May-June 2017

LAO ECONOMIC MONITOR

APRIL 2017

1. Recent Economic Developments and

Outlook

2. Health Sector Financing in Lao PDR

1. Recent Economic Developments

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.

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.

Global and regional environment

Global GDP growth(Year-on-year growth)

Global IP and manufacturing PMI(IP – yoy growth, left scale; PMI – index, right scale)

-4

-2

0

2

4

6

8

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6e

World

Advanced economies

Emerging and developing economies

50

51

52

53

0

2

4

6

8

Ja

n-1

6

Apr-

16

Ju

l-1

6

Oct-

16

Ja

n-1

7

Manufacturing PMI (RHS)

Industrial production growth

Sources: Haver Analytics, World Bank staff estimates.

Note: LHS: percent, 3-month on 3-month moving

average, SAAR; RHS: index, >50 denotes expansion

Sources: World Development Indicators; Haver Analytics;

and World Bank staff estimates.

The global economy started to recover from is weakest post-crisis

performance in early 2016

Global and regional environment

Global GDP growth(Year-on-year growth)

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.

In EAP, growth is resilient: China is rebalancing; the others built

on their strong performance

2%

3%

4%

5%

6%

7%

8%

Indonesia Malaysia Philippines

Thailand Vietnam China

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

Inflation is low; but picked up as fuel prices recover

-30

-20

-10

0

10

20

30

0

1

2

3

4

5

6

7

Ja

n-1

5

Ma

r-15

Ma

y-1

5

Ju

l-1

5

Sep

-15

Nov-1

5

Ja

n-1

6

Ma

r-16

Ma

y-1

6

Ju

l-1

6

Sep

-16

Nov-1

6

Ja

n-1

7

Ma

r-17

% c

ha

nge

(righ

t)

% c

ha

nge

(le

ft)

Raw food (left) Excl raw food & Petrol Oil (left)

CPI (left) Fuel (right)

Source: Lao Statistics Bureau

Higher world oil prices resulted

in higher energy inflation

Food inflation also moderated

reflecting good harvest and

well stocked regional food

markets.

Overall inflation remains low

with core inflation around 1%.

Fiscal deficit remains high

The deficit increased as revenues underperformed

25.2

29.1 28.026.6 25.223.9 23.0 24.1 22.9

19.0

-1.3

-6.0-3.8 -3.7

-6.2-12

-6

0

6

12

18

24

30

2011/12 2012/13 2013/14 2014/15 2015/16Est.

Expenditure

Revenue and grants

Overall balance (incl grants)

Source: Ministry of Finance

Revenues declined to 19% of

GDP due to:

• Low commodity prices

• Moderating growth

• Lower grants

Expenditure adjustment was

more modest also due to the

rigid spending patterns and

ASEAN chairmanship

activities.

Public debt continues to increase

31

13

17

8

20

45

5 7

- 12

23 14

0%

20%

40%

60%

80%

100%

end - 2010 end - 2015

Public Debt outstanding (percent share)

ADB WB China

Thailand Japan Bonds

other countries

• 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

• Increasing share of bilateral and

commercial sources

• Public sector arrears remain a

challenge

Source: Ministry of Finance

Public debt stock is high, risk of debt distress

moved from moderate to high

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

5

10

15

20

25

201

0/1

1

201

1/1

2

201

2/1

3

201

3/1

4

201

4/1

5

20

15/1

6 E

st.

% o

f G

DP

% o

f d

om

esti

c n

on

-res

ou

rce

reve

nu

e

External public debt services

Amortisation+interest on external debt (% of non-resourcerevenues, left axis)

Amortisation+interest on external debt (% of GDP, rightaxis)

• 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

• Strengthened public debt management capacity, promulgation of Public Debt Law is important for keeping debt manageable

Source: Ministry of Finance

The current account deficit narrowed, but reserves

remain low

0

10

20

30

40

Ja

n-1

4

Apr-

14

Ju

l-1

4

Oct-

14

Ja

n-1

5

Apr-

15

Ju

l-1

5

Oct-

15

Ja

n-1

6

Apr-

16

Ju

l-1

6

Oct-

16

Ja

n-1

7

Pe

rcen

t

Reserves to foreign currency deposit (left axis)

Reserves to M2 (left axis)

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

Source: Bank of Lao PDR

0%

200%

400%

600%

800%

1000%

1200%

PH

L

IDN

TH

A

MY

S

MM

R

MN

G

CH

N

VU

T

KH

M

VN

M

LA

O

SLB

PN

G

TO

N

FJI

WS

M

Reserves, as % forex deposits

Source: WB EAP Economic Update, April 2017

The exchange rate remains tightly managed

• 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

• Slower pace of appreciation of the

Kip’s real effective exchange rate

(REER) in 2016 as regional

currencies stabilized and inflation

pressure was low

95

100

105

110

Dec-1

4

Fe

b-1

5

Apr-

15

Ju

n-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Ju

n-1

6

Aug

-16

Oct-

16

Dec-1

6

Fe

b-1

7

Dec 2

01

4=

10

0

Kip/US$

Source: www.BIS.org

Note: Increasing index means appreciation.

Declining index means depreciation

-2.00.02.04.06.08.0

10.012.014.0

Dec-1

4

Fe

b-1

5

Apr-

15

Ju

n-1

5

Aug

-15

Oct-

15

Dec-1

5

Fe

b-1

6

Apr-

16

Ju

n-1

6

Aug

-16

Oct-

16

Dec-1

6

Real effective exchange rate (% YOY)

Credit growth stabilized at a more sustainable level

0

10

20

30

40

50

60

70

Ma

r-11

Sep

-11

Ma

r-12

Sep

-12

Ma

r-13

Sep

-13

Ma

r-14

Sep

-14

Ma

r-15

Sep

-15

Ma

r-16

Sep

-16

Ma

r-17

Pe

rcen

t Y

OY

Credit to private sector (percentage points)

Credit to SOEs (percentage points)

Credit to the whole economy

Source: Bank of Lao PDR

• 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

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 2010-2016

but the sector continue to face challenges

• Banking sector assets increased four folds between 2010-2016

• 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

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

-2-1012345678

2016 2017 2018 2019

Outlook

• 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

0.0 10.0 20.0 30.0 40.0

Crime, theft and disorder

Courts

Business licensing andpermits

Corruption

Tax administration

Labor regulations

Access to finance

Customs and traderegulations

Inadequately educatedworkforce

Electricity

Transportation

Tax rates

Practices of the informalsector

LAO16

EAP

ALL

Outlook

• Fiscal deficit is expected to remain high in 2017 and gradually decline

over medium term; however, public debt will remain elevated.

0

20

40

60

80

100

120

Chin

a

Ind

one

sia

Ma

laysia

Phili

ppin

es

Th

aila

nd

Vie

tna

m

Cam

bod

ia

Lao

PD

R

Mo

ngo

lia

General Government Debt, % of GDP2015

2016

2017

2018

2019

• 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

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

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