Laos: Risk Assessment
Country Risk Rating
Business Climate Rating
- 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
- Large and persistent current account deficit
- Weak foreign exchange reserves
- Governance shortcomings and major inequalities
- Fragile banking sector
- Significant sovereign risk due to high external debt, especially Chinese-owned external debt
- Sensitive to commodity prices as well as regional economic and geopolitical conditions (landlocked location)
- High levels of corruption (134th/198 on the Transparency International index in 2020)
A weaker-than-expected recovery
The recovery has been held back by an unexpected wave of COVID-19 in the second half of 2021, as containment measures and lockdowns hit consumption and manufacturing activity. Household consumption, which accounts for 66% of GDP, should remain weak due to income losses resulting from a surge in unemployment triggered by lockdowns and low overseas remittances, the primary source of income for 9% of households. Restrictions will continue to weigh on construction activity (8% of GDP) in the short term and delay some projects, as manual laborers were fired during lockdowns. However, this is not the case for larger infrastructure projects: the China-Laos railway, a project under the Belt and Road Initiative, started to operate in December 2021, as scheduled. Moreover, a strong pipeline of large projects, including the Nam Theun 1 Hydropower project (a joint project between the Lao and Thai governments) that is expected to start operating in 2022, and the Sithandone Special Economic Zone by Guangdong Yellow River Industrial Group (a Chinese company planning to invest USD 10 billion) should support the construction outlook and investments in 2022. Electricity, which accounts for 10% of GDP and 25% of exports, will continue to be a key driver of growth in 2022. The agriculture industry (15% of GDP), which employs 60% of the workforce, is expected to expand in 2022, assuming that weather conditions remain favorable. However, China’s cattle import ban in July 2021 following an outbreak of lumpy skin disease will likely be challenging for the industry. The mining industry (6% of GDP) should continue to decline due to the government’s suspension of new mining concessions in 2016. Services, especially tourism (accounting for 3.5% of GDP), have been affected by restrictions and should continue to weigh on recovery.
Vulnerable to external shocks due to persisting high levels of external public debt
The public deficit is set to narrow slightly in FY2022, as revenue will continue to improve, and spending should grow slower after a 1.9% GDP stimulus plan was implemented in 2020 to support the economy. External debt amounts to 67% of GDP, with 56% of total external debt owed by the public sector and the remainder corresponding to unsecured commitments within the framework of public-private partnerships or the Boten-Ventiane railway. The external debt is denominated mainly in dollars, making it vulnerable to external shocks, and increases when the kip depreciates, which was the case in 2021 (especially since September). Half of the debt is held by China, which has taken part in the country’s significant investments under the Belt and Road Initiative (USD 5.9 billion loans for the Vientiane-Boten high-speed train line, hydroelectricity, etc.). The debt and debt service level prevents the country from financing its expenditures on favorable terms on financial markets, which is why the concessional part accounts for 61% of the external public debt.
The current account deficit is set to narrow slightly as the trade balance deficit should improve, thanks to a recovery in external demand. Exports are recovering, especially for copper ore and electricity, due to the rescue of Laos’ main trading partners (China, Thailand, and Vietnam). That being said, a weak tourism sector should limit the recovery in the trade deficit, as restrictions on borders are likely to remain. Moreover, 70% of expatriate remittances (1.7% of GDP in 2019) come from Thailand, which has been badly affected by the crisis and will follow its recovery. The current account deficit is usually financed by bilateral and multilateral debt and FDI, especially from China. Foreign exchange reserves reached 3.3 months of imports as of September 2020 (the latest data) and remain adequate for now.
An opaque political system and high dependency on China
President Boungnang Vorachit and Prime Minister Thongloun Sisoulith are both Lao People’s Revolutionary Party (LPRP) members, the country’s only authorized ruling party. This communist party controls all aspects of politics and civil liberties. The legislative elections in February 2021 reinforced the LPRP’s position in the parliament, with 14 additional seats (158/164 seats).
China’s influence continues to remain strong as the country relies heavily on China for large infrastructure projects, such as highway projects (Vientiane expressway), as part of the Belt and Road Initiative to support its economic recovery. Concerns are growing about large loans contracted by Laos to finance such projects. If it fails to repay Chinese creditors, this may drive the country into a debt trap, where China would seize assets. This was the case in September 2020, when Laos allowed China to take control of its national electricity company.