On the Brink

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Every day, a queue snakes out of the Ministry. It is formed of desperate people hoping to apply for passports so they can travel abroad for work. But even those who obtain papers may not be able to make the trip. Their currency has lost 36 per cent of its value against the dollar over the past year. Petrol is hard to find and increasingly unaffordable. Over the past weeks they have got used to queueing for hours to fill their tanks.

The images call to mind Sri Lanka, which defaulted on its debt in May and whose residents are suffering from shortages of fuel, food and medicine. Many of the same conditions that plunged Sri Lanka into turmoil are now present in Laos. The economy was already suffering from the absence of tourists, who stayed away during the pandemic. Soaring oil prices caused by Russia’s invasion of Ukraine and exacerbated by the decline in the Laotian currency, the kip, make it harder to afford fuel, all of which is imported.

The price of petrol increased by more than 80 per cent in the year to May; imported foods such as cooking oil and instant noodles were 19 per cent more expensive in April than the year before.

Another parallel with Sri Lanka is bad Government policy. To finance grand infrastructure projects the Government, run by the Lao People’s Revolutionary Party since 1975, has over the past decade amassed debts totalling $14.5 B or 88 per cent of GDP, nearly half of which is owed to China. It is hard to see how it will make annual payments of $1.3 B that will come due over the next three years: it collects just twice that in revenue each year and had foreign-currency reserves worth around the same amount in December, enough for a mere two months of imports.

In June, Moody’s, a credit-rating agency, downgraded Laos, warning that it was likely to default.

For Laos, 2022 was supposed to be the year of economic recovery. Instead, inflation was up to 12.8 per cent in May, an 18-year high and one of the highest in Asia. The local currency collapsed in value. This time last year, around 9,400 kip would buy you one US dollar. Today, it trades for almost 15,000. Much of the country has faced fuel shortages for months. Wages are stagnating.

Like Sri Lanka, corruption is a major issue. It’s almost certain that the Government will now double down on promises to tackle graft, just as every other administration has done. It’s a potential crowd-pleaser, if done well. But successes have been far and few between in recent years. Whereas neighbouring Vietnam’s “burning furnace” anti-corruption campaign has taken down billionaires and ministers since 2016, the Lao Government spends much of its time talking about stopping officials from using State-funded cars.

According to the Diplomat, the chief reason behind Laos’ economic collapse is the perennial thorn in the side of many Asian countries: corruption.

Prime Minister Phankham Viphavanh has admitted as much, telling the National Assembly  that embezzlement by executives and staff, combined with poor management, are the main reasons for the chronic losses racked-up by 178 State enterprises.

Media in the one-party state, which operate under Government censorship, have reported openly on the economic crisis.

But public anger at last seems to have spurred the Government to act. In June it reshuffled the cabinet, replacing two Deputy Prime Ministers and the Commerce Minister, as well as the Central Bank Governor. The measures seem to have had some effect. The kip appears to have has stabilised, probably owing to new capital controls.

Laotians have other reasons to take heart. Unlike Sri Lanka, the country has not lost access to international capital markets. In May the borders reopened, which should revive the tourism industry and will allow Laotians to resume work abroad, boosting remittances.

Laos is the only country in Southeast Asia without a coastline, but it’s hoped a new high-speed train line will help open up the country and boost trade. The 420-kilometre-long rail link takes only three hours to connect Laos’s capital Vientiane with China.

The Government is trying to renegotiate foreign debts and analysts think it has a good chance of succeeding, particularly with China. “I don’t think China will let Laos default,” Nishizawa Toshiro of the University of Tokyo, told the Economist.

Unlike Sri Lanka, Laos may yet pull back from the brink.

By Michael Gregson