Laos: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Lower commodity prices are likely to put pressure on growth
Laos's economy will remain dynamic but is likely to be hit by a contraction in commodity prices, first and foremost metal prices. Moreover, the mining sector is handicapped by a moratorium on the exploitation of new mines, which is limiting production capacity. Nevertheless, growth in the hydroelectric sector is expected to remain buoyant. Meanwhile, despite fiscal consolidation measures, infrastructure development will continue. The country, which is confronted by huge infrastructure shortcomings, is involved in projects aimed at improving its rail connections with Thailand and China. In addition, a fifth airport is to be built and the country is developing its hotel capacity. Accordingly, the number of tourist arrivals, especially from China, is expected to remain high. The tourists' countries of origin will continue to be highly concentrated, with 80% of tourists originating from Thailand, China or Vietnam. The agricultural sector, – under-modernized – will remain dominant: it represents 25% of GDP and employs over 70% of the economically active population.
Laos's exports should benefit from the recovery of activity in Thailand, its main trading partner. Moreover, Laos and Singapore are negotiating an agreement with Malaysia and Thailand aimed at allowing the delivery of Laotian electricity to Singapore, which is looking to diversify its energy resources.
Meanwhile, household consumption is expected to remain firm and will benefit from the rise in the minimum wage and the sharp drop in inflation due to weakness in oil prices and the moderation of food prices.
The country continues to suffer from considerable weaknesses, but the current account balance will benefit from the lower oil price
Despite the growth in exports of electricity and mining products fueled by dynamic neighboring economies, the current account deficit is huge, as the country imports twice as much as it exports. Imports mainly consist of oil products and capital goods. However, the trade deficit is expected to narrow in 2016, due to lower oil prices and economic recovery in Thailand. Meanwhile, now that several hydroelectric projects have been completed, the growth in imports of capital goods for the construction industry should slow. At the same time, tourism growth should help offset dividend repatriations by foreign companies engaged in the exploitation of natural resources. The country also receives remittances from expatriate workers and foreign aid. This means it should also manage to slightly reduce the level of its current account deficit.
Moreover, FDIs are booming on the back of the major projects initiated. They are expected to grow still more with the business climate improving, in particular thanks to the country's accession to WTO membership in early 2013.
Nevertheless, the country's external debt is substantial and it is dependent on its neighbors for the financing of its infrastructure projects. Its foreign exchange reserves remain insufficient, covering less than a month's imports, making the country vulnerable to external shocks.
In 2016, the budget deficit and the public debt – already at high levels - will continue to grow despite the fiscal consolidation steps taken by the government. This is because government mining revenues have been hit by falling prices and tax collection is hampered by high levels of corruption. Nonetheless, there has been tighter control of spending by the different entities.
Finally, the banking sector remains weak, given the lack of supervision and inadequate capitalization. In view of the sharp growth in credit in recent years, credit risk still needs to be watched.
Political stability but major development challenges
The presence of a single party, the communist-inspired Lao People's Revolutionary Party (PPRL), ensures the country's political stability. However, the country remains underdeveloped, despite the strong economic growth observed in recent years. This situation is explained by the advent of an economy strongly oriented towards the external market and favoring FDIs (which enabled the country to join the WTO) but which offers little benefit to the population. Meanwhile, there are still considerable shortcomings in terms of governance, as evidenced by the high level of corruption.