Recent Financial Turmoil and its Impact on the Lao PDR

1. Recent Financial Turmoil and its Impact on the Lao PDR By Somneuk Davading Vientiane, November 19, 2008

2. Impact on the developing countries

3. Three parts to the crisis • Financial sector • Housing in US and several developed countries • Commodity/food prices

4. Lao PDR • The underdeveloped financial sector in Lao PDR shields the country from many of the risks that are now faced by other developing countries; • Future growth would slow down a bit, but remain fairly strong over the medium-term (ave 7%) driven by resource FDI and exports as well as domestic consumption.

5. The vulnerabilities will feed through: • Falling commodity prices. Due to possible fall in demand from China and the developed countries, as well as because of withdrawals from speculative position in commodity funds; • Exports will decline. Pass-through from the trade partners (especially Thailand) via terms of trade, garments; • Tourism, especially from US & Europe once recession starts; • Remittances to Lao PDR would decrease (West, TL); • Foreign direct investment will decline especially if crisis deepens; • Private sector debt exposure – not much.

6. Commodity Prices (Index 2000 = 100) Source: WB (DECGP) latest forecasts, Nov 04, 2008

7. Decline in commodity prices (copper) and fiscal impacts • Changes in copper prices will have significant fiscal impacts on GOL’s mining revenue; • Overall mining revenue would remain strong in 2008 (130-$150m) largely due to price gains by Sepon project in the first 3 quarters of the year ($8000/t or $3.6/lb). • However, revenue is expected to drop by half in 2009 as copper price has fallen sharply in recent months. (see graph next)

8. Future mining revenue (US$m): Impacts of copper price change Source: WB staff projections and simulations

9. Resource & Non-resource Revenue (% of GDP) 3.0% 2.3% 1.3% Source: MoF & WB staff preliminary estiamtes

10. Revenue Structure (% of total) Non-tax Tax Profit tax Source: MoF & WB staff preliminary estiamtes Note: Profi tax as % of Tax revenue

11. Exports • Lao exports would fall significantly in 2009 due to sharp decline in copper price (also agriculture); • However, recovery from 2010 onward because of NT2 and other LPs, incl. Sepon expansion; • Major Lao export destinations include ASEAN countries, China, Australia and EU - less affected region; • Key Lao export products: mining (copper & gold), wood products, garments, electricity and agriculture (coffee, rice, maize and other crops) (see graph next)

12. Simulations of Copper prices & Exports Source: WB staff projections and simulations

13. Impacts on Agriculture • Decline in demands (China, Thailand & others) • Falling agricultural prices (coffee, maize, rubber); • Most affected people – rural cash crops farmers; • Social impacts (livelihood, poverty); • Rural finance: borrowers & lenders (Nayobai bank, microfinance, other schemes)

14. Export Structure ($ m) Mining Wood products Total exports Electricity Agriculture Garments Source: WB staff projections and simulations

15. External Balances & Inflation • BOP: External balance might be affected in 2009 if large power projects in pipeline (FDI) are delayed. However, decline in exports would not have much impact CAB as fuel and capital imports are expected to drop due to lower prices and demands. The non-resource CAB would remain at 1 digit level. • Inflation: Overall inflation came back to 1 digit level since mid-2008, dropped fast to 6.5% in Oct2008 (10.3% in May2008); It would decline further in 2009 as prices continue to drop.

16. Lao PDR: Recent inflation Source: Lao authorities and WB staff calculations

17. Foreign direct investments • Foreign investments in Lao PDR could be affected, especially those in major hydropower projects as well as in other sectors; • Without delay in construction of 4 LPPs (Hongsa Lignite, Nam Ngum 3, Nam Ngiep 1, NT1), total FDI will be over $1bn a year during 2009-13; • In case of delay, FDI would drop to around $700m a year on average. Lao PDR: FDI projections Source: WB staff projections and simulations

18. Growth – large projects • Medium Case (assumed: delays in LPs except expansion of Theun-Hinboun Power and Sepon Mine, agriculture grows at 3% a year on average and services at 6% a year): Lao GDP growth would remain robust in the medium-term at about 7% a year on average; • High Case (assumed: no delays in LPs, agriculture grows at 4% a year on average and services at above 7% a year): GDP would grow at 8-9% a year on average • Low Case (assumed: no delay for expansion of Theun-Hinboun Power and Sepon Mine, agriculture grows at 2% a year on average and services at 5% a year): The economy would grow at 6.5% a year on average during 2009-13.

19. Lao PDR: GDP growth scenarios (%) Source: WB staff projections and simulations

20. Implications on domestic spending in 2009 • Lower GOL’s revenue puts pressures on the expenditure; • Decline in tourism: affects micro/household/SME businesses – trade & services; • Decrease in remittances leads to lower houshold incomes and spending; • Falling agricultural prices reduce rural farmers’ income; • Poverty? • Social safety net programs?

21. Summary: Key Impacts • Falling commodity prices; • Decline in exports (mining and agriculture). • Tourism downturn (from US & EU); • Decline in remittances (NERI 2006: $100m from 200 ths Lao workers in Thailand); • Decline in FDIs (if the crisis deepens); • Social impacts (remittances, tourism, agric. prices…) • Compared to Asian Crisis (1998-99) – not much! Next steps: • How to cope with the shocks? Key measures to mitigate the likely impacts? • How to use opportunities emerged? (as Laos affected less than many other developing countries)

22. Thank You!