Thayer Consultancy Background Brief:

ABN # 65 648 097 123

If Laos Defaults What Will
China Do?
July 12, 2022

We are preparing a report regarding the possibility of a debt default by Laos, and how
China would react. We request your assessment of the following issues:
Q1. What are the chances that Laos will default on its debt obligations?
ANSWER: The chances that Laos will default on its debt obligations are extremely high.
Laos does not have sufficient foreign exchange to service its public debt repayments.
The Lao economy is experiencing rising inflation that reached 23.6% in June, high fuel
prices, a depreciating currency – the kip fell 36% against the U.S. dollar over the past
year – and a forecast decline in economic growth to 3.8% for this year.
Fitch Ratings Inc. gave Laos a CCC rating in August 2021, while Moody’s Investors
Service downgraded Laos’ credit rating to Caa3 or junk status in June this year. Both
of these downgrades indicate there is a high risk of Laos defaulting on debt
repayments.
Laos has a total sovereign debt estimated between $13.3 and $14.5 billion. The World
Bank reported in April that Laos had $1.3 billion in reserves or about half the annual
total domestic revenue. Debt repayments from now until 2025 will average $1.3 billion
a year.
Q2. How would China react if Laos was on the brink of defaulting? Would the Chinese
government step in to help Laos or allow Laos to default? How might China help out?
ANSWER: Laos’ debts to China amount to around 47% to 50% of its total foreign debt.
The debt arises from Chinese loans to finance the highspeed rail link and hydroelectric
projects. If Laos sought relief there are three options. The first would be to grant a
concession to a Chinese investor for one or more of the big Chinese-financed
infrastructure projects. The second option would be to renegotiate the repayment
schedule under Chinese terms. Finally, Laos could turn to the International Monetary
Fund to restructure its other loans. Laos would almost certainly come under pressure
to curb corruption, increase domestic revenues and reduce government spending.
Q3. What would be the geopolitical ramifications for Beijing of a Laos debt default,
given that analysts have warned for years about a “debt trap”?
ANSWER: The warning signs of economic difficulties in Laos first appeared in 2020. If
Laos defaulted, China would come under renewed international criticism for its “debt
trap diplomacy.” Pakistan’s near escape from defaulting, Sri Lanka’s default and now
 2

Laos’ economic difficulties could impact negatively on the willingness by other

developing countries to rely on China for future concessional loans to finance
infrastructure projects associated with the Belt and Road Initiative. This might provide
a fillip to the United States and its partners in pushing their alternate high quality
infrastructure initiative.

Suggested citation: Carlyle A. Thayer, “If Laos Defaults What Will China Do?,” Thayer
Consultancy Background Brief, July 12, 2022. All background briefs are posted on
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Thayer Consultancy provides political analysis of current regional security issues and
other research support to selected clients. Thayer Consultancy was officially
registered as a small business in Australia in 2002.