Worldbox Country Risk Climate – August 2024
LAOS
Summary
| Overall Risk Score 16 (Stable)
Political risk: Stable 7/10 Economic risk: Stable 5/10 Commercial risk: Stable 4/10 The risk assessment of a country is made up of 3 components, being Political, Economic and Commercial. Each component is scored out of 10 with 1 being the highest risk and 10 the lowest. |
ESG Risk: 4/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Stable at 7
The Lao People’s Democratic Republic, as Laos is officially known, has been a one-party state since its foundation in 1975 at the end of the Indochina war. The only legal party is the Lao People’s Revolutionary Party (LPRP). There is no organized opposition and no truly independent civil society. A 61-member Central Committee of the LPRP, under the leadership of the 11-member Politburo, makes all major decisions. National Assembly elections are held every five years but are not free or fair, while protests are banned.
The LPRP is now facing perhaps the most challenging period since independence. It oversaw strong economic growth after liberalising the economy in the late 1980s and early 1990s. During the decade up until 2019, the economy grew by an average 7% per annum and Laotians enjoyed rising living standards and improved access to electricity and healthcare.
However, the Covid-19 pandemic exposed the country’s economic vulnerabilities. Economic growth fell sharply and inflation surged as the currency depreciated significantly. Many Laotians left the country, while millions more suffered extreme hardship. This background could prove a severe threat for many governments but in Laos there is no credible alternative to the LPRP, which is why Worldbox Intelligence believes the country will remain stable.
The extent of the country’s economic crisis was highlighted in July, when National Assembly lawmakers removed the governor of Laos’ central bank at the end of its legislative session.
Economic Risk – Stable at 5
Despite rapid economic growth over much of the past two decades, Laos remains one of the poorest countries in the world. About two-thirds of the population live in rural areas, with many working in agriculture. Yet agriculture contributes only 15% to GDP. Therefore, earnings and farm incomes remain low, and many Laotians lack access to enough safe and nutritious food to meet their dietary needs, according to the World Bank.
Laos was also badly affected by COVID-19. The pandemic severely impacted micro, small and medium enterprises (which make up the vast majority of firms) and businesses owned by women. The tourism and handicrafts sectors were among the worst-affected areas. Meanwhile, the Ukraine war resulted in a surge in inflation that hit the poorest sections of society hardest.
According to a US State Department Investment Climate Statement released in mid-2024, the exploitation of natural resources – particularly mining and forestry – and the development of hydropower drove the rapid economic growth seen prior to the pandemic, with both sectors led largely by foreign investors.
However, because these industries employ few people, and growth opportunities are finite, the government has recently started prioritizing and expanding the development of higher-value agriculture, light manufacturing and tourism, while continuing to develop energy resources and related electrical transmission capacity for export to neighbouring countries.
Commercial Risk – Stable at 4
Corruption is a significant challenge. Laos ranks 136th out of 180 countries in Transparency International’s (TI) 2023 Corruption Perceptions Index, moving down ten positions from its 2021 score. Laos is considered to be the third most corrupt country in the ASEAN region, ahead of Myanmar and Cambodia.
The US State Department’s mid-2024 Investment Climate Statement reports that Laos’ government is increasingly tying its fortunes to the economic integration of ASEAN and export-led development, and has prioritized the digital economy, logistics, green growth, and more sustainable development, in addition to continuing to develop agriculture and resource extraction.
The report adds that corruption, policy and regulatory ambiguity, and the uneven application of laws are disincentives to further foreign investment. The multiple ministries, laws and regulations affecting foreign investment in Laos create confusion and require potential investors to engage either local partners or law firms to navigate an opaque and cumbersome bureaucracy.
However, the report notes that the government’s efforts have borne fruit, citing the streamlining of application processes that means it now takes less than 17 days to obtain a business license, compared with 174 days on average a few years ago.
August Bulletin
Political Risk – Stable at 7
In December 2023, the government introduced new measures to address the nation’s severe economic problems, including imposing exchange rate controls and regulating food prices. A month earlier, it raised the minimum wage for the third time since 2018, recognition of the considerable hardships facing the majority of Laotians.
The new measures include cracking down on black market currency exchanges, boosting domestic production and encouraging the flow of foreign currencies into the nation’s commercial banking system. Civil servants, meanwhile, will be paid a new monthly allowance equivalent to around US$7.50.
In April 2024, the government also increased the monthly cost-of-living allowance provided to civil servants, retirees and volunteer teachers, to help them cope with high inflation.
There have been no reports of further unrest in Laos, suggesting that the government may have navigated one of the most turbulent periods in Laos’ post-revolutionary history.
Economic Risk – Stable at 5
Economic growth remains below 2019 levels: growth in 2023 was an estimated 3.7%, with positive contributions from the services sector (mainly tourism, transport, logistics and mining), according to the Lao Economic Monitor, published by the World Bank in April 2024. High inflation caused by depreciation of the kip means that about a third of households, especially low-income families, have reduced their spending on health and education.
The World Bank expects growth of around 4% in 2024, well below the levels seen during the decade prior to the pandemic, when it averaged over 8%. In 2023, the average official kip/US dollar exchange rate weakened by 31%. Given Laos’ high import dependence, depreciation feeds though into higher domestic prices.
Headline inflation averaged 31% in 2023 and remains high, with food, transport, hotel and restaurant price increases the main contributors. In June, the central bank raised interest rates for the fifth time in two years, in a bid to contain inflation and the continuing weakening of the kip. The interest rate for short-term loans increased from 8.5% to 10%. The central bank has raised rates by 690 basis points since May 2022. The inflation rate was running at around 26% on an annual basis by July 2024.
There are fresh concerns about the level of debt facing the country. In July, the government revealed that by the end of 2023 the debt mountain had risen to US$13.8 billion in total public and publicly guaranteed debt. This represents over 100% of the country’s GDP.
Loans from China, Laos’ biggest creditor, amounted to half of Laos’ US$10.5 billion foreign debt, according to data published by Bloomberg. China is “doing its best” to help Laos with its debt burden, a Chinese Foreign Ministry spokesperson told Bloomberg.
Nikkei Asia reported in July that Laos’ foreign-exchange reserves were estimated at US$1.85 billion at the end of March this year. The government is struggling to increase its dollar reserves to stave off default on its foreign loans. Government sources cited by Nikkei Asia revealed the country must service annual debts of around US$1.3 billion from 2024 through 2028. The government needs at least US$10 billion to cover “debt-related expenses”, which could prove challenging.
A World Bank report in April estimated that Laotian net foreign reserves, excluding the swap arrangement, are insufficient to cover one month’s imports of goods and services. Worldbox Business Intelligence believes that China will ensure Laos avoids a default, but that will only increase the country’s dependence on Beijing.
Commercial Risk – Stable at 4
The US State Department’s latest Investment Climate Statement reports that international companies continue to face significant hurdles when navigating Laos’ business environment.
However, there have been improvements in some areas. Customs clearance speed, for example, has improved markedly in recent years, according to the latest US Country Commercial Guide, through the streamlining of processes such as using electronic systems to enhance customs administration and inspections for imports and exports. The Guide says that the customs clearance processing time dropped from an average of 11 hours in 2012 to 9 hours in 2020.
Environmental, Social and Governance (ESG) – Stable at 4
The United Nations’ Sustainable Development Goals (SDGs) are recognized as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Laos is ranked 119 out of 166 in the 2024 report, with a score of 62.95.
Environment – Laos faces a number of environmental challenges. Public waste management and recycling is nearly non-existent, and with the increase in the use of disposable plastic in recent decades, Laos today faces a huge waste problem. Meanwhile, forest loss and degradation is a serious challenge, costing the country nearly 3% of GDP per year, according to World Bank estimates. Air pollution is another serious problem. Around 93% of households rely on solid fuels for cooking, leading to increased respiratory problems, heart disease and other illnesses that end up causing an estimated 7000 deaths annually, says the World Bank.
Social – Laos scores very lowly in this area. According to the US State Department, key concerns include credible reports of: arbitrary detention; political prisoners; serious problems with the independence of the judiciary; serious restrictions on free expression and media, including censorship and the use of criminal defamation laws; serious restrictions on internet freedom; substantial interference with the freedom of peaceful assembly and freedom of association; and the inability of citizens to change their government peacefully through free and fair elections.
Governance – Laos also rates very poorly in terms of governance with high levels of corruption and very weak rule of law as outlined in the commercial risk section.
August Bulletin
Environmental, Social and Governance (ESG) – Stable at 4
A fall in the average amount of rainfall over the last five years is seriously affecting agricultural and electricity production, according to a June report by Radio Free Asia that quoted government sources. The report said that farmers had been unable to plant rice or vegetables after a heat wave in April and May further hardened the ground and lowered water levels for rivers and streams to just a trickle.
The rainfall shortage has left Laos’ dam reservoirs at just 30% of water capacity, causing electricity production to fall 10% from 2023, according to an official from the state-owned power company, Électricité du Laos.
Prime Minister Sonexay Siphandone said at a Cabinet meeting in May that the government is stepping up its monitoring of climate change and its impacts.
Latest economic data
f – forecasts
e – estimates
* – World Bank
** – Worldbox Business Intelligence
3 – Trading economics
4 – Statista
6 – IMF
Source: AsianDevelopment Bank, except where stated.
Useful Links
https://www.transparency.org/en/cpi/2021
https://www.imf.org/en/Countries/LAO
https://www.adb.org/countries/lao-pdr/main
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