Vientiane may need more help from Beijing to stem cash outflows
BANGKOK — Two years after a shake-up at the central bank of Laos paved the way for Bounleua Sinxayvoravong to take over as its head, he has been removed by the communist government in the latest sign of trouble for the debt-strapped Southeast Asian country.
But the jury is still out among commercial bankers and seasoned observers whether Bounleua was reassigned to a more challenging role in the bureaucracy or fired in early July, which marked the end of the midyear sessions of the country’s rubber-stamp national assembly.
During an address to lawmakers in June, Santiphab Phomvihanh, the finance minister, hinted at Bounleua’s shortcomings by criticizing the central bank’s failure to build up sufficient foreign exchange reserves. His successor, Vathana Dalaloy, a former deputy governor, inherits the challenge to build reserves.
The latest reshuffle at the central bank, which lacks independence under the ruling Laos People’s Revolutionary Party, points to anxiety among the country’s leaders because of the worsening foreign debt crisis, said a commercial banker in a Southeast Asian capital who works with Laotian counterparts.
“Laos doesn’t want to default on its foreign debts,” he said, “but it also does not want to go to the IMF for a bailout out because of the political consequences.”
Data from the Laotian Finance Ministry reveals the debt spiral that the impoverished, landlocked country bordering southern China has sunk into. The country’s external public debt servicing costs ballooned to $950 million in 2023, from $507 million in 2022. Public and publicly guaranteed debt, which combines domestic and external debts, by 2023 had reached $13.8 billion, or 108% of gross domestic product. The total external debt that year was $10.5 billion, of which around 48%, or $5.09 billion, was owed to China.
Laos’ foreign exchange reserves were estimated at $1.85 billion at the end of March this year. The government is struggling to increase its dollar reserves to stave off defaulting on its foreign loans. Government sources revealed the country must service annual debts of around $1.3 billion from 2024 through 2028. The government needs at least $10 billon to cover “debt-related expenses,” said Santiphab.
The collapse of the local currency’s value has added to the economic pain the public have to stomach in a heavily import-dependent economy. Dollars are in demand not only to service foreign debts but to pay the bills for local consumption and investment needs. The kip is currently trading around 21,500 to the dollar, down from the 11,500 in 2022.
That has not halted the government’s plans to shore up its dollar reserves. “Last year, commercial banks in Laos were told to inject more foreign capital … doubling the U.S. dollar capital on their books,” Sathit Talaengsatya, an economist at UOB Thailand, based in Bangkok, told Nikkei Asia. “Exporters in Laos are under pressure to deposit dollar earnings in local commercial banks.”
But economists reckon Laos may have to fall back on the conventional routes of debt financing. “New borrowings may still be required to fulfil debt service obligations if nondebt sources of finance prove insufficient,” said Emma Allen, senior country economist for Laos at the Asian Development Bank. “In order to increase market access with lower costs, the country will need to address macroeconomic challenges to support sovereign credit ratings improvement.”
Kowtowing to China, Laos’ ideological ally and the country’s largest lender, is the other route. The Export-Import Bank of China’s debt service deferrals since 2020 and the swap arrangement with the People’s Bank of China, the country’s central bank, “helped increased the reserves from around $1 billion before 2020 to $1.9 billion as of March 2024,” said Tokyo-based scholar and Laos specialist Toshiro Nishizawa.
A World Bank report in April estimated Laotian net foreign reserves, excluding the swap arrangement, are insufficient to cover one month’s imports of goods and services.
“The only feasible remedy for the short term is to maintain foreign exchange reserves by saving foreign exchange outflows through Chinese creditors’ continued debt service deferrals and swap arrangements,” said Nishizawa, who formerly served as a policy adviser to the Laotian government. This is the way for Laos to manage and survive “the pressure of its external debt servicing in the second half of 2024.”
Deferrals have resulted Laos delaying $670 million in debt payments in 2023, adding to the country’s $1.2 billion in debt deferrals since 2020, according to government statistics. The other method of calming Chinese lenders has been debt-for-equity swaps. Vientiane has offered a controlling stake in the power distribution network of the debt-strapped state-owned energy utility, and land for a special economic zone in the capital.
“Debt-for-equity swaps to Chinese companies are politically sensitive,” a Vientiane-based political analyst said on condition of anonymity. “With the regime already blamed for corruption and economic mismanagement, this will only add to the anti-regime anger.”
https://asia.nikkei.com/Economy/Laos-central-bank-shake-up-reveals-forex-crisis-China-dependence
