In November 2020, my article for this column looked at how Cambodia was a weak link in the ASEAN chain. Reference was made to both Cambodia and Laos as states that are integrally part of the ASEAN, but are also areas of concern for the group’s unity and cohesion, especially as these states are increasingly coming under the influence of their larger neighbour, China. This article looks at how Laos, which has gone through a leadership change in March 2021, has been trying to balance its external debt even as regional geopolitical shifts continue to have a huge impact on such small states.
In the first week of July, an article in Asia Times by Peter Janssen highlighted that Laos had redeemed a $150 million bond that had been listed on the Singapore Exchange. The article clearly stated that this was a small percentage of the external debt that Laos owed over the next five years. For nearly a year now, the economic situation in which Laos finds itself has been a matter of concern, for the country and the region at large. It was also indicative of the growing closeness between Laos and China even as Beijing is the highest contributor to the former’s external debt. In September 2020, Laos’ foreign exchange reserves had reached an all-time low of $1 billion. This depletion in its reserves was critical as the levels of its debt repayments exceeded the foreign reserves, pushing the small country to the brink of defaulting on its sovereign debt.
A timeline of Laos’ external debt and its evolving ties with China is critical in the context of understanding where it stands currently compared to when it joined the ASEAN. Prior to its entry into the grouping in July 1997, its external debt (in December 1996) was around $769.6 million. The focus of ASEAN expansion to include new members such as Vietnam, Myanmar, Laos and Cambodia (known as the CLMV countries) was two-fold: first to bring all members of Southeast Asia under the ASEAN framework as the Cold War had ended and ideological divides were no longer critical in the region; second, to reduce the economic gap between the original ASEAN members and the new ones, particularly the CLMV countries that lagged behind in their economic development as compared to the older members of the grouping. This approach, however, does not seem to have made much headway, particularly in the context of Laos and Cambodia.
At the height of the Cold War, Laos’ relations with China were tenuous given the close ties the former had with Vietnam. The space for furthering bilateral relations with China opened up after the Cold War ended. Economically too, Laos had closer ties with both Thailand and Vietnam, which were its immediate neighbours. Thailand continues to be its largest trading partner and till the 1997 Asian Financial Crisis, it had also been the largest investor in Laos. While the end of the Cold War allowed political ties with Beijing to improve steadily, China’s rapid integration into the global economy also had a profound impact on the smaller states in its immediate vicinity. The impact for Laos has been a dual one: first, as Beijing’s economic space expanded, it provided an outlet for Laos’ raw materials into the Chinese manufacturing space; second, manufactured goods from China found access to markets within Laos. It simultaneously opened up its economy to foreign direct investment and as Thai investments reduced following the 1997 crisis, China became one of the foremost investors.
In December 2019, just prior to the Covid-19 outbreak, Laos’ external debt stood at nearly $9.9 billion, when its GDP for the same period was to the tune of $18.9 billion, making its external debt almost 52% of its GDP. A World Bank Study indicates that for the year 2020, the external debt will be 69% of the GDP.
Out of this external debt of $9.9 billion, almost $5.9 billion is the amount that Laos has incurred as loan to build the Vientiane-Boten railway project that will link its capital to China’s Kunming as part of the BRI project. For China, the BRI extending into Laos is critical in the context of its Indochina Peninsular Corridor, which is a vital node in the project’s objectives for Southeast Asia. This in effect makes the external debt that Laos has incurred to China around 60% of the total as on December 2019, even before the pandemic. As with all economies globally, Laos’ economy too has shrunk as a result of Covid-19. Similarly, the growth rate for 2020 has dropped to 0.4% while the same for 2019 was 5.5%. Estimates are stating that by end 2021, the economic growth may stabilise at 0.8%, but the uncertainties of the variants and lengthy lockdowns may continue to impact the country, increasing its reliance on China even further.
As the new leadership continues to deal with the situation, there are critical areas to address. First, can diversification of external debt, which is already visible, be an option for Laos? Second, while being open to infrastructure investments from China, how much political accommodation will Laos have to provide to its increasingly aggressive giant neighbour?
Shankari Sundararaman
Professor at School of International
Studies, JNU, New Delhi
(shankari@mail.jnu.ac.in)