TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to US$200 million in senior unsecured bonds of Lao People’s Democratic Republic (Lao PDR). TRIS Rating has also affirmed the sovereign rating and the issue rating of Lao PDR at “BBB+”. The outlook remains “stable”.
The ratings reflect the continuously strong growth rate of the nation’s economy despite the global economic slowdown in 2014 and 2015. The ratings also reflect the nation’s abundance of natural resources, the increase in revenues from the hydropower sector, the government’s commitment to modernize the economy and alleviate poverty. The ratings are constrained by a moderately high level of public external debt, the fact that government revenues are exposed to volatile commodity prices, 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’s belief 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 also includes the expectation that government revenues from hydropower projects will rise faster after the power plants are completed and begin to sell electricity according to the contract terms and agreements.
In contrast, an excessive level of external public debts, without the government revenues needed to support the higher debt service repayments, will be the negative rating factor. The ability of the government of Lao PDR to service foreign currency denominated debts could be affected negatively by drops in revenues from exports or lower government tax and non-tax revenues.
A more favorable rating requires a substantial, sustained decline in public external debts, the increases in the foreign exchange reserves, and the higher GDP per capita and government revenues.
The growth rate of real GDP is expected to stay at 7.5% in 2015, down slightly from 7.8% in 2014. GDP, at current market prices, in 2014, was US$11.7 billion, equivalent to a per capita income of US$1,671 per annum. The nation recorded growth in real GDP per capita of 5.8% in 2014. This rate is the fastest among the 10 countries in the Association of Southeast Asian Nations (ASEAN).
Public external debt in 2014 is estimated to be equal to 49.3% of GDP, up from 47.2% in 2013. Most of the government debt was used for infrastructure development projects. As of 2014, over 80% of public external debts were multilateral and bilateral loans. Debt service was equal to 36.5% of foreign exchange reserves in 2014, up from 25.0% in 2013.
Government revenues in 2014 rose by 11.7% causing the government interest expenses to government revenues ratio to decline to 3.9% in 2014, from 5.1% in 2013.
Lao PDR derives most of its government revenues from taxes. Lao PDR implemented a tax reform plan and introduced value added tax in 2010. The nation also improved its tax administration and collection system. The proportion of government revenues from tax equaled 65.3% in 2014. The higher proportion of non-tax revenues is due primarily to increases in revenues from royalties for mining and hydropower projects. In 2014, revenues from the hydropower sector were LAK656 billion (US$82 million). It is expected to increase to LAK1,000 billion (US$125 million) in 2015. According to the Asian Development Bank, the Mekong River sub-basin in Lao PDR has an estimated 20,000 MW of technically viable hydropower capacity. By 2020, it is expected that Lao PDR will have a total generating capacity of about 8,100 MW to serve both domestic and export markets.
The government and monetary authorities of Lao PDR are in the process of improving their data collection systems and database so that essential economic data will be more comprehensive and up to date. At present, the Bank of the Lao PDR (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 trade and the balance of payments, and more. The most recent economic data and financial market data published by the BOL and LSB were from the first quarter of 2015.
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 the single political party that has ruled the country. The National Assembly of the Lao PDR appoints a 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 implement its economic development plans in a meaningful and 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, in preparation for increasing economic activity. The new infrastructures include laws and regulations governing commercial trading, investment activity, and environmental controls.
Sovereign Rating: BBB+ Issue Ratings: MOFL186A Bt1,000 million senior unsecured bonds due 2018 BBB+ MOFL206A Bt5,000 million senior unsecured bonds due 2020 BBB+ MOFL256A Bt6,000 million senior unsecured bonds due 2025 BBB+ Up to US$200 million senior unsecured bonds due 2025 and 2027 BBB+ Rating Outlook: Stable
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