TRIS Rating has affirmed the sovereign and issue ratings of the Lao People’s Democratic Republic (Lao PDR) at “BBB+” with “stable” outlook. The ratings reflect the strong, albeit slowing, growth rate of the nation’s economy. The ratings also reflect the nation’s abundance of natural resources, rising government revenues from the hydropower sector, and the government’s commitment to modernize the economy and alleviate poverty. The ratings are constrained by a rise in external public debt, a slower growth rate for exports, slower growth in government revenues, a limited data reporting system for the public sector, and the nation’s small but emerging financial markets and capital markets.
The “stable” outlook is based on the government’s ability and willingness to repay its debts under the assumption that external public debt will range from 40%-50% of the gross domestic product (GDP). The annual debt service requirement is expected to fall below 45% of official foreign exchange reserves over medium term. This ratio may increase slightly in the 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 tax revenues will continue to increase and government revenues from hydropower projects will rise rapidly after the construction phase of those power plants completed and begin to sell electricity according to terms and agreements.
In contrast, if the level of external public debt exceeds 60% of GDP on a sustained basis, the credit risk of the Lao PDR government will be markedly higher and the government will be more exposed to exchange rate volatility. The ability of the government to service its foreign currency-denominated debts could be affected negatively by several factors: a fall in revenues from exports, lower revenues from tax and non-tax collections, or a decline in foreign direct investment which will reduce foreign currency capital inflows.
A more favorable rating requires a substantial, sustained decline in external public debt, an increase in foreign exchange reserves, or a decrease in the debt service requirement for external public debt.
The GDP of the Lao PDR has grown by about 7.9% per annum, in real terms, between 2011-2015, according to the Bank of the Lao PDR (BOL). This growth rate was the fastest among the Association of South-East Asian Nations (ASEAN) member countries. The fast-growing economy has been fueled by rises in investment made by the public sector and the private sector. Some of the public and private sector investment projects were joined by foreign public and private investors.
The real GDP growth rate is expected to fall slightly in 2015 and 2016. The growth rate is forecasted to range between 7.2% and 7.5%. The drop is due to lower commodity prices that affect government revenues and export values. GDP in 2015, at current market prices, was estimated at US$12.58 billion. The real growth rate of GDP per capita is expected to be 5.5% in 2015. Government revenues are not expected to rise in 2015, after several consecutive years of double-digit growth between 2010 and 2014.
The government and the monetary authorities of the Lao PDR still need to improve their data collection systems and databases so that essential economic data are more comprehensive and up to date. Reliable and comprehensive economic data are crucial so that the government can make the appropriate policies to achieve 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 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 development of data collection and reporting systems is underway, under the supervision of multilateral institutions. The key statistics which are needed 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 political situation in the Lao PDR has been stable for 40 years, since the establishment of the Lao People's Democratic Republic in 1975. The nation has a single political party, the Lao People’s Revolutionary Party, which has ruled the country for more than 40 years. 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. The most recent general election, held in early 2016, should not affect the political environment in the Lao PDR. The political stability in the Lao PDR supports the continuation of the government policies to implement its economic development plans in a meaningful, effective manner.
The Lao PDR implemented a tax reform plan and introduced value added tax (VAT) in 2010. The nation also improved the tax administration and collection system. Despite a general economic slowdown in 2015, the Ministry of Finance of the Lao PDR (MOFL) estimates revenues from taxes in fiscal year (FY) 2015 rose by 6.9%. Revenue from VAT increased by 18.3%. The growth rate for non-tax revenues has been slower due primarily to a decline in grants from international agencies and foreign governments. In 2015, revenues from grants was expected to drop for the first time, slipping by 12.5% from a year earlier.
Revenues from the hydropower sector are expected to keep rising, as several big hydropower plants are finished. In 2015, government revenues from hydropower projects are expected to rise by 33% to LAK355 billion (or US$43.8 million). 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 2020, it is expected that the Lao PDR will have about 8,100 MW of installed generating capacity to serve both domestic and export markets. According to information from a Lao PDR government official, revenues from the hydropower sector paid to the government will rise to about US$1,000 million per year after 2020.
The external public debt of the Lao PDR equaled 51.8% of GDP or US$6.5 billion in 2015. This ratio was higher than in 2014. According to the MOFL, the government has borrowed very little money from the domestic market, or just about 15% of GDP. TRIS Rating believes the Lao PDR’s external public debt will rise and remain high over medium term. The government must finance a number of projects undertaken by the government itself and state-owned enterprises. Domestic funding sources remain limited. Because of its large external public debts, the Lao PDR is exposed to the risk from abrupt and large depreciations of the exchange rate. Nonetheless, this risk is partially reduced because bilateral and multilateral creditors are the largest portion of the Lao PDR government’s external creditors. 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 2015, loans from multilateral and bilateral lenders to the government accounted for about 70% of total external public loans.
Government expenditures to service external debts are projected to grow faster over medium term. Existing multilateral loans will gradually mature and be replaced with more commercial-based external financing at less favorable interest rates. It is estimated that the external debt service of the Lao PDR will be higher than 35% of the government’s foreign exchange reserves over the next three to five years.
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