Laos opens new rail link with China built on a mountain of Chinese debt

Bangkok

LAOS opened a new US$6 billion rail link with China to fanfare earlier this month, but analysts warn that the government is grappling with a potential debt crisis. The line will connect the capital Vientiane with the Chinese city of Kunming, and there are grand plans for a high-speed rail network running to Singapore via Thailand and Malaysia.

The government is hopeful the railway will turn a profit by 2027, but analysts are concerned about the unsustainable Chinese loans to pay for this and other projects.

With a tiny domestic market, there is "limited commercial logic for an expensive railway" to connect the country of 7 million to Kunming, said Jonathan Andrew Lane in an Asian Development Bank Institute report. His analysis found that potential benefits to Laos do not appear to outweigh the risks. Laos faces having to stump up vast sums of cash to pay for the rail line, which was set up as a Laos-China joint venture under Beijing's vast, trillion-dollar Belt and Road infrastructure initiative (BRI).

As the country's overall debt climbs to a dizzying US$13.3 billion - making up almost three-quarters of gross domestic product - experts fear Laos could be at risk of default. That could bind it further to China, as Beijing accounts for 47 per cent of its borrowings. Besides a US$1.06 billion debt liability, Laos has exposed itself to so-called "hidden debt" in the formation of the joint venture to finance the railway, according to AidData, a research lab at American university William & Mary. The tie-up comprises 3 Chinese state-owned firms and a Lao enterprise, with Beijing staking 70 per cent of the US$3.54 billion debt.

Researchers said there is some uncertainty over which country would feel compelled to bail out the joint venture if it defaulted. If "insufficiently profitable, anywhere between 0 per cent and100 per cent of the total US$3.54 billion debt could become a repayment obligation of the government of Laos", AidData warned.

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Another hidden debt is Laos' equity stake in the joint venture: a separate US$480 million loan also financed by the Chinese - which suggests the tiny nation's asset "may be worthless", the lab added.

Laos' communist leaders have long tied the nation's economic development to its huge neighbour.

By August 2020, Moody's downgraded the country's credit rating to junk status. Fitch Ratings followed soon after.

Laos Prime Minister Phankham Viphavanh - installed in March - hopes to reduce debt from 72 per cent to 64.5 per cent of GDP by the end of 2023. But in the meantime, Laos owes US$1.16 billion per year between 2022 and 2025, Fitch Ratings said.

But while the outside world mulls whether China is taking over Laos, the Lowy Institute's Ben Bland said the impoverished state has little choice in its search for partners to grow its economy. AFP