Laos faces debt crisis after borrowing billions from China

Laos, deeply in debt to China for large-scale infrastructure projects, is at high risk of defaulting, experts say, a situation exacerbated by the economic stress felt around the world due to the coronavirus and the war. in Ukraine.

International ratings agency Moody’s downgraded Laos’ credit rating to Caa3 on June 14, citing “very high indebtedness and insufficient coverage of external debt maturities by (foreign exchange) reserves”. The agency warned that Laos’ default risk will remain high.

According to a World Bank report released in April, preliminary estimates indicate that Laos’ total public and publicly guaranteed debt reached 88% of gross domestic product in 2021. Debt is valued at $14.5 billion. , about half of which is owed to China on loans. to finance projects including the China-Laos railway.

Greg Raymond, a Southeast Asia expert and senior lecturer at the Australian National University, told VOA Mandarin that the crisis facing Vientiane has multiple origins.

“The short-term reasons are rising oil prices due to the war in Ukraine and rising US interest rates leading to a fall in the value of the Lao currency,” he said.

“But deeper reasons would include the country’s decisions to go deep into debt to fund large-scale infrastructure projects,” Raymond added. China continued to be the biggest foreign investor in Laos last year, undertaking 813 projects worth more than $16 billion, according to Chinese state media Xinhua, citing Lao officials.

VOA Mandarin contacted the Chinese Embassy in Washington for comment on the loans in Laos and was referred to the Ministry of Foreign Affairs in Beijing and the Lao Embassy. Inquiries filed with both offices went unanswered.

The so-called “debt trap” incurred by accepting infrastructure funding from Beijing has also impacted Sri Lanka and other countries.

Beijing has poured more than $800 billion into its “Belt and Road” infrastructure building initiative since 2013. The initiative is a vital tool in China’s quest to sell more goods and secure contracts for its businesses construction – in addition to questioning what it refers to. as “American hegemony”.

But China has been accused by the United States and others of pursuing “debt trap diplomacy” designed to make economically weak countries dependent on China for support. Chinese diplomats deny the accusations.

On Thursday, the Group of Seven countries pledged to raise $600 billion from public and private sources to finance infrastructure projects in developing countries. The objective is to counter the efforts of China in the same sector.

AidData Lab at the College of William & Mary tracks the debt of Belt and Road projects in China. According to the lab’s statistics, the total value of Laos’ public debt to China is about $12.2 billion, significantly more than the World Bank’s calculation.

AidData Lab explains that it uses different World Bank sources and methodologies. But either multi-billion dollar estimate dwarfs the country’s per capita GDP of around $2,600, making the Southeast Asian nation of 7 million people one of the poorest in the world.

Bradley Parks, executive director of AidData, told VOA: “During this 18-year period, the Government of Laos has contracted or guaranteed loans from official sector creditors in China worth 5.57 billions of dollars.” But that “is just the tip of the iceberg,” he added, pointing to the additional $6.69 billion owed to Beijing.

According to the World Bank, Laos must repay $1.3 billion in foreign debt each year until 2025, which is almost equivalent to the country’s federal foreign exchange reserves and half of total domestic income. ]]

The World Bank predicts that Laos’ economy will grow by 3.8% this year, but warns that this will not be enough to generate the tax revenue the government needs to pay its external debt.

Addressing members of the National Assembly on June 20, Lao Finance Minister Bounchom Ubonpaseuth said the annual debt service payment had risen from $1.2 billion in 2018 to $1.4 billion. dollars this year.

The finance minister told lawmakers that the government would not let the country default, saying Laos would reform its tax system to increase revenue and that it was possible to generate revenue from natural resources such as oil. ‘mining. The Lao government has restricted foreign exchange transactions by residents.

He added that the loans “have been necessary for the development of our country in recent years”.

For example, the China-Laos Railway that connects Kunming in southwest China to Vientiane, the capital of Laos, opened in December 2021 and cost $5.9 billion.
Laos hopes the railway will reduce transport costs and boost exports and tourism.

The Laos-China Railway Company is 70% owned by three Chinese state-owned companies and 30% by the Lao government.

Laos has incurred $1.9 billion in debt for the project, an additional obligation that could push Vientiane to seek a pardon from Beijing for repayment.

China’s central bank, the People’s Bank of China, provided an emergency loan worth around $300 million to the central bank of Laos in 2021 to support its foreign exchange reserves, according to AidData Lab.

However, AidData’s Parks said, “Chinese state-owned banks are generally more willing to extend grace periods and repayment periods than to cut interest rates. In some cases, Chinese public policy banks will even raise the interest rates that apply [to] the debts of a sovereign borrower in order [to] ensure that they recover sufficient total repayment over the life of a loan in terms of net present value.

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