TRIS Rating affirms the sovereign rating and the ratings of outstanding senior unsecured bonds of the Lao People’s Democratic Republic (Lao PDR) at “BBB+”, with “negative” outlook. The ratings reflect the sovereign credit profile of the Lao PDR as a small, fast growing and developing economy. The ratings are constrained by the continued rise in the nation’s external debt, widening fiscal deficit, and persistently low foreign reserves. The Lao PDR government is expected to continue relying on external finance to fund public investment over the next few years. The lack of the up-to-date economic, financial, and fiscal data is another credit constraint.
KEY RATING CONSIDERATIONS
Rising GDP
The real gross domestic product (GDP) of the Lao PDR is expected to grow by 6.9% in 2017, according to
the Ministry of Finance of the Lao PDR (MOFL). GDP in 2018 is expected to rise by 6.5%-7.0%. The Lao PDR’s economic growth has shown an improving trend in 2018 thanks to the improvement in commodity prices, construction activities, and exports.
Widening fiscal deficit
The government fiscal deficit has widened since 2015. In 2017, the fiscal deficit registered at US$941.4 million, increased 46.86% from US$641 million in 2015. Fiscal deficit rose mainly because government expenditures rose rapidly. Government revenues grew at a slower rate amid economic slowdown in recent years. The Lao PDR government forecasts revenues to grow by 9.49% in 2018, compared with 3.86% in 2017. Expenditures are projected to increase by 8.9% in 2018, compared with 7.1% in 2017.
Low foreign exchange reserves, though improving
According to the Bank of the Lao PDR (BOL), foreign exchange reserves at the end of 2017 were US$1,015.83 million, up 24.66% from US$814.83 million in 2016. During the past five years, official foreign exchange reserves averaged US$859 million. Annual ratio of debt services to foreign exchange reserves averaged 33.47%. The ratio is forecast at 45.66% in 2017 and 47.31% in 2018 based on TRIS Rating’s base case scenario.
Rising public debts over the medium term
The external public debt of the Lao PDR is expected to rise to over US$8,600 million by the end of 2017. This level is equal to about 50.0% of the country’s GDP in the same year. All of the external debt has been used to finance government infrastructure projects and hydropower projects. TRIS Rating expects the Lao PDR government to continue relying on bilateral project loans and bond issuances in Thailand’s debt capital market to fund its deficit in the medium term.
Bilateral and multilateral loans comprise most of public debt
At the end of 2017, the Lao PDR’s outstanding bonds issued in Thailand equaled US$1,436.71 million, accounting for 16.74% of total external debts. Bilateral loans, most of which are long-term amortized project loans related to government infrastructure investments, accounted for the largest portion (64.82% at the end of 2017) of total external debt. More than 50.0% of total outstanding loans, including multilateral and bilateral loans, are owed to the Chinese creditors.
Political stability yields continuity
The political situation in the Lao PDR has been stable for 40 years, since the establishment of the Lao PDR 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 degree of political stability in the Lao PDR supports the continuation of the government’s economic development plans and policies in a meaningful, effective manner.
RATING OUTLOOK
The “negative” outlook reflects TRIS Rating’s concerns regarding the continued rise of government debt and low foreign exchange reserves. A rise in external public debt will increase the foreign currency debt service burden of the Lao PDR government over the medium to long term and add pressure on foreign exchange reserves.
The large amount of external public debt also exposes the Lao PDR government to foreign exchange risk.
RATING SENSITIVITIES
A change in outlook to “stable” is dependent upon a fall in the level of external debt, higher and more stable foreign exchange reserves, and lower government budget deficit on a sustainable basis. The broadening of tax base and the completion of hydropower and other productive government investment projects could increase the government’s revenue and reduce the government’s dependency on external sources of fund.
On the contrary, a materially worsening trend in foreign exchange reserves and external public debt will lead to a rating downside scenario.
COUNTRY OVERVIEW
The Lao PDR is the smallest economy in the Association of Southeast Asian Nations (ASEAN). In 2017, the Lao PDR’s GDP was Kip140.75 trillion (approximate US$17.16 billion), according to the Lao Statistical Bureau.
The Lao PDR’s economy trailed in size the economies of Myanmar, Cambodia, and Brunei Darussalam. However, the Lao PDR is among the fast growing GDP per capita economies.
According to the International Monetary Fund (IMF), in 2017, the Lao PDR’s GDP per capita was projected to be US$1,821. Per capita GDP was estimated to grow in real term by an annual average of 4.91% in 2017. The Lao PDR government’s 8th Five Year National Socio-Economic Development Plan (2016-2020) sets a target of 7.5% as the average annual growth rate of GDP.
The Lao PDR has abundant natural resources, such as copper, gold, and lignite. The Lao PDR has positioned itself as the “Battery of Asia” as it has plenty of water resources suitable for generating power. Electricity exports to neighboring countries have been an important part of the revenues of the Lao PDR’s government.
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Lao People’s Democratic Republic (Lao PDR)
Sovereign Rating: BBB+
Issue Ratings:
MOFL186A: Bt1,000 million senior unsecured bonds due 2018 BBB+
MOFL19NA: Bt4,802.90 million senior unsecured bonds due 2019 BBB+
MOFL206A: Bt5,000 million senior unsecured bonds due 2020 BBB+
MOFL20OA: Bt2,791.30 million senior unsecured bonds due 2020 BBB+
MOFL21NA: Bt1,870.50 million senior unsecured bonds due 2021 BBB+ BBB+
MOFL22OA: Bt1,019.80 million senior unsecured bonds due 2022 BBB+
MOFL23NA: Bt1,063.80 million senior unsecured bonds due 2023 BBB+
MOFL24OA: Bt340.90 million senior unsecured bonds due 2024 BBB+
MOFL256A: Bt6,000 million senior unsecured bonds due 2025 BBB+
MOFL26NA: Bt1,371.50 million senior unsecured bonds due 2026 BBB+
MOFL27OA: Bt2,967.00 million senior unsecured bonds due 2027 BBB+
MOFL28NA: Bt1,891.30 million senior unsecured bonds due 2028 BBB+
MOFL29OA: Bt1,505.50 million senior unsecured bonds due 2029 BBB+
MOFL32OA: Bt5,375.50 million senior unsecured bonds due 2032 BBB+
MOFL25DA: US$162 million senior unsecured bonds due 2025 BBB+
MOFL27DA: US$20 million senior unsecured bonds due 2027 BBB+
Rating Outlook: Negative