Laos opens scenic railway built on mountain of Chinese debt


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Bangkok (AFP) – Laos opened a new $ 6 billion rail link with China to much fanfare this month, but analysts warn the party could be short-lived as the government grapples with a potential debt crisis .

The line will connect the capital Vientiane to the city of Kunming in southern China, and there are big plans for a high-speed rail network connecting Singapore through Thailand and Malaysia.

At the inauguration, Laotian President Thongloun Sisoulith announced a “new era of modern infrastructure development” for the impoverished country, adding that “the dreams of the Lao people have come true”.

The government hopes the railroad will turn a profit by 2027, but analysts are worried about unsustainable Chinese loans to pay for this and other projects.

With a tiny domestic market, there is “limited business logic for an expensive railroad” to connect the country of seven million people to Kunming, Jonathan Andrew Lane said in a report from the Asian Bank Institute of development.

Its analysis revealed that the potential benefits to Laos do not appear to outweigh the risks.

Laos hopes the railway will make a profit by 2027, but analysts worry about unsustainable Chinese loans to pay for this and other project STR LAO NATIONAL TV / AFP / File

“This debt service will further strain the government’s limited ability to raise taxes,” Lane wrote.

Laos has to shell out huge sums of money to pay for the rail line, which was established as a Laos-China joint venture as part of Beijing’s vast Belt and Road (BRI) infrastructure initiative , worth a trillion dollars.

As the global debt of the lonely Southeast Asian country climbs to $ 13.3 billion, which is nearly three-quarters of gross domestic product, experts fear Laos is threatened with default.

This could tie it more to China, having already attracted the nickname “Chinese satellite state” – Beijing accounts for 47% of its borrowing.

“Hidden debt”

Besides debt of $ 1.06 billion, Laos exposed itself to so-called “hidden debt” in forming the joint venture to finance the railway, according to AidData, a research laboratory at the university. American William & Mary.

The merger includes three Chinese state-owned companies and a Laotian company, with Beijing taking 70% of the $ 3.54 billion debt.


National debt in some Asian countries
National debt in some Asian countries Jean SAEKI AFP

Deemed “too big to fail,” the researchers said there is some uncertainty as to which country would feel pressured to bail out the joint venture in the event of default.

If “insufficiently profitable, between 0 and 100% of the total debt of 3.54 billion dollars could become a repayment obligation of the government of Laos,” AidData warned.

Another hidden debt is Laos’ stake in the joint venture: a separate $ 480 million loan also funded by the Chinese – suggesting that the small nation’s assets “may be worthless,” the lab added.

The communist rulers of Laos have long linked the economic development of the nation to its immense neighbor.

Between 2008 and 2019, he signed a total of $ 5 billion in Chinese loans for more than a dozen infrastructure projects, the lion’s share going to dams and hydropower production.

In August 2020, the global credit agency Moody’s downgraded the country’s credit rating to “junk” status. Fitch Ratings followed soon after.

“What is the alternative? “

Laos Prime Minister Phankham Viphavanh, installed in March, hopes to reduce debt from 72% to 64.5% of GDP by the end of 2023.

But in the meantime, Laos owes $ 1.16 billion a year between 2022 and 2025, according to Fitch Ratings.


Communist leaders in Laos have long linked the country's economic development to its huge neighbor China
Communist leaders in Laos have long linked the country’s economic development to its huge neighbor China STR LAO NATIONAL TV / AFP / File

Its public debt is higher than most of its regional counterparts – including Cambodia, Vietnam and the Philippines – which also have infrastructure projects funded by China, according to the International Monetary Fund.

At the start of 2021, Laos was “on the brink of sovereign default and urgently sought debt relief from its Chinese creditors,” AidData said.

But China is often reluctant to write off BIS debts, instead offering deferrals – sometimes with higher interest rates – or rescheduled payment plans.

In September, Laos sold its electricity transmission system to a Chinese state-owned company for $ 600 million, an apparent debt-for-equity swap, the researchers said.

Fitch said in August that further domestic asset sales are expected.

This trend has been observed in other Asian indebted countries in China.

One of the most prominent cases was Beijing’s 2017 takeover of the Hambantota port in Sri Lanka after the country was unable to repay a huge loan.

AidData said in September that the BIS had burdened poor countries with “hidden debt” worth $ 385 billion, and more than a third of its projects had been affected by allegations of corruption and protests .

But as the outside world questions whether China is taking control of Laos, Ben Bland of the Lowy Institute said the impoverished state has little choice in its search for partners to grow its economy.

“What is the alternative? It does not appear that other foreign investment and development partners are keen to supplant China,” he told AFP.


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