Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

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Asia Frontier Capital Travel Report: Laos

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Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Credit

<p style="text-align: justify;">We initiate our coverage of <a href="https://www.smartkarma.com/entities/laos-sovereign-credit" target="_blank" data-smartkarma-citation="entities:29165:1" rel="noopener">Laos Sovereign Credit (LAOS GOVT)</a> (Laos) as a high-yield sovereign credit. In this report, we review the country’s macroeconomic and institutional performance against its selected “B”-rated Asian peers including Cambodia, Mongolia ( <a href="https://www.smartkarma.com/entities/mongolia-government-international-bond" target="_blank" data-smartkarma-citation="entities:28351:1" rel="noopener">Mongolia Government International Bond (MOGOL GOVT)</a>), Papua New Guinea, Sri Lanka ( <a href="https://www.smartkarma.com/entities/sri-lanka-government-international-bond" target="_blank" data-smartkarma-citation="entities:28349:1" rel="noopener">Sri Lanka Government International Bond (SRILAN GOVT)</a> ), and Tajikistan ( <a href="https://www.smartkarma.com/entities/tajikistan-sovereign-credit" target="_blank" data-smartkarma-citation="entities:29166:1" rel="noopener">Tajikistan Sovereign Credit (TAJIK GOVT)</a> ) to identify severe problems Laos is facing, including the credit rating downgrade risk. We will follow-up with a subsequent report on the country’s and its state-owned enterprises’ international bond relative value comparisons with our recommendations in due course.</p>
<p style="text-align: justify;">We found that servicing Laos’ external debt in 2020 and 2021 will be challenging and costly. Laos government’s external debt service repayments amount to &gt;USD1.1bn over the next three years (USD1.2bn in 2020). On the other hand, the country’s foreign reserves have been low, standing at ~USD1bn in recent years (equivalent to &lt; one month of imports), which was below Laos’ 2020 external debt service obligations. Laos’ large chronic fiscal and current account deficits will make the government even more reliant on international capital markets to refinance its rising external debts, in our view.</p>
<p style="text-align: justify;">Although Laos has so far avoided a major health crisis stemming from the COVID-19 outbreak, we expect the pandemic to reduce tourism activities and remittances, which will adversely affect Laos’ twin deficits. Besides the USD150mn 6.875% 06/21 bond issuance in December 2019, the government reportedly plans to place another issuance in 2020 to refinance its maturing debt. We expect the macroeconomic vulnerabilities compounded by the heightened risk in the global financial market amid the COVID-19 pandemic to render Laos’ access to external financing more uncertain and costly.</p>
<p style="text-align: justify;">On 24-April, Fitch revised Laos’ “B-“ rating outlook to negative. Two months later, Moody’s followed with a placement of Laos’ “B3” sovereign ratings under a downgrade review. On 28-June 2019, Thai Rating and Information Services (TRIS) downgraded Laos’ senior unsecured credit rating to “BBB” from “BBB+” on a national scale. Such rating activities will further restrain the country’s capability in raising new debt to refinance its maturing external debt going forward.</p>
<p style="text-align: justify;">Our negative outlook on Laos PDR reflects a debt maturity wall in the next three years vs. a credit rating downgrade risk by one notch later this year on (1) a failure to proceed on negotiations on its debt restructuring with key creditors, a discussion on the Debt Service Suspension Initiative announced by the G20<a href="#_ftn1" target="_blank" rel="noopener">[1]</a>, or a search for a joint donor support program, and/or (2) rising debt servicing costs should the country manage to secure financing this year.</p>
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<p><a href="#_ftnref1" target="_blank" rel="noopener">[1]</a><a href="https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative" target="_blank" rel="noopener">https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative</a></p>
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We initiate our coverage of Laos Sovereign Credit (LAOS GOVT) (Laos) as a high-yield sovereign credit. In this report, we review the country’s macroeconomic and institutional performance against its selected “B”-rated Asian peers including Cambodia, Mongolia ( Mongolia Government International Bond (MOGOL GOVT)), Papua New Guinea, Sri Lanka ( Sri Lanka Government International Bond (SRILAN GOVT) ), and Tajikistan ( Tajikistan Sovereign Credit (TAJIK GOVT) ) to identify severe problems Laos is facing, including the credit rating downgrade risk. We will follow-up with a subsequent report on the country’s and its state-owned enterprises’ international bond relative value comparisons with our recommendations in due course.
We found that servicing Laos’ external debt in 2020 and 2021 will be challenging and costly. Laos government’s external debt service repayments amount to &gt;USD1.1bn over the next three years (USD1.2bn in 2020). On the other hand, the country’s foreign reserves have been low, standing at ~USD1bn in recent years (equivalent to &lt; one month of imports), which was below Laos’ 2020 external debt service obligations. Laos’ large chronic fiscal and current account deficits will make the government even more reliant on international capital markets to refinance its rising external debts, in our view.
Although Laos has so far avoided a major health crisis stemming from the COVID-19 outbreak, we expect the pandemic to reduce tourism activities and remittances, which will adversely affect Laos’ twin deficits. Besides the USD150mn 6.875% 06/21 bond issuance in December 2019, the government reportedly plans to place another issuance in 2020 to refinance its maturing debt. We expect the macroeconomic vulnerabilities compounded by the heightened risk in the global financial market amid the COVID-19 pandemic to render Laos’ access to external financing more uncertain and costly.
On 24-April, Fitch revised Laos’ “B-“ rating outlook to negative. Two months later, Moody’s followed with a placement of Laos’ “B3” sovereign ratings under a downgrade review. On 28-June 2019, Thai Rating and Information Services (TRIS) downgraded Laos’ senior unsecured credit rating to “BBB” from “BBB+” on a national scale. Such rating activities will further restrain the country’s capability in raising new debt to refinance its maturing external debt going forward.
Our negative outlook on Laos PDR reflects a debt maturity wall in the next three years vs. a credit rating downgrade risk by one notch later this year on (1) a failure to proceed on negotiations on its debt restructuring with key creditors, a discussion on the Debt Service Suspension Initiative announced by the G20[1], or a search for a joint donor support program, and/or (2) rising debt servicing costs should the country manage to secure financing this year.



[1]https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative
 



Sri Lanka Government International Bond (SRILAN GOVT)

Mongolia Government International Bond (MOGOL GOVT)

Laos Sovereign Credit

LAOS PDR: Twin Deficit Dilemma