Laos faces a debt crisis after borrowing billions from China


Laos, deeply indebted to China for major infrastructure projects, is at high risk of defaulting on its commitments, experts say, a situation exacerbated by global economic stress stemming from the coronavirus and the war in Ukraine.

The international rating agency Moody’s downgraded Laos’ creditworthiness to Caa3 on June 14, citing “a very high debt burden and insufficient coverage of foreign debt maturities by (currency) reserves”. The agency warned that Laos’ default risk will remain high.

According to a World Bank report released in April, preliminary estimates suggest that Laos’ total public and state-guaranteed debt will have reached 88% of gross domestic product in 2021. The debt is estimated at $14.5 billion, about half of which is owed to China in loans to fund projects like the China-Laos railway.

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

“The short-term reasons are the rise in oil prices due to the war in Ukraine and interest rate hikes in the US causing the Lao currency to depreciate,” he said.

“But deeper reasons would be the country’s decision to borrow heavily to fund large infrastructure projects,” Raymond added. China continued to be the largest foreign investor in Laos last year, implementing 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 to Laos and was referred to the Foreign Ministry in Beijing and the Lao Embassy. Inquiries to both offices went unanswered.

The so-called “debt trap” created by accepting infrastructure financing from Beijing has also affected 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 key tool in China’s bid to sell more goods and win contracts for its construction companies — not just challenging what it refers to as “American hegemony.”

But China has been accused by the US and others of engaging in “debt trap diplomacy” aimed at making economically weak countries dependent on China’s support. Chinese diplomats deny the allegations.

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

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

AidData Lab explains that it uses various World Bank sources and methods. But each of the multibillion-dollar estimates dwarfs the nation’s GDP per capita of about $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 those 18 years, the government of Laos has originated or guaranteed $5.57 billion worth of loans from public sector creditors in China.” But that “is just the tip of the iceberg,” he added, pointing to another $6.69 billion owed by Beijing.

According to the World Bank, Laos will need to repay $1.3 billion in external debt annually through 2025, nearly equal to the country’s federal foreign exchange reserves and half of total domestic revenue. ]]

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

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

The finance minister told lawmakers the government would not let the country default, saying Laos would reform its tax system to boost revenue and said there was potential to generate revenue from natural resources such as mining. The Lao government has restricted foreign exchange transactions by residents.

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

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

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

Laos has borrowed $1.9 billion for the project, an additional commitment that could prompt Vientiane to seek mercy from Beijing on repayment.

According to AidData Lab, China’s central bank, the People’s Bank of China, extended an emergency loan worth about $300 million to the central bank of Laos in 2021 to shore up its foreign exchange reserves.

However, AidData’s Parks said: “Chinese state banks are typically more willing to extend grace periods and repayment periods than cut interest rates. In some cases, Chinese state policy banks are even increasing applicable interest rates [to] a government borrower’s debt in order [to] Make sure they receive sufficient total NPV repayment over the life of a loan.”


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