LAO ECONOMIC MONITOR APRIL 2017

Transcription

1 LAO ECONOMIC MONITOR APRIL 2017 May-June 2017

2 1. Recent Economic Developments and Outlook 2. Health Sector Financing in Lao PDR

3 1. Recent Economic Developments

4 Contents 1. Key findings 2. Growth and inflation 3. Fiscal developments 4. External sector and exchange rate 5. Monetary development and banking sector 6. Policy Implications All photos are copyright World Bank Group Laos.

5 Key Findings Economic growth moderated slightly, but Lao PDR remains among the fastest growing economies in the EAP region. Inflation is low but has picked up slightly as oil prices rise. The fiscal deficit widened significantly further increasing the public debt. The external balance improved over the last year; however, pressures emerged on the exchange rate. Credit growth stabilized at more sustainable levels. The banking sector continues to expand, but some banks still face low capital buffers and weakening loan portfolios.

6 e Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Global and regional environment The global economy started to recover from is weakest post-crisis performance in early 2016 Global GDP growth (Year-on-year growth) Global IP and manufacturing PMI (IP yoy growth, left scale; PMI index, right scale) 8 World Advanced economies Emerging and developing economies 8 Manufacturing PMI (RHS) Industrial production growth Sources: World Development Indicators; Haver Analytics; and World Bank staff estimates. Sources: Haver Analytics, World Bank staff estimates. Note: LHS: percent, 3-month on 3-month moving average, SAAR; RHS: index, >50 denotes expansion

7 Global and regional environment In EAP, growth is resilient: China is rebalancing; the others built on their strong performance 8% 7% 6% 5% 4% 3% 2% Global GDP growth (Year-on-year growth) Indonesia Malaysia Philippines Thailand Vietnam China Exports have started to recover as demand and commodity prices recovered gradually However, domestic demand continues to drive growth in response to: Low interest rates; Rapid credit growth and Low unemployment Sources: World Development Indicators; Haver Analytics; and World Bank staff estimates.

8 In Lao PDR, GDP Growth moderated but remains strong Growth moderated to 7%, reflecting: Strong contribution from the power sector Manufacturing - parts and components from SEZs Construction remained resilient However: Mining output remained largely flat Tourist arrivals declined Source: Lao PDR authorities and WB staff estimate

9 Inflation is low; but picked up as fuel prices recover % change (left) Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 % change (right) Higher world oil prices resulted in higher energy inflation Food inflation also moderated reflecting good harvest and well stocked regional food markets. 0 Raw food (left) -30 Excl raw food & Petrol Oil (left) Overall inflation remains low with core inflation around 1%. CPI (left) Fuel (right) Source: Lao Statistics Bureau

10 Fiscal deficit remains high The deficit increased as revenues underperformed Expenditure Revenue and grants Overall balance (incl grants) Revenues declined to 19% of GDP due to: Low commodity prices Moderating growth Lower grants / / / / /16 Est. Expenditure adjustment was more modest also due to the rigid spending patterns and ASEAN chairmanship activities. Source: Ministry of Finance

11 Public debt continues to increase 100% 80% 60% 40% Public Debt outstanding (percent share) Public debt reached 68% of GDP in 2016 the 2017 IMF/WB Debt Sustainability Analysis moved the risk of debt distress from moderate to high 20% 0% end end ADB WB China Thailand Japan Bonds other countries Increasing share of bilateral and commercial sources Public sector arrears remain a challenge Source: Ministry of Finance

12 % of domestic non-resource revenue 2010/ /12 Public debt stock is high, risk of debt distress moved from moderate to high 2012/ / / /16 Est. % of GDP External public debt services Debt servicing needs increased Double allocation to agriculture in FY15/16 Two thirds of allocation to health Pipe-line of large infrastructure projects investment concern on debt sustainability and implementation capacity Amortisation+interest on external debt (% of non-resource revenues, left axis) Amortisation+interest on external debt (% of GDP, right axis) Strengthened public debt management capacity, promulgation of Public Debt Law is important for keeping debt manageable Source: Ministry of Finance

13 The current account deficit narrowed, but reserves remain low Percent Jan-14 PHL IDN THA MYS MMR MNG Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 CHN VUT KHM VNM LAO Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 SLB PNG TON FJI WSM Oct-16 Jan-17 The current account deficit declined to around 14% of GDP in 2016: Higher exports of electricity and manufacturing products offset the impact of lower copper prices and decline in timber exports Lower fuel import prices FDI inflows remained resilient Still, reserves remain low less than 25% of forex deposits, 11% of broad money Reserves to foreign currency deposit (left axis) Reserves to M2 (left axis) Source: Bank of Lao PDR 1200% 1000% 800% 600% 400% 200% 0% Reserves, as % forex deposits Source: WB EAP Economic Update, April 2017

14 Dec 2014=100 The exchange rate remains tightly managed Dec-14 Dec-14 Feb-15 Feb-15 Apr-15 Apr-15 Jun-15 Jun-15 Aug-15 Aug-15 Oct-15 Oct-15 Dec-15 Dec-15 Feb-16 Feb-16 Apr-16 Apr-16 Jun-16 Jun-16 Aug-16 Aug-16 Oct-16 Dec-16 Oct-16 Feb-17 Dec Kip/US$ Exchange rate policy focuses on tight management of Kip/USD rate However, in an environment of low reserves, pressures emerged on the exchange rate at the exchange offices market Real effective exchange rate (% YOY) Slower pace of appreciation of the Kip s real effective exchange rate (REER) in 2016 as regional currencies stabilized and inflation pressure was low Source: Note: Increasing index means appreciation. Declining index means depreciation

15 Credit growth stabilized at a more sustainable level Percent YOY Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Credit to private sector (percentage points) Credit to SOEs (percentage points) Credit to the whole economy Monetary policy aimed at stimulating credit growth Credit expanded at around 20% y- o-y, financed through deposits growth as well as foreign borrowing The share of loans and deposits in foreign currency increased 10 0 Source: Bank of Lao PDR

16 Financial sector performance Most lending went to industry sector and concentrated in a few banks Banking sector more than doubled as share to GDP during but the sector continue to face challenges Banking sector assets increased four folds between However, parts of the banking sector face challenges Some SOEs and private banks have capital levels below the requirement minimum (8%) High and growing non-performing loans in some banks Low profitability Only around 20% of banks had Return on Assets of around 2% or above at end 2016

17 Outlook Medium term growth outlook remains broadly favorable Regional growth is expected to remain resilient Power sector as key driver 500 MW added annually Non-resource sector opportunities from regional integration and better connectivity

18 Outlook Practices of the informal sector Tax rates Transportation Electricity Inadequately educated workforce Customs and trade regulations Access to finance Labor regulations Tax administration Corruption Business licensing and permits Courts Crime, theft and disorder LAO16 EAP ALL Challenges in addressing business environment to promote other sectors outside the natural resources Perceptions on major constraints in doing business Informality Tax rates Infrastructure Skills

19 Outlook China Indonesia Malaysia Philippines Thailand Vietnam Cambodia Lao PDR Mongolia Fiscal deficit is expected to remain high in 2017 and gradually decline over medium term; however, public debt will remain elevated General Government Debt, % of GDP 0 External sector current account deficit is likely to increase reflecting expected large imports for infrastructure projects. FDI and external borrowing is expected to finance this deficit

20 Policy Considerations High risks to macroeconomic stability strengthens the case for macroeconomic prudence: Reduce the fiscal deficit in line with plans widen tax base, improve tax administration, keep tight control over the wage bill, improve public procurement and reconsider investment projects. Strengthen the legal framework and capacity for public debt management Allow more flexibility in the exchange rate movement within the existing policy band, along with supportive monetary and fiscal policies Address risks in the banking sector restructuring of weak SOBs, enforcing capital adequacy requirement, strengthen bank supervision capacity of BOL

21 Policy Considerations Introduce reforms to increase productivity and to ensure gains from increased regional integration opportunities: Ensure a level playing field to address one of the business main concern on informality Building skills, including through more efficient public spending on education and health (see next presentation) Simplify the business environment and Improve quality of infrastructure