Economic and Trade Report Lao PDR August 2017

Transcription

1 Ref. Ares(2017) /08/2017 Economic and Trade Report Lao PDR August 2017 Economic Summary Laos' economic growth is expected to remain robust and relatively stable, consistent with a GDP growth of around 6.9% in 2016 and 6.7 % 2017 (from 7.5 percent in 2015). The growth drivers remain limited to a few economic activities, namely exports of copper and electricity, investment in hydropower, manufacturing and construction. Increased ASEAN integration will open opportunities, including in tourism, transport, trade and increased participation in value chains. However, external risks have increased for Laos, including from the economic slowdown in China, and continuing slow growth in Thailand. For the last fiscal year ( which ended in December 2016) revenue collection was much lower than expected, decreasing from 24% to 19% of GDP in one year, and resulted in an amendment of the budget. At the same time, spending cuts were less commensurate to the revenue shortfall, with the expenditure to GDP ratio declining from 27% to 25%. The budget deficit aggravated to 6.9% of GDP. The level of public debt is at a high level and according to IMF and World Bank estimates reaches nearly 70% of GDP, which constitutes an elevation of the risk of debt distress from medium to high (IMF Debt Sustainability Analysis). Monetary and banking sector conditions are characterized by relatively high liquidity, with banks accumulating excess reserves at the Bank of Lao, as well as rising non-performing loans (NPL), weakening balance sheets and low capital adequacy in public banks. Exchange rate policy remains focused on a tight management of the kip/us dollar exchange rate which does not allow the exchange rate to be used as a short term absorber. The real exchange rate continues to appreciate, affecting the competitiveness of Lao exports. For 2017, growth will continue to benefit from investments in the energy sector, the commissioning of hydro-power plants and a slightly higher than expected mining output, with some recovery in agriculture and manufacturing. Export diversification (electronics and garments) has started to take place, although this is done on a small scale in comparison to the country's natural resource based exports or to the scale of some regional competitors (Cambodia and Myanmar). There are not enough workers with sufficient skills and education to meet the demand, which is an obstacle for diversification and business development. On the fiscal side, the government's austerity measures in response to the revenue constraints are likely to reduce the growth of the construction sector and bank credits relevant to the sector as well as to curb the plan to increase public recruitment and wages. The progress in fiscal consolidation has to be monitored. 1

2 I) Key economic developments Growth and inflation In 2016 Laos' economic growth decreased to 6.9% (according to the IMF), as it suffered from a less favourable external environment. However, growth remained robust and comparable to countries with a similar level of development in the region. The economy remains highly dependent on a few natural resource-based economic activities. The sectors of hydropower, construction and manufacturing continue to attract most of the foreign direct investments (FDI). FDI inflows in 2016 ( million USD) declined by 7.6% since Copper and electricity continue to dominate exports and generate most of the government revenue. Inflation increased slightly in 2016 (+1.6%) from 2015 (1.3%), mainly due to the rise in food prices and unfavourable weather conditions. However it remained low due to lower oil and commodity prices. The inflation rate in April 2017 was recorded at 0.96 percent (Bank of Laos). Current account For the last fiscal year (FY) revenue collection was much lower than expected, decreasing from 24% to 19% of GDP in one year, and resulted in an amendment of the budget. At the same time, spending cuts were less commensurate to the revenue shortfall, with the expenditure to GDP ratio declining from 27% to 25% in FY 2015/2016. The budget deficit increased to 6.9% of GDP due to weak tax revenue growth and rising current spending. The IMF projected that the current account deficit in 2016 would stand around 2.35 billion USD (17.1% of GDP which is an increase from the 16.8% of GDP of 2015). Unless there is a major external trade or credit shock, in particular from China, the Lao economy is expected to grow at around 7 % in This outlook for 2017 had been slightly revised due to the revenue shortage which forced the government to reconsider certain investment plans and the wage bill. Nevertheless export revenues are expected to improve in 2017 which should leave some fiscal space to the government. Public debt The level of public debt is at a high level and according to IMF and World Bank estimates it is nearly 70% of GDP, which constitutes an elevation of the risk of debt distress from medium to high (IMF Debt Sustainability Analysis). Encouragingly, the government set the target of reducing the debt and is drafting a Public Debt Law. Monetary policy Gross international reserves are below regional comparator countries and do not offer adequate protection against external shocks. Foreign reserves were US$ 0.81 billion at the end of 2016, 1 The budget calendar year changed to the calendar year in 2017 and previous fiscal year exceptionally run on a months basis from October 2015 to December

3 covering less than 2 months of imports, implying a thin buffer against external shocks. There is a discrepancy between the amounts quoted by the government on foreign currency reserves (5.3 months of imports), the IMF (2 months) and the World Bank (1.5 month) which could be due to a difference in the methodology used to calculate reserves. Monetary and banking sector conditions are characterized by relatively high liquidity, with banks accumulating excess reserves at the Bank of Lao, as well as rising non-performing loans, weakening balance sheets and low capital adequacy in public banks. The banking sector has expanded (banking sector assets as percentage of GDP have increased steadily), with new foreign branches entering the market. By June 2016, credit growth picked up to 22% year-onyear. The composition of the credit growth is mainly driven by foreign monetary credit with banks borrowing offshore and lending domestically. The Bank of Lao PDR has been maintaining the kip within a narrow trading band against the US dollar external value at 8, It has made the Lao kip overvalued against currencies of neighbouring countries which affects the competitiveness of Laos' exports. A tightly managed and overvalued exchange rate, low reserves and dollarization make Laos vulnerable to trade shocks or capital flow reversals. It also leads to the risk of a parallel exchange rate market. Credit growth, while slowing down to a more sustainable level due to measures taken by the Bank of Lao PDR in phasing out lending to local governments and by the government in freezing certain construction projects, continued to increase (around +23% in 2016 according to the Bank of Laos). Total credits at year end 2016 stood at 55% of GDP compared to 48% of GDP at year end Manufacturing is the sector receiving most of the credit (around 23% of total credit in 2016) followed by commercial sector (19%), construction (nearly 17%) and services (nearly 11%). According to the IMF, the strong credit growth was driven mostly by lending in foreign currency, echoing concern on dollarization. Fiscal Policy For the last fiscal year revenue collection has been much lower than expected, decreasing from 24% to 19% of GDP in one year, and resulted in an amendment of the budget. The revenue shortfall was due to lower commodity and oil prices (affecting royalties and taxes on mining, and excises and import duties on oil), and moderating economic activity and imports 3. 2 The Bank of Laos permits a fluctuation of plus or minus 5%. 3 Among the sources of revenue, the customs revenue of trillion Kip (225 million USD) made up only 75.3% of the target (2.426 trillion Kip or 300 million USD) despite the authorities' claim on its efforts in combatting smuggling ( 3

4 Spending cuts were less commensurate to the revenue shortfall, with the expenditure to GDP ratio declining from 27% to 25% in FY 15/16. 4 It is difficult for the government to substantially cut expenditure as most of it is destined for civil servants salaries and regular administration costs. The authorities are introducing a number of fiscal consolidation measures (e.g. plans to revise the Investment Promotion and Special Economic Zones laws, introduce a land tax and to improve tax administration) but these are unlikely to make an impact in the short term. Delegation Comment As of August 2017, Laos is facing a difficult macroeconomic situation with a high public debt and deficit. However, the government is taking encouraging steps in the right direction to remedy the situation. The Ministry of Finance is drafting a Public Debt Law, which will have the objective to manage debt and thereby also to finance the deficit, and which should be finalized by the end of Growth is not sustainable given that the growth drivers continue to be very limited and cannot offer resilience against external shocks. Growth has not translated into high employment and this is mainly because the economy is not diversified and the growth of hydropower has not been used for the growth in others sectors. Major hurdles for growth diversification are also the lack of qualified human resources and the poor education system. Laos is still not taking full use of the "Everything But Arms" initiative as its exports of garment and footwear to the EU are low. With a small (approximately 6.7 million people) and sparsely populated population, Laos is unlikely to grow and become like one of the other South East Asian countries. Sustainable and equitable growth will largely depend on governance, institutions and management of volatility. Electricity exports from hydropower plants will continue to be a major source for the government's revenue over the medium term, with the ambition to export electricity to Malaysia and Singapore. However, this comes at the expense of the environment (e.g. freshwater fishery) and could lead to tensions with neighbouring countries in the downstream of Mekong River, especially in the dry season. Mining and timber products, which are also major sources of the country's revenue, were less exploited due to the decline in global commodity prices coupled with the government's more stringent measures on the supply chain. Should problems in the revenue collection aggravate, there would be more pressure on the government to resume granting new mining concessions again in addition to the ones reserved to China against payment of the railroad construction. 4 Expenditure has been trimmed from trillion Kip to trillion kip 4

5 II) Key Trade and Investment Developments Trade in goods Based on the information from the Bank of Laos, the trade deficit has improved with the increase of exports (3.35 billion USD) in 2016 by 21.1% from 2015, boosted by the peak in electricity exports, while imports (4.74 billion USD) fell by 9.4 (deficit lowered by nearly 44%), further to the stagnation of investment projects 5. Exports in 2016 mainly consisted of resource-based products: copper (32.8% of total exports; growth: -1.7%) and electricity (31.1% of total exports; growth: %). Imports were concentrated in capital goods (34.7% of total imports; growth: +3.4% - mainly automotive and machinery), intermediate and raw products (37% of total imports; growth: -13.1% - mainly oil, iron and steel). Other important imports included food and beverages (12.4% of total imports growth: +19.7%) and electronic equipment (8.8% - growth: -33.7%). Transactions growth 2016 share Export 2, , % 100.0% Agriculture % 15.2% - Coffee % 2.0% - Cereals % 2.7% - Vegetable, roots and tubers % 3.4% - Fruits and nuts % 6.5% - Others (agri) % 0.5% Industry Products 1, , % 53.0% - Wood products % 0.8% - Garment % 4.2% - Prepared foodstuff, beverages and tobacco % 3.2% - Mining 1, , % 37.7% - -Copper 1, , % 32.8% - - Gold % 3.9% - -Others % 1.0% 5 According to the Bank of Laos, many investment projects have also suffered from unfavourable weather conditions and natural disasters. 5

6 Transactions growth 2016 share - Chemicals % 4.1% Electricity , % 31.1% Other exports % 0.7% Import 5, , % 100.0% Consumer products 1, , % 21.1% - Food and beverages % 12.4% - Electrical machinery and equipment % 8.8% Intermediate products and raw materials 2, , % 37.0% - Live animals % 3.4% - Salt, sculpture, plaster, lime and cement % 2.1% - Crude oil, fuel, lubricant and others % 14.0% - Iron and steel % 10.7% - Others (raw materials) % 6.9% Capital goods 1, , % 34.7% - Fertilisers % 0.7% - Vehicle and vehicle equipment % 20.2% - Machinery and mechanical equipment % 10.3% - Scientific and optical instruments % 3.5% - Plastic and rubber products % 2.7% - Others (captital goods) % 0.0% Electricity % 1.0% Gold and copper % 1.5% Other imports % 4.7% Source: Bank of Laos Trade with key trading partners The Bank of Laos does not provide trade statistics breakdown by trading partners. Our analysis will be based on mirror data from key trading partners 6 and the EU. Sources Laos' Imports (million USD) Laos' exports (million USD) growth growth Thailand (TH) 4, , % 1, , % China (CN) 1, % 1, , % Total from TH and CN 5, , % 2, , % Bank of Laos 5, , % 2, , % 6 Source: Global Trade Atlas, January

7 Sources Laos' Imports (million USD) Laos' exports (million USD) growth growth IMF projection 7, , % 4, , % Clearly, a substantial underestimated trade record in the Laos' authorities continues. The value of trade with Thailand and China, which represents around 70% of Laos' trade, made up already as much as the value of the official record. This does not count trade with Vietnam, another significant partner (11.1% of Laos' trade) and other trading partners. When compared with the projection by the IMF, the official figures by the authorities are lower by 30% - 40%. Trade with Thailand: Based on available information, Thailand continues to be Laos' largest trading partner with a substantial trade surplus despite declining exports (to Laos) and growing imports (from Laos) trends. Electricity 7 continues to be the dominant trade item for export to Thailand (53.6% of total imports from Laos in 2016, growth: +76%). Other key imports from Laos included electrical machinery and equipment (18.7% of total imports from Laos, growth: +17.7% - mainly television, radio and telephone parts), unwrought refined copper (14% of total imports from Laos, growth: -26.3%) and cassava (3.2% of total imports from Laos, growth: +56.9%). Increasing trend in exports of electricals to Thailand has been observed since 2014 as a result of Japanese's industries relocation from China (rising costs) and Thailand (flooding in 2011 and political turmoil). 7 On this note, Laos will start export electricity to Malaysia by September 2017 under the first phase of a pilot project to sell 100MW of electricity to Malaysia via Thailand s national grid. Laos also expects to export another 100MW of power to Singapore via Thailand and Malaysia s network by 2020 as the second phase. Laos, which already exports electricity to its neighbours, is looking at exporting power to Singapore because of the higher energy prices in Singapore. The Ministry of Energy and Mines was preparing documents that would speed up talks with the authorities in Thailand and Malaysia in March 2017, to negotiate prices and the electricity-transmission process. The sale of energy will be pursued under the initial phase of the Laos, Thailand, Malaysia and Singapore Power Integration Project (LTMS-PIP). LTMS-PIP is a pathfinder to complement towards the multilateral electricity trade in the ASEAN Power Grid and the AEC. Currently, its current production capacity is approximately 6,400 MW with transmission lines that connect with neighbouring countries: 14 carry power to Thailand, 2 to Vietnam, 1 to China, 2 to Cambodia, and 1 to Myanmar. Laos is expected to generate 14,000MW by Up to 75% of this is expected to be exported, as domestic demand is forecast at only 25%. 7

8 Thailand's oil exports remain the first export item to Laos, even though in terms of value it declined due to low oil prices (14% of total exports to Laos in 2016, growth: -20.9%). The value of automotive exports, the second largest export item (13% of total exports to Laos) declined by 7.8% as a result of a sharp contraction in exports of pick-up truck (-80%) while passenger cars exported to Laos increased (+43.5%). Electrical machinery and equipment, the third largest group of export items altogether making up around 9.6% of total exports to Laos, slightly increased (+1.2%). Steel products represented nearly 7% of exports to Laos (+3.6%). Trade with China: Ores is the largest import item from Laos (nearly 40% of total imports from Laos, mainly copper ores - growth: +6.9%), followed by timber products (22.6% share, growth: %), copper and copper products (11.9% share, growth: -18.4%), natural rubber (9.5% share, growth: nearly +40%), maize (3.9% share, growth: +3.8%), mineral/chemical fertilizer (3.6% share, growth: -60.6%) and rice (2.7% share, growth: +22.8%). The decrease in wood exports is a result of tighten government's regulation 8. Chinese exports to Laos mainly consist of intermediate and capital goods e.g. telephone parts (9.2% share, growth: +43.8%), pick-up trucks (8% share, growth: -1.3%), structural steels (7.9% share, growth: -1%), stranded wire/cables (5% share, growth: +85.4%), machinery for sorting/screening minerals (4.1% share, growth: -1.1%), electronic switch boards/panels (2.9% share, growth: +5.9%), special purpose vehicles (2.7% share, growth: +80.7%), hydraulic turbines (2.6% share, growth: +18.3%), etc. Trade with the EU: The EU's trade with Laos is relatively small compared to that of Thailand and China. The trade deficit remains at the same level as the gap observed in 2015 due to a substantial fall in the EU's exports to Laos in that year. Based on the Eurostat, the EU's imports from Laos continued to concentrate on a small range of goods: garment, sugar, coffee, footwear and rice while the EU's key exports to Laos were machinery, diamonds, electrical machinery and equipment, passenger vehicles, pharmaceutical products and steel products. Trade EU - Laos (Euros) Growth 2016 EU imports from Laos 225,027, ,756, ,755, % EU exports to Laos 181,208, ,204, ,586, % Trade balance -43,819, ,552, ,168, % Top five items EU trade with Laos 2016 share 2016 growth Exports to Laos 8 Order No. 15/Mn on increasing stringency in managing, logging, transporting and wood business 8

9 Top five items EU trade with Laos 2016 share 2016 growth - Machinery (Chapter 84) 27.3% 15.9% - Diamond (Heading 7102) 11.3% -11.3% - Electrical machinery and equipment (Chapter 85) 8.8% 152.6% - Passenger vehicles (Heading 8703) 7.7% 5.6% - Pharmaceutical products (Chapter 30) 7.0% 29.6% Imports from Laos - Textile and garment (Chapter 50-63) 67.6% -1.0% - Sugar (Heading 1701) 11.4% 128.3% - Coffee (Heading 0901) 10.0% -24.7% - Footwear (Chapter 64) 3.3% 52.1% - Rice (Heading 1006) 1.3% 12.1% Source: Eurostat Trade in services Services (million USD) growth Exports % Imports % Trade Balance % Source: Bank of Laos Laos' exports and imports of services are mainly driven by tourism. In 2015, the number of tourist arrivals reached 4.68 million (+12.6%), generating revenue by more than 725 million USD (nearly 91% of services exports, +13%) 9. In 2016 though, the number of tourists dropped to 4.23 million (nearly -10%), in particular from Thailand and Vietnam. The Thailand's tax incentive to support domestic tourism, the tightening by the Laotian government of the measures to address the abuse of tourist visa by foreign (Vietnamese) workers as well as the higher living costs in Laos are given as the main rationale of the decrease by the Laotian authorities. The tourism revenue in 2016 (724 million USD) was also slightly lower than in The authorities target 4.89 million visitors in It would benefit from the joint tourism campaign 'Two Countries, One Destination" launched in May 2017 by Laos and Thailand

10 Additional bridges will be built across the Mekong river delta, and investments will be made in the tourism facilities in the areas close to the border, with an emphasis on the Laos' side 11. The authorities do not make details of exports and imports of services in 2016 available. The latest available information is from the WTO statistics database. Source: WTO statistics database Foreign Direct Investment Lao's FDI (million USD) Inflows by Central Bank , Inflows by UNCTAD , NA -Stock by UNCTAD 1, , , , , , NA Source: Bank of Laos and UNCTAD According to information from the Bank of Laos, the FDI inflows in 2016 ( million USD) declined by 7.6% from The inflows were concentrated in hydropower, manufacturing and construction sectors. Unfavourable weather conditions and low commodity prices are advanced as the main reason for the decline in the FDI inflows. Based on the latest statistics by UNCTAD, the FDI stock stood at 4.85 billion USD in Taking into consideration the FDI inflow data by the Bank of Lao the authorities together with the information of FDI stock from UNCTAD, Laos' FDI stock would have reached 5.8 billion USD in In terms of foreign presence, the Chinese, Thai and Vietnamese investors remain the dominant players for investments in Laos. Boosted by the "One Belt, One Road" Chinese initiative, the railway investments with China are going ahead. The China-Laos railway construction started in December 2016 and should be completed within 5 years. The construction had been divided into six sections and tenders had 11 Laos Country Report, Economist Intelligence Unit, June 13th

11 been signed with five Chinese contractors. The 414 km long- rail link will be managed and operated by a Joint-Venture Company with 30% of shares held by the Lao government and the remaining 70% of shares retained by the Chinese contractors. Overall costs were estimated at US$6.5 billion out of which Laos government share was US$ 700 million. Against this background, it is expected that investments, bilateral loans and FDI will keep concentrating and supporting the development of transport infrastructure and the power sector Authors: Chet Suksang, Isabelle De Stobbeleir and Julianna Hyjek (Economic Section) Visa: Philipp Dupuis and Bryan Fornari Electronically signed on 11/08/ :31 (UTC+02) in accordance with article 4.2 (Validity of electronic documents) of Commission Decision 2004/563 11