developed country status to lower-middle income status, and therefore saw diminished overseas development aid at concessional rates.

Laos has increasingly turned to commercial-rate lending to finance its capital-intensive projects, including hydroelectric power plants and a US$6 billion rail link to China that opened in 2021.

“We borrowed money to invest in many projects, forecasting to receive the return from these investments in the medium to long term,” said Soulivath Souvannachoumkham, the director-general of external finance and debt management at Laos’ Ministry of Finance.

“However, the timing didn’t match the cash flow we needed to repay the money,” said Soulivath, addressing a recent World Bank event.

Laos, a landlocked mountainous country, is rich in hydro resources. The government has exploited this over the past three decades by building scores of hydroelectric plants, usually via public-private partnerships with mainly Thai, Chinese and South Korean companies, to export power to Laos’ neighbours, chiefly Thailand. It has also farmed out numerous concessions in tin, goldmining and forestry.

The International Monetary Fund estimates that Laos’ public and publicly guaranteed (PPG) debt stands at 122 per cent of gross domestic product in 2023, with a large chunk owed to Beijing due to some massive infrastructure projects under China’s Belt and Road Initiative. Some reports put the total value of Laos’ public debt to China at about US$12.2 billion.

Fitch Ratings, which downgraded Laos’s sovereign credit rating in 2020 and stopped rating the country in 2022, has estimated Laos’s debt repayments at about US$1.2 billion to US$1.4 billion per annum between 2023 and 2027, a hefty amount when compared with Laos’ annual GDP of about US$19 billion.

A portion of its PPG debt is to the bond market. In 2013, the Ministry of Finance issued its first bond on the Thailand market, and has since then accumulated about US$1 billion in bond issuances.

The Electricite du Laos Generation, a subsidiary of the state-owned EDL, has issued a similar amount in bonds, mostly to Thai investors. Bonds accounted for about 13 per cent of Laos’ PPG debt stock in 2020.

Although there have been no defaults on Lao bonds to date, the Ministry of Finance has indicated that it will not issue more.

“We have stopped borrowing the expensive loans on commercial terms. We have stopped borrowing at commercial terms to invest,” Soulivath said.

The ministry is trying to keep its PPG debt stock at its current levels, and is hoping to bring down its annual budget deficit from the current 5 per cent of GDP to 2 per cent. Doing so, unfortunately, has led to a reduction in spending on crucial social services such as education, health and welfare.

“What we have seen is that the combined spending on health and education has halved in the past nine years, from just under 5 per cent of GDP to 2.6 per cent, and in 2023 it is likely to be lower,” said World Bank senior economist Pedro Martins.

The World Bank has recommended that Laos increase its revenue collection by boosting taxes and lowering tax incentives to corporates and foreign direct investments.

Laos lowered its value-added tax (VAT) in 2022 from 10 per cent to 7 per cent, but is expected to reverse this measure soon. “The increase of VAT back to 10 per cent will be implemented (in 2024),” said Soulivath.

Another necessary measure is to get Chinese banks to continue deferring payments on past loans, something they have done since 2020 and which Beijing might try to encourage with the focus of its Asean partners directed on Laos next year.

Deferrals might help raise Laos’ foreign exchange reserves and thereby strengthen its kip currency (which depreciated further against the US dollar by 21 per cent in Oct 2023) and relieve inflation (which reached 26 per cent in October).

On the bright side, Laos’ economy is forecast to grow 3.7 per cent in 2023, up from 2.7 per cent in 2022, and reach 4.1 per cent in 2024. This is “led by services and exports and assisted by growing international demand, coupled with Laos’ improving connectivity and logistics services”, said the World Bank in its Laos report.