Laos’ public debt could climb to nearly 95% of GDP by the end of 2022, making it one of the most heavily indebted and mostly likely to default nations in Asia, according to World Bank estimates published this month
Significantly, the World Bank’s already dire debt figures do not encompass all of the small Southeast Asian nation’s liabilities.
Asia Times’ reporting and analysis show that Laos’ total debt, including other publicly guaranteed liabilities not included in headline figures, could take the state’s total financial obligations well over 100% of GDP for the first time ever this year. And that’s only the debt officially recognized by the Lao government.
After debt crises erupted in Sri Lanka and Pakistan earlier this year, Laos’ public finances have attracted rare international attention to the often overlooked, land-locked state of fewer than eight million people.
With US$1.3 billion worth of annual debt servicing obligations on the books between now and 2026, Vientiane has been busy securing debt service deferrals and refinancing deals on its existing debt stock. Timely repayment has become more difficult due to the major economic crisis Laos has suffered this year.
The national currency, the kip, is in freefall, depreciating as much as 37% against the US dollar on the official market between January and August. Inflation spiraled 30% year-on-year in September. The World Bank now reckons the economy will only grow by 2.5% this year, down from an earlier forecast of 3.8%.
Laos also faces a liquidity crunch, as foreign exchange reserves of around US$1.3 billion are equal to the amount it needs to annually service its debt. Because China is Laos’ biggest creditor, currently holding more than half of its external debt obligations, concerns are rising over how Beijing will respond if Laos can’t pay on time.
“External debt service deferrals have provided short-term relief since 2020, but the outcome of the ongoing debt renegotiation with large bilateral creditors – crucial to restoring a sustainable debt trajectory – is still unknown,” stated the World Bank in its latest outlook published earlier this month.
Toshiro Nishizawa, a University of Tokyo professor and a former advisor to the Lao government, has been a vocal proponent of the argument that China won’t allow Laos to default on its payments, not least for geopolitical reasons.
“A ‘debt trap’ for Laos would also imply a ‘debt trap’ for Chinese lenders,” he wrote in August. “China does not want to become a creditor burdened with non-performing assets, nor does it want to look like an unreliable lender to developing Asia-Pacific and indeed African nations.”
Laos also owes what some analysts refer to as “hidden” debts to China. According to AidData, a research lab at the College of William & Mary in the US, Laos took on official debts to China worth around $5.57 billion from 2000 to 2017, yet it probably has additional hidden debts of $6.69 billion.
“We define hidden public debts as debts contracted by entities that are wholly or partially owned by the government of Laos but without an explicit sovereign repayment guarantee,” Bradley Parks, executive director at AidData, told Asia Times. As such, the state may or may not be liable to repay them if those entities cannot.
“In principle, this $6.69 billion of hidden public debt exposure to China — 35.4% of GDP — figure should be separate from and additional to the 94.9% of GDP estimate from the World Bank,” he added.
Last month, Parks told Nikkei Asia that Laos’ “true level of public debt exposure to all creditors is most likely north of 120% of GDP” in 2021. By the end of this year, it could be even higher.
But even if Laos isn’t allowed to default, the Lao government and public won’t escape the mounting downsides of fast-mounting liabilities.
Nishizawa noted in August that Laos still needs to deal with $964 million of debt owed to commercial creditors, as well as additional sums to bilateral lenders other than China. “Its outstanding bonds in the Thai market exceeded the equivalent of $1 billion in 2021,” he added.
Those lenders, analysts suggest, might not be as forgiving as Beijing, particularly considering Thailand’s own deteriorating debt position amid a slowly recovering economy hit especially hard by Covid.
Laos’ communist government has already committed to austerity measures, reducing government expenditure and increasing reliance on foreign investors, namely China and Vietnam.
That gives apparatchiks in Vientiane even fewer resources to tackle poverty, with Laos home to one of the highest rates in the Association of Southeast Asian Nations (ASEAN) bloc, and chronic underdevelopment in rural areas.
Lao authorities will soon have to make considerable efforts to boost taxation, although the World Bank describes an “absence of determined efforts to boost revenue collection.”
Vientiane could boost revenue by ending the generous tax exemptions given to foreign firms and those invested in various special economic zones (SEZs), but that might deter future foreign investors, especially those that invested under the belief they would not pay duties, and ruffle some feathers in Beijing.
Pressuring the local population to pay more in taxes would be just as risky, though. Greater taxation might come with the cry of greater representation in the repressive one-party state, especially as many small businesses are accustomed to not sharing their limited profits with tax collectors. Wise not to protest in public, greater numbers of Laos have taken to social media this year to vent about the state of the economy.
Released this month, the World Bank’s latest Macro Poverty Outlook expects public debt to GDP in Laos to reach around 94.9% by the end of 2022. It is forecast to climb to 96.4% in 2023 and 97.7% in 2023. The World Bank says it will cross-check these figures against government data, which is likely to be released next year.
However, those projections do not include publicly guaranteed debt, such as credit owed to and by Laos’ numerous state-owned enterprises, Asia Times understands. The World Bank outlook states that public debt (without publicly guaranteed debt) in 2021 was 77.9% of GDP, yet it reckons that public and publicly guaranteed debt combined reached 89% of GDP.
It’s not a precise figure, to be sure, but that means publicly guaranteed debt alone likely accounted for 11.1% of GDP at the end of 2021, and is likely to be the same if not higher this year.
So if the World Bank is correct that public debt alone will stand at 94.9% of GDP by the end of the year, then the addition of publicly guaranteed debt would likely mean that Laos’ entire debt burden will climb to well above 100% of GDP, although this depends to a large extent on the continuing depreciation of the kip.
Even that, however, is not the whole picture. These estimates do not account for other future liabilities, such as state-backed pension schemes and welfare payments that have been expanded under the government’s National Social Protection Strategy 2025.
According to the government’s costing analysis, published in September 2020, child and disability benefits will cost the state 115 billion kip (nearly $7 million at today’s exchange rates) in 2022. However, once adult benefits such as old-age social benefits are factored in from 2025, costs will double to 207 billion kip that year and up to 478 billion kip in 2030.
The government’s costing shows all of these social security payments will only account for 0.10% of GDP in 2030.
However, this does not include the expanded social benefits the government wants to initiate, nor the decline in GDP because of the pandemic. The report warned that “other strategic activities have not been included in this costing exercise.”
The government’s policy paper added that “these cost estimates will need to be revised once the action plans and the full detail of the activities and implementing measures are completely developed.”
Indeed, they were made on the assumption that payments would only be provided to the poor, using a poverty estimate of 23.2% of the total population.
But the World Bank’s latest Macro Poverty Outlook report stated that — based on the lower-middle-income poverty line of $3.65 a day (in 2017 PPP) — the country’s poverty rate is likely to be around 32% in 2022 and will only decline marginally to 31.3% next year.
As such, expanded social welfare payments will likely be much more costly than the government’s estimates suggest.
Follow David Hutt on Twitter at @davidhuttjourno