Country Report Laos June 2009

The domestic economy: Unemployment and currency appreciation are concerns

Rising unemployment is a concern for the government, but so far its efforts to address the problem have been weak, focused on organising job fairs, labour market surveys and short-term training courses. Skilled labour remains in short supply in Laos, with educational standards falling below those across most of South-east Asia. Given that nearly one-half the Lao population of 6.5m people are aged under 16, long-term training and employment opportunities are real concerns.

Since May 1st the Ministry of Labour and Social Welfare has been enforcing a new minimum wage that was announced by the government. Including all allowances, the monthly minimum wage for unskilled workers working 208 hours per month is K569,000 (US$67). The government's decision to raise the minimum wage followed public pressure from the Lao Federation of Trade Unions, which accused employers of using the financial crisis as an excuse to postpone paying workers their legal wages. The federation also insists that the new minimum wage fails to match the rising cost of living in Laos.

Lao exporters remain concerned by the strength of the kip, which has appreciated by more than 10% against the US dollar and by 15% against the Thai baht in the past year. In response, the Bank of the Lao People's Democratic Republic (the central bank) is targeting a trading band that would restrict the kip to a movement of 5% against a basket of major foreign currencies. The bank says that its international reserves are sufficient to cover five months of imports and that it is confident of maintaining the value of the kip within the prescribed trading band. The bank has also guaranteed that it will not interfere in market mechanisms to determine exchange rates. Currency controls have been relaxed in recent years, and people are now able to use kip to buy foreign currencies with few restrictions. The kip has actually weakened slightly against the dollar since the beginning of 2009, but is stable at around K8,5oo:US$1.

The construction industry is enjoying a return to strong profits due to lower prices for building material and fuel products. After renegotiating contracts in the second half of 2008 when costs were high, companies are now enjoying a windfall as prices return to 2007 levels while contracts remain at the higher rates. State infrastructure projects, such as the facilities for the Southeast Asian Games, as well as transport and irrigation projects, are supporting demand for construction services. Private investment in hotels and houses or apartments for rent is also buoyant. According to a member of a Lao construction group, Phimmaha Panyanouvong, road and bridge construction companies are making the most significant profits but the whole sector is thriving, mainly owing to lower fuel prices. In the capital, Vientiane, petrol topped K12,000 (US$1.4) per litre in June 2008, but by April 2009 it had fallen by more than 40% to below K7,000/litre. In the same period the price of steel dropped from around K11m (US$1,300) per tonne to about K6m/tonne. Prices for cement have remained at around K750,000/tonne. Average construction prices in the country stand at US$100-300/sq m.

© 2009 The Economist lntelligence Unit Ltd. All rights reserved
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