RAM downgrades Laos’ rating on deteriorating position
KUALA LUMPUR: RAM Ratings has downgraded Laos' global-scale rating to gB2(pi)/stable/gNP(pi) from gB1(pi)/negative/gNP(pi) in view of the deterioration of its external position and the expected worsening of government finances as contingent liabilities from weak public-sector banks continue to rise.
“The vulnerability of the country's external position is seen in reported large double-digit deficits in its current account for 2014 and 2015,” noted Esther Lai, RAM's Head of Sovereign Ratings in a statement yesterday.
Hefty imports and weak exports as a result of lower commodity prices are likely to keep the currentaccount deficit wide in the medium term, against previous expectations of a narrow deficit in 2016.
“Laos' external vulnerability is compounded by rising external debt amid low reserves,” RAM added. “The country's coverage of reserves to imports and short-term external debt has been consistently below the IMF prudential standard and peer-average benchmarks.
“This heightens external payment risks and increases the country's sensitivity to global conditions, especially during periods of heightened risk aversion.” RAM said the downgrade also considers the persistent weakness in the banking sector, evinced by the undercapitalisation of banks and a large proportion of nonperforming loans, primarily among state-owned banks.
“This raises contingent risks, given the government's history of recapitalising and supporting failing banks.”
The IMF has forecasted a bailout of approximately US$250 million -- or 1.8 per cent of GDP -- which would pressure the government's already-high and widening fiscal deficit.
RAM expects the government balance to reach minus 5.7 per cent of GDP in 2016 on the back of declining revenue owing to weak commodity markets. Additionally, government debt levels are high at over 60 per cent of GDP.
With the bulk of government debt denominated in USD, the central bank's limited ability to maintain a tightly managed peg to the USD, given low reserves, exacerbates external payment risks.
Elsewhere, the IMF has forecasted growth of 7.0 per cent and 6.7 per cent in 2016 and 2017, respectively, driven by a less favourable external environment and slowing credit growth.