Years of extravagant spending on infrastructure that, in normal times, might have been survivable have proved impossible to sustain in the Covid-19 era, plunging Laos into a sovereign-debt crisis that will leave China in control over the electricity grid in Thailand’s neighbor.
For nearly a decade Laos’ Communist government has been warned that its spending spree enormous financial risks that could threaten its very sovereignty. But those warnings fell on deaf ears as Vientiane, which has been hell-bent on becoming the “Battery of Asia” by borrowing heavily to build highways, bridges, railways and hydropower dams that have contributed to the dismal plight of the Mekong River region, including Thailand.
The borrowing plan never anticipated the coronavirus pandemic, during which remittances from foreign workers have evaporated alongside tourism income and exports from its state-run factories.
The upshot is that this tiny landlocked country is facing a sovereign default as its foreign reserves slump below US$1 billion, with China taking control of an electricity grid once touted for future prosperity but, in reality, was just another debt trap.
China has earned itself a notorious reputation for laying debt traps in cash-strapped countries from Africa to Sri Lanka to the Pacific and now — it would appear — Laos. It has a habit of lending too much, then seizing control of assets when a nation fails to repay.
Case in point: A deal reportedly was reached this week between state-owned Electricite du Laos and China Southern Power Grid Co., with Laos ready to cede majority control of its electricity grid.
Details of the deal are scant but the Chinese embassy in Laos reportedly said on its website that Laos could gradually repurchase shares, assuming returns from operations are sufficient.
Laos, unfortunately, has only itself to blame.
According to the Financial Times, Laos’ annual debt payments will be more than $1 billion a year until the end of 2024 while its current reserves stand at just $864 million.
The World Bank said in June that Laos’ debt levels would reach up to 68 percent of gross domestic product in 2020, up from 59 percent last year. Total GDP is less than $18 billion, and most of its borrowings are coming from China with state assets serving as collateral.
According to China’s state-run news service Xinhua, Chinese investment in power, transport and other projects already tops $10 billion.
As a result, Moody’s Investors Service has downgraded Laos’ rating to Caa2 from B3, which puts its debt quality firmly amid the ranks of “junk” with a negative outlook. Fitch Ratings has also downgraded Laos’ ability to repay debt and changed its outlook to negative.
The last Asian country to default on its sovereign debt was Myanmar in 2002. Thailand also did so as the Asian financial crisis erupted in 1997. The prospect of Laos being forced to suspend repayments and go cap in hand to the International Monetary Fund and ask for help is very real.
A version of this commentary was first published in UCA News, a Bangkok Herald partner. The opinions expressed in this article are those of the author and do not necessarily reflect the official editorial position of the Bangkok Herald or UCA News.