On 30 December, Lao Prime Minster Phankham Viphavanh (72) resigned ostensibly on health grounds, but amidst an economy in sharp decline and saddled in foreign debt. He is succeeded by the scion of one of the country's two political dynasties, Deputy Prime Minister Sonexay Siphandone (56).
Politics in Laos are secretive and elite. The ruling Lao People’s Revolutionary Party’s Central Committee has a mere 71 members (with 10 alternates) and its Politburo only 13. There is almost no transparency and all media are party-controlled.
Viphavanh became Prime Minister following the party’s 11th Congress in early 2021, having moved steadily up the organizational chart, serving on the Central Committee since 2006 and the Politburo since 2011, as well as serving as a deputy prime minister, a Minister of of Education and Sports, and a provincial governor.
He had a short but rocky tenure, with an economy battered by the collapse of tourism, border closures with China, and an unsustainable foreign debt load. Following a cabinet reshuffle in June, it became clear that Viphavanh was not up to the task.
An economy in free-fall
The economy of the landlocked country is in dire straits, after several years of 5-6 percent growth.
Between 2011 to 2020, Lao GDP grew by 117 percent, from $8.75 to $19 billion. But since the pandemic, the tourist-dependent economy has stagnated. In 2022, it was down to $18.8 billion.
The Lao currency continues to decline in value. Since November 2020, the kip's value against the dollar has fallen 66 percent. In 2022, alone, it lost over 38 percent of its value against the US dollar and 33 percent against the Thai Baht, its major trading partner, with whom it runs chronic trade deficits. The currency's collapse has made both imports and debt servicing prohibitively expensive.
Inflation is currently over 38 percent, the highest in Southeast Asia, but for certain imported items, it's far higher. The cost of diesel fuel went up by 90 percent in 2022, and gasoline 107 percent; which drove up costs of production. With stagnant national and per capita GDP, inflation has hit very hard especially for those on fixed salaries.
The World Bank warned many of the 7.4 million population were at risk of falling into poverty.
Adding pressure, after several years of trade surpluses, including $1 billion in 2021, Laos looks to be facing a deficit in 2022
State revenue continues to fall, in no small part, owing to corruption involving concessions to foreign investors the former prime minister granted, especially to Chinese mining firms. At least $9 million in tax went unpaid in 2022. While that’s not a lot of money, given that per capita GDP is only $8150, it’s not insignificant.
Mounting debt
But the country’s real problem is its mounting debt crisis. In 2021, Laos’ total public debt was 88 percent of GDP, and foreign debt was $10.4 billion. The World Bank predicted that debt would surpass 100 percent of GDP in 2022.
Between 2022 and 2026, Laos will need to service $1.3 billion of debt annually, roughly equivalent to its foreign exchange reserves. $964 million of debt is owed to commercial creditors.
It has over $1 billion in outstanding bonds in the Thai market. In March 2022, it issued Bt5 billion ($140 million), in its first international offering since a $180 million offering in November 2018. It came close to defaulting on that loan. Fitch and Moody's downgraded Lao debt to junk bond status. Laos faces $101 million in redemptions on the latest Thai bond in 2023 alone, and $204 million in 2025.
Laos has been saddled with debt from the $5.9 billion railway from China; 60 percent of which came from Chinese loans. Without the last leg through Thailand to the port in Bangkok; the railway is running at a loss. Nikkei Asia Review reported that the dry port in Laos was operating at 20 percent capacity.
The country has borrowed heavily to pay for a cascade of 11 hydro-electic dams on the Mekong, and hundreds of smaller dams on tributaries. Yet not all of the energy has buyers. Laos simply assumed that Thailand would buy 100 percent of their hydro-electricity. In 2020 Chinese firms took over parts of the Lao grid in a debt for equity swap.
Over half of Lao debt is owed to China. If one includes the $6.7 billion in “hidden” debt to China, Laos' total debt owed to China is an estimated $12.2 billion, or 64.8% of GDP. Nonetheless, Vientiane views Beijing as its lender of last resort, not the IMF.
Can the new guy fix it?
While the economic condition is dire, the country is losing control over its sovereignty. Large Chinese special economic zones are splinters of Chinese sovereign territory, where Lao law and law enforcement officials have no authority. They have become epicenters of money laundering, drug trafficking, on-line gambling, human trafficking, and internet and phone scam centers.
While undermining Lao sovereignty, they also add nothing to government coffers, while at the same time have had a deleterious impact on official and security force corruption.
A record amount of illicit narcotics has poured out of Myanmar’s Shan State, increasingly trafficked through Laos. 2022 saw record seizures, and yet, according to the UNODC, prices of illicit drugs continued to fall.
Is Laos at the point of no return?
Sonexay Siphandone, who was elected nearly unanimously, comes from communist Lao “royalty”. His father had been the LPRP’s General Secretary; he had served on the party's elite Central Committee since 1991, and on the Politburo since the 10th Congress in 2016. He had been the President of the rubber stamp parliament since the 11th Congress January 2021.
He has the political connections to maybe run a more efficient government or make some hard choices, but Laos’ problems are systemic and far greater than what one man can solve.
Saddled with crippling debt loads, a moribund economy, and proliferating Chinese zones, Siphandone may be the head of the government, but what he governs is rapidly diminishing.
Zachary Abuza is a professor at the National War College in Washington and an adjunct at Georgetown University. The views expressed here are his own and do not reflect the position of the U.S. Department of Defense, the National War College, Georgetown University or RFA.