Laos tumbles towards sovereign debt default
Facing a toxic combination of high external debt, dwindling cash reserves, surging inflation and a nosediving currency, the small Southeast Asian nation of Laos is moving closer to a possible sovereign default, meaning a failure of the government to honor some or all of its debt obligations.
Fuel shortages across the country of just 7.7 million people have been the latest sign of distress as a combination of elevated oil prices and the plunging local currency, the kip.
The exchange rate of the kip to the US dollar fell to 14,665 as of June 15 from 11,185 at the beginning of the year. In September 2021 the kip stood at around 9,400 to the US dollar.
This was before the country entered huge debt obligations to China to finance mainly Chinese-backed projects, which include loans to fund Laos’ 30 per cent share of the $5.9-billion China-Laos high-speed railway, a project that became operational in December 2021.
Laos debt reaches $14.5 billion
According to the World Bank, the country’s overall debt climbed to a whopping $14.5 billion last year, making up almost three-quarters of the country’s gross domestic product which is mainly built upon agriculture, tourism and hydropower exports. Some 47 per cent of the debt is owed to China.
“[Laos] is on the brink of default,” said Anushka Shah, vice president and senior credit officer at Moody’s Investors Service, which downgraded Laos’s credit rating on June 14 one notch to Caa3 – meaning “poor debt quality and very high credit risk” and just two notches from default –, citing weak governance, a very high debt burden and insufficient foreign exchange reserves to cover maturing external debt.
Meanwhile, Fitch Ratings has put Laos’ sovereign credit rating at CCC, which also reflects a possibility of a default, said Jeremy Zook, Hong Kong-based director of sovereign ratings at the rating agency and lead analyst for Laos. A key factor going forward is the debt to China, he told Bloomberg News.
Currency reserves exhausted
As of December 2021, the country had $1.3 billion of reserves on hand while external debt repayments total roughly that same amount every year until 2025, the equivalent of about half total domestic revenue, World Bank data shows.
The sliding currency has struck importers seeking to purchase enough fuel for the domestic market, causing painful supply gaps and long lines at the pumps. Laos was getting less than half of the 120 million liters of gas needed per month to meet public demand, local media reported in May.
“Persistent fuel shortages disrupt agriculture, transport services and many other sectors of the economy, and their economic impact could be akin to the effects of the Covid-19 pandemic, when restrictions significantly affected mobility and supply chains,” Pedro Martins, country economist for Laos at the World Bank, was cited as saying by Bloomberg News.
“Because of government debt and poor revenue collection, the situation is particularly challenging,” Alex Kremer, Laos country manager at the World Bank, said last month. “The top policy priority is therefore to increase public revenue by reviewing tax exemptions.”
[caption id="attachment_38537" align="alignleft" width="300"] National Assembly in Vientiane, Laos[/caption] Facing a toxic combination of high external debt, dwindling cash reserves, surging inflation and a nosediving currency, the small Southeast Asian nation of Laos is moving closer to a possible sovereign default, meaning a failure of the government to honor some or all of its debt obligations. Fuel shortages across the country of just 7.7 million people have been the latest sign of distress as a combination of elevated oil prices and the plunging local currency, the kip. The exchange rate of the kip to the US dollar fell to 14,665...
Facing a toxic combination of high external debt, dwindling cash reserves, surging inflation and a nosediving currency, the small Southeast Asian nation of Laos is moving closer to a possible sovereign default, meaning a failure of the government to honor some or all of its debt obligations.
Fuel shortages across the country of just 7.7 million people have been the latest sign of distress as a combination of elevated oil prices and the plunging local currency, the kip.
The exchange rate of the kip to the US dollar fell to 14,665 as of June 15 from 11,185 at the beginning of the year. In September 2021 the kip stood at around 9,400 to the US dollar.
This was before the country entered huge debt obligations to China to finance mainly Chinese-backed projects, which include loans to fund Laos’ 30 per cent share of the $5.9-billion China-Laos high-speed railway, a project that became operational in December 2021.
Laos debt reaches $14.5 billion
According to the World Bank, the country’s overall debt climbed to a whopping $14.5 billion last year, making up almost three-quarters of the country’s gross domestic product which is mainly built upon agriculture, tourism and hydropower exports. Some 47 per cent of the debt is owed to China.
“[Laos] is on the brink of default,” said Anushka Shah, vice president and senior credit officer at Moody’s Investors Service, which downgraded Laos’s credit rating on June 14 one notch to Caa3 – meaning “poor debt quality and very high credit risk” and just two notches from default –, citing weak governance, a very high debt burden and insufficient foreign exchange reserves to cover maturing external debt.
Meanwhile, Fitch Ratings has put Laos’ sovereign credit rating at CCC, which also reflects a possibility of a default, said Jeremy Zook, Hong Kong-based director of sovereign ratings at the rating agency and lead analyst for Laos. A key factor going forward is the debt to China, he told Bloomberg News.
Currency reserves exhausted
As of December 2021, the country had $1.3 billion of reserves on hand while external debt repayments total roughly that same amount every year until 2025, the equivalent of about half total domestic revenue, World Bank data shows.
The sliding currency has struck importers seeking to purchase enough fuel for the domestic market, causing painful supply gaps and long lines at the pumps. Laos was getting less than half of the 120 million liters of gas needed per month to meet public demand, local media reported in May.
“Persistent fuel shortages disrupt agriculture, transport services and many other sectors of the economy, and their economic impact could be akin to the effects of the Covid-19 pandemic, when restrictions significantly affected mobility and supply chains,” Pedro Martins, country economist for Laos at the World Bank, was cited as saying by Bloomberg News.
“Because of government debt and poor revenue collection, the situation is particularly challenging,” Alex Kremer, Laos country manager at the World Bank, said last month. “The top policy priority is therefore to increase public revenue by reviewing tax exemptions.”
