Laos Debt Dares US Elusive Economic Strategy

After East Asia leaders descended on Washington in May for commercial and diplomatic pitches under the Biden Administration’s vague Indo-Pacific strategy, short of free trade but with digital cooperation as a centerpiece, the region has its own debt crisis in tiny Laos. The communist state long in Russia’s and China’s orbit has had a distant relationship for decades with the US since the Indochina war, with bilateral aid still focused on demining. From that experience Cambodia and Vietnam are allies, and it exports hydropower to Thailand its main cross-border direct investor and bondholder. As the so-called “battery of Asia” with massive dams on the Mekong River, the cross-border delivery network was expanded to Malaysia and Singapore in a recent deal. These partner countries are all at the core of President Biden’s new economic arrangement, succeeding the doomed Asia free trade pact from the Obama administration. Environmental and local community concerns are a shared priority with the business bottom line, and Laos is a test case with widespread reports of land erosion and rural displacement. 

Debt woes first surfaced last year as the $6 billion high-speed railway built and financed by China was completed. $900 million was borrowed from policy banks over years, with the most optimistic scenarios not envisioning payback from cargo and individual passenger revenue in the near term. Debt/GDP was in the 80% range, with contingent liabilities from state enterprises uncounted. One-third was directly attributable to the government electricity monopoly, and one-half external debt owed China. Approximately $1.5 billion was due in annual repayments through mid-decade, equal to foreign exchange reserves. Ratings agencies blew the whistle on the credit predicament with a CCC near default downgrade, and a pilot $150 million Eurobond could not be rolled over. 

As a poor country Laos was eligible for the G20 bilateral debt suspension in force through the end of 2021 but declined participation. It preferred direct negotiation with Beijing, which reportedly deferred immediate obligations without disclosing terms. The US was on the sidelines while advocating workouts for other low-income countries, in Africa in particular. Its new Indo-Pacific strategy should invite active engagement, including technical assistance through a longstanding Treasury Department program for long-term debt management.

Since the railway’s December launch, the underlying squeeze worsened with covid vaccine coverage ranking at Asia’s bottom deterring tourism, and fuel supplies exhausted by rising import costs bringing agriculture and industry to a grinding halt. The local currency, the kip, is down 20% both the dollar and nearly that much against the Thai baht this year, and authorities in classic command economy mode have sacked responsible officials and blamed money dealer speculation for depreciation rather than shifting policies. The central bank head was replaced, and traders rounded up for arrest. State banks were ordered to follow strict practice and to subscribe to a $300 million government bond, which could help bridge the fiscal deficit and soak up liquidity as a temporary measure. The Finance Ministry claims it put aside cash to cover fuel imports for the next three months and will somehow meet $500 million in domestic and $1.5 billion due in foreign debt in the final quarters of 2022. It admits to behind the scenes talks with Beijing over a moratorium and has reached out to Moscow to secure backstop oil supplies despite sanctions. 

Food prices have also doubled the past year and inflation hit 13% in May, a 15-yearr high. A single China-Laos rail ticket went from 200,000 to 250,000 kip in June, out of reach for average citizens. The electricity company is listed on a nascent stock exchange, and shares are falling ahead of an end July $30 million Thai baht bond redemption. The World Bank updated its estimate of public and guaranteed debt to $14.5 billion in May, almost 90% of economy size and a 20% jump since the pandemic. Moody’s joined the ratings C level demotion parade with a dire “brink of default” warning at the same time. The central bank lifted bank kip reserve requirements 2% to 5%, equal to the foreign currency ratio, and convened a high-level party task force to tackle the debt emergency, with Prime Minister Phankham’s fate on the line after a year in the post. 

To quell social discontent, the minimum wage was hiked to $80 per month, and officials have tried to reassure over farm exports at $600 million for six months, equal to full year 2021 as fields go idle from lack of cash for inputs. The new central bank chief has imposed a hard currency withdrawal limit of $1000/day and threatened an outright ban on citizen holding for an indefinite period. The ruling party has turned its anger on Western-dominated ratings agencies and development lenders for scaremongering and refused to release publically the IMF 2021 Article IV consultation report, a rare decision which only magnifies investor doubt.
Unlike in Cambodia where the US has an unresolved bilateral debt issue dating back to the 1970s, it could apply the Indo-China fresh strategy in Laos with a clean slate. Washington can enlist advisers to offer debt stabilization and market development steps for the immediate crunch and medium-term ascent to recognized “frontier” status in benchmark indices. This ad hoc troubleshooting may not fit an ambitious grand design, but the results on the ground fifty years after fighting a war can be an impressive first mutual win in a different financial battle.