Estudios Económicos
Laos

Laos

Population 7.4 million
GDP 2,513 US$
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (p)
GDP growth (%) -0.4 2.1 2.2 3.1
Inflation (yearly average, %) 5.1 3.8 22.7 8.5
Budget balance (% GDP) -5.6 -3.6 -5.1 -4.8
Current account balance (% GDP) -4.5 -0.2 -4.5 -5.9
Public debt (% GDP) 82.7 93.5 107.1 108.9

(e): Estimate (f): Forecast

STRENGTHS

  • Abundant natural resources: minerals (copper, gold, iron), agricultural commodities (maize, rice, sugar cane, rubber, cassava, soybeans, coffee) and forestry (wood and pulp).
  • Expansion of the hydroelectric sector and diversification of the economy (agri-food, electronics, clothing)
  • Foreign investment in the commodities and energy sectors
  • Regional integration (ASEAN) and WTO membership

WEAKNESSES

  • Persistent and increasing current account deficit
  • Very low foreign exchange reserves
  • Significant sovereign risk due to high external debt, especially Chinese-owned external debt
  • Sensitive to commodity prices
  • Governance shortcomings and major inequalities
  • Fragile banking sector
  • Dependent on regional economic and geopolitical conditions (landlocked location)
  • High levels of corruption (128/180 on the Transparency International Corruption Perceptions Index in 2021)

RISK ASSESSMENT

Continuing weak recovery amid external vulnerabilities

After having been held back by Covid-related measures in 2021, the recovery was constrained by skyrocketing prices (CPI annual growth breached 30% in August 2022, a 20-year high) and supply disruptions linked to towering import bill and a lack of foreign exchange (FX) the next year. In 2023, economic growth should remain affected by these two ailments. Given the inflationary trajectory of 2022, second-round effects are expected to spill over to 2023 and are very likely to weigh on household consumption (66% of GDP in 2016). In addition to China’s zero-Covid policy, the environment of high inflation and supply constraints - especially if fuel and food shortages occur - would contribute to delaying a rebound in international tourist arrivals. Tourism accounted for 10% of GDP in 2019 declined to 2.9% in 2021. Meanwhile, despite a global slowdown in trade, robust demand for electricity and copper should drive exports. Furthermore, copper, which is mostly exported to China would, like other goods, benefit from the China-Laos railway that opened in late 2021. As for electricity exports, mainly earmarked to Thailand, they will also benefit from the completion of several projects completed in throughout 2022 (Nam Theun 1 Hydropower, for example). The sector will be a source of growth thanks also to new investments, notably in the Monsoon Wind project, which is Southeast Asia’s biggest wind energy project, with an expected capacity of 600 megawatts from 2025. This would, in turn, drive construction activity (34% of GDP in 2021). High prices would also affect the agriculture sector (15% of GDP and 61% of employment in 2019) as increases in the prices of fertilizers, animal feed, and fuel would affect output. That being said, this adverse impact could be reduced by low-interest loans for local food producers to buy agriculture inputs.

To address the surge in inflation, the Central Bank of Lao (BOL) issued Laotian kip-denominated bonds in order to boost demand for the currency and, in turn, limit imported inflation. Nevertheless, with very low reserves (1.7 months of imports in September 2022), BOL was not able to intervene much to stabilise the weakening kip.

 

Sovereign debt in distress

Laos’ fiscal situation is likely to remain weak. In the context of very high energy and food inflation, a sharp depreciation of the Laotian kip against the USD and tightening of global financial conditions, liquidity risk relating to Laos’ public debt has risen in 2022. Public debt represented 62% of GDP in 2019 and this share is expected to have exceeded the 100% threshold in 2021. External vulnerabilities are consequential as public debt is mainly external. Almost half the debt is held by China, which has taken part in the country’s major investments under the Belt and Road Initiative (USD 5.9 billion loan for the Vientiane-Boten high-speed train line, hydroelectricity, etc.). Public external debt is predominantly denominated in USD, increasing the value of debt service due to kip depreciation. Foreign currency public debt service (interest and principal) over the 2022-2026 period should average $1.3 billion annually, which was the amount of the country’s total foreign reserves at end-June 2022. Laos may continue to need debt relief to meet near-term pressures, such as the relief it has received from China through debt payment deferrals since 2020, as the current account is expected to remain in deficit and should even widen in 2023. Laos’ growing trade deficit is, indeed, expected to weigh on the current account balance. Although exports will remain supported by electrical energy (25.9% of total goods exports in 2021) and copper (6.6%), imports would still grow faster due to elevated oil prices and recovering private consumption leading to greater demand for capital and consumer goods.

 

High dependence on China

In March 2021, the Lao People’s Revolutionary Party (LPRP) elected former Prime Minister Thongloun Sisoulith as the party’s general secretary, making him the President of the country. This came a month after the legislative elections, which reinforced the only authorised ruling party’s position, with the LPRP gaining 14 additional seats (158 out of 164 seats). This communist party controls all aspects of politics and civil liberties.

Against a backdrop of high commodity prices, low foreign reserves and a weak Laotian kip, indebtedness to China raises concerns. In addition to trade links, the country still relies heavily on Beijing for large infrastructure projects such as highway projects (e.g., the Vientiane expressway), as part of the Belt and Road Initiative. In the event it fails to repay Chinese creditors, Laos may have no other choice than to sign concession agreements. This was the case in September 2020, when Laos agreed for China to manage its national electricity company for 25 years. Laos has remained neutral relative to the conflict in Ukraine as Russia is an historical ally and a potential source of discounted crude oil for Laos.

 

Last updated: April 2023

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