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Laos shifts to China equity from loans as party congress starts

Beijing's communist sibling pushed to salvage state enterprises amid pandemic

Laotian Prime Minister Thongloun Sisoulith, left, and Chinese President Xi Jinping at the Great Hall of the People in Beijing last year. China is Laos' largest lender.   © Reuters

BANGKOK -- Laotian Prime Minister Thongloun Sisoulith has signaled a change in tack to slow the communist-ruled country's slide toward defaulting on its foreign debts: securing foreign financing through equity rather than more loans, the largest source of which has been China.

Thongloun's cue, unveiled at a recent meeting of apparatchiks, came on the eve of the quinquennial national party congress of the Laos People's Revolutionary Party. The LPRP, which has ruled the landlocked, impoverished country with an iron grip, is expected to flag the direction of the country for the next five years during its sessions from Wednesday through Friday in Vientiane, the capital.

The shift in policy is aimed to salvage the country's underperforming and debt-strapped state-owned enterprises. Government officials have been "urged to study ways to transform loss-making enterprises into joint ventures," Chaleun Yiapaoher, the government spokesman, told local media.

Signs of this tilt toward equity emerged in the second half of last year, following a deal that saw China's state-run China Southern Power Grid Co. secure majority stakes in the state utility Electricite du Laos, effectively handing over Laos' national power grid to its giant, northern neighbor. Details of the Chinese dominance of EDL -- which had $ 5 billion in debts, according to Fitch Ratings, a global ratings agency -- have continued to be shrouded in secrecy in a country ruled by a regime already notorious for being opaque.

But such a turn to Chinese equity is not purely of Laos' making, said Toshiro Nishizawa, an academic specializing in economic and development policy at the University of Tokyo. "China appears to be increasingly inclined to equity investment rather than lending," Nishizawa, who has been a policy adviser for the Laotian government, told Nikkei Asia. "This inclination perhaps helps the Laos government to ... [secure] foreign exchange to make external debt-service payments."

The Chinese financial lifeline comes as Laos faces a formidable foreign debt bill to settle, worsened by its diminished foreign reserves. In mid-2020, reserves shrank to $864 million, below the $900 million in foreign loans that had to be settled by the end of the year, according to a Laotian financial observer. "Some government officials were worried," the source told Nikkei Asia.

A similar challenging environment cannot be ruled out from 2021 till 2024, warns Fitch, since Laos has to settle an average of $1.1 billion annually in servicing its international debts. Its foreign reserves are estimated to be $1.3 billion.

According to available reports, the $20 billion Laotian economy has an estimated $12.6 billion in foreign debts. Of that, nearly half is owed to China, an estimated $5.9 billion. China's rise as the country's leading lender has been fueled by billions of dollars to finance a building spree of megaprojects, spanning large hydropower dams and economic zones to a flagship high-speed railway.

Chinese workers build part of the first rail line linking China to Laos, a key part of Beijing's Belt and Road project across the Mekong, in Luang Prabang, Laos, in February 2020.    © AFP/Jiji

Not surprisingly, international financial institutions like the World Bank and ratings agencies such as Fitch and Moody's have sounded warnings about Laos's external debt pile. The World Bank classified Laos as the only country in mainland Southeast Asia facing the "risk of external debt distress," while Fitch downgraded Laos' credit ratings to "CCC" from a previous downgrade of "B-", marking two downgrades in 2020. Moody's has downgraded Laos' ratings to "Caa2" from "B3," which it gave earlier last year, reducing the sovereign bond to junk.

The COVID-19 pandemic has not spared Laos either, compounding its financial strain in 2020. Laos's economy contracted last year for the first time in two decades, the World Bank stated in its latest assessment of the economy. It expected the economy to shrink by 0.6 % in 2020, a stark drop from the stellar growth of 8% it averaged from 2011 till 2014, and 7% in the subsequent years.

The Chinese bailout -- either through loans or equity -- is earning Laos unflattering assessments as being drawn into China's orbit, at best, or a victim of China's "debt-trap" diplomacy, at worse. It has been propelled by Chinese cash to fund Laos' dam building goal in order to export power to its neighbors on its road to become the "battery of Southeast Asia."

"Laos is already perceived to be very firmly in Beijing's orbit," said Peter Mumford, head of Southeast Asia analysis at Eurasia Group. "If China provides increasing amounts of finance to support Laos' energy export ambitions, then the country will become increasingly indebted to China going forward."

But Thailand-based observers say that neither Laos nor China would want to precipitate a crisis that could upstage the prevailing balance between the Asian communist giant and its smaller communist sibling. "Laos leaders, notably Thongloun, himself, have realized that the debt is a heavy burden to the tiny economy, but are still confident they have the ability to manage the debt," said Supalak Ganjanakhundee, a Bangkok-based Southeast Asia analyst. "I understand that China would [also] not allow Laos to go bankrupt because it could boomerang on Chinese companies and creditors."

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