Hefty debt to China stokes soaring inflation in Laos
BANGKOK — Laos is straining under soaring inflation rates made worse by the stress of massive loans owed mostly to China for a series of megaprojects that have yet to pay off.
The tiny landlocked nation of nearly 8 million has already deferred some payments. But economists and analysts say Beijing may start asking for a stake in Laotian land, resources and infrastructure as compensation, which could expand China’s influence in the neighboring country.
Rising prices
Laos’ inflation rate jumped from the low single digits to 23% in 2022 and another 31% last year, the highest in all of Asia, according to the Asian Development Bank, or ADB. The regional development bank expects inflation to stay above 20% through 2025.
Food prices have climbed even higher, nearly hitting 40% in 2023. The ADB says the prolonged climb has slammed most families in Laos, forcing many to eat less or even forage to make up for what they can no longer afford to buy in a country that already had the highest rates of hunger in mainland Southeast Asia.
“The price of everything [is] just increasing, increasing, increasing, more and more,” said a resident of Luang Prabang, Laos’ ancient royal capital, who spoke to VOA on condition of anonymity for fear of reprisal from the communist country’s authoritarian government.
He said the price of beef has more than doubled in the past year and that an average meal or a grilled fish from a street stall now costs up to four times what it used to.
“People are suffering,” he said. “Some people buy less than before because of things [being] more expensive. That is why many people now, we try to grow things by ourselves.”
The Luang Prabang resident who works as a language instructor says he started a fruit and vegetable garden a year ago to help feed his own family and earn a little extra at the local market.
Shaky kip
Analysts and economists ascribe the rampant inflation to several factors, including a rise in global oil prices and a sharp drop in the value of the local currency, the kip, as central banks in other countries have raised their interest rates, driving their own currencies up.
Souknilanh Keola, a senior economist at Indonesia’s Economic Research Institute for ASEAN and East Asia, mostly blames Laos’ failure to build up a healthy supply of foreign currency reserves over the years. He says that has forced the government to now spend big on foreign currencies to pay its bills with other countries, driving the kip down and the price of imports up.
But he and others agree that the burden of servicing Laos’ mammoth public debt has made the problem worse.
At $13.8 billion, or 108% of the country’s gross domestic product, the World Bank recently called Laos’ debt “unsustainable.” Of the $10.5 billion Laos owes to other countries, half is due to China.
Much of that debt has gone to financing Laos’ share of the bill for a few megaprojects, some backed by China, including hydropower dams on the Mekong River and a $6 billion high-speed rail line connecting China and Thailand through Laos.
“Because of the Chinese debt, yes, that put pressure on the foreign exchange,” Keola said. “They had to do everything to try to buy foreign currencies in the market, and that put pressure for [the] Lao kip to be weaker, thus making inflation going up.”
The kip lost half its value against the U.S. dollar in 2022 and another fifth during the first three quarters of this year, according to the World Bank.
Wen Chong Cheah, a research analyst for the Economist Intelligence Unit, says having to pay back so much debt has also been driving the kip down by making it less attractive for investors to buy, trade or hold.
“This plays into investor sentiment. If you expect a country to … default, if you expect the kip to worsen, you would less likely want to hold kip. This makes the allure of holding kip less,” he said.
Laos watchers see little to no chance of China standing by to let the country default.
Useful advocate
Cheah says Laos has been a useful advocate of China’s interests this year as chair of the Association of Southeast Asian Nations, or ASEAN, playing down talk of a code of conduct for the South China Sea.
ASEAN has been in talks with Beijing for years over a binding code for the sea, where China has overlapping claims with several members. Landlocked Laos does not have any claims in the South China Sea.
Analysts say China is widely seen to be dragging its feet, preferring instead to deal with the competing countries one on one to make the most of its overwhelming size.
“Laos provides China a voice in Southeast Asia,” said Cheah. “It is in China’s best interests to not let Laos default because if Laos defaults it is likely to seek aid from Western countries or multilateral organizations, and this would diminish China’s influence.”
Debt swaps
He said China was likely to keep deferring some of the debt, but added that more so-called debt-for-equity swaps, where China trades a part of the debt for a stake in some equity such as land or mineral rights, were another distinct possibility.
In 2021, Laos gave China a majority stake in a joint venture between a Chinese state-owned power company and its own, heavily leveraged Electricite du Laos. The deal effectively handed Beijing control over the country’s power grid, including electricity exports to neighbors.
“I think these forms of restructuring — they are not a straightforward 'debt-for-equity swap' — are likely to grow, but it depends what crown jewels China wants for its wider strategic aims,” said Pon Souvannaseng, assistant professor of global studies at Bentley University in the United States. “I don't think it'll be hard for them to get their way.”
Although the terms of China’s loans to Laos are opaque, they do include some land and natural resources as collateral, according to AidData, a research unit based at the William & Mary, a university in the U.S. state of Virginia. Keola said Laos’ mineral mines would be a likely option for any future swaps or restructuring of the sort arranged for Electricite du Laos.
Souvannaseng said that raises serious questions about how much China might add to its already considerable leverage over the country if its stake in key assets keeps growing.
“Outside countries like the U.S. should wonder to what extent the de facto suzerainty will influence Lao economic and political relations with other countries and to what extent it will start harmonizing its foreign policy with China on key issues that China wants backing on,” she said.
“The risk is there,” Cheah agreed. “The electricity company is a very clear example that that has happened.”
The tiny landlocked nation of nearly 8 million has already deferred some payments. But economists and analysts say Beijing may start asking for a stake in Laotian land, resources and infrastructure as compensation, which could expand China’s influence in the neighboring country.
Rising prices
Laos’ inflation rate jumped from the low single digits to 23% in 2022 and another 31% last year, the highest in all of Asia, according to the Asian Development Bank, or ADB. The regional development bank expects inflation to stay above 20% through 2025.
Food prices have climbed even higher, nearly hitting 40% in 2023. The ADB says the prolonged climb has slammed most families in Laos, forcing many to eat less or even forage to make up for what they can no longer afford to buy in a country that already had the highest rates of hunger in mainland Southeast Asia.
“The price of everything [is] just increasing, increasing, increasing, more and more,” said a resident of Luang Prabang, Laos’ ancient royal capital, who spoke to VOA on condition of anonymity for fear of reprisal from the communist country’s authoritarian government.
He said the price of beef has more than doubled in the past year and that an average meal or a grilled fish from a street stall now costs up to four times what it used to.
“People are suffering,” he said. “Some people buy less than before because of things [being] more expensive. That is why many people now, we try to grow things by ourselves.”
The Luang Prabang resident who works as a language instructor says he started a fruit and vegetable garden a year ago to help feed his own family and earn a little extra at the local market.
Shaky kip
Analysts and economists ascribe the rampant inflation to several factors, including a rise in global oil prices and a sharp drop in the value of the local currency, the kip, as central banks in other countries have raised their interest rates, driving their own currencies up.
Souknilanh Keola, a senior economist at Indonesia’s Economic Research Institute for ASEAN and East Asia, mostly blames Laos’ failure to build up a healthy supply of foreign currency reserves over the years. He says that has forced the government to now spend big on foreign currencies to pay its bills with other countries, driving the kip down and the price of imports up.
But he and others agree that the burden of servicing Laos’ mammoth public debt has made the problem worse.
At $13.8 billion, or 108% of the country’s gross domestic product, the World Bank recently called Laos’ debt “unsustainable.” Of the $10.5 billion Laos owes to other countries, half is due to China.
Much of that debt has gone to financing Laos’ share of the bill for a few megaprojects, some backed by China, including hydropower dams on the Mekong River and a $6 billion high-speed rail line connecting China and Thailand through Laos.
“Because of the Chinese debt, yes, that put pressure on the foreign exchange,” Keola said. “They had to do everything to try to buy foreign currencies in the market, and that put pressure for [the] Lao kip to be weaker, thus making inflation going up.”
The kip lost half its value against the U.S. dollar in 2022 and another fifth during the first three quarters of this year, according to the World Bank.
Wen Chong Cheah, a research analyst for the Economist Intelligence Unit, says having to pay back so much debt has also been driving the kip down by making it less attractive for investors to buy, trade or hold.
“This plays into investor sentiment. If you expect a country to … default, if you expect the kip to worsen, you would less likely want to hold kip. This makes the allure of holding kip less,” he said.
Laos watchers see little to no chance of China standing by to let the country default.
Useful advocate
Cheah says Laos has been a useful advocate of China’s interests this year as chair of the Association of Southeast Asian Nations, or ASEAN, playing down talk of a code of conduct for the South China Sea.
ASEAN has been in talks with Beijing for years over a binding code for the sea, where China has overlapping claims with several members. Landlocked Laos does not have any claims in the South China Sea.
Analysts say China is widely seen to be dragging its feet, preferring instead to deal with the competing countries one on one to make the most of its overwhelming size.
“Laos provides China a voice in Southeast Asia,” said Cheah. “It is in China’s best interests to not let Laos default because if Laos defaults it is likely to seek aid from Western countries or multilateral organizations, and this would diminish China’s influence.”
Debt swaps
He said China was likely to keep deferring some of the debt, but added that more so-called debt-for-equity swaps, where China trades a part of the debt for a stake in some equity such as land or mineral rights, were another distinct possibility.
In 2021, Laos gave China a majority stake in a joint venture between a Chinese state-owned power company and its own, heavily leveraged Electricite du Laos. The deal effectively handed Beijing control over the country’s power grid, including electricity exports to neighbors.
“I think these forms of restructuring — they are not a straightforward 'debt-for-equity swap' — are likely to grow, but it depends what crown jewels China wants for its wider strategic aims,” said Pon Souvannaseng, assistant professor of global studies at Bentley University in the United States. “I don't think it'll be hard for them to get their way.”
Although the terms of China’s loans to Laos are opaque, they do include some land and natural resources as collateral, according to AidData, a research unit based at the William & Mary, a university in the U.S. state of Virginia. Keola said Laos’ mineral mines would be a likely option for any future swaps or restructuring of the sort arranged for Electricite du Laos.
Souvannaseng said that raises serious questions about how much China might add to its already considerable leverage over the country if its stake in key assets keeps growing.
“Outside countries like the U.S. should wonder to what extent the de facto suzerainty will influence Lao economic and political relations with other countries and to what extent it will start harmonizing its foreign policy with China on key issues that China wants backing on,” she said.
“The risk is there,” Cheah agreed. “The electricity company is a very clear example that that has happened.”