TRIS Rating has assigned the sovereign and issue ratings of Lao People’s Democratic Republic (Lao PDR) at “BBB+” with “stable” outlook. The ratings reflect the strong growth rate of the nation’s economy. The ratings also reflect an abundance of natural resources, the increasing of government revenue from the hydropower sector, the government commitment to modernize the economy and alleviate poverty. The ratings are constrained by moderately high public external debts, the government revenue exposure to volatile global prices of commodities, a limited data reporting system for the public sector, and the nation’s small but emerging financial and capital markets.
The “stable” outlook is based on TRIS Rating believes that the government of Lao PDR’s ability and willingness to repay debts will be stable over the next three years based on the assumption that public external debts will remain in the range of 40% to 50% of GDP over the medium term. The debt service is expected to remain between 30% and 40% of official foreign exchange reserves. This ratio may increase slightly in near future as soft loans and grants from multilateral organizations are replaced with commercial loans from international lenders. The stable outlook is also included the expectation that government revenue from hydropower projects will rise fast after the construction phase of those power plants completed and begin to sell electricity according to terms and agreements.
On the contrary, the excessive external public debts without government revenue to support higher debt service repayments will be the negative rating factors. The ability of government of the Lao PDR to repay foreign currency debt services could be affected negatively by the dropping of revenue from exports or lower government revenue from taxes and non-taxes.
On the other hand, the more favorable rating requires a substantially declining of public external debt on sustainable basis; the increasing of the government foreign exchange reserves, and the decreasing of external debt services.
The gross domestic product (GDP) of Lao PDR has grown by over 7% per annum, in real term, since 2006. The fast-growing economy has been fueled by the increased investment of public sector and the private sector. Some of the public and private sector investment projects were joined by foreign public and private investors. The country’s abundant natural resources have attracted foreign direct investment of more than US$ 300 million per annum since 2007.
The real GDP growth rate is expected to stay above 7.5% per year over the next three to five years. GDP, at current market prices in 2013, was US$11.64 billion, or equivalent to a per capita income of US$1,688 per annum. The nation recorded a real growth rate of GDP per capita of 5.72% between 2008 and 2013. This rate was the fastest among the 10 countries in Association of Southeast Asian Nations (ASEAN). The sustained, rapid growth rate will improve the average standard of living and boost government revenue.
The government and monetary authorities of Lao PDR still need to improve their data collection systems and database so that essential economic data will be more comprehensive and up to date. A reliable and comprehensive economic database is crucial for the government to make the appropriate policies to achieve its development targets or fix economic problems. Timely reports are needed especially during an economic crisis so that important economic problems can be handled effectively. At present, the Bank of Lao (BOL) and the Lao Statistics Bureau (LSB), a part of the Ministry of Planning and Investment, are the two major agencies responsible for collecting and publishing key economic statistics. The key statistics include the composition of national income, GDP growth rate, inflation rate, credits and deposits of financial institutions, international trades and the balance of payments, and more. The most recent economic data and financial market data published by the BOL and LSB were from 2013.
The political situation in Lao PDR has been stable for 40 years, since the establishment of the Lao People's Democratic Republic in 1975. The Lao People’s Revolutionary is a single political party that has ruled the country. The National Assembly of Laos appoints president who will appoint the prime minister, vice presidents, ministers and other officials with the consent of the National Assembly. Political stability helps the government to implement its economic development plans in a meaningful effective manner.
Public administration procedures and practices are being reviewed and improved with the assistance of international organizations. Administrative procedures which are more efficient and streamlined will speed the development of the nation. In addition, a number of institutional infrastructures are being drafted, reviewed, and revised, to prepare for a growing economic activity. The new infrastructures include laws and regulations governing commercial trading, investment activity and environmental controls.
Lao PDR implemented a tax reform plan and introduced value added tax in 2010. The nation also improved its tax administration and collection system. Despite these changes, the government revenue from tax increased by an average of 20% per annum from 2011 until 2013. The global economic slowdown in 2013, plus falling commodity prices, affected the mining sector. The proportion of government revenue from taxes declined from 73% in 2008 to about 60% of total government revenue in 2013. The higher proportion of non-tax revenue is due primarily to increases in revenue from royalties for mining and hydropower projects. The government revenue derived from mining comprised over 13% of government revenue in 2012. As a result, the government of Lao PDR faces greater risks when commodity prices are low. For example, in 2013, government tax and non-tax revenue from mining dropped by 22.7% to Kip1,860 billion, compared with Kip2,408 billion in 2012.
Revenue from the hydropower sector will increase soon, once several big hydropower plants are finished. According to the Asian Development Bank, the Mekong river sub-basin in the Lao PDR has an estimated 20,000 MW of technically viable hydropower capacity. By 2011, 2,570 MW of this capacity had been developed and operational for producing power for domestic consumption and for export. A further 2,623 MW of capacity, involving 12 power plants, is in various stages of construction. By 2020, it is expected that the Lao PDR will have total generating capacity of about 8,100 MW to serve both domestic and export markets. According to the information from Lao PDR government official the revenue to the government from Hydropower will rise to about US$1,000 million per year since 2020.
To be able to diversify more government revenue base to capture more of the growth in domestic economy, tax base must cover more sectors of the economy. The development of productive tax system, especially the corporate income tax, value added tax, and personal income tax, will sustain the future government revenue over the long term.
The external public debt of Lao PDR equaled 39.5% of GDP or US$4.2 billion in 2013. This ratio was moderately high comparing with other country members in ASEAN. Government borrowing from the domestic market has been few, comprising only 10% of GDP. TRIS Rating believes Lao PDR’s external public debt will rise in over the next three to five years and will remain high over medium term as it must finance a number of future projects undertaken by the government and state-owned enterprises. Domestic funding sources are limited. Because of its large external public debts, Lao PDR is exposed to the risks from abrupt and large depreciation of the exchange rate. Nonetheless, this risk is partially reduced because bilateral and multilateral creditors have been the largest portion of external creditors of Lao PDR government. TRIS Rating believes that the terms and conditions of the loans from bilateral and multilateral lenders tend to be more relaxed and flexible than loans made by commercial lenders. In 2013, Lao PDR had external debts of US$4.2 billion, of which 46.3% were loans from multilateral lenders and 53.7% were bilateral loans.
The external debt service expenditures of the Lao PDR government are projected to grow faster over medium term. Existing multilateral loans will mature and be replaced with the more commercial-based external financing at less favorable interest rates. It is estimated that the external debt service requirement of the Lao PDR will be range from 30% to 40% of the government’s foreign exchange reserves over the next three to five years. Official foreign exchange reserves are expected to grow by more than 20% per annum in the medium term.
Lao People’s Democratic Republic (Lao PDR)
Sovereign Rating: BBB+
Issue Rating:
Up to Bt12,000 million senior unsecured bonds due within 2025 BBB+
Rating Outlook: Stable