Bangkok [Thailand], July 3 (ANI): Laos, a country in Southeast Asia, is struggling to cope with its debt in a context of deterioration of sovereign ratings and depletion of foreign exchange reserves.
Writing in the Asia Times, Peter Janssen said that the future of the country’s economy and its financial stability depend heavily on mainland China.
This week, Laos bought back $ 150 million worth of bonds listed on the Singapore Stock Exchange, slightly cutting the surge in foreign debt over the next five years, the Asia Times reported.
The rating agencies Moody’s and Fitch’s both responded in time to concerns about rising public debt in theoretically communist countries, declining foreign currency reserves and potential debt in default, and noted Laos sovereign l ‘last year. Has been downgraded, the Asia Times reported.
The 2020 economic slowdown came at a time when public debt in Laos rose to 72% of GDP last year, and large loans were expected.
In August 2020, Moody’s downgraded Laos’ sovereign rating to Caa2, reflecting growing concerns about the double blow of shrinking foreign exchange reserves and rising debt. Asia Times reported that Fitch followed in September 2020 and downgraded Laos from B- to CCC.
Jeremy Zook, chief analyst at Fitch in Laos, said: “Our main concerns with the Laos rating and the reason for our CCC rating are that our definition indicates that defaults are possible. , The country’s external finances. “
“Laos has a very difficult external debt repayment schedule and will pay over $ 1 billion a year over the next five years,” he told the recent Fitch Forum.
According to Janssen, such a rating is likely to be a self-fulfilling prophecy as it will be difficult for Laos to raise new obligations in the international market to repay future contributions.
Mr. Zuck of Fitch said that Laos’ foreign exchange reserves improved somewhat, from US $ 800 million in June 2020 to an average of US $ 1.2 billion from December 2020 to May 2021.
However, this was in part due to a central bank-to-central bank “swap line”, which was established between the Lao Bank and the People’s Bank of China in January.
The swaps sent the yuan to Laos ‘central bank, theoretically increasing Laos’ foreign exchange reserves as a prepayment for imports from China, analysts said. China holds more than half of Laos’ external debt, Janssen wrote.
Laos has handled the Covid crisis relatively well, but the country is suffering from a second wave of pandemics, forcing the government to announce a blockade from April 21 to July 4.
The Covid crisis has already taken the breath away of Laos’ former rising tourism industry, which previously accounted for around 10% of GDP, and is now in the process of disappearing.
“Half of the debt repayments over the next five years will be in China, so whether China offers refinancing or postpones some of its debt repayments will be an important factor in debt sustainability. “Let’s do it,” Zuck said of Fitch. ..
Part of the future debt comes from the China Export-Import Bank, which has granted a concessional loan of US $ 470 million at an interest rate of 2.5% as part of its contribution to the railway project. Chinese in Laos.
The 414-kilometer medium-speed train connecting southern China and Vientiane is scheduled to open on December 2 this year. According to sources in Vientiane, the deadline has not been delayed despite the suspension of work due to the Covid crisis last year.
The rail link is owned by Laos China Railway Company, a joint venture established in 2016, with Laos owning 30% and China 70%, reports Asia Times.
The estimated cost of the project is US $ 6 billion, but the debt portion of the project in Laos represents around 8% of the total investment, which is still significant for a country with a GDP of only US $ 18 billion. U.S. dollars.
The cash commitment for the Laos project under the joint venture is $ 720 million, of which $ 250 million comes from the national budget during the five-year construction period, with the remaining 470 coming from EXIM Bank. of China. I was borrowed. Grace period of 5 years and maturity of 35 years.
As Laos seeks to avoid taking on debt, we should expect more “joint ventures” in the future. It may be bad for the Laotian people exiled by such a project without proper compensation, but it may be good for the economy overall. Janssen.
“Laos is focusing on equity financing, which may mitigate some of its liquidity risk and increase the rating,” said Zuck of Fitch.
For example, in March of this year, state-owned electricity company EDL formed a joint venture with state-owned China Southern Power Grid, building and operating most of the state-owned power grid over the past 25 years. to come before Laos. government.
EDL’s share in enterprises is estimated at 10% in the form of existing grid assets, and China Southern Power Grid has acquired a dominant stake in pricing and trading with neighboring countries, reports the Asia Times. I am.
The US $ 2 billion project aims to fulfill Laos’ long-standing ambition to turn transmission lines into nearby “batteries” in Southeast Asia.
Chinese state-owned enterprises will also pay Laos a prepaid concession fee and pay annually, sources said.
“Therefore, Laos has the two advantages of connecting north-south, east-west and becoming truly a battery in Southeast Asia, without weighing down the country,” said Adisorn Singhasacha, CEO of Twin Pine Group. is a Bangkok-based financial advisory firm that has arranged seven sovereign bonds for Laos and corporate bonds for government bond producer EDL-Gen since the introduction of its neighbors into Thai capital markets in 2013. ..
Such concessions, for a limited period, come at the expense of handing over public assets from Laos to China, but avoid new debts, many of which are already owed to China. Janssen explained.
“China is clearly a big player in Laos, and around 50 percent of debt repayments over the next few years will come from China,” said Zuck of Fitch. “Therefore, whether China steps in to provide more funding to Laos is central to our assessment, which is a bit difficult for us to monitor. “(ANI)