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Economy

Laos faces public backlash as economy teeters toward default

Debt crisis triggers rare anger against communist leaders on social media

Workers at a Chinese-backed hydroelectric dam construction site in Bokeo Province, Laos in 2017. The country's foreign debt is estimated at $1.3 billion, which it must settle by 2025.   © Getty Images

BANGKOK -- Shortly after a Laotian-language article headlined "Lao economy collapses" appeared on the Facebook page of U.S.-funded Radio Free Asia this month, public rage erupted against leaders of the one-party state.

The 1,100-plus replies to the post include angry rants by Laotians within the landlocked, resource-rich Southeast Asian nation. Despite replies being easily traceable, people have vented. "If the government cannot manage the economy, get out!" fumed one female poster.

This public display of outrage -- also evident across other social media platforms including Tik Tok and YouTube -- has not been lost on seasoned observers in the Laos capital Vientiane. They see it as a rare sign of courage by a public long cowed into silence by the Lao People's Revolutionary Party, the communist party in power since the mid-1970s.

"People are losing their fear and not scared to be openly critical because the economic crisis is affecting their daily lives," said one observer, on condition of anonymity. "Social media is the only avenue they can do so in Laos' repressive political environment."

The economic crisis has been brewing over recent months. The signs range from long lines of vehicles at gas stations in Vientiane and beyond to a spike in the price of food and other essentials, as the kip, the local currency, weakened against the dollar.

In June, international ratings agencies raised the ante in a warning that the Laotian economy, already saddled with fiscal and current-account deficits for years and grappling with a liquidity and solvency crisis, is being fingered for potential default. It immediately drew parallels with the economic meltdown in Sri Lanka, the South Asian nation that announced in April that it had run out of dollars to meet its foreign debts this year.

The government's response to public frustration has been as revealing, with leading officials admitting to the crisis in the $20 billion economy. Prime Minister Phankham Viphavanh is among them. During the latest session of Laos' National Assembly, which convened last week, he revealed in a moment of candor that he was aware of the criticism on social media.

Finance Minister Bounchorn Oubonpaseth has been equally candid about mounting pressures in the impoverished country of 7.5 million people. On Monday, he told the members of the National Assembly that the country has amassed huge debt because of "massive loans borrowed for national development from 2010 and 2016." The annual foreign debt servicing had grown from $1.2 billion in 2018 to $1.4 billion in 2022, he said. "In 2010, our external debt-service payments amounted to just $160 million, which could be paid for out of domestic revenue."

Similar openness was evident in May, when senior officials at the Central Bank of Laos said that only 33% of the country's export earnings had reentered local banks by the end of April, depriving the country of building sufficient foreign reserves to pay for imports and service foreign debt. The main foreign exchange earners are energy sales to neighbors from hydropower projects, the extraction industry and agriculture products.

Tokyo University professor Toshiro Nishizawa believes this official candor is being done selectively in the wake of financial challenges that he describes as "tremendous and worrying." But Nishizawa, who formerly served as a policy adviser to the Laotian government, said the official warnings are "formulaic, preset and generalized." He is not expecting an immediate disclosure of key economic and financial indicators, "due partly to political sensitivities and capacity constraints."

Analysts say the economic crisis threatening to rattle the entrenched communist order comes in the wake of back-to-back external crises: COVID-19 in 2020, which drained foreign earnings from a lucrative tourism sector; the Russia-Ukraine war, which has increased oil prices; and the increase in U.S. interest rates, which is weakening local currencies against the dollar to make imports pricier.

This week's firing of Bank of Lao Gov. Sonexay Sitphaxay hints at the panic that has set in. He has been replaced by Bonleua Sinxayvoravong, the former deputy finance minister.

But signs of an economic downturn had already been evident. The World Bank, International Monetary Fund and other international agencies had warned Laos before the pandemic that it was headed toward an external debt crisis because of depleted foreign reserves.

"A large current-account deficit, low level of reserves, a high level of debt, managed exchange rate, and a dollarized banking system amplify macro-vulnerabilities," the IMF noted in August 2019 following its Article IV consultation of the Laotian economy.

According to the World Bank, by the end of 2021 the country's public debt had skyrocketed to 88% of gross domestic product, with foreign debt at an estimated $14.5 billion. The country's list of foreign lenders included Chinese creditors, who accounted for a 47% share, reflecting Laos' close ties with China, which in the past decade has become Laos' largest lender, investor and trading partner. In addition, Laos owes 11% of its debt to China from bilateral loans.

The World Bank and the Asian Development Bank account for a combined 17%, international sovereign bonds 17%, and non-concessional loans 8%. Some of the bonds are in Thai baht -- after Laos tapped the Thai capital market in 2013 -- and in U.S. dollars.

The World Bank says Laos' foreign debt is estimated at $1.3 billion, to settle annually till 2025 -- a daunting challenge for a country whose foreign reserves are about the same amount. On the back of that, Moody's Investors Service downgraded Laos by a notch this month, lowering it to Caa3 from Caa2. Fitch Ratings still maintains the CCC rating it reaffirmed in August 2021, but notes that "there is a possibility of default."

"The space has narrowed for Laos to access external finances to meet its debts," said Jeremy Zook, Hong Kong-based director of sovereign ratings at Fitch and the lead analyst for Laos. "It has a lot of bilateral and multilateral payments to be made this year, almost half of the debt servicing, while there are smaller bond payments and syndicated bank loans to be settled."

Still, it is a predicament that Lao government authorities are still not ready to discuss openly with friendly neighbors like Thailand, a major source of Laotian imports and the main buyer of Laos' hydropower exports. The silence was audible when the Laotian premier visited Bangkok in early June. During Phankham's talks with his Thai counterpart, Prime Minister Prayuth Chan-ocha, there was no hint of Laos' mounting debt crisis.

"We were aware of the problem but there was no reference to it at the official talks from their side," a source in Prayuth's office who witnessed the discussions, told Nikkei Asia. "There was hardly a hint that they were facing debt troubles and wanted some economic help. Nothing. Very tight-lipped."

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