Worldbox Country Risk Climate – June 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 Business Intelligence believes the country will remain stable.
A pickup in the country’s economic fortunes could also release some of the pressures on Lao society. Economic growth is recovering while inflation, while remaining high, is edging down.
Economic Risk – Stable at 5
Laos remains one of the poorest countries in the world, despite achieving significant progress over the past 20 years. Levels of poverty halved while education and health outcomes improved. However, subsistence agriculture – dominated by rice – accounts for about 40% of GDP and provides 80% of total employment. Hydroelectric power and textiles account for over two-thirds of the country’s exports, while coffee is another major export earner. Tourism has become the country’s single biggest earner of foreign exchange.
Accession into the World Trade Organization in 2013 and the creation of the ASEAN Economic Community (AEC) in 2015 precipitated significant reforms designed to improve the business and investment environment. Rapid economic growth in neighbouring countries such as China, Vietnam and Thailand has also boosted trade and FDI.
China, Thailand and Vietnam are the country’s main trade and investment partners. Trade with China is growing particularly rapidly, aided by massive Chinese FDI and the China–Laos Railway project, which travels across Laos from the Chinese border to the capital Vientiane. Three Chinese-backed highway projects are also underway as part of China’s Belt and Road Initiative.
Radio Free Asia delivered a remarkably upbeat assessment of the country’s economy in March. The commentary was by David Hutt, a research fellow at the Central European Institute of Asian Studies (CEIAS) and the Southeast Asia columnist at The Diplomat, an excellent source of information on Laos. Hutt said there were many reasons for optimism. Positive factors include:
- It is likely that tourism will return to pre-pandemic levels in 2024. According to official figures, the number of foreign tourists who visited the country from January to September 2023 rose to 2.49 million – 3.8 times more than during the same period in 2022. Though not reaching the pre-COVID levels of 2019, the inbound tourist count in the first nine months of 2023 surpassed the 1.29 million foreign tourist arrivals in 2022.
- Laos should benefit from growing food exports to China, “since China’s demographics are arguably the worst in the world and [the country] is set to have the fastest population decline in human history”. Chinese demand for food exports is likely to grow rapidly, says Hutt, as China’s working-age population “collapses, forcing even more rural folk into the cities and industries”.
- The Vientiane-Kunming railway has already expanded export opportunities into China. If Laos can attract interest from consumers further west, in Central Asia and Europe, it can use the railway links through China to increase trade. Better still, adds Hutt, “if Laos can extend its rail network down to Thailand’s ports, again thanks to Chinese investment, that would make it easier and cheaper to export its goods further afield”. In addition, says Hutt, Vietnam has pledged to connect Laos via railways to its port in Vung Ang, which would make it easier for trans-Pacific exports, opening up Laos’ producers to the US market.
- Laos has the youngest population of all the Association of Southeast Asian Nations (ASEAN) states and the healthiest-looking demographics over the coming three decades. Just 4.7% of the population is aged over 65. Some 65.4% are of working age (15–64) and 29.9% are below the age of 15. By 2050, the working-age population will have grown to 68%, while just a tenth will be of retirement age. The comparable figures for neighbouring Thailand and Vietnam are dire by comparison.
Hutt did point out the considerable challenges facing Laos. These include the large number of younger Laotians emigrating in search of better lives, the poor state of education, and the looming economic decline of China.
Commercial Risk – Stable at 4
Corruption is a significant challenge. Laos ranks 136th out of 180 countries in Transparency International’s (TI) 2022 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.
Writing for the CEIAS in March 2024, Laotian expert David Hutt argued that Laos’ failure to tackle corruption effectively reflected the fact that the central apparatus of the LPRP in Vientiane has never been that strong, with provincial and district officials having much more freedom to act.
Moreover, powerful families dominate politics in Laos and are related through marriage. Corruption benefits virtually the entire party elite, and any attempt to reduce or eliminate it immediately runs up against family ties and interests.
June 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
There are as yet no firm growth figures for 2023. However, the economy continued to improve over that year, according to the Lao Economic Monitor, published by the World Bank in November 2023. The economy is estimated to have grown by 3.7% overall in 2023, up from 2.7% in 2022. An improved performance in tourism, transport and logistics services, together with foreign investment, contributed to the recovery.
The Monitor added, however, that growth is lower than previously expected, mainly because of the falling value of the kip, inflation, labour shortages, and unfavorable weather. The government took measures to improve its finances by controlling expenditure and increasing domestic revenues in the first half of 2023. It has raised excise rates on vehicles, alcohol, and tobacco.
The Monitor said that while the government earned more than it spent in the first half of 2023, debt repayments remain high and renegotiating the country’s debt burden is crucial. Meanwhile the pressure on the public finances is weighing on investment in human capital. Combined public spending on education and health declined from 4.9% of GDP in 2013 to an estimated 2.3% in 2023.
Inflation stood at 24.9% in March 2024, down from an average of 31.2% in 2023. The weak kip is seen as one of the main factors driving inflation, while low domestic production capacity and high import values have increased pressure on the exchange rate. The kip fell in value by 29% against the Thai baht and 21% against the US dollar in the year to October 2023. On average, says the Monitor, a 1% fall in the value of the kip increases consumer prices by 0.5%. Therefore, it concludes, inflation will remain high until exchange rates stabilize.
The government is forecasting an expansion of 4.5% in 2024. However, the economic outlook is subject to significant uncertainty, reflecting risks such as the impact of lower global and regional growth, which would lower demand for Lao exports. Any escalation in global tensions could also raise commodity prices, which would feed domestic inflation.
Domestic risks, according to the Monitor, include further loss of foreign currency because of debt service obligations, slow progress with structural reforms, and a deterioration of bank balance sheets.
Commercial Risk – Stable at 4
Counterparty risk, already difficult to assess (corporate financial information is rarely available and, when available, is usually unreliable), has almost certainly risen during the pandemic. The legal system continues to make debt collection very unpredictable.
In February 2024, the central bank adopted a measure mandating foreign investors to open a local bank account within 15 days of obtaining a business licence. The account can be kept in multiple currencies but is limited to one commercial bank.
The move is part of the government’s efforts to ensure more foreign currency enters the banking system, as it was found that the recorded foreign investment inflows were much lower than the agreed value of investment capital. The new regulation is also aimed to address the shortfall in the country’s balance of payments and to help stabilise the kip.
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 all 193 UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Laos is ranked 115 out of 166 in the 2023 report with a score of 63.0.
Environment – According to the World Bank, forest loss and degradation have cost the country nearly 3% of GDP per year until recently. However, it adds that the government has taken steps to invest in protecting the country’s forest as a long-term economic asset. In recent years, the lower half of the Mekong, which runs through Thailand, Myanmar, Cambodia, Laos, and Vietnam, has experienced a number of serious droughts that have sent water levels to all-time lows. This is partly due to climate change and the El Nino but dam construction also has an impact, according to ecologists.
Social – Laos scores very lowly in this area. Key areas of concern include freedom of speech, association, and assembly; enforced disappearances; abusive drug detention centres; and repression of minority religious groups, according to Human Rights Watch. Workers have few rights and living standards are among the lowest in the world.
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.
June Bulletin
Environmental, Social and Governance (ESG) – Stable at 4
New research published in Environmental Research Letters indicates a recent expansion and intensification of shifting cultivation in Laos, resulting in direct loss of forests, degradation of important carbon-sink ecosystems, and substantial increases in carbon emissions. Shifting cultivation is a type of rotational farming typically practised by small-scale subsistence farmers. The research reveals it accounted for a third of the forest area lost in Laos between 1990 and 2020.
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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