Laos should focus on LCY bond market: ADB

Laos needs to strongly develop the local currency (LCY) bond market to reduce its reliance on external debt as much as possible, according to the Asian Development Bank (ADB).
“To manage the increasing debt burden after the Covid pandemic, sustainable debt finance, especially through the local currency (LCY) bond market, needs to play a more critical role,” a new ADB case study, titled “Developing a Local Currency Government Bond Market in an Emerging Market in the Wake of COVID-19”, has stated.
Like the other countries, the fiscal condition of Laos deteriorated due to the Covid-19 pandemic. The country needs more attention because the size of the public and publicly guaranteed (PPG) debt to its economy is larger when compared to those of neighbouring countries.
According to the Ministry of Finance, the government’s gross debt-to-GDP ratio increased to 88 percent in 2021.
Meanwhile the figure was only 38.7 percent in Cambodia, 58 percent in Thailand and 40.2 percent in Vietnam, according to the ADB.
A lesson learnt from the Asian financial crisis is that a huge currency mismatch is a potential source of an economic crisis.
“The global financial crisis in 2007–2008 also made us realize again the importance of an LCY bond market,” the ADB report said.
The ADB Advisor to the Economic Research and Regional Cooperation Department, Mr Satoru Yamadera, said: “Deepening domestic financial markets, particularly through local currency bonds, offers diverse benefits, including raising the capacity of an economy to respond to shocks and providing the government with a stable source of funding at a reasonable cost and desirable maturity.
“Those economies that have made progress in deepening their local currency markets are more insulated from sudden currency shocks.”
The study examined the importance of the LCY government bond market in recovering from Covid-19. It featured Laos as an example because its market is exposed to many challenges shared with other developing member countries in ADB. Laos can also benefit from the experiences of its neighbours in the Asian Bond Markets Initiative (ABMI). The bond market of Laos was created in 1994, when treasury bills were issued for the first time to help finance the annual budget deficit. Since then, government securities have been regularly issued to finance the budget deficit and to repay public debts.
In June 2022, the Bank of the Lao PDR (BOL) issued bonds worth 5 trillion kip to minimise the damage to the economy and slow the rise in prices.
The ADB recommended that issuing domestic bonds is relatively quick and easy, because issuance of bonds in the offshore market involves a negotiation and usually requires a country rating, which may worsen when the country is facing an economic challenge.

By Somsack Pongkhao
 (Latest Update December 21, 2022)