Economic studies
Lao People's Democratic Republic

Lao People's Democratic Republic

Population 7,029 million
GDP 1 786 US$
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Synthesis

major macro economic indicators

   2014 2015 2016 (e) 2017 (f)
GDP growth (%) 8.0 7.5 6.9 6.8
Inflation (yearly average) (%)  5.5 5.3 3.3 2.3
Budget balance (% GDP)  -4.5 -2.9 -3.0 -3.9
Current account balance (% GDP)  -24.9 -23.1 -18.0 -17.6
Public debt (% GDP) 63.0 63.0 61.7 62.6

 

(e) Estimate (f) Forecast

STRENGTHS

  • Abundant natural resources: minerals (copper, gold, bauxite, iron, zinc), oil and agricultural commodities (maize, rice, sugar cane, rubber, manioc, soya, coffee)
  • Expansion of the hydroelectric sector
  • Foreign investments in the commodities and energy sectors
  • Regional integration (ASEAN) and WTO membership

WEAKNESSES

  • Massive current account deficit
  • Inadequate level of reserves
  • Governance shortcomings and high poverty rate
  • Weak banking sector
  • Significant sovereign risk because of high stock of debt

RISK ASSESSMENT

Activity expected to remain firm

In 2016, growth dipped a little and this trend is expected to continue in 2017. Activity will, however, remain very dynamic. The Laotian economy should benefit from the slight recovery in commodity prices, primarily those of mining products. Meanwhile, construction will profit from momentum in the hydroelectric sector. 35 power plants are under construction, while several projects were launched at the end of 2016. Meanwhile, despite fiscal consolidation measures, infrastructure development is continuing. The country, which is confronted by major infrastructure shortcomings, is involved in projects aimed at improving its rail connections with Thailand and China. In addition, a fifth airport is to be built and the country is expanding its hotel capacity. Accordingly, the number of tourist visitors, especially from China, is expected to remain high. The tourist source countries will continue to be highly concentrated with 80% of tourists coming from Thailand, China or Vietnam. The agricultural sector - under-modernised - will continue to dominate: it represents 25% of GDP and employs over 70% of the economically active population.
The country's exports are expected to continue to benefit from electricity development projects (80% of the electricity produced in Laos is exported) and the recovery of activity in Thailand, the country's main trading partner. In addition, Laos and Singapore are negotiating an agreement with Malaysia and Thailand aimed at allowing the delivery of Laotian electricity to Singapore, which is looking to diversify its energy resources.
Finally, household consumption looks set to remain firm and will benefit from the rise in the minimum wage, although it could be hit by the fiscal consolidation measures and rising inflation, which, while remaining moderate, is likely to be driven higher by the slight rise in oil prices.

 

The country continues to suffer from major weaknesses but the current account balance is expected to improve slightly

Despite the growth in exports of electricity and mining products, the current account deficit is still huge. This is because the country imports almost twice as much as it exports. Imports mainly consist of oil products and capital goods, destined, in particular, for the hydroelectric sector. Nonetheless, in 2017, the trade deficit is expected to narrow, thanks chiefly to the slight expected increase in prices for mining products and the recovery of the Thai economy. At the same time, tourism growth should help to offset dividend repatriations by foreign companies engaged in the exploitation of natural resources. The country also receives expatriate workers' remittances and foreign aid. Accordingly, it should manage to slightly reduce the level of its current account deficit.
Moreover, FDIs are booming on the back of major projects initiated. They are expected to grow still further with the business climate improving, thanks particularly to the country's accession to WTO membership in early 2013.
However, the country has substantial external debt and is dependent on its neighbours to finance its infrastructure projects. Laos is, in particular, very reliant on finance from China. Meanwhile, its foreign exchange reserves are still insufficient, covering hardly more than a month's imports and making the country vulnerable to external shocks.
In 2017, the budget deficit and the public debt - already at high levels - will continue to grow, despite the government's fiscal consolidation measures. This is because tax collection is hampered by high levels of corruption. Nevertheless, we can report tighter control of spending by the different entities.
Finally, the banking sector remains weak, given the lack of supervision and inadequate capitalisation. In view of the sharp growth in credit in recent years, credit risk still needs watching.

 

Political stability but major development challenges

The presence of a single party, the communist-inspired Lao People's Revolutionary Party (PPRL), ensures the country's political stability. In April 2016, the transition of power to a new leadership team led by Thongloun Sisoulith ensured continuity. However, the country remains underdeveloped, despite the strong economic growth observed in recent years. This situation is explained by the advent of an economy strongly oriented towards the external market and favouring FDIs (which enabled the country to join the WTO), which, however, offers little benefit to the population. Meanwhile, despite some progress, notable on financial data, there are significant governance shortcomings, as evidenced by the high level of corruption.

 

Last update : January 2017

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