Executive Summary: Growth in 2020 will be flat, while, in the medium to longer term, growth should rebound to its potential rate of 5.0-6.0% p.a.
Lao PDR: A Country Overview
Lao PDR among ASEAN peers: One of the dynamic frontier markets
Lao PDR is a lower-middle income country with the GNI per capita of USD2,570 (July 2020), highest among in the CLMV peers. This has been driven a sustained impressive economic growth over the last two decades with the annual growth rate over 7%. In our view, Lao PDR growth momentum should continue in the long term driven by fundamentals and foreign investment against a backdrop of vulnerable macroeconomic stability.
Major milestone of Lao PDR s’ developments
Growth in 2020 is likely to be flat weighed on severely by the pandemic, but a relatively robust pick up is expected in 2021 and over the medium term
COVID-19 pandemic shocks are likely to impact Lao PDR’s growth through different channels on the demand side*
The pandemic could lower 2.1% of Lao PDR’s growth in 2020 according to our model
The outbreak would reduce global GDP growth substantially by 5.5ppt from baseline forecast (pre-outbreak). Krungsri Research now projects the outbreak would pose a negative impact to Lao PDR’s economy of 2.1 ppt, which is relatively lower than that of regional peers in ASEAN. The impact of the pandemic to the economy is passed through different channels – tourism, supply disruption at home and abroad, and multiplier effect.
Policy measures have been deployed to cushion the dire economic impact of the COVID-19 pandemic
Lao P.D.R. has 24 confirmed cases of COVID-19 as of October 22, 2020, among the lowest number of cases reported across the region. A nationwide lockdown is now being gradually lifted. Most businesses can resume activities, but night markets, eatery spots, cinemas, casinos must abide by strict preventative measures and practice social distancing. In-country travel and public transport are fully operational. All schools have resumed but must ensure hygiene and distancing practices. All indoor and outdoor sporting activities are now permitted, and audiences are allowed, however, entertainment venues remain closed. The authorities have introduced measures –fiscal and monetary policy- to alleviate the economic impact:
Despite a small number of cases, economic activities are not normalized
Macro forecasts
Lao PDR’s Economic Structure and
Its Medium-term Prospects
Despite its impressive growth trajectory, Lao PDR has suffered from its structural vulnerabilities
Lao PDR’s structural weaknesses could be exacerbated by subdued global economy and the COVID-19 pandemic
Persistent current account deficit has been dragged by deficits of trade in goods and services as well as primary income
Trade deficits have been chronic as a result of a narrow and commodity-based export structure
Electricity and primary products have dominated Lao PDR’s exports
Higher value-added intermediate products and consumer goods have dominated Lao PDR’s imports
A relatively low degree of openness to trade structurally reflects low integration with the global economy of Lao PDR’s
Protracted twin deficits have undermined the external sector stability and led to mounting external debts
Lao PDR’s external debt profile has shifted to bilateral borrowing
Rising debts may be a signal for Lao PDR government to pursue a large-scale fiscal consolidation and fiscal reforms
A high degree of dollarization has constrained roles the use of monetary policy to support the macroeconomy
Sustained high economic growth in the past decades has been driven by a narrow set of drivers
Manufacturing sector remains at the early stage of development dominated by the electricity production
Foreign investment inflows have been directed to the extractive industry and non-manufacturing sector
Cross-border remittance flows financing 12% of total households is expected to be disrupted by the pandemic
Although cross-border flows of remittances currently account only for about 2% of Lao PDR’s GDP ( as of 2019), those flows play a crucial role as another main source of income for around 12% of the total households, according to the figure provided by the ADB. We expect that inflows of remittances should resume strongly once the pandemic is effectively contained and the regional economic activity starts to recover in the medium term.
Tourism sector, another key source of revenues, is hit severely by the pandemic
Lao PDR is one of the key trading partner in ASEAN for Thailand
Thai direct investment (TDI) in Lao PDR is also rising
Underlying fundamentals driving
Lao PDR’s Long-term Prospects
A strong growth trajectory of 5.0-6.0% p.a. is likely to be resumed should near-term vulnerabilities are well managed
Favorable fundamentals will underpin Lao PDR’s growth trajectory in the years ahead
Although the pandemic is expected to substantially erode Lao PDR’s potential growth path, over the medium to long term, we view that the economy should be able to eventually follow its potential trajectory of 5.0%-6.0%. There are 4 main drivers comprising (1) demographic dividend, (2) structural reforms, (3) Regional integration, and (4) foreign direct investment (FDI) inflows. These factors will enable Lao PDR to remain one of the most dynamic frontier economies regionally.
1 Sizeable youthful population will enhance Lao PDR’s attractiveness as a growing consumer market
1 Wealthier young workers are turning to be middle-class consumers amid rising urbanization
2 Ongoing structural reforms should help draw FDI inflows to Lao PDR in the long term
2 High-speed rail links and regional trade agreements could potentially transform the country into a strategic land link
3 Closer regional economic integration will help spur the manufacturing sector in the years ahead
3 Cost of production for manufacturing in Lao PDR is among the lowest compared to that of regional peers
3 Wages which remain relatively lower than those of regional peers should also be conducive for foreign investment
4 Foreign investment should continue driving economic activities in the country in the post-pandemic era
In the medium term, Lao PDR will remain among the fastest-growing frontier economies regionally against its vulnerable macroeconomic stability
Business Opportunities in Lao PDR
for Thailand
Thailand could link supply chains with neighboring countries including Lao PDR to leverage on comparative advantages of each country
Some of labor-intensive activities and potential services could be shifted into to the region
Thailand is in line with the world economy in moving toward a service-based economy, and this is depicted by a rising contribution of service sector to GDP from 50.3% in 2008 to 56.9% in 2017.
Based on the recent data, we found that Thailand also has relatively high valued-added labor productivity in the services sector. Thai businesses may be able to reap the advantages to shift labour-intensive manufacturing activities as well as export services to countries in the region including Lao PDR.
Growing domestic demand and growing wealthier middle-class consumers in Lao PDR offer business opportunities for Thailand
On the back of impressive economic growth record over the past two decades, this has resulted in a growing and wealthier young consumers in Lao PDR. Therefore, looking ahead, we expect that the country will remain one of the most vibrant economies regionally and this offers business opportunities for Thai firms seeking markets to grow their business in the region. In our view, some potential sectors in Lao PDR that are (1) food and beverage, (2) homewares, (3) healthcare and pharmaceuticals,
(4) agribusiness, and (5) construction materials.