American credit rating agency Fitch Ratings has downgraded Laos’ status as it believes the country is now more vulnerable to default on financial obligations.
Fitch announced the downgrade on its website yesterday, saying that Laos’ Long-Term Foreign-Currency Issuer Default Rating (IDR) had moved downward from ‘CCC’ to ‘CCC-.’
According to Fitch, the downgrade of Laos’ Long-Term Foreign-Currency IDR reflects a further rise in external liquidity risks, driven most recently by the spike in commodity prices and tightening global financing conditions. Laos’ external debt repayment profile is challenging amid narrow financing options, surging inflation, currency depreciation, and low foreign-exchange reserves.
The rating agency states that while the Lao government has prioritized repayment of private debt obligations in recent years, it believes risks are growing due to these external liquidity strains.
A higher import bill as a result of the rise in global commodity prices and substantial debt repayments have pushed up the demand for foreign exchange in an environment of diminishing availability. This has resulted in a 25 percent devaluation of the Lao kip against the US dollar since February 2022, and a 35 percent depreciation since the previous year at the official exchange rate.
Fitch acknowledges that some steps have been taken to stabilize the official exchange rate since June, however it expects further depreciation in the remainder of 2022.
It also notes that foreign-exchange reserves have remained relatively stable, however, reserve cover relative to imports and external debt repayments is low, with the company forecasting foreign-exchange reserves to begin declining by the end of the year.
At the same time, Fitch expects a wider current account deficit for Laos, while the country struggles to make significant external debt repayments with limited external financing options.
The rating agency says it believes that China remains a key source of bilateral financing and possible debt relief because at least half of Laos’ external debts are due to China. Fitch believes that Laos has likely already received approximately USD 800 million in bilateral debt relief from China in 2020-2021.
Meanwhile, the company believes Laos’ public debt and publicly guaranteed debt ratio will rise to nearly 108% of GDP in 2022, much higher than the 70% peer median, from 73% in 2020.
Inflation in Laos reached a record 23.5 percent in June due to the rise in global commodity prices and currency depreciation, which exacerbated economic stability issues. Fitch believes inflation will remain high, receding gradually in 2023 on declining oil prices.
According to Fitch, Laos could see a positive rating or an upgrade if there is an easing of external liquidity pressures by a rise in foreign-exchange reserves, or an expansion of access to external funding sources from bilateral or multilateral creditors, capital markets, or asset sales.