BANGKOK: Laos opened a new $6 billion rail link with China to much fanfare this month, but analysts warn the party could be short-lived as the government grapples with a potential debt crisis. The line will connect the capital Vientiane with the southern Chinese city of Kunming, and there are grand plans for a high-speed rail network running to Singapore through Thailand and Malaysia.
Laos President Thongloun Sisoulith at the opening heralded a “new era of modern infrastructure development” for the impoverished country, adding that “the dreams of Lao people have come true”. The government is hopeful the railway will turn a profit by 2027, but analysts are concerned about the unsustainable Chinese loans to pay for this and other projects.
With a tiny domestic market, there is “limited commercial logic for an expensive railway” to connect the country of seven million to Kunming, said Jonathan Andrew Lane in an Asian Development Bank Institute report. His analysis found that potential benefits to Laos do not appear to outweigh the risks.
“That debt service will put further strain on the limited tax-raising abilities of the government,” Lane wrote. Laos faces having to stump up vast sums of cash to pay for the rail line, which was set up as a Laos-China joint venture under Beijing’s vast, trillion-dollar Belt and Road infrastructure initiative (BRI).
As the reclusive Southeast Asian country’s overall debt climbs to a dizzying $13.3 billion — making up almost three-quarters of gross domestic product — experts fear Laos could be at risk of default. That could bind it further to China, having already attracted the moniker “Chinese satellite state” — Beijing accounts for 47 percent of its borrowings.
Besides a $1.06 billion debt liability, Laos has exposed itself to so-called “hidden debt” in the formation of the joint venture to finance the railway, according to AidData, a research lab at American university William & Mary. The tie-up comprises three Chinese state-owned companies and a Lao enterprise, with Beijing staking 70 percent of the $3.54 billion debt.
Considered “too big to fail”, researchers said there is some uncertainty over which country would feel compelled to bail out the joint venture if it defaulted. If “insufficiently profitable, anywhere between 0-100 percent of the total $3.54 billion debt could become a repayment obligation of the Government of Laos”, AidData warned.
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