(Bloomberg) -- Laos, which has racked up more debt than it can repay, could explore swapping debt for equity with its biggest creditor China to avoid an eventual default, the Southeast Asian nation’s central bank chief said.
The country owes China about half of its total external debt, the Bank of Lao P.D.R’s Acting Governor Vathana Dalaloy said in a Bloomberg interview in the capital city of Vientiane on Thursday. The government has been in negotiations with Beijing to secure deferrals, a matter that’s been handled on a year-to-year basis, she said.
Years of borrowing to fund infrastructure projects, including through China’s Belt and Road Initiative, has meant Laos’ national debt is now larger than the size of its economy. That’s left the government spending a big chunk of its budget to service borrowings instead of economically productive investments.
With the economy reeling from the debt burden, one potential mechanism to alleviate the pain could be to offer up an equity stake as had been done previously with troubled state electricity provider, Electricite du Laos, Dalaloy said.
“In the future that could be possible. But to which significance, we haven’t decided,” she said. “We are going to continue to work and negotiate with the Chinese government and will see how they respond.”
China is by far Laos’ biggest creditor, accounting for about half of the $10.5 billion in external government debt. The nation had $13.8 billion in total public and publicly-guaranteed debt at the end of last year, amounting to 108% of its gross domestic product, official data showed.
Laos’ external debt payments last year nearly doubled to $950 million, prompting the Southeast Asian nation to seek additional deferrals.
Dalaloy was optimistic that Laos could service its debt, saying there was no risk of a default this year. Nevertheless, she sees “some difficulties” in meeting loan obligations in the future given economic factors like inflation, which has averaged about 25% during the first six months of this year.
“I still strongly believe that we have the capacity to addressing debt servicing,” she said, referring to the potential of development and different sectors with the abundance of natural resources. “We have to put a lot of effort. It’s not easy.”
Laos’ economy beat projections in the first half of the year by growing 4.7%, Dalaloy said. Also, the balance of payments during that period notched a surplus of more than $330 million thanks to a recovery in the energy, mining, manufacturing and tourism sectors, she said.
To stimulate the economy further, the central bank last month raised the interest rate for short-term loans to 10% from 8.5%. Dalaloy said it could do so again “probably a couple of months.”
“I foresee that we still have a lot of potential for recovering,” she said. “The government also stepped back in terms of investing in public investment projects and put more focus on the addressing the debt.”
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