A complex and fast-changing world and a stronger US dollar on the back of interest rate rises could make for a rough or productive ride for business, investors and the economy in developing countries around the world seeking to ride the wave of continued economic growth, Laos included.
This was one of the take outs from a major regional report entitled East Asia and Pacific Economic Update released by the multilateral World Bank on Thursday.
According to the World Bank, Laos’ economic growth is projected to ease to 6.7 per cent in 2018, down from 6.9 per cent in 2017, remaining robust compared to regional peers.
It recommends that economies such as Laos:
- Save some financial reserves for a rainy day and loosen up the exchange rate.
“Reduce short-term vulnerabilities and build policy buffers. Greater exchange rate flexibility can help absorb and adapt to external shocks. Tighter fiscal policies can help preserve or rebuild buffers to cope with a future downturn, without threatening debt sustainability.
- Trade is your friend.
“Redouble commitment to an open, rules-based international trade and investment system, including through deeper regional economic integration. Regional economies could gain by deepening existing preferential trade agreements and lowering non-tariff barriers. A further escalation of trade tensions could be avoided by turning to bilateral negotiations or the World Trade Organization.”
- Get your house in order.
“Deepen structural reforms, including liberalizing key sectors, improving the business climate, and boosting competitiveness. Leveling the playing field between SMEs and large firms, and between foreign and domestic firms, could also help reduce resource misallocation and create jobs.
- Build a social safety net.
“Strengthen economic security and promote economic mobility though programs such as targeted cash transfers, fiscally-sustainable social insurance systems, better access to prenatal and early childhood development, and more resources to schools in geographically-disadvantaged areas so as to reduce gaps in access and quality of education.”
It comes after recommendations for Laos were covered in greater depth in the World Bank publication “Safeguarding Stability” completed in June (prior to major flooding).
In the report, Laos’ economic growth was “projected to ease to 6.7% in 2018, down from 6.9% in 2017, but is still robust compared to regional peers.”
- “Growth in the power sector and the recent expansion of the manufacturing of electronic parts and components is expected to continue.
- After a fall last year, tourism is gradually recovering with the number of international tourists and non-ASEAN countries increasing in the first quarter of 2018.
- Mining output is expected to remain flat this year, but higher metal prices, compared to 2017, are likely to help exports.
- Expansion of job-creating sectors such as agriculture, manufacturing, and services in recent years, as well as inflows of remittances, are expected to continue to support poverty reduction.
- Inflation has started to pick up since late 2017, reaching almost 2% by April 2018, reflecting the increase in oil prices.
- Credit growth further moderated to 11% by the end of 2017, and the trend continued in the first quarter of 2018.
- The current account deficit narrowed slightly in 2017 due to strong exports of electricity, manufacturing and agricultural products, as well as higher mining exports, supported by improved copper prices. This trend in exports continued into 2018, but import is expected to grow as the construction of the Kunming-Singapore railway and oil prices pick up. Therefore, the current account deficit is projected to temporarily widen this year.”
It said that “despite improvements in macroeconomic management, risks remain.”
- “Total budget revenues increased by 5% in 2017 compared to a year ago – slightly short of the target and declining to 16.1% of GDP.
- Cuts in recurrent spending were not enough to offset the increase in capital spending, including for paying off arrears and public investment, mostly in the power sector. Total public spending increased to 21.4% of GDP in 2017, widening the deficit to 5.3% of GDP, up from 4.3% a year ago. Continued efforts to increase revenues and bolder steps on fiscal discipline will be needed to meet the 2018 target of 4.9%.
- Public debt reached around 61% of GDP in 2017. Debt is largely external and on less concessional terms, which makes Lao PDR’s public debt vulnerable to risks for exchange rate volatility and, to a lesser extent, from interest rate increase.
- Reserves remain low, with the ratio of reserves to foreign currency deposits at less than 30% and less than two months of imports. Greater flexibility in the exchange rate saw the kip depreciate against the dollar and the baht, narrowing the gap between the official and parallel market exchange rates.
- Parts of the financial sector remain weak, including with low capital buffers, weakening loan portfolios, and low profitability.
- The medium-term outlook remains broadly favorable, subject to improvement in fiscal and debt management, reforms in the business environment, and efforts to improve the viability of the power sector.
- Growth is projected to rebound to nearly 7% next year as large power projects start operation and non-resource sector opportunities, for example agriculture, agro-processing, tourism, trade, and manufacturing, open up in response to improvements in the business environment.”
“Going forward, policies should aim to reduce risks and implement business environment reforms for long-term growth.
- Taking bolder steps on the fiscal consolidation plan and fiscal discipline is an immediate priority. Improved tax administration, expanding the tax base, modernizing revenue collection methods and the ongoing revision of laws can contribute to higher revenue collection.
- Public investment should be carefully prioritized and scaled back, particularly in the power sector.
- Achieving stable and long-term growth will require vibrant private sector development, including addressing informality and constraints to doing business, as well as investing in human capital and infrastructure services.”
“Large challenges loom for the global economy”
The WB’s report comes as another global organisation, the International Monetary Fund (IMF) issued its own latest World Economic Outlook released overnight.
The IMF singled out ultra-low interest rates and surging debt levels as potential triggers for another meltdown.
“The extended period of ultralow interest rates in advanced economies has contributed to the build-up of financial vulnerabilities,” the IMF warns.
Increases in rates could see a turbulent ride ahead for global currencies and exchange rates and the willingness of creditors to lend at rates of interest that remain at historic lows.
“The large accumulation of public debt and the erosion of fiscal buffers in many economies following the crisis point to the urgency of rebuilding those defences to prepare for the next downturn.”