Rating Action: Moody's downgrades Laos's rating to Caa2, outlook changed to negative
Global Credit Research - 14 Aug 2020
Singapore, August 14, 2020 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Laos's issuer rating to Caa2 from B3 and changed the outlook to negative. This concludes the review for downgrade initiated on 19 June 2020.
The decision to downgrade the rating to Caa2 reflects Moody's assessment that Laos is facing severe liquidity stress, given sizeable debt servicing payments due this year and persisting until 2025, and constrained financing options. Heightened liquidity risk is exacerbated by weak external and fiscal buffers and poor governance, and points to a material probability of default in the near term.
The negative outlook reflects the risk of material losses to investors in the event of a default by Laos, beyond what would be consistent with a Caa2 rating. A more severe deterioration in credit fundamentals than Moody's currently expects, potentially because of a more acute impact of the coronavirus shock, would raise the probability of default and may imply larger losses to private sector creditors.
Concurrently, Moody's has lowered Laos's long-term foreign-currency bond ceiling to Caa1 from B1, its long-term foreign-currency deposit ceiling to Caa3 from Caa1, and its long-term local-currency bond and deposit ceilings to B1 from Ba3.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Caa2
HEIGHTENED FINANCING STRESS EXACERBATED BY WEAK GOVERNANCE
Laos's government liquidity risks have increased significantly. While borrowing requirements remain moderate at about 13% of GDP, the government has not developed a credible financing strategy to meet both near- and medium-term debt payments. Financing gaps in the immediate future raise the risk of default in a challenging financing environment.
Laos' government debt service amounts to $1.2 billion in 2020. Loans from commercial banks and Thai-baht bonds mature in September and October this year, respectively. Financing stresses are unlikely to abate given that, between 2021-2025, Laos faces debt service repayments averaging a little over $1 billion annually, including principal payments on a $150 million Eurobond due in June 2021.
The government plans to meet its debt service requirements through a combination of sizeable commercial borrowing, rollovers, and bilateral support. However, raising new borrowing at affordable costs will be very challenging in the current market environment. As a result, in the absence of financial assistance from International Financial Institutions which seems unlikely to materialize in the foreseeable future, Moody's expects that Laos will predominantly rely on rollovers of or new commercial bank loans while reprofiling some bilateral debt.
However, the possibility that these options may fail to materialize in time raises the risk of default. To date, it is unclear how much progress has been achieved on several aspects of the government's funding plan. Uncertainty remains around the status of bilateral discussions surrounding recent and upcoming maturities. In general, the absence of a transparent financing strategy and opacity around how maturing debt obligations have and will continue to be met, raise uncertainty about the capacity for the government to secure financing in time and at affordable costs.
The option to refinance external debt domestically would deplete further already low foreign exchange reserves, intensifying liquidity and external risks further.
FISCAL AND EXTERNAL CHALLENGES HAVE INCREASED
Government borrowing needs are compounded by wider deficits and weaker growth, as a result of the impact of the coronavirus outbreak on the manufacturing and tourism sectors.
Moody's expects real GDP will contract 0.2% year-on-year in 2020, down from 6.7% on average over the last five years. Coupled with measures to alleviate the impact of the pandemic on small businesses and individuals, this will result in revenue shortfalls relative to the original budget. Even with efforts to cut non-essential spending, the budget deficit will widen to 6.7% of GDP in 2020, from 3.5% of GDP in 2019.
The combination of slower growth and wider fiscal deficits will lead to a deterioration in fiscal and debt metrics. Moody's expects the debt ratio will continue to gradually edge higher, to peak at 64% of GDP in 2022 from 58% of GDP in 2019. This marks a departure from a path of gradual moderation that Moody's expected previously. A resolution of outstanding arrears, the size of which is not publicly known, would raise the debt burden further; while non-resolution would continue to hinder economic activity at a time when companies already face a significant revenue shock.
On the external front, a wider current account deficit coupled with slower FDI inflows will weigh on foreign exchange reserves. Moody's expects reserves to fall in 2020, to $740 million, from close to $1 billion in 2019. Under these assumptions, Moody's projects the External Vulnerability Indicator, or the ratio of external debt maturing over the following year to reserves, to remain at rather elevated levels at above 260% in 2021.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Laos's credit profile, as the country is vulnerable to climate change risk. Natural disasters, including storms, floods, landslides and droughts, have adversely affected agricultural conditions and weighed on economic growth. Increased frequency of droughts due to climate change would also reduce Laos's hydropower production potential. Furthermore, substantial reconstruction and rehabilitation costs following natural disasters constrain fiscal flexibility.
Social considerations are relevant to Laos's credit profile. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The coronavirus has posed a material cost to domestic economic activity. Moreover, the acute financing risks explained above are triggered by heightened uncertainty around financing options in the wake of the outbreak. More generally, Moody's assessment of Laos's economic strength incorporates social considerations related to the low level of human capital and limited access to quality healthcare and education. That said, the country benefits from a young population, while per capita incomes have doubled over the past 10 years given strong and stable economic growth.
Governance considerations are material to Laos's credit profile. The country's rankings on the WGI are low and point to weak rule of law and control of corruption. Transparency and accountability in government policymaking remain limited owing to the institutional setup that is closely intertwined with the political structure.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects downside risks beyond what would be consistent with a Caa2 rating. A more severe deterioration in credit fundamentals than Moody's currently expects, potentially because of a more acute impact of the coronavirus shock, would further weigh on the rating.
Laos' economy is narrowly diversified, with growth reliant on a few large infrastructure projects. More significant project delays or cancellations than built into Moody's baseline assumptions, would weigh on GDP growth and heighten fiscal, liquidity and external pressures.
GDP per capita (PPP basis, US$): 8,109.6 (2019 actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.0% (2019 estimate) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.3% (2019 actual)
Gen. Gov. Financial Balance/GDP: -3.5% (2019 actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2019 actual) (also known as External Balance)
External debt/GDP: 90.0% (2019 estimate)
Economic resiliency: b2
On 11 August 2020, a rating committee was called to discuss the rating of the Laos, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance strength, have materially decreased. The issuer's governance and/or management, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook indicates that an upgrade is unlikely in the near term. Moody's would consider changing the outlook to stable, if Laos's financing risks diminished durably on the back of securing various financing options to meet upcoming repayments.
Moody's would downgrade the rating, in the event of a larger or more rapid fall in foreign exchange reserves and/or further increase in liquidity stress that would make a default by the government on its debt payments increasingly likely.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Anushka Shah Vice President - Senior Analyst Sovereign Risk Group Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Marie Diron MD-Sovereign Risk Sovereign Risk Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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