Country Report Laos June 2009

Outlook for 2009-10: External sector

Exports will contract in 2009-10, owing to slower economic growth in the country's main export markets as well as low global prices for energy and minerals. Although exports of electricity to Thailand will emerge as a major source of revenue in the next two years or so as new hydropower projects come on stream, the outlook for total exports in 2009-10 is poor, as the economy of Thailand, Laos's main export market, is forecast to shrink by 4.5% in 2009 and grow by only 1.9% in 2010. Mineral exports also hold potential, but global prices for copper are expected to decline by 43% in 2009. Gold will fare better, with global prices edging up by 2.9% this year, but that will not be enough to prevent a contraction in exports. Growth in garment exports will be modest, owing to the poor competitiveness of the industry and labour shortages, as well as weakening demand in end markets in the US and Europe.

The merchandise trade deficit widened to an estimated US$222m in 2008 as imports rose by an estimated 30%, primarily owing to increased purchases from abroad of construction materials and machinery for new mining and hydropower projects. Lower tariff barriers in line with AFTA commitments, combined with the poor competitiveness of local products, have also led to strong growth in imports of consumer goods. In 2009 imports will contract as a result of a fall in prices, as well as weakening demand for shipments of construction materials and other capital goods. As a result, the merchandise trade deficit will narrow to an estimated US$204m. The surplus on the services account will continue to rise in line with growth in the tourism industry, but this will only partly balance the merchandise trade deficit. The surplus on the current transfers account will also continue to be offset by the income deficit, with the latter widening from US$50m in 2007 to US$205m in 2010 owing to the remittance of profits from foreign-invested mining projects.

As a result of these trends the current account is estimated to have moved from a surplus equivalent to 2.6% of GDP in 2007 (based on IMF data) to a deficit of 1% of GDP in 2008. The current-account deficit will narrow to 0.4% of GDP in 2009 (owing to the narrowing of the merchandise trade gap), before widening to 1.3% of GDP in 2010. Although private investment inflows are likely to fall, transfers from official donors will continue, and foreign reserves have been built up in recent years. As a result, the country's ability to meet its external financing requirement is not an immediate concern.

© 2009 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information