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
- 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)
- Poor business environment (154th out of 190 countries in the Doing Business 2019 report)
- High levels of corruption (120th/198 on the Transparency International index in 2019)
A strong rebound expected in 2021
Laos's economic growth cooled significantly in 2020, slowing to almost zero. In 2021, it is expected to make a brisk recovery, approaching pre-crisis levels. Household consumption, which accounts for 67% of GDP, will start growing again after declining due to income losses (the unemployment rate surged to about 20%, and expatriate remittances, which account for 60% of income in 10% of households, plummeted). Investment decreased in 2020 as a number of projects were postponed. It will be supported in 2021 by the implementation of these projects, including the USD 2 billion Luang Prabang dam project by the Chinese company Datang Hydropower, as well as the USD 2 billion investment by the Laos Transmission Company Ltd (a joint venture between Chinese and Laotian companies created in September 2020) to improve power transmission lines to neighboring countries. Electricity accounts for 10% of the country's GDP and 25% of its exports and will be one of the engines of growth in 2021. The agricultural sector, which accounts for 15% of GDP but 60% of the workforce, has recovered from the floods of 2018 and, assuming that weather conditions are the same, will continue to grow positively in 2021. The mining sector (6% of GDP) will continue to decline due to the government’s suspension of new mining operations since 2016. Maturing copper mines are another factor that is affecting the sector. Services, particularly tourism and trade (each accounting for 12% of GDP), were hard hit by distancing measures but could resume once these restrictions are lifted.
Vulnerable to external shocks due to persistently high deficits
Despite progress in recent years in curbing the public deficit, the government had little room to maneuver when responding to the crisis. In April 2020, the country implemented a USD 330 million stimulus plan, representing 1.9% of GDP, which mainly focused on cash transfers to the poorest workers. This plan, coupled with an estimated 21% drop in revenue, caused the public deficit to widen in FY2020 and increased the public debt. External debt is equivalent to 86% of GDP, with 60% owned by the public sector and the remainder corresponding to unsecured commitments within the framework of public-private partnerships or the Boten-Vientiane railway. The risk associated with this debt, which is largely denominated in dollars, increases during periods when the kip is depreciating, as was the case in 2020. Half of this debt is held by China following its numerous investments in the country as part of its New Silk Road strategy (USD 5.9 billion loans for the Vientiane-Boten high-speed train line, investment in hydroelectricity, etc.). The level of the debt and its servicing prevents the country from financing its expenditures on favorable terms on financial markets, which is why the concessional portion accounts for 65% of the external public debt.
The current account deficit, which was already high, widened in 2020 after the trade deficit worsened and expatriate remittances fell by half. The decline in exports, particularly of electricity, ore, and tourism, due to the economic slowdown among Laos’s main trading partners (Thailand, China, and Vietnam) was not offset by a decrease in imports (oil bill and purchases of capital goods). Any improvement in the trade deficit is expected to be limited in 2021, due to the weak tourism sector. 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 the Thai recovery. The current account deficit is usually financed by bilateral and multilateral debt, as well as FDI, especially from China. Given the low foreign exchange reserves (one month of imports), the additional financing requirements for 2020 relied on emergency aid.
Non-transparent political environment
President Boungnang Vorachit and Prime Minister Thongloun Sisoulith are both members of the Lao People's Revolutionary Party (LPRP), which is the only authorized party in the country. This communist party controls all aspects of politics and civil liberties. The next legislative elections, to be held in 2021, are expected to see the LPRP win the vast majority of seats, while a handful of independent, non-partisan candidates approved by the single party will be allowed to sit in the assembly.
Chinese influence will remain strong as the Laotian government seeks to restructure the substantial debt owed to that country. This may be one reason why Laos agreed in September 2020 to allow China to control its national electricity company. Some hydroelectric projects, such as the construction of the Luang Prabang dam, the third Laotian hydroelectric dam on the Mekong river, have upset local populations as well as other riparian countries and environmental NGOs because of the potential disruptions to fishing and agriculture along the river.