Posted inAT Finance, Beijing, China, France, Hong Kong, Laos, South Asia, Thailand, World
Laos on a fast track to a China debt trap
Beijing-backed US$6.7 billion high-speed railway project threatens to bust the small nation's already fragile finances
by David Hutt March 28, 2018 February 18, 2020
Illustration: iStock
Laos is one of eight global countries considered of "particular concern" for a future debt crisis, according to a recent report by the Center for Global Development (CGD), a Washington-based economic think tank.
The main cause of concern is the small poor country's big rich plans for a US$6.7 billion high-speed railway that China is promoting as part of its Belt and Road Initiative (BRI). The project's cost represents a quarter of Laos' current gross domestic product (GDP).
One-third of that sum will be covered by a China-Lao joint venture company, of which the Lao government will contribute roughly 30%, or around US$700 million. Around US$480 of that amount will come from an Export-Import Bank of China loan. The remaining US$220 million will be drawn from the state budget.
But, as the CGD report notes, "the financial terms for many elements of the project remain a secret." The opaque terms on the remaining US$6 billion is raising concerns about the concessions China may be able to wrest in the case of default. The project is scheduled for completion in 2021.
Beijing has already notched various long-term land concessions for plantation agricultural and other commercial ventures that have facilitated fast migration of Chinese workers and entrepreneurs. The train, designed to connect China to Laos and then through Thailand to mainland Southeast Asia, will pave the way for even faster Chinese migration southward.
Laos' population is estimated at 5.5 million, small for a nation geographically the size of France.
A map of Laos in regional context. Image: iStock/Getty Images
Laos' state finances, meanwhile, look increasingly fragile. The government's gross debt was an estimated at 67.8% as a percentage of GDP in 2016. The CGD report estimates that could rise to 70.3% by the end of this year.
Nearly 65% of Laos' external debt is owed to bilateral creditors, namely China, according to an International Monetary Fund (IMF) report. Early last year, the IMF warned that Laos' risk of "external debt distress" has risen from "moderate to high."
It's not only international agencies and Western think tanks concerned about Laos' shaky debt profile. In 2014, the Export-Import Bank of China announced that it would curb its loans to Laos for most infrastructure projects, a sign of the state policy bank's concern about Laos' future ability to repay its debts.
Exceptions were made for certain strategic economic sectors like mining and hydropower, for which Laos generally provides satisfactory guarantees on its loans. That same year saw the creation of the Laos-China Bank – a joint venture between Fudian Bank of China, and Banque Pour Le Commerce Exterieur Lao – with a remit to specialize in small and medium-sized enterprise (SMEs) financing.
The train, designed to connect China to Laos and then through Thailand to mainland Southeast Asia, will pave the way for even faster Chinese migration southward
Reports at the time suggested the joint venture was motivated by several Chinese firms, including some of the largest currently active in Laos, that were struggling to secure funding from China's more prominent outward-oriented banks, including the Export-Import Bank of China.
The lack of funding forced some Chinese developers to postpone the planned construction of hydropower dams on tributaries of the Mekong River, according a 2016 report from the Stimson Center, another Washington-based think tank. Much of the electricity from those stalled projects was to be export to China.
That's raising similar questions about the commercial viability and rationale for the high-speed train project, particularly as Thailand stalls construction of its part of the line initially designed to reach and connect at the Thai-Lao border.
Lao officials told a BRI conference in Bangkok last October that the train line was already more than 20% complete. The remaining 80% or so of the track will require extensive and challenging tunneling work to cut through Laos' mountainous terrain.
Without the link to Thailand and wider Southeast Asia, the economic viability of a US$6.7 billion fast-speed train that connects only to China is in commercial doubt, according to financial analysts monitoring the project.
Chinese Premier Li Keqiang and Prime Minister Thongloun Sisoulith of Laos attend a document signing ceremony at Great Hall of the People in Beijing, November 28, 2016. Photo: Reuters/Thomas Peter
Loans from China are commonly guaranteed by future revenue from invested projects, meaning it might be decades until the Lao government actually collects any profits from the train line.
That comes amid rising concerns that the Lao economy may not grow as quickly as it has in the recent past. The IMF projects Laos' average real GDP will grow 6.3% on average from now until 2036, considerably slower than the last decade's average of 7.8%.
The Lao government reckons it can pay off its debts through future revenue, though it's unclear in the country's opaque system if those calculations are based on current or even faster future growth rates.
Vientiane must now be doubly concerned about what happens if its large megaprojects, especially in the hydropower sector, don't generate expected future revenues.
Those concerns, too, are rising. Last month, the Electricity Generating Authority of Thailand (EGAT) said it is reconsidering whether to purchase electricity produced at the China-backed US$2.4 billion Pak Beng dam in Laos, which will be finished in either 2019 or 2020.
Laos had expected to sell almost 90% of the energy produced by the dam to Thailand, according to International Rivers, an environmental watchdog. Datang Overseas Investment, a Chinese company, controls an 81% stake in the venture, with the remaining stake held by the Lao government.
Given the official secrecy surrounding most of Laos' mega-projects, it is unclear whether the Lao government has fronted 19% of the construction costs, which could be as much as US$500 million.
This picture taken on May 31, 2016 shows a Chinese-run construction site along the Mekong River in Vientiane. Photo: AFP/Lillian Suwanrumpha
As China's larger banks are only willing to finance big infrastructure schemes in Laos, mostly in hydropower and mining, Vientiane has had little choice but to continue with megaproject-led development to attract new funds. And because of its existing debts with China, Vientiane cannot easily change course against Beijing's expectations.
Laos is known to guarantee debts with its natural resources, including state-owned land. When the government couldn't pay back a US$80 million loan provided by China to build a stadium for the 2009 Southeast Asian Games, the government paid the contracted Chinese company with a 300-hectare land concession.
In late 2016, Prime Minister Thongloun Sisoulith said that he wants to end such land-for-repayment deals because they were affecting ordinary Laos, many of whom had been run off their technically state-owned land to make way for the concessions. It isn't clear, though, if any legislation or other measures have been passed on the issue.
It is widely believed that the US$480 million loan from China's Export-Import Bank for the Laos-China railway was guaranteed by the railway's future income as well as two mining concessions.
Laos is a likely next victim of China's "debt trap" diplomacy, a phenomena seen in other countries that have been forced to repay Chinese debts through sovereignty-eroding concessions
This is another sensitive sector in Laos due to rising public concerns over environmental impacts. In response, Thongloun introduced a moratorium on new mining concessions in late 2016, though the measure hasn't been strictly enforced.
If the high-speed train proves to be economically unviable, the Lao people will be left to foot the bill. That's why some analysts feel Laos is a likely next victim of China's "debt trap" diplomacy, a phenomena seen in other countries that have been forced to repay Chinese debts through sovereignty-eroding concessions.
Jean-Christophe Carret, the World Bank's country manager for Laos, says that "fiscal consolidation" is necessary to improve Lao's debt solvency. "Any potential implications of consolidation could be mitigated through adopting a gradual approach to consolidation, but more importantly through improved efficiency in spending."
But with the China-backed high-speed train already on track, there's likely no turning back for heavily indebted Laos.
Tagged: Center for Global Development, China, Chinese migration, Debt Trap Diplomacy, Economy, Export-Import Bank of China, External Debt Distress, High-Speed Railway, International Monetary Fund, Land Concessions, Laos, Laos China Bank, Pak Beng Dam, Politics, Southeast Asia, Technology, Thongloun Sisoulith
15 replies on "Laos on a fast track to a China debt trap"
Peter Seo says:
China strategic objective is peace at its border. One way to achieve this is bringing development to the area. Money for development and investments to develop the businesses. Lao's choice is budget for development within means, minimum development with social consequences or grab the opportunities provided by China and pivot to a higher level of social economic development. This type of opportunities do not come around often. Nothing wrong with that. British did it to Egypt in the past.
Ken Kwan says:
I honestly don't know why people keep on reading this kind of articles. And articles from this "expert/know it all" in particular. You would have thought he should be back in his own country analysing all the "great" things his POTUS is doing. Instead, like a lot of writers of his ilk hanging around in this part of the world, supported by funds from the CIA NGOs, spending their spare time humping the local girls/women, and trying to justify their arguments by quoting from various CIA sponsored
"know-it-all think tanks". It is always their trying to appear very wise and sympathetic to all those countries(S.E Asia, South Asia, Africa, the Pacific Island nations, etc which have agreed with China to take on/develop infrastructural projects, that those countries will inevtably be so indebted that the future generations of those countries will have to shoulder the debt burdens. Therefore those countries are deemed to be very unwise and stupid to take on such high cost projects. Therefore it their leaders should have the commonsense to keep their countries/people to rot in their present state of poverty. Its better to be dirt poor and backward than to accept any helping hand to change their lot. GREAT WESTERN IMPERIAL CAPITALIST ADVICE! Its like saying, if you have only a small 30% downpayment , don't buy a house, or a motorbike, or a farming equipment. No! Don't take on a loan for such things. You'll never be able to pay them back. What f–ked up arguments!. As if those people will be sitting on their arses and just go to the temples to pray/plead everyday to get their gods to help them to make those loan payments disappear! For those countries whose people have been living for ages in darkness at night, what little industries they have could not be efficiently operated due to lack of power, citizens/children drinking water from polluted rivers/wells, travelling on potholed and muddy dirt roads, yes, time and time again these few "know-it-all experts white" have been espousing their great sympathy for those poor stupid countries, and insinuating about the "heinous" acts the Chinese are doing to ensnare those poor countries and their people into carrying unsupportable debt burdens. And I suppose they mean the terrible heartless Chinese leaders in China have been doing all these horrible things to their own people too! That they too should not have built and continue to build all those hydro power dams, solar farms, wind farms, 25000 km high speed rails, nuclear power plants, 100s of thousand km of super highways, magnificent bridges, hundreds of tunnels, building a hugh channel to divert water from the Yangtze River to 1000km to the north, smart cities, innovating, putting up factories to make things for the selfish capitalist countries, and with all the goodies such developments brough have eanble the Chinese government to lift 200 million abject poor Chinese out of poverty. If you accept these experts/think tanks' arguments, China should definitely be better off remaing as they were 40 years ago. How friendly, compassionate, and "magnanimous" they were to the poor bloody helpless Chinese then. Xi would have no reservation to tell it in your face : F–k U! Nothing is free(although the Chinese government have given a lot in the past and is still givng with NO STRINGS ATTACHED, unlike the US/the western countries), for sure. China takes on / steps into those things which in many instances are of the type
"Fools rush in where angels fear to tread!", very high risks in terms of getting repayment let alone to show a profit. And my know-it-all friends, you know damn well why your "great" country and all the other capitalist countries to this date have still not the balls to take on development of such projects in those countries. You want immediate, low risk fast returns. Better still, your/the western capitalist world/ countries have been quite happy to see that they remain in their miserable lot, so that they can condescend to you whenever and whatever you feel to demand of them. UNTIL THE CHINESE CAME ALONG!
continue…..
The Chinese are willing to provide such high risk financing. Sure, those countries will have to pay back, even if it takes 50 or 100 years or through exchange of whatever commodities. I buy a property. It takes me 25 years(in your country its 30. In Japan even longer) to pay off the mortgage. Buying a car will normally these days take 5-7 years to pay off the loan. these are all personal debt burdens. Well, we each and every one of us will have to work our butts off to pay off such debts. Surely its no difference with a country. Its only a question if the country can find a "banker" to lend it the money. The western capitalist countries are too smart to put heir money into such "HIGH RISK BORROWERS". Its not as if the borrowed money is being pilfered away. They are for REAL THINGS( like the 450km Nairobi railsystem). China is willing. You morons should be applauding China for their courage, instead of casting aspersions and insinuating. As for repayment, like what happens to China, and what is happening to the completion of the Kenya/Nairobi railway system , and the ports in Gwadar, Jibouti, the solar farm in Morroco, the rail system linking China to Iran, Turkey, Europe, Russia, the East Coast railway in Malaysia, and the soon to be tendered high speed rail link Kuala Lumpur to Singapore, completion of all these mega propjects are expected to have tremendous impacts on the economic growth of those countries/regions. BUT of course, the moronic writers of such articles in Asia Times and their oft quoted think tank buddies, think all those countries are absolutely stupid. Unless thry are foc, they shouldn't for a minute think of take on developing those projects. They should remain poor as they have been for the last so many generations, so that the parents will happily acquiese to letting their small daughters to be working in the bars/brothels in Bangkok, Pattaya, Olonggapo and the former Clark Air base in the Philippines, and various islands, Vientianne, Phnom Penh, to serve these moronic writers desires, and earn that pittance to help their families. This seem to be what these moronic writers are advocating as the best solution for those poor countries.
Shuami Bev says:
I am poor, freshly out of school, and with practically no credit history. Nobody cares for me and wants to lend me a loan to buy a car or put down a down payment for an apartment. PLEASE, PLEASE hit me with a "debt trap". At least I can drive to work and have a roof over my head, even if I have to pay interest for the loans for practically the rest of my life, until I make it big.
I can smell the vinagar (the result of too much staled sour grapes) permeating from this article
Kongxay Bounnapha says:
Since LPDR has collected nearly 70% dept, globally, onto the Lao people shoulders. The dept just keeks adding an other 6.8 billions dollars with the Chinese high speed train. How LPDR is going to pay for it? More selling the country? Moron Lao Communist leaderships!!!!
George Silversurfer says:
very touching to see the sudden concern expressed by western analysts and politicians on the fiscal health of nations that most of them would struggle to identity on the map.
El Condor says:
you ae being too kind – the author deserved no respect
Duy Khánh Lê says:
Actually, almost Laotian people are quite naive and gullible. As far as I'm concerned, there are not much Laotians paying enough attention to politics. This is an extremely dangerous situation for this small country. However, It is also difficult for them to find another way to push their enonomy when their ally Vietnam is also strongly dependent to Beijing now. How to escape from China's expansion? It is really a big question to solve.
ຄະນິດສາດ ກຽມເສັງ ໄປຢີ່ປຸ່ນ says:
What about the circumference of both countries?
Simon Meszaros says:
well…development is nice thing, but be careful not to find yourself in a trap. As a eastern european counry which struggled under communist era and went through transition to democratic country i can tell that cheap money can disrupt more than bring(doesnt matter where are they from). Never been to asia, but it doesnt sound sane to think whatever article is western should be bad(be cautious but not biased). It seems biased and not sane. I can imagine reasons. Why i am saing this? Slovakia is simialr to laos- lot of quite preserved nature, not densely populated, with same population. Lets say eu comission body is comparable powerful as china with european bank for development as its body to operate elsewhere. I am honestly happy slovakia didnt end up stuck in the middle of nowhere(between eu and russia lika ukraine did). At the same time i can tell that being responsible towards own people needs not only money, either from obroad, but also sanity not to sell valuable things in exchange for invaluable. If counrty has to payback its debt which it cant it will be kind of colony of China. You will sell your land for something china has to build for themselves. In eu roads and infrastructure is being build from the european money schemes but in very clear terms. We pay back it indirectly as we are open to investments with our cheaper labour. This money brings lot of corruption to the system as well, we have kind of mafia in state which is still considered democratic. We are struggling now with EU policy for renewables, which accounts biomass as a renewable and adds wood(this is going to change, but seems lot of damage was done) . So we are clear cutting forests for exchange for cheap money and burn them in western countries. So try it sum up. You are making exhange. You want to build dams. Well maybe towns will be better in expense for ecological stability, soil erosion, and loosing self sufficiency. Just be careful, you cannot avoid development but be ready for good decisions good for all the people not just a few(thats democratic ideal).
Anhguitar Nguyen says:
To Daniel….Same reaction when I first read: geographically the same size of France. What???
Ying YM says:
White emperialist like the writer, David Hutt and his boss want all non-white to be subhumans… trying hard to defame China.