Population 6.376 million
GDP 9.269 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
8.1 |
8 |
8.2 |
8 |
|
Inflation (yearly average) (%)
|
6 |
7.6 |
5.2 |
6 |
|
Budget balance (% GDP)
|
-4.6 |
-3 |
-2.6 |
-2.6 |
|
Current account balance (% GDP)
|
-18.3 |
-21.4 |
-21.9 |
-24 |
|
Public debt (% GDP)
|
61.8 |
55.9 |
54.1 |
52.4 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Abundant natural resources: minerals (copper, gold, bauxite, iron, zinc), oil and agricultural raw materials (maize, rice, sugar cane, rubber, manioc, soya, coffee)
- Development of the hydro-electric industry
- Foreign investments in the raw materials sector
- Regional integration (ASEAN) and WTO membership (official member from early 2013)
WEAKNESSES
- Massive current account deficit
- Inadequate level of reserves
- Shortcomings in governance and high level of poverty
- Weak banking sector
- Significant sovereign risk because of high debt
Risk assessment
Sustained growth driven by the hydroelectric and mining sectors
Growth was robust in 2012, driven by the expansion of the hydroelectric sector and infrastructure construction for the SAEM forum (Asia-Europe Meeting), which took place in Ventiane in early November. This year too, the continuation of major energy construction projects thanks to public and foreign investments will favour strong growth. Several hydroelectric dams are under development and construction of the big Hongsa thermal power station is underway. Growth will also be driven by consumption, stimulated by a big civil service wage rise and external demand. This demand, coming mainly from Thailand (the country’s main trading partner) and China, is expected to drive the strongly export-oriented production of electricity and minerals. On the supply side, mining, energy, construction and tourism will be buoyant to the detriment of agriculture, the contribution of which to GDP is falling. Meanwhile, inflation is likely to accelerate in this context of strong domestic demand.
Weaknesses persist: massive current account deficit, high public debt and credit risk to be watched
Despite the export growth of electricity (enabled by the rise in production since 2010 with the inauguration of the Nam Theun 2 Dam) and mining products (copper, 31% of exports) buoyed by dynamic neighbours, the current account deficit is massive. The country imports more than twice what it exports. Main imports are oil products and capital goods. The trade deficit is expected to widen in 2013 as imports will grow more strongly than exports, in response to the increased need for inputs for ongoing works in the hydroelectric (27% of imports) and mining industries. At the same time, increased tourism is expected to make it possible to offset the repatriation of dividends by foreign companies involved in the exploitation of the country’s natural resources. However, even with the transfers from expatriate workers and foreign aid, the country will post a higher current account deficit than in 2012. Foreign direct investment, which has boomed since 2011 because of the major projects initiated, is expected to increase further and cover three quarters of the deficit. External debt is therefore expected to grow. In this context, the country’s foreign exchange reserves will be insufficient, covering less than two months of imports.
The fiscal deficit is expected to be similar to that of the past year, despite a jump in civil service wages. At the same time, tax revenues are expected to increase sharply, thanks mainly to the mining sector and the creation of new taxes. In this context, public debt is likely to fall but remains at a high level.
Finally, the banking sector is still weak due to the lack of supervision and inadequate capitalisation, despite the recapitalisation of the country’s three public banks. In view of the sharp rise in lending last year, credit risk still needs watching.
Political stability but major challenges in terms of development
The presence of a single communist-inspired party, the Lao People’s Revolutionary Party (LPRP), ensures the country’s political stability. However, the country remains underdeveloped despite the strong growth observed in recent years. This situation is explained by the advent of an export oriented economy favouring foreign direct investment (which has enabled the country to join the WTO) but which brings little benefit to the population. Meanwhile, there are still substantial governance shortcomings, particularly the high level of corruption.
