Laos is back in the Thai baht debt markets again, with issuance from the Republic coming just two months after the country’s government-owned utility EDL-Generation tapped the domestic market of its sovereign neighbour.
The Lao People’s Democratic Republic is looking to raise 11 billion baht, or around US$310 million over the next couple of days, with a successful print representing the country’s fifth foray in baht.
Whilst there may be logic in this frontier market issuer tapping the relatively deep liquidity of its neighbouring country, the exercise strikes me as being a little too cosy.
Laos has begun to rely heavily on Bangkok-based Twin Pines Consulting for its capital raising – in this case with the consultancy suggesting a way around Bangkok’s strict rules on the repatriation of funds from issuance in its domestic market. The solution preferred was for Thai banks to extend short-term dollar loans to Laos which will be redeemed out of the bond’s proceeds at maturity.
This sounds like a neat solution, but it contains much that is troubling. In the first place, it exposes Laos to currency and tenor mismatch of the sort that underpinned the Asian financial crisis of the late 1990s. Indeed, in this case, Laos is exposed to both Thai baht and US dollar FX risk on the transaction, which carries five tranches from three years out to twelve years.
Much academic work has been produced on the dangers of developing countries saddling themselves with debts in hard currencies, whereby it has been demonstrated that the long-term economic impact of the accrual of such debt is a depreciating domestic currency and a gradual rise in the inflation rate, as the unsterilised funds circulate around a relatively unsophisticated economy.
Laos issued its first dollar bonds around a year ago with a US$182 million issue of 10 and 12-year floaters, paying around Libor plus 340bp on each tranche. Not only do those coupons look onerous from the get-go, the exposure of the country to a possible sharp decline in its currency, the kip, versus the dollar presents a less than auspicious risk profile.
But it seems the land-locked country is beginning to develop what strikes me as a growing and dangerous addiction to debt. Indeed, back in June, Malaysia’s RAM ratings placed the country’s credit rating outlook on a negative footing, citing its deteriorating external position and the increasing risk of financial instability.
Laos has a weak banking system – NPLs have risen 400% in 2016 on a year-on-year basis to 8% – and a deteriorating interest rate coverage ratio in relation to its reserves, with short-term debt service a particular worry, something that will not be best served with the short-term US dollar loans the country intends to put in place to circumvent Thailand’s repatriation regulations.
Rather than relying on offshore funding, and lining the pockets of Bangkok’s banking and consultancy community in the process, Laos should look to develop a domestic bond market from scratch. In this way it can avoid the risks of double mismatch that its neighbour Thailand has managed to do with its domestic bond market. Thailand learned the hard way during the Asian financial crisis. All the signs are that its neighbour to the east will end up doing the same.
Written by: Jonathan Rogers
Source: The Asset