Laos: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Strong growth in 2010 and 2011
Laos has proven very resilient to the crisis with economic growth near 8%. The economy has been driven by the growth of domestic demand and the rebound of exports. The mining and tourist sectors continue to enjoy rapid growth. Mining exports soared in 2010, fuelled by the rise of prices for gold and copper. However, drought undermined the economic expansion, mainly in the hydro-electricity and agricultural sectors: insufficient rainfall limited electricity production and damaged nearly 85% of agricultural production.
The strong economic growth is expected to continue in 2011. Exports will likely increase thanks to the rise of prices for ore (copper, gold) of particular interest to the country's dynamic neighbours (Vietnam, Thailand, China). The operational start-up of three hydroelectric power stations (notably Nam Theun II) and the development of electricity exports will moreover provide regular inflows of foreign currency. The situation in the primary sector has, however, remained difficult with poor harvests likely to stoke relatively high inflation. Agriculture continues moreover to focus mainly on food production despite government efforts to foster exports.
Weak financial position
After widening considerably as a result of the crisis, the public sector deficit narrowed in 2010 thanks particularly to the withdrawal of expansionary fiscal policies and the growth of revenues (VAT reintroduction in January 2010, sale of public assets). In 2011, the public deficit is expected to remain stable with the increase in revenues (strong economic growth, tax reform in progress) paving the way for additional spending (infrastructure, education, health).
However, sovereign risk is still high due to the amount of public foreign debt (vulnerable to exchange rate depreciation) and to the level of debt service in relation to tax revenues.
In 2010, the current account deficit narrowed considerably with the rebound in exports (rise of raw material prices) more than offsetting the growth of imports (construction materials, capital goods). In 2011, however, the current account balance is expected to deteriorate again with the growth of exports (especially electricity to Thailand) unlikely to suffice to offset a sharp rebound in imports spurred by the resumption of investment projects (dams, transport, telecommunications). In this context foreign debt will remain high.
The low level of foreign exchange reserves, meanwhile, tends to undermine the exchange rate and could give rise to a significant liquidity crisis.
Despite of low level of bank intermediation, the credit risk remain has to be watched because of the significant credit growth in 2008-2009 (+80%) and the lack of supervision.
Persistent structural weaknesses
Despite the political stability, the business environment has remained very shaky. Measures taken to improve education and health notwithstanding, the general level of education remains very low and the health system is still underdeveloped. Besides, Laos will be highly unlikely to succeed in attracting direct investment in sectors other than natural resources, although success on that score constitutes a crucial challenge for the country's future.
Strengths
- Abundant natural resources
- Advantageous geographic position at the hub of dynamic economies
- Political stability
- Significant foreign investment in raw materials
- Strategy of openness, and regional integration (ASEAN) and trade-liberalisation policy (WTO admission process under way)
- Foreign investment in raw materials
Weaknesses
- Deficiencies in terms of governance
- High poverty rate
- Weak banking sector
- High sovereign risk due to a lack of debt relief