Laos: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources: minerals (copper, gold, bauxite, iron, zinc), oil, and agricultural commodities (maize, rice, sugar cane, rubber, manioc, soya, coffee)
- Expansion of the hydroelectric sector
- Foreign investment in the commodities and energy sectors
- Regional integration (ASEAN) and WTO membership
- Massive current account deficit
- Weak foreign exchange reserves
- Governance shortcomings and high poverty rate
- Weak banking sector
- Significant sovereign risk due to high debt stock
- Sensitivity to commodity prices and regional economic cycle
Growth Still Firm but Dipping Again Slightly
In 2018, activity should continue to slow slightly, although growth will remain robust. However, the Laotian economy is expected to benefit from the slight recovery in commodity prices, primarily those of mining products. Meanwhile, construction will benefit from the boom in the hydroelectric sector, which contributes nearly 20% of total exports. Thirty-five power plants are under construction, with several projects being launched at the end of 2016. Despite fiscal consolidation measures, infrastructure expansion continues.
The country, which is confronted by major infrastructure shortcomings, is involved in projects aimed at improving the country’s rail and road connections with other countries in the region. These connections will enable the country to profit from its geographic position (borders with five other countries) to become a regional trade hub. In addition, a fifth airport is due to for construction and the country is expanding its hotel capacity. Accordingly, growth in the number of tourists, especially from China, is expected to remain high. The tourist source countries will continue to be highly concentrated, with 80% of tourists coming from Thailand, China or Vietnam. The agricultural sector, although under-modernized, will continue to dominate: it represents 25% of GDP and employs over 70% of the workforce.
Household consumption is expected to remain firm and will benefit from the rise in the minimum wage, but could be hit by the consolidation measures and the slight rise in inflation. Moreover, robust mining and hydroelectric output, low urbanization rates, as well as an inefficient banking sector, will continue to prevent households from benefiting from the country’s strong growth.
The Considerable Public Debt Ratio and the Dependence on External Finance Expose the Country to External Shock
The fiscal deficit will remain high in 2018 despite the fiscal consolidation measures taken by the government. This is because tax collection (15% of GDP) is affected by high levels of corruption and low rates of tax. However, greater spending control by the different administrations has been observed, helping to improve expenditure effectiveness.
Despite the slight growth in exports of electricity and mining products, the current account deficit remains huge. This is because the country imports almost twice as many goods as it exports. Imports mainly consist of oil products and capital goods, notably for the hydroelectric and construction sectors. However, the country’s exports should benefit from the development of electricity projects (80% of the electricity produced in Laos is exported) and the economic recovery in Thailand, Laos’ main trading partner.
At the same time, the expansion of tourism should in part offset the repatriation of dividends by the foreign companies involved in the exploitation of natural resources. The country also receives remittances from expatriate workers and foreign aid. Furthermore, FDIs are booming because of major projects initiated by private, notably Chinese, companies, and the funds generated by these FDIs serve to fund the import of capital goods.
Nevertheless, the country has substantial foreign debt and depends on its neighbors (especially China) to fund its infrastructure projects. Meanwhile, the foreign exchange reserves are still inadequate, covering less than two months of imports and making the country and its currency, the kip – whose exchange rate is tightly controlled by the central bank – vulnerable to external shocks. Finally, the banking sector – especially public banks –remains fragile due to the lack of supervision and inadequate capitalization. With regard to the sharp growth in credit in recent years, credit risk still needs to be watched.
Political Stability Despite Major Challenges Regarding the Development of Governance
The presence of a single party, the communist-inspired Lao People’s Revolutionary Party (PPRL), ensures the country’s political stability. In April 2016, the transition of power to a new governmental team led by Thongloun Sisoulith ensured continuity. Nonetheless, 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 offering little benefit to the population since the public authorities prioritize infrastructure spending over health and education spending. Meanwhile, despite some progress (especially on financial data), there are still significant governance shortcomings, as evidenced by the high level of corruption.