In Focus / A Closer Look into Laos’ Currency Crisis and its Implication for the Thai Economy

Laos is facing a rapid depreciation of the kip in tandem with inflation surges.

As of August 8th, 2022, the Lao kip already tumbled to 15,000 LAK/USD—seeing a 57% drop against the greenback and 44% against the Thai baht since September 2021, marking the largest depreciation among regional peers. Driving forces behind the kip crumble were tightening global financial condition, inflationary pressures from the ongoing Russia-Ukraine war which sent commodity and oil prices soaring, and the global supply chain bottleneck—all of which threatened Laos’ economy that highly relies on imports. Against this backdrop, Laos’ inflation has been on the rise, resulting in US dollar inadequacy and goods shortages nationwide, particularly fuel oil.

The crisis primarily stemmed from a fragile economic structure.

Recent developments in the global economy—notably monetary policy tightening among major central banks—took a heavy toll on the Lao economy, which already grappled with long-running fiscal deficits and public debt overload from large infrastructure investments to buttress growth. Aside from that, Laos’ financing options became limited given rising costs of funds after its sovereign credit rating was slashed to a speculative grade. Foreign reserves buffers also remained low, owing to persistent current account deficits. These were downward pressures on the kip and looming risks to external debt service and imports of staple goods.

In our view, the situation in Laos is unlikely to follow a crisis-ridden Sri Lanka since Laos still secures financing options and leeway for debt renegotiation.

Despite a spiraling public debt stock, the debt figure in Laos remained lower while international reserves in terms of imports and short-term external debt were higher than those of Sri Lanka. Besides, Laos still secure some funding channels from (1) Issuing bond in foreign financial markets such as Thailand—Laos recently issued government bonds worth THB 5 billion in March 2022; (2) Loans from international organizations; and (3) Economic restructuring through the privatization of under-performing state-owned enterprises while encouraging investment and private sector engagement in order to attract foreign investment and bolster exports. Until now, Laos’ fiscal and monetary policies were primarily focused on supporting the economy. Yet these measures do not address the root causes of problems, and could worsen an already-fragile economic stability. Looking ahead, debt renegotiation, especially with China, should be a priority for the Lao government to stave off a debt default. As a dominant creditor, China will likely take the offer considering Laos’ strategic position in its ambitious Belt and Road Initiative to gain influence over the ASEAN region.

Adverse impacts on Thailand should be limited, albeit remains risks that warrant monitoring.

EIC assesses that the crisis will affect Thailand’s economy through four channels: exports, tourism, Thailand’s direct investment (TDI), and the financial sector. First, Thai exports might suffer from an economic slowdown in Laos followed by shrinking demand. But overall exports still see a rosy outlook buoyed by rising prices of refined oil—a major export product to Laos. Secondly, incoming tourists from Laos are confronted with risks from eroding purchasing power on the back of the weakening kip. Yet, the number of Lao visitors should pick up after Thailand’s full reopening. Thirdly, TDI inflows to hydropower projects in Laos should be heedful of a possible delay of electricity payment from Laos, which could affect future sentiment. Although Laos’ financial stability is relatively strong, it could become more vulnerable going forward. Still, we expect that overall impacts on Thailand should be limited since the major buyers of Laos’ power are also Thai enterprises, and there are signed PPAs in place.