Singapore, August 14, 2020 -- Moody's Investors Service ("Moody's") has today downgraded the Government
of Laos's issuer rating to Caa2 from B3 and changed the outlook
to negative. This concludes the review for downgrade initiated
on 19 June 2020.
The decision to downgrade the rating to Caa2 reflects Moody's assessment
that Laos is facing severe liquidity stress, given sizeable debt
servicing payments due this year and persisting until 2025, and
constrained financing options. Heightened liquidity risk is exacerbated
by weak external and fiscal buffers and poor governance, and points
to a material probability of default in the near term.
The negative outlook reflects the risk of material losses to investors
in the event of a default by Laos, beyond what would be consistent
with a Caa2 rating. A more severe deterioration in credit fundamentals
than Moody's currently expects, potentially because of a more
acute impact of the coronavirus shock, would raise the probability
of default and may imply larger losses to private sector creditors.
Concurrently, Moody's has lowered Laos's long-term
foreign-currency bond ceiling to Caa1 from B1, its long-term
foreign-currency deposit ceiling to Caa3 from Caa1, and its
long-term local-currency bond and deposit ceilings to B1
from Ba3.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Caa2
HEIGHTENED FINANCING STRESS EXACERBATED BY WEAK GOVERNANCE
Laos's government liquidity risks have increased significantly.
While borrowing requirements remain moderate at about 13% of GDP,
the government has not developed a credible financing strategy to meet
both near- and medium-term debt payments. Financing
gaps in the immediate future raise the risk of default in a challenging
financing environment.
Laos' government debt service amounts to $1.2 billion in
2020. Loans from commercial banks and Thai-baht bonds mature
in September and October this year, respectively. Financing
stresses are unlikely to abate given that, between 2021-2025,
Laos faces debt service repayments averaging a little over $1 billion
annually, including principal payments on a $150 million
Eurobond due in June 2021.
The government plans to meet its debt service requirements through a combination
of sizeable commercial borrowing, rollovers, and bilateral
support. However, raising new borrowing at affordable costs
will be very challenging in the current market environment. As
a result, in the absence of financial assistance from International
Financial Institutions which seems unlikely to materialize in the foreseeable
future, Moody's expects that Laos will predominantly rely on rollovers
of or new commercial bank loans while reprofiling some bilateral debt.
However, the possibility that these options may fail to materialize
in time raises the risk of default. To date, it is unclear
how much progress has been achieved on several aspects of the government's
funding plan. Uncertainty remains around the status of bilateral
discussions surrounding recent and upcoming maturities. In general,
the absence of a transparent financing strategy and opacity around how
maturing debt obligations have and will continue to be met, raise
uncertainty about the capacity for the government to secure financing
in time and at affordable costs.
The option to refinance external debt domestically would deplete further
already low foreign exchange reserves, intensifying liquidity and
external risks further.
FISCAL AND EXTERNAL CHALLENGES HAVE INCREASED
Government borrowing needs are compounded by wider deficits and weaker
growth, as a result of the impact of the coronavirus outbreak on
the manufacturing and tourism sectors.
Moody's expects real GDP will contract 0.2% year-on-year
in 2020, down from 6.7% on average over the last five
years. Coupled with measures to alleviate the impact of the pandemic
on small businesses and individuals, this will result in revenue
shortfalls relative to the original budget. Even with efforts to
cut non-essential spending, the budget deficit will widen
to 6.7% of GDP in 2020, from 3.5% of
GDP in 2019.
The combination of slower growth and wider fiscal deficits will lead to
a deterioration in fiscal and debt metrics. Moody's expects the
debt ratio will continue to gradually edge higher, to peak at 64%
of GDP in 2022 from 58% of GDP in 2019. This marks a departure
from a path of gradual moderation that Moody's expected previously.
A resolution of outstanding arrears, the size of which is not publicly
known, would raise the debt burden further; while non-resolution
would continue to hinder economic activity at a time when companies already
face a significant revenue shock.
On the external front, a wider current account deficit coupled with
slower FDI inflows will weigh on foreign exchange reserves. Moody's
expects reserves to fall in 2020, to $740 million,
from close to $1 billion in 2019. Under these assumptions,
Moody's projects the External Vulnerability Indicator, or
the ratio of external debt maturing over the following year to reserves,
to remain at rather elevated levels at above 260% in 2021.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Laos's credit profile,
as the country is vulnerable to climate change risk. Natural disasters,
including storms, floods, landslides and droughts, have
adversely affected agricultural conditions and weighed on economic growth.
Increased frequency of droughts due to climate change would also reduce
Laos's hydropower production potential. Furthermore, substantial
reconstruction and rehabilitation costs following natural disasters constrain
fiscal flexibility.
Social considerations are relevant to Laos's credit profile. Moody's
regards the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
The coronavirus has posed a material cost to domestic economic activity.
Moreover, the acute financing risks explained above are triggered
by heightened uncertainty around financing options in the wake of the
outbreak. More generally, Moody's assessment of Laos's economic
strength incorporates social considerations related to the low level of
human capital and limited access to quality healthcare and education.
That said, the country benefits from a young population, while
per capita incomes have doubled over the past 10 years given strong and
stable economic growth.
Governance considerations are material to Laos's credit profile.
The country's rankings on the WGI are low and point to weak rule of law
and control of corruption. Transparency and accountability in government
policymaking remain limited owing to the institutional setup that is closely
intertwined with the political structure.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects downside risks beyond what would be consistent
with a Caa2 rating. A more severe deterioration in credit fundamentals
than Moody's currently expects, potentially because of a more
acute impact of the coronavirus shock, would further weigh on the
rating.
Laos' economy is narrowly diversified, with growth reliant
on a few large infrastructure projects. More significant project
delays or cancellations than built into Moody's baseline assumptions,
would weigh on GDP growth and heighten fiscal, liquidity and external
pressures.
GDP per capita (PPP basis, US$): 8,109.6
(2019 actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.0% (2019 estimate)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.3%
(2019 actual)
Gen. Gov. Financial Balance/GDP: -3.5%
(2019 actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2019 actual)
(also known as External Balance)
External debt/GDP: 90.0% (2019 estimate)
Economic resiliency: b2
On 11 August 2020, a rating committee was called to discuss the
rating of the Laos, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's institutions and governance strength, have materially
decreased. The issuer's governance and/or management, have
materially decreased. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed. The
systemic risk in which the issuer operates has not materially changed.
The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook indicates that an upgrade is unlikely in the near
term. Moody's would consider changing the outlook to stable,
if Laos's financing risks diminished durably on the back of securing various
financing options to meet upcoming repayments.
Moody's would downgrade the rating, in the event of a larger
or more rapid fall in foreign exchange reserves and/or further increase
in liquidity stress that would make a default by the government on its
debt payments increasingly likely.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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Regulatory disclosures contained in this press release apply to the credit
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review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
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Anushka Shah
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD-Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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