TRIS Rating has assigned the rating of “BBB+” to the proposed issue of up to Bt11,000 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 the outstanding senior unsecured bonds of Lao PDR at “BBB+”. The outlook remains “stable”. The proceeds from the new bond issuance will be used to repay loans from commercial banks.
The ratings reflect the strong, albeit slowing growth rate of the Lao PDR’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 GDP. The annual debt service is expected to fall below 45% of official foreign exchange reserves over the 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 construction is complete and the government begins to sell electricity.
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 including the lower revenues from tax and non-tax collections, the fall in revenues from exports, or the decline in foreign direct investment. The last two factors could reduce foreign currency capital inflows markedly.
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 for external public debt.
The growth rate of real gross domestic product (GDP) of the Lao PDR is expected to stay at around 7% in fiscal year 2015/2016 (FY2015/2016), down from 7.8% in 2014. GDP in 2015, at current market prices, was US$12.58 billion. GDP per capita rose to US$1,821 in 2015, up from US$1,690 in 2014. Government revenues declined slightly in 2015, after several consecutive years of double-digit growth rates between 2010 and 2013.
Gross external public debt in 2015 was estimated to be equal to 53.8% of GDP, and could rise to 54.67% in 2016. It is expected that this ratio will decline after 2016 when some of the outstanding debts are refinanced. The proceeds from most government debt issuances were used for infrastructure development projects. As of 2015, over 80% of public external debts were multilateral and bilateral loans. Debt service is projected to rise to 59.5% of foreign exchange reserves by the end of 2016 but will fall in 2017 and 2018 as a portion of the outstanding high cost commercial bank loans are refinanced with lower fixed rate coupon bonds.
According to the Ministry of Finance of the Lao PDR (MOFL), the government has borrowed few portions from the domestic market, equivalent to about 15% of GDP. TRIS Rating believes the Lao PDR’s public debt will rise and remain high over the 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 the 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 creditor of the Lao PDR government.
Despite a general economic slowdown in 2015, revenues from taxes in FY2015 rose by 6.9% according to the preliminary data. Revenue from value-added tax (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 were expected to drop for the first time, slipping by 12.5% from a year earlier.
Government expenditures to service external debts are projected to grow faster over the medium term. Existing multilateral loans will gradually mature and be replaced with more commercial bank-based external financing at less favorable interest rates. It is estimated that the external debt service of the Lao PDR will exceed 35% of the government’s foreign exchange reserves over the next three to five years.
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 to implement its economic development plans in a meaningful, effective manner.
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