Laos faces public backlash as economy falters towards default

BANGKOK – Shortly after a Lao-language article titled “Lao economy collapses” was published this month on the Facebook page of US-funded Radio Free Asia, public rage flared against the rulers of the one-party state.

The more than 1,100 replies to the post include angry rants from Laotians within the landlocked and resource-rich Southeast Asian nation. Although the responses are easily traceable, people let off steam. “If the government can’t manage the economy, get out!” fumed a female poster.

This public display of outrage – also evident on other social media platforms including Tik Tok and YouTube – has not escaped seasoned observers in Vientiane, the capital of Laos. They see it as a rare sign of courage from a public long intimidated by the Lao People’s Revolutionary Party, the communist party in power since the mid-1970s.

“People are losing their fear and are no longer afraid to be openly critical because the economic crisis is affecting their daily lives,” said one observer, who spoke on condition of anonymity. “Social media is the only way to do this in Laos’ repressive political environment.”

The economic crisis has been brewing in recent months. Signs range from long lines of vehicles at gas stations in Vientiane and beyond to a spike in prices for food and other essentials as the local currency kip weakened against the dollar.

In June, international rating agencies raised the bar by warning that the Lao economy, which had already been struggling with budget and current account deficits for years and grappling with a liquidity and solvency crisis, was being singled out. for a potential defect. He immediately drew parallels with the economic collapse in Sri Lanka, the South Asian nation which announced in April that it had run out of dollars to meet its external debts this year.

The government’s response to public frustration was equally telling, with top officials admitting the crisis in the $20 billion economy. Prime Minister Phankham Viphavanh is one of them. During the last session of the National Assembly of Laos, which convened last week, he revealed in a candid moment that he was aware of the criticism on social media.

Finance Minister Bounchorn Oubonpaseth was equally outspoken about mounting pressures in the impoverished country of 7.5 million people. On Monday, he told members of the National Assembly that the country had fallen into debt because of “massive loans taken out for national development between 2010 and 2016″. Annual external debt service rose from $1.2 billion in 2018 to $1.4 billion in 2022, he said. “In 2010, our external debt service payments amounted to only $160 million, which could be paid from domestic revenue.”

A similar opening was evident in May, when senior Lao Central Bank officials said only 33% of the country’s export earnings had reentered local banks by the end of April, depriving the country of building up foreign exchange reserves. enough to pay for imports and services. external debt. The main sources of foreign exchange are energy sales to neighbors from hydroelectric projects, the mining industry and agricultural products.

University of Tokyo professor Toshiro Nishizawa believes that this official franchise is made selectively following financial difficulties which he describes as “enormous and disturbing”. But Nishizawa, who was previously a political adviser to the Lao government, said the official warnings are “formulated, predefined and generalized”. He does not expect immediate disclosure of key economic and financial indicators, “in part because of political sensitivities and capacity constraints.”

Analysts say the economic crisis that threatens to shake the entrenched communist order comes in the wake of back-to-back external crises: COVID-19 in 2020, which drained foreign revenue from a lucrative tourism sector; the Russian-Ukrainian war, which drove up oil prices; and rising interest rates in the United States, which weaken local currencies against the dollar and make imports more expensive.

The dismissal of Bank of Laos Governor Sonexay Sitphaxay this week hints at the panic that has set in. He was replaced by Bonleua ​​Sinxayvoravong, the former deputy finance minister.

But the signs of an economic slowdown were already evident. The World Bank, International Monetary Fund and other international agencies had warned Laos before the pandemic that it was heading for an external debt crisis due to depleted foreign exchange reserves.

“A large current account deficit, low level of reserves, high level of debt, a controlled exchange rate and a dollarized banking system amplify macro vulnerabilities,” the IMF noted in August 2019 following its consultation of article IV of the Lao economy.

According to the World Bank, by the end of 2021, the country’s public debt had skyrocketed to 88% of gross domestic product, with external debt estimated at $14.5 billion. The country’s list of foreign lenders included Chinese creditors, who accounted for a 47% share, reflecting Laos’ close ties with China, which over the past decade has become Laos’ largest lender, investor and trading partner. . In addition, Laos owes 11% of its debt to China in the form of bilateral loans.

The World Bank and the Asian Development Bank together account for 17%, international sovereign bonds 17% and non-concessional loans 8%. Some of the bonds are in Thai baht – after Laos tapped the Thai capital market in 2013 – and US dollars.

The World Bank says Laos’ external debt is estimated at $1.3 billion, to be settled annually until 2025 – a daunting challenge for a country with roughly the same amount of foreign exchange reserves. On the back of that, Moody’s Investors Service downgraded Laos this month from Caa2 to Caa3. Fitch Ratings still maintains the CCC rating which it reaffirmed in August 2021, but notes that “there is a possibility of default”.

“The space has shrunk for Laos to access external financing to meet its debt obligations,” said Jeremy Zook, Hong Kong-based head of sovereign ratings at Fitch and senior analyst for Laos. “He has a lot of bilateral and multilateral payments to make this year, nearly half of debt service, while there are smaller bond payments and syndicated bank loans to settle.”

Yet it’s a difficult situation that Lao government officials are still unwilling to discuss openly with friendly neighbors like Thailand, a major source of Lao imports and the main buyer of Laos’ hydroelectric exports. The silence was audible during the Laotian Prime Minister’s visit to Bangkok in early June. During Phankham’s talks with his Thai counterpart, Prime Minister Prayuth Chan-ocha, there was no hint of Laos’ escalating debt crisis.

“We were aware of the issue but there was no reference to it in official talks from their side,” a source in Prayuth’s office who witnessed the talks told Nikkei Asia. “There was hardly any hint that they were facing debt problems and wanted economic help. Nothing. Very low key.”

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