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 and economic diversification
- Foreign investment in the commodities and energy sectors
- Regional integration (ASEAN) and WTO membership
- Persistent large current account deficit
- Weak foreign exchange reserves
- Governance shortcomings and high inequality
- Fragile banking sector
- Significant sovereign risk due to high external debt stock, specially Chinese-owed external debt
- Sensitivity to commodity prices as well as regional economic cycle and geopolitics (landlocked country)
Resilient growth supported by a diversified economy
Growth is recovering from the 2018 natural disasters and is expected to remain robust in 2020 on the back of economic diversification towards agriculture, services and manufacturing. Hydropower will continue to support GDP growth through construction and exports with the completion of several power projects on the Mekong River such as the Xayabury and Don Sahong dams, adding 2,200 MW generation capacity by 2020. Electricity currently accounts for a quarter of exports and addresses mostly demand from China, Vietnam and Thailand, which absorb 70% of Laos’ total exports. In light of trade tensions and global economic downturn, electricity demand from these three major trading partners is likely to be reduced, threatening Laos’s expected growth. Tourism will bolster services growth in 2020, coming from ASEAN countries, and China, and supported by the government’s infrastructure development (international airport extended, global hotel brands facilities) and advertisement campaigns to promote tourism. Subject to this year’s weather conditions, agriculture, accounting for 30% of GDP and 60% of the workforce, is expected to rebound after the flooding in 2018, which heavily affected rice crops and infrastructure. In light of poor crops, kip depreciation and African swine fever spreading to South-East Asia, consumer prices are likely to increase temporarily.
Vulnerability to external shocks due to persistent high deficits
Fiscal deficit is expected to decline this year on the back of further fiscal consolidation, though slowly due to underperforming revenues. This results from low tax rates and grants accounting for more than 5% of revenues. The public external debt estimated at 58.5% of GDP in 2018 exposes the country to external shocks, especially to a sharp decrease in exports and currency depreciation. In addition, two-thirds of the public debt is denominated in foreign currency, which exposes the economy to exchange rate fluctuations. The economy relies progressively more on China, which becomes its largest creditor as it invests massively to meet the economy’s infrastructure needs (high-speed railway, power projects) – holding over 42% of Laos’s external debt. Although the banking system is relatively strong and well capitalized, it is still highly dollarized which makes the country vulnerable in case of financial crises. Foreign exchange reserves, now covering around 1.2 months of imports are not enough to buffer those risks.
High current account deficit is expected to persist, financed by external debt and FDI inflows (7.8% of GDP at the time of writing) largely from China. Exports will increase thanks to higher capacity of hydropower generation, and help to compensate disaster-related and project imports. The economy also receives foreign assistance (ODA: 3% of GNI according to the World Bank in 2017) making it one of the highest aid recipient in ASEAN.
Growth and foreign relations at the expense of humane development and environment
The communist Lao People’s Revolutionary Party (LPRP) is the only authorized party in power in the country and controls all aspects of politics and civil liberties. Ranked 154th out of 190 countries on the World Bank Doing Business report for 2019, the business environment suffers from opacity and trade barriers that reduce the economy’s competitiveness and attractiveness among investors. In addition, despite recent anti-corruption campaigns, corruption remains at high levels, placing the country 132 of 180 on Transparency International’s corruption perceptions index for 2019.
While Laos experiences rapid economic growth, inequality is on the rise with the low-income population deprived of land and access to natural resources with the completion of dams, leading to growing frustration. The recent completion of the Xayaburi dam on the lower Mekong benefits little to the country as 95% of electricity generated will be exported to Thailand while water is at a very low level, threatening activities along the river. On the other hand, these projects strengthen trade and investment cooperation with Thailand and its neighbors, which mitigates historical cross-border issues.