https://asia.nikkei.com/Spotlight/A...=1&pub_date=20220906190000&seq_num=2&si=44594
Laos owes more than half its foreign debt to China, including "hidden obligations," and experts say the Southeast Asian country could end up bartering away land and resources for relief. © Illustration by Hiroko Aida
Laos' debt pressure raises specter of a China vassal state
Echoes of Sri Lanka on the Mekong as muzzled public seethes over economic woes
MARWAAN MACAN-MARKAR, Asia regional correspondentSeptember 6, 2022 06:00 JST
NONG KHAI, Thailand -- At gas stations in Nong Khai, a quiet Thai town on the western banks of the Mekong River, streams of vehicles pulling up reveal the troubles across the waterway in Vientiane, the capital of Laos.
The drivers with Laotian license plates come with two requests: a full tank, and extra fuel for the 20-liter containers they have on board. Many roll up in high-end SUVs or sleek Mercedes-Benzes, popular among the wealthy few in their impoverished country.
"Some of the drivers are regulars, known to us, and they complain about the high price or short supply" of gas back in Laos, said Kiri Malaya, a station attendant, as he filled up a black Range Rover and a blue jerrycan.
Kiri has been busier since June. By that month, Laos' gasoline prices were up by 107.1% on the year. But fuel is not the only item on the shopping lists of Laotians who cross the nearby bridge connecting the two countries. An office worker from Vientiane said she comes for household staples like soap, detergent, clothes and even food, since "some are not available in the shops or are now more expensive than before." A baker, struggling with rising costs of ingredients, said, "I have to find new supplies that are cheaper."
Living under a communist regime notorious for its oppression and opaqueness, they and other Laotians avoid complaining openly, apart from whispers and rare outbursts of anger on social media. Nong Khai, however, offers a vantage point on their hardships and the risks their China-reliant country faces.
Experts have warned the strongmen of the Lao People's Revolutionary Party that there are multiple economic land mines in their midst. The $18 billion economy's depleted foreign reserves and its unsustainable foreign debt -- much of it owed to China for large-scale infrastructure projects like a multibillion-dollar railway -- have prompted some to compare Laos to Sri Lanka. The bankrupt South Asian island ran out of dollars to service its foreign obligations in April, becoming the first country in the region to default in decades.
A view of the Mekong river bordering Thailand and Laos is seen from the Thai side at Nong Khai in 2019. The town offers a vantage point on the Laotian economic crisis. © Reuters
In Laos, "the macroeconomic situation is very challenging," said Alex Kremer, country manager at the World Bank. The bank warned in May that many in the nation of about 7 million were "at risk of falling into poverty, especially in towns and cities," as prices rise faster than incomes. Overall inflation hit 25.6% in July, according to official statistics.
Kremer said that structural weaknesses "have been exacerbated by the impacts of the COVID-19 pandemic, a deteriorating global macroeconomic environment and the rapid depreciation of the Lao kip," the local currency.
A year ago, the exchange rate was about 9,400 kip to the dollar. By mid-2022, some exchange outlets in Vientiane were listing rates of about 15,000 kip per dollar. On the black market, the figure was even higher, at about 19,000 kip.
The crumbling local currency has prompted Thai analysts to sound the alarm over a severe shortage of foreign reserves in Laos, currently estimated to be roughly $1.3 billion. That is enough to cover only 2.2 months of imports, and will make it a squeeze to service $1.3 billion in foreign debts this year.
The country is "suffering from twin deficits -- fiscal deficit and current-account deficit -- amid thin foreign exchange reserves," said Sathit Talaengsataya, a senior economist at Thailand's Krungsri Research. He said that over the past decade, Laos has run fiscal deficits equivalent to 3% to 4% of gross domestic product annually, requiring substantial external financing and resulting in the current-account deficit averaging more than 10% of GDP.
Sathit called this a "chronic problem" necessitating an immediate "reset of the economy."
Some shaken Laotian leaders have made rare admissions about the country's dire straits. Bounleua Sinxayvoravong, who was appointed central bank governor in June after his predecessor was fired, hinted at the panic in an address to party apparatchiks in the National Assembly.
"From the start of 2021 to the first quarter of this year, Laos should have received $9.81 billion, however, only 32% of this entered the banking system of our country," he said, according to local reports.
Yet the leadership is coy about how deeply their country is indebted to China, and the potential implications.
AidData, a research lab at William & Mary college in the U.S., calculates that Laos racked up $5.57 billion in official debts to China during a borrowing spree from 2000 to 2017. Even that "is only the tip of the iceberg," said Bradley Parks, executive director at AidData.
"Laos also has an unusually high level of hidden public debt exposure to China -- an additional $6.69 billion," he said, or about 35% of GDP. AidData defines hidden debts as those contracted by entities wholly or partially owned by the government of Laos but without an explicit sovereign repayment guarantee.
Consequently, Laos' total "debt exposure to China is worth approximately $12.2 billion, or 64.8% of GDP," Parks told Nikkei Asia.
The World Bank estimated that total public and publicly guaranteed debts stood at 88% of GDP in 2021. But since the World Bank's figure excludes Laos' hidden public debts to China, Parks said, "the country's true level of public debt exposure to all creditors is most likely north of 120% of GDP."
"There is no other country in the world with a higher level of public debt exposure to China as a percentage of host country GDP," he added.
Not surprisingly, the danger of Laos following Sri Lanka into default has grown, since its annual foreign debt bill averages $1.3 billion until 2025, according to the World Bank.
In June, global ratings agency Moody's lowered Laos' credit rating further into junk territory. "Default risk will remain high given very weak governance, a very high debt burden and insufficient coverage of external debt maturities by foreign exchange reserves," Moody's said.
This has sparked a diplomatic scramble by Laotian leaders seeking help from China as well as Vietnam and longtime ally Russia, according to seasoned observers familiar with politics in Vientiane.
In May, the government invited ambassadors from the three countries for a discussion with relevant agencies and private banks to "resolve the current economic crisis," said Japanese scholar Norihiko Yamada, a Laos specialist who has worked in many government ministries there.
"The results and the content of the consultations are not yet known, but it is possible that not only China but also Vietnam and Russia [may get involved] in assisting Laos," he said.
Other experts think Laos may benefit from a shift in China's thinking on the debt loads of developing countries.
While Beijing has appeared reluctant to restructure Sri Lanka's debt, observers note that it has thrown lifelines to some African countries straining under loan obligations -- largely owed to China for Belt and Road Initiative infrastructure projects, as in Laos.
A high-speed railway linking Vientiane with China's Kunming, launched last December, has contributed to Laos' mountain of debt to China. © Reuters
"Interest-free loans, especially to African countries, have been cancelled several times," Mengdi Yue and Christoph Nedopil Wang of the Green Finance and Development Center, a think tank at Shanghai's Fudan University, said in an email exchange with Nikkei. "China has officially expressed its stance on several occasions that it will work with other multilateral and bilateral creditors to tackle debt crises in developing countries."
Some argue that countries like Laos -- one of 17 "least developed" countries where China is the single largest bilateral lender, according to the Green Finance and Development Center -- are so enmeshed with Beijing's interests that it has no option but to help.
Patrick Mendis, a visiting professor of global affairs at the National Chengchi University in Taiwan and a former U.S. diplomat, said Chinese lending under the "Beijing Consensus" development model is designed on "connectivity" to China's national and security interests.
Failing to assist Laos "is not an option for Beijing," Mendis said.
Yet any relief efforts are also under wraps.
"The Chinese offered $800 million in debt relief to Laos over the past two years, and that gave the Laos government breathing room for external financing pressures," said Jeremy Zook, Hong Kong-based director of sovereign ratings and the lead analyst for Laos at Fitch, the ratings agency. "There are other discussions going on between Laos and China about the nature of future debt relief or debt restructuring to ease the near-term burden, but it is difficult to get an accurate read."
The handling of Laos' unpaid debts to China in the past may provide clues -- and hint at a bailout that could turn the Southeast Asian country into an economic vassal state.
Previous debt-relief options have ranged from swaps for equity in Laotian state entities to carving out land to pacify Chinese creditors. "There is certainly some historical precedent for bartering land and natural resources to repay foreign debts in Laos or to support domestic infrastructure," said Keith Barney, an academic at the Australian National University in Canberra.
Vientiane boasts of such a swap. Laos' government handed over a marsh to build a special economic zone as part of a deal to repay the Chinese, who had built a $100 million National Stadium in time for the 2009 Southeast Asian Games, which Laos hosted.
"This is part of the idea of 'turning land into capital,' which was a key development slogan of Laos and implicit policy through the 2000s," Barney said.
Laos' government handed over a marsh to build a special economic zone as part of a deal to repay the Chinese, who had built a $100 million National Stadium for the 2009 Southeast Asian Games in Vientiane. © AP
But will the Laotian public remain silent spectators if their country is carved up by China, debt by debt?
Public sentiment has already turned sour against the one-party, socialist state as the mismanaged economy and dollar crunch make it increasingly difficult to pay for essential imports like fuel and cooking gas.
"The word on the street among Laotians in business is that the country is becoming a failed state," a Thai investment consultant who has clients in Vientiane told Nikkei. "Never before has the Laotian public been so angry with the government. ... Its legitimacy to rule is being shredded."
Laos owes more than half its foreign debt to China, including "hidden obligations," and experts say the Southeast Asian country could end up bartering away land and resources for relief. © Illustration by Hiroko Aida
Laos' debt pressure raises specter of a China vassal state
Echoes of Sri Lanka on the Mekong as muzzled public seethes over economic woes
MARWAAN MACAN-MARKAR, Asia regional correspondentSeptember 6, 2022 06:00 JST
NONG KHAI, Thailand -- At gas stations in Nong Khai, a quiet Thai town on the western banks of the Mekong River, streams of vehicles pulling up reveal the troubles across the waterway in Vientiane, the capital of Laos.
The drivers with Laotian license plates come with two requests: a full tank, and extra fuel for the 20-liter containers they have on board. Many roll up in high-end SUVs or sleek Mercedes-Benzes, popular among the wealthy few in their impoverished country.
"Some of the drivers are regulars, known to us, and they complain about the high price or short supply" of gas back in Laos, said Kiri Malaya, a station attendant, as he filled up a black Range Rover and a blue jerrycan.
Kiri has been busier since June. By that month, Laos' gasoline prices were up by 107.1% on the year. But fuel is not the only item on the shopping lists of Laotians who cross the nearby bridge connecting the two countries. An office worker from Vientiane said she comes for household staples like soap, detergent, clothes and even food, since "some are not available in the shops or are now more expensive than before." A baker, struggling with rising costs of ingredients, said, "I have to find new supplies that are cheaper."
Living under a communist regime notorious for its oppression and opaqueness, they and other Laotians avoid complaining openly, apart from whispers and rare outbursts of anger on social media. Nong Khai, however, offers a vantage point on their hardships and the risks their China-reliant country faces.
Experts have warned the strongmen of the Lao People's Revolutionary Party that there are multiple economic land mines in their midst. The $18 billion economy's depleted foreign reserves and its unsustainable foreign debt -- much of it owed to China for large-scale infrastructure projects like a multibillion-dollar railway -- have prompted some to compare Laos to Sri Lanka. The bankrupt South Asian island ran out of dollars to service its foreign obligations in April, becoming the first country in the region to default in decades.
A view of the Mekong river bordering Thailand and Laos is seen from the Thai side at Nong Khai in 2019. The town offers a vantage point on the Laotian economic crisis. © Reuters
In Laos, "the macroeconomic situation is very challenging," said Alex Kremer, country manager at the World Bank. The bank warned in May that many in the nation of about 7 million were "at risk of falling into poverty, especially in towns and cities," as prices rise faster than incomes. Overall inflation hit 25.6% in July, according to official statistics.
Kremer said that structural weaknesses "have been exacerbated by the impacts of the COVID-19 pandemic, a deteriorating global macroeconomic environment and the rapid depreciation of the Lao kip," the local currency.
A year ago, the exchange rate was about 9,400 kip to the dollar. By mid-2022, some exchange outlets in Vientiane were listing rates of about 15,000 kip per dollar. On the black market, the figure was even higher, at about 19,000 kip.
The crumbling local currency has prompted Thai analysts to sound the alarm over a severe shortage of foreign reserves in Laos, currently estimated to be roughly $1.3 billion. That is enough to cover only 2.2 months of imports, and will make it a squeeze to service $1.3 billion in foreign debts this year.
The country is "suffering from twin deficits -- fiscal deficit and current-account deficit -- amid thin foreign exchange reserves," said Sathit Talaengsataya, a senior economist at Thailand's Krungsri Research. He said that over the past decade, Laos has run fiscal deficits equivalent to 3% to 4% of gross domestic product annually, requiring substantial external financing and resulting in the current-account deficit averaging more than 10% of GDP.
Sathit called this a "chronic problem" necessitating an immediate "reset of the economy."
Some shaken Laotian leaders have made rare admissions about the country's dire straits. Bounleua Sinxayvoravong, who was appointed central bank governor in June after his predecessor was fired, hinted at the panic in an address to party apparatchiks in the National Assembly.
"From the start of 2021 to the first quarter of this year, Laos should have received $9.81 billion, however, only 32% of this entered the banking system of our country," he said, according to local reports.
Yet the leadership is coy about how deeply their country is indebted to China, and the potential implications.
AidData, a research lab at William & Mary college in the U.S., calculates that Laos racked up $5.57 billion in official debts to China during a borrowing spree from 2000 to 2017. Even that "is only the tip of the iceberg," said Bradley Parks, executive director at AidData.
"Laos also has an unusually high level of hidden public debt exposure to China -- an additional $6.69 billion," he said, or about 35% of GDP. AidData defines hidden debts as those contracted by entities wholly or partially owned by the government of Laos but without an explicit sovereign repayment guarantee.
Consequently, Laos' total "debt exposure to China is worth approximately $12.2 billion, or 64.8% of GDP," Parks told Nikkei Asia.
The World Bank estimated that total public and publicly guaranteed debts stood at 88% of GDP in 2021. But since the World Bank's figure excludes Laos' hidden public debts to China, Parks said, "the country's true level of public debt exposure to all creditors is most likely north of 120% of GDP."
"There is no other country in the world with a higher level of public debt exposure to China as a percentage of host country GDP," he added.
Not surprisingly, the danger of Laos following Sri Lanka into default has grown, since its annual foreign debt bill averages $1.3 billion until 2025, according to the World Bank.
In June, global ratings agency Moody's lowered Laos' credit rating further into junk territory. "Default risk will remain high given very weak governance, a very high debt burden and insufficient coverage of external debt maturities by foreign exchange reserves," Moody's said.
This has sparked a diplomatic scramble by Laotian leaders seeking help from China as well as Vietnam and longtime ally Russia, according to seasoned observers familiar with politics in Vientiane.
In May, the government invited ambassadors from the three countries for a discussion with relevant agencies and private banks to "resolve the current economic crisis," said Japanese scholar Norihiko Yamada, a Laos specialist who has worked in many government ministries there.
"The results and the content of the consultations are not yet known, but it is possible that not only China but also Vietnam and Russia [may get involved] in assisting Laos," he said.
Other experts think Laos may benefit from a shift in China's thinking on the debt loads of developing countries.
While Beijing has appeared reluctant to restructure Sri Lanka's debt, observers note that it has thrown lifelines to some African countries straining under loan obligations -- largely owed to China for Belt and Road Initiative infrastructure projects, as in Laos.
A high-speed railway linking Vientiane with China's Kunming, launched last December, has contributed to Laos' mountain of debt to China. © Reuters
"Interest-free loans, especially to African countries, have been cancelled several times," Mengdi Yue and Christoph Nedopil Wang of the Green Finance and Development Center, a think tank at Shanghai's Fudan University, said in an email exchange with Nikkei. "China has officially expressed its stance on several occasions that it will work with other multilateral and bilateral creditors to tackle debt crises in developing countries."
Some argue that countries like Laos -- one of 17 "least developed" countries where China is the single largest bilateral lender, according to the Green Finance and Development Center -- are so enmeshed with Beijing's interests that it has no option but to help.
Patrick Mendis, a visiting professor of global affairs at the National Chengchi University in Taiwan and a former U.S. diplomat, said Chinese lending under the "Beijing Consensus" development model is designed on "connectivity" to China's national and security interests.
Failing to assist Laos "is not an option for Beijing," Mendis said.
Yet any relief efforts are also under wraps.
"The Chinese offered $800 million in debt relief to Laos over the past two years, and that gave the Laos government breathing room for external financing pressures," said Jeremy Zook, Hong Kong-based director of sovereign ratings and the lead analyst for Laos at Fitch, the ratings agency. "There are other discussions going on between Laos and China about the nature of future debt relief or debt restructuring to ease the near-term burden, but it is difficult to get an accurate read."
The handling of Laos' unpaid debts to China in the past may provide clues -- and hint at a bailout that could turn the Southeast Asian country into an economic vassal state.
Previous debt-relief options have ranged from swaps for equity in Laotian state entities to carving out land to pacify Chinese creditors. "There is certainly some historical precedent for bartering land and natural resources to repay foreign debts in Laos or to support domestic infrastructure," said Keith Barney, an academic at the Australian National University in Canberra.
Vientiane boasts of such a swap. Laos' government handed over a marsh to build a special economic zone as part of a deal to repay the Chinese, who had built a $100 million National Stadium in time for the 2009 Southeast Asian Games, which Laos hosted.
"This is part of the idea of 'turning land into capital,' which was a key development slogan of Laos and implicit policy through the 2000s," Barney said.
Laos' government handed over a marsh to build a special economic zone as part of a deal to repay the Chinese, who had built a $100 million National Stadium for the 2009 Southeast Asian Games in Vientiane. © AP
But will the Laotian public remain silent spectators if their country is carved up by China, debt by debt?
Public sentiment has already turned sour against the one-party, socialist state as the mismanaged economy and dollar crunch make it increasingly difficult to pay for essential imports like fuel and cooking gas.
"The word on the street among Laotians in business is that the country is becoming a failed state," a Thai investment consultant who has clients in Vientiane told Nikkei. "Never before has the Laotian public been so angry with the government. ... Its legitimacy to rule is being shredded."
