Worldbox Intelligence Risk Rating LAOS
Overall score 19 – stable
Political risk: Stable: 8/10
Economic risk: Stable: 6/10
Commercial risk: Stable: 5/10
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 lowest risk and 10 the highest.
Political risk – stable at 8
Laos has experienced relatively high levels of political stability for nearly 50 years, following the end of the Indochina conflict in 1975 and the takeover of the communist Pathet Lao movement. Laos remains a one-party state, under the control of the communist Lao People’s Revolutionary Party (LPRP). There is little opposition to the party’s rule. National Assembly elections are held every five years but are not free or fair, while protests are banned.
Since the late 1980s, the government has pursued a similar economic and political model to those of Vietnam and China. It has implemented market-based economic policies while maintaining a high degree of state control and welcoming foreign direct investment (FDI). This has proved highly successful in generating rapid economic growth. Over the decade prior to the pandemic, for example, annual growth averaged just under 8 per cent, one of the highest levels in the world.
A party congress at the beginning of 2021 heralded modest changes at the top of the party and reaffirmed Laos’s economic strategy, including its growing reliance on China. However, a significant turnover of personnel took place at lower levels, with new technocratic officials taking over from wartime officials and party apparatchiks. The move seems to recognise criticism relating to corruption and economic mismanagement.
The popular prime minister and party number two Thongloun Sisoulith succeeded the retiring Bounnhang Vorachith as general secretary. As prime minister, Thongloun attempted to curb government waste and corruption. At the congress, he acknowledged the government’s poor financial management record and announced a reduced annual growth target of 4 per cent for 2021–25, perhaps in recognition of the debt problems facing the country (see Economic Risk).
Economic risk – stable at 6
The Laos economy has grown by nearly 8 per cent a year for the last decade. 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.
The railway project should have a significant impact on growth by encouraging FDI and attracting increasing tourism from China. It should also boost exports. The cost of shipments from Vientiane to Kunming in the southern Chinese province of Yunnan will be cut by 40–50 per cent, along with a 20–40 per cent cost reduction on domestic routes, according to a World Bank report. Exports from Laos to China were worth US$1.7 billion in 2019 and could expand by about 20 per cent per year, according to the UN.
However, there are growing concerns that Laos could be falling into a debt trap. The country’s official debts have grown rapidly in recent years and now equal 86 per cent of GDP, with 60 per cent owed by the public sector and the remainder comprising public–private partnerships such as the Boten-Vientiane railway. The risk associated with this debt, largely denominated in dollars, increases during periods when the kip is depreciating, as was the case in 2021.
Half of the external debt is owed to China, following its numerous investments in the country, including the US$5.9bn loan for the China–Laos high-speed train line and US$17.8bn for three highways, as well as loans for hydroelectricity projects. If Laos falls into arrears, many of its infrastructure assets could be seized by China. In 2018, the US think tank Center for Global Development cited Laos as one of eight countries with particularly weighty debts to China.
In September 2020, Fitch Ratings downgraded the country’s Long-Term Foreign-Currency Issuer Default Rating from B- to CCC, saying that the country’s foreign-currency reserves were “insufficient” compared with its future debt-repayment plan. When reaffirming the rating in August 2021, Fitch said that the external debt repayment profile remained “challenging”, with an average of US$1.16bn due per annum between 2022 and 2025.
Fitch expects the government to pursue asset sales and concession agreements to shore up external liquidity over the next few years. The agency believes these measures will likely support external liquidity in the near term, but this could come at the expense of fiscal and foreign-exchange revenues in the longer run.
The IMF has warned that Laos is also vulnerable to a sharper-than-expected slowdown in China – Laos’s largest trading partner and FDI investor – that reduces exports and decelerates FDI flows. In addition, lower demand growth from Thailand and Vietnam may reduce growth in electricity exports.
Natural disasters are an ever-present threat. GDP growth slowed to 6.3 per cent in 2018 from 6.8 per cent in 2017, for example, as both agricultural and industrial production declined, mainly due to natural disasters. Heavy rainfall from tropical storms resulted in flooding across the country, followed by the collapse of the Xe-Pian Xe-Namnoy dam.
Commercial risk – stable at 5
Laos is one of the most difficult countries in the Asia–Pacific region in which to do business, according to the World Bank, which ranked it 154th among 190 in its 2020 Ease of Doing Business guide, ahead of only Myanmar in Southeast Asia.
The World Bank says the low ranking reflects the country’s complex and opaque business environment, with barriers to regional trade and integration that limit its attractiveness as an investment destination. The Bank cites investors’ complaints about the high costs of doing business and the absence of a transparent, dynamic and streamlined business environment. Overall, the economy remains inward-oriented (only 2.9 per cent of firms export directly), with little investment or innovation among local firms.
Corruption is another significant challenge. Laos ranks 134th out of 180 countries in Transparency International’s (TI) 2021 Corruption Perceptions Index. Laos is considered to be the third most corrupt country in the ASEAN region, behind Myanmar and Cambodia.
The Laos Corruption Report by GAN also reports that corruption is a high risk for companies operating in Laos and deters foreign investment. GAN says that political patronage pervades all business sectors, and a culture of corruption has been perpetuated by senior LPRP leaders and by foreign investors willing to buy political support and pay off officials. It adds that companies are likely to encounter petty bribery when trading across borders, paying taxes or acquiring public services.
In terms of the rule of law, GAN says that a weak and inefficient judiciary impedes the proper enforcement of anti-corruption laws and officials are rarely prosecuted. It adds that bribery is widespread in both civil and commercial cases, and the legal system is subject to political interference.
Political risk – No Change
The government has won plaudits for its handling of the COVID-19 crisis. By January 2022, Laos had reported only 127,348 cases of COVID-19, with just 507 deaths since the pandemic began in 2020, thanks to strict lockdown and quarantine measures. By February 2022, nearly 60% of the population had been fully vaccinated.
There have been no significant political developments since the party congress at the beginning of 2021. There is no obvious threat to the continuing rule of the communist LPRP.
Economic risk – No Change
The IMF estimates the economy grew by 2.1% in 2021 and anticipates an expansion of 4.2% in 2022 and 4.5% in 2023, up from just 0.5 per cent in 2020. The Asian Development Bank estimates growth at 2.3% in 2021 and foresees an expansion of 4% in 2022.
The re-opening of the country to foreign tourists in 2022 will provide a welcome boost to the economy. The country welcomed 4.79 million tourists and earned US$935m from tourism in 2019, making the sector a vital source of foreign-exchange earnings. International visitor numbers fell to under 900,000 in 2020. The opening of the China–Laos high-speed train line in late 2021 should also boost the economy, although Chinese COVID-related restrictions on outward bound Chinese tourism will restrict the impact, at least during 2022.
Commercial risk – No Change
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.
The Financial Action Task Force (FATF) removed Laos from its “gray list” of banking jurisdictions in June 2017, as a result of government efforts to clamp down on money laundering. Enforcement of rules and regulations is weak but improving. However, lingering concerns may continue to affect the ease with which international banking transactions are conducted in Laos.
About Worldbox Business Intelligence
An independent service, Worldbox Business Intelligence provides online company credit reports, company profiles, company ownership and management reports, legal status and history details, as well as financial and other business information on more than 50 million companies worldwide, covering all emerging and major markets. Worldbox was founded in the 1980s, with the vision to become a global business provider. Its ability to deliver data in multiple languages in a standard format has strengthened its brand.
Copyright (C) 2021 Worldbox Business Intelligence. All rights reserved.
Worldbox Business Intelligence