Laos’ Dire Debt Situation

Within the Belt & Road Initiative, China is pouring infrastructure investment into many countries, especially those in its own region, but also beyond.

In 2020 the Harvard Business Review estimated that the “Chinese state and its subsidiaries have lent about US$1.5 trillion in direct loans and trade credits to more than 150 countries around the globe.” Of course, the debts connected to those investments have to be paid back, and some countries have difficulty with doing just that. Laos, one of China’s neighbors and allies in South-East Asia, is such a country. In the West, Laos’ dire situation is often interpreted as China’s ‘debt trap’-policy.

Laos is a one-party state with a socialist government. The chances that it will default on its debt obligations are huge. Laos’ foreign debts grew to 88% of its GDP. The national currency lost a third of its value against the US$ in one year, and inflation hit 23% mid-2022. Moody’s has given Laos a ‘junk status’.

Around half of Laos’ debts are owed to China, including the Lao state’s one-third stake in the $5.9 billion China-Laos high-speed railway. And experts think China will not allow Laos to default, because that would hurt them geo-politically.

The high-speed railway connects Laos’ capital Vientiane with the Chinese border, more than 400 km North, before heading to the Chinese city of Kunming. It is an important part of China’s Belt and Road Initiative in South-East Asia, as it also connects Thailand with China, since Vientiane is on the border with Thailand. Laos expects the train to be profitable only by 2027.

How Vientiane and Beijing are going to solve the problem is still unknown, but possibly Laos can renegotiate the repayment schedule with China. After all, Beijing considers the railway one of the key projects of China’s Belt and Road Initiative (BRI). To be continued…

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