Spotlight - Laos: June 30, 2022

It has been quite the two months for Laos.
The tiny, land-locked country of only 7.5 million people found itself invited to the White House for U.S. president Joe Biden’s special ASEAN Summit in early May. Lao prime minister Phankham Viphavanh, who took office in March 2021, attended the gathering and got the necessary photo-op with Biden. Just weeks later, Deputy Secretary of State Wendy Sherman actually went to Laos, making her the highest-ranking U.S. diplomat to do so since then- Secretary of State John Kerry visited Vientiane in July 2016. Given Laos’s own dismal human rights performance and the country’s perceived alignment with China, these engagements were critically important, and noteworthy.
But Laos’s relative moment in the sun has given way to cloudier skies.
On June 15, ratings agency Moody’s downgraded the country’s sovereign debt rating into “junk” territory—putting Laos alongside Angola, Cuba, and Russia. Moody’s declared that Laos’s default risk would “remain high given very weak governance, a very high debt burden and insufficient coverage of external debt maturities” by foreign exchange reserves.
The World Bank says that Laos has only $1.3 billion reserves on hand; its public debt, however, reached $14.5 billion last year. And as elsewhere in the world, inflation is spiking, particularly of food and fuel costs. But because Laos has so little foreign reserves, the country is struggling to import enough of these critical goods—creating a situation not so dissimilar from in Sri Lanka, which has its own severe foreign reserves shortage, has failed to import these goods, and last month became the first Asian country in decades to default on its debt.
Yet while Sri Lanka has many creditors, including China, Japan, and the World Bank, Laos owes around 50 percent of its debt to China alone. China, however, has throughout the pandemic been reluctant to offer relief to its developing world debtors. If China takes such an approach to Laos, more pro-Western factions in the Lao government could have slightly more cover to enlist Washington or Brussels’ assistance. Some Lao officials already seem aware that relying almost entirely on China and Vietnam is no longer practical—which is why Lao business groups are reaching out to South Korea, and likely part of the reason why Laos will soon host a leading U.S. business group.
But Laos can’t seem to catch a break.
In mid-June, the U.S. Federal Reserve hiked its interest rate by 75 basis points, thereby strengthening the dollar and weakening foreign currencies—including the Lao kip—against it. One U.S. dollar is currently worth over 15,000 kip; a year ago, one U.S. dollar was worth only around 9,270 kip. That means that the Lao currency has lost nearly 40 percent of its value since last July, making imports—which were already expensive before the war in Ukraine, which then worsened general inflationary pressures—even more expensive.
This economic peril is beginning to reverberate across Laos; the fact that so many people cannot afford basic goods is not a development any government could sweep under the rug. The fact, meanwhile, that people are posting so openly on Facebook with demands like “If the government cannot manage the economy, get out!" is no small thing in Laos, whose government meets political opposition with repression. Neither is the fact that there have been social media rumblings about taking to the streets.
The ruling Lao People’s Revolutionary Party, helmed by President Thongloun Sisoulith, has controlled the country since the 1970s. The party is highly unlikely to face an ouster, given its strong grip on power and the near-complete lack of alternatives. The government has, however, tried to satisfy the public by reorganizing its ruling cabinet and ousting the central bank governor. But these moves will not be enough; more political sacrifices seem inevitable.
It may be just two months since Phankham Viphavanh was palling around with Joe Biden at the White House, but the prime minister could soon find himself in trouble—and on the outside of Vientiane’s halls of power, looking in.
Charles Dunst is an adjunct fellow (non-resident) with the Southeast Asia Program at the Center for Strategic and International Studies in Washington, D.C.
Charles Dunst
Adjunct Fellow (Non-resident), Southeast Asia Program