Laos’ sovereign debt rating now close to junk

The Lao central bank is under pressure from mounting debt

US credit rating agency Fitch Ratings has become the next to downgrade the sovereign credit rating of Laos close to junk as the country has begun struggling with a debt burden from infrastructure and energy projects mainly loan-financed by China.

Fitch on September 23 announced that it downgraded Laos’ long-term foreign-currency issuer default rating to CCC from B- which means a downgrade from a “noticeably varying financial situation” to “highly vulnerable, very speculative” with no outlook. CCC is only three notches above default.

The agency is following Moody’s which in August downgraded Laos sovereign debt to Caa2 from B3, classifying the country’s sovereign debt now as “poor quality and very high credit risk.”

Fitch said its downgrade reflected “deepening external liquidity pressures” in Laos as a result of the coronavirus pandemic and the country’s large debt maturities. Even though the Lao government had secured some new financing in recent months, its financing options have nevertheless narrowed and foreign-exchange buffers remain low.

Fitch further forecasts a deterioration in the country’s fiscal deficit and increasing near-term financing needs. These developments have diminished the ability of the government to meet its debt service obligations, the agency said.

About $1,1 billion a year in debt repayments due

Laos faces a challenging external debt profile with around $500 million due during the remainder of 2020 and a further $1.1 billion a year due over the subsequent four years, compared to current foreign-exchange reserves of just $1.3 billion. Financing for Laos to meet its obligations during the remainder of 2020 appears adequate, but a large external financing gap would open from next year, Fitch noted.

While additional bilateral financing and debt relief could be forthcoming, including from China, there are not many financing options left for the government. Laos has not engaged the International Monetary Fund for financing through the latter’s pandemic-related credit facility, and while multilateral financing remains a potential option, Fitch said it saw sees no indications this path is being pursued.

However, not all is dire for Laos. Still, this year, the economic shock and fiscal deterioration is expected to push up public debt to nearly 65 per cent of GDP in 2020, from about 58 per cent in 2019. But 2021 and beyond will bring a gradual economic recovery with Laos’ “high underlying growth potential” remaining intact.

Fitch forecasts Laos’ GDP growth to rebound to 5.5 per cent in 2021 and six per cent in 2022. Over the medium term, the agency expects growth to remain at around six per cent, underpinned by the country’s ample hydropower capacity, increased regional transport connectivity, natural resource wealth, political stability and young population.



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The Lao central bank is under pressure from mounting debt US credit rating agency Fitch Ratings has become the next to downgrade the sovereign credit rating of Laos close to junk as the country has begun struggling with a debt burden from infrastructure and energy projects mainly loan-financed by China. Fitch on September 23 announced that it downgraded Laos’ long-term foreign-currency issuer default rating to CCC from B- which means a downgrade from a “noticeably varying financial situation” to “highly vulnerable, very speculative” with no outlook. CCC is only three notches above default. The agency is following Moody's which in...

The Lao central bank is under pressure from mounting debt

US credit rating agency Fitch Ratings has become the next to downgrade the sovereign credit rating of Laos close to junk as the country has begun struggling with a debt burden from infrastructure and energy projects mainly loan-financed by China.

Fitch on September 23 announced that it downgraded Laos’ long-term foreign-currency issuer default rating to CCC from B- which means a downgrade from a “noticeably varying financial situation” to “highly vulnerable, very speculative” with no outlook. CCC is only three notches above default.

The agency is following Moody’s which in August downgraded Laos sovereign debt to Caa2 from B3, classifying the country’s sovereign debt now as “poor quality and very high credit risk.”

Fitch said its downgrade reflected “deepening external liquidity pressures” in Laos as a result of the coronavirus pandemic and the country’s large debt maturities. Even though the Lao government had secured some new financing in recent months, its financing options have nevertheless narrowed and foreign-exchange buffers remain low.

Fitch further forecasts a deterioration in the country’s fiscal deficit and increasing near-term financing needs. These developments have diminished the ability of the government to meet its debt service obligations, the agency said.

About $1,1 billion a year in debt repayments due

Laos faces a challenging external debt profile with around $500 million due during the remainder of 2020 and a further $1.1 billion a year due over the subsequent four years, compared to current foreign-exchange reserves of just $1.3 billion. Financing for Laos to meet its obligations during the remainder of 2020 appears adequate, but a large external financing gap would open from next year, Fitch noted.

While additional bilateral financing and debt relief could be forthcoming, including from China, there are not many financing options left for the government. Laos has not engaged the International Monetary Fund for financing through the latter’s pandemic-related credit facility, and while multilateral financing remains a potential option, Fitch said it saw sees no indications this path is being pursued.

However, not all is dire for Laos. Still, this year, the economic shock and fiscal deterioration is expected to push up public debt to nearly 65 per cent of GDP in 2020, from about 58 per cent in 2019. But 2021 and beyond will bring a gradual economic recovery with Laos’ “high underlying growth potential” remaining intact.

Fitch forecasts Laos’ GDP growth to rebound to 5.5 per cent in 2021 and six per cent in 2022. Over the medium term, the agency expects growth to remain at around six per cent, underpinned by the country’s ample hydropower capacity, increased regional transport connectivity, natural resource wealth, political stability and young population.



Support ASEAN news

Investvine has been a consistent voice in ASEAN news for more than a decade. From breaking news to exclusive interviews with key ASEAN leaders, we have brought you factual and engaging reports – the stories that matter, free of charge.

Like many news organisations, we are striving to survive in an age of reduced advertising and biased journalism. Our mission is to rise above today’s challenges and chart tomorrow’s world with clear, dependable reporting.

Support us now with a donation of your choosing. Your contribution will help us shine a light on important ASEAN stories, reach more people and lift the manifold voices of this dynamic, influential region.

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Donation Total: $10.00

 

 

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