Laos could be teetering on economic collapse, triggering concerns of a sovereign default to creditors including China.

The Southeast Asian nation is suffering from mounting debt, rampant inflation and a plunging currency. Its struggles have been likened to Sri Lanka’s economic woes.

Public and publicly guaranteed debt in Laos has surged since 2019, reaching $14.5 billion last year, or 88% of its GDP. The ratio was much higher than its regional peers, according to preliminary estimates by the World Bank in an April report.

At the end of 2020, Laos had $5.5 billion in outstanding public sector debt owed to neighboring China, an increase of 4% from a year earlier, according to the latest available data from the World Bank’s database. That accounted for more than half of Laos’ external public sector debt, making China its largest single creditor.

“The macroeconomic situation (in Laos) was deteriorating even before the Covid-19 pandemic, owing to several structural challenges,” the World Bank report said. Prolonged Covid containment measures have heightened its economic vulnerabilities, while inflation continues to surge, owing to higher global fuel prices and a sharp depreciation of the local currency, the kip, the report said.

Consumer price inflation climbed to nearly 13% year-on-year in May, up from less than 2% recorded in February last year, according to the Lao Statistics Bureau. The kip, which was trading at around 9,450 to the U.S. dollar last June, had weakened about 60% to 15,100 earlier this month.

Laos is facing both liquidity and solvency risks, the World Bank report said, citing the country’s high debt service burden, poor revenue collection and financing options, as well as low foreign currency reserves.

Analysts at Moody’s Investors Service Inc. estimated Laos’ foreign exchange reserves to be around $1.2 billion this year, which is less than its external debt amounts due each year. The ratings agency on June 14 downgraded the landlocked country’s sovereign debt rating one notch deeper into junk territory to Caa3.

“Default risk will remain high given very weak governance, a very high debt burden and insufficient coverage of external debt maturities by FX (foreign exchange) reserves,” the Moody’s analysts said.

There are rising concerns as to whether Laos would follow in the footsteps of Sri Lanka, which last month defaulted on its sovereign debt for the first time amid an economic crisis.

Laos’ GDP per capita ranked eighth out of the 10 member countries of the Association of Southeast Asian Nations last year, according to data from the International Monetary Fund.

Chinese companies have poured investment into Laos under Beijing’s Belt and Road Initiative, with new direct investment in the country reaching $1.15 billion in 2019, bringing the balance to $8.25 billion at the end of that year, according to data from China’s Ministry of Commerce.

These projects included the construction of economic cooperation zones, railways, power grids, hydropower stations, real estate and communication satellites, the ministry said.

In a move to further boost economic connectivity, the two countries constructed the China-Laos railway, which opened in December. The 1,035-kilometer (643-mile) segment runs from Kunming, Southwest China’s Yunnan province, to the Laos capital Vientiane, according to China State Railway Group Co. Ltd.

The railway, which cost about $6 billion to build, had been partly financed with loans from the Export-Import Bank of China (Exim Bank), according to a World Bank report published in January 2020. Laos had borrowed $1.54 billion from the Exim Bank for the project, the report showed. That accounted for almost 30% of the country’s public sector debt to China.


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