In the future of Laos, its financial stability depends on China

Bangkok [Thailand], July 3 (ANI): Southeast Asian country Laos is struggling to meet its debt amid sovereign downgrades and depletion of foreign exchange reserves.

Writing in the Asia Times, Peter Janssen stated that the future of the country’s economy and its financial stability depend heavily on mainland China.

This week, Laos redeemed US $ 150 million of bonds listed on the Singapore Exchange, slightly cutting off the surge in external debt over the next five years, the Asia Times reported.

Both Moody’s and Fitch’s credit rating agencies responded to concerns about rising public debt in nominally communist countries, declining foreign currency reserves, and potential default debt on time, and rated Laos sovereign last year. Was downgraded, the Asia Times reported.

The economic slowdown in 2020 occurred at a time when public debt in Laos increased, reaching 72% of GDP last year, and large loans were planned.

In August 2020, Moody’s downgraded Laos’ sovereign rating to Caa2, reflecting growing concerns about the double blow of reduced foreign exchange reserves and increased 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 rating concerns about Laos, and the reason for our CCC rating 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 US $ 1 billion annually 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 make it difficult for Laos to raise new bonds in the international market to repay future membership fees.

Mr. Zuck of Fitch said 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 partly due to a “swap line” from the central bank to the central bank, which was established between the Lao Bank and the People’s Bank of China in January.

Swaps sent the yuan to the Lao central bank, theoretically boosting 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 21st to July 4th.

The Covid crisis has already blown away the wind from Laos’s former up-and-coming tourism industry, which previously accounted for about 10% of GDP, and is now disappearing.

“Half of 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,” said Fitch’s Zuck. ..

Part of the future debt comes from the China Export-Import Bank, which provided a concessional loan of US $ 470 million at a 2.5% interest rate as part of its contribution to the Laos China Railroad Project 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 construction due to the Covid crisis last year.

The railway link is owned by the Laos China Railway Company, a joint venture established in 2016, with Laos holding 30% and China 70%, Asia Times reports.

The estimated cost of the project is US $ 6 billion, but the debt portion of the project in Laos is about 8% of the total investment, which is still large for a country with GDP of only US $ 18 billion.

The cash commitment to the Laos project under the joint venture is US $ 720 million, of which US $ 250 million comes from the national budget during the five-year construction period, with the remaining US $ 470 from EXIM Bank of China. I was borrowed. 5 year grace period and 35 year maturity.

As Laos seeks to avoid debt, we should expect more such “joint ventures” in the future. This may be bad for the Lao people exiled by such a project without proper compensation, but it may be good overall for the economy. Janssen.

“Laos has a focus on equity finance, which can mitigate some of its liquidity risk and add to the rating,” said Fitch’s Zuck.

For example, in March of this year, the EDL state-owned power company entered into a joint venture with the state-owned China Southern Power Grid, building and managing most of the state-owned power grid over the next 25 years before the Lao government.

The share of EDL in ventures is estimated to be 10% in the form of existing grid assets, and China Southern Power Grid has gained a dominant share in pricing and trading with neighboring countries, the Asia Times reports. I am.

The US $ 2 billion project aims to achieve 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 benefits of connecting north-south, east-west and truly becoming a battery in Southeast Asia, without burdening 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 introducing its neighbors to the Thai capital markets in 2013. ..

Such concessions, for a limited period of time, come at the expense of handing over Lao’s state-owned assets to China, but avoid further debt, many of which are already owed to China. Janssen explained.

“China is clearly a huge player in Laos, and about 50 percent of debt repayments over the next few years will come from China,” said Fitch’s Zuck. “Therefore, whether China intervenes to provide more funding to Laos is very central to our assessment, which is a bit difficult for us to monitor.” (ANI)

In the future of Laos, its financial stability depends on China

Source link In the future of Laos, its financial stability depends on China

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