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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