After playing with “high risk” levels of over-indebtedness for more than a decade, Laos has fallen into a debt crisis (and possibly a trap).
The latest data indicates that Laos’ total public and publicly guaranteed (PPG) debt has increased from 68% of GDP ($12.5 billion) in 2019 to 88% ($14.5 billion) in 2021. is expected to exceed 100% of GDP this year and continue to grow in the years to come. External public debt stood at 66% of GDP in 2021, about half of which is owed to China.
This significant increase in PPG was mainly due to the economic impacts of the COVID-19 pandemic and the recent deterioration in the global macroeconomic environment amid the war in Ukraine. It could be further exacerbated by slowing GDP growth in China (a major trading partner and investor in Laos). At the height of the pandemic, global debt reached (and surpassed) wartime levels, with more than half of the world’s poorest countries experiencing or at high risk of debt distress. Lebanon, Sri Lanka, Suriname and Zambia have all defaulted on their foreign debt in recent years. And while the G-20 pandemic-induced Debt Service Suspension Initiative (DSSI) provided temporary repayment relief to 48 participating low-income countries, the initiative has now ended.
In Laos, economic growth – essential to offset rising debt levels and ensure debt sustainability – fell dramatically to around 5.5% in 2019 and -0.4% in 2020 (from 6. 3% in 2018 and an average of 7.9% in the early 2010s). Growth remains below pre-pandemic levels, despite an estimated rebound of 2.5% in 2021. The value of the Lao economy and the cost of its debt have been further threatened by the depreciation of the kip: its value fell by 35% between February 2021 and August 2022, with inflation rising from less than 2% to 30% over the same period.
Public debt service payments were estimated at 48% of total revenue in 2021 (compared to 65% expected in Laos’ 2021 plan solely through debt service deferrals granted by major lenders in 2020-21). Interest payments are expected to exceed total government spending on health and education combined in the very near term. External debt reserve-to-stock ratios have steadily declined since the early 2010s and are widely considered insufficient to meet required annual repayments of $1.2-1.4 billion through 2026. As of August 2022 , Fitch lowered Laos’ rating. Rating (IDR) at “CCC-” – the lowest sovereign rating in Asia without default.
As expected, the current crisis has led to much speculation about what the short-term future will bring, as well as much commentary about possible causes, culprits and consequences. Although recent shocks have played a central role in pushing Laos to the brink of a debt crisis and possible default, the country’s current predicament appears more deeply rooted in the economic vulnerabilities inherent in programs focused on growth that have guided many international development efforts since the mid-1980s.