WASHINGTON: The International Monetary Fund’s Executive Board concluded the Article IV consultation with Lao People’s Democratic Republic. Real GDP growth is likely to moderate from 8 percent in 2013 to 7½ percent in 2014.
Inflation has declined to 3 percent from 6½ percent at end-2013, largely due to weaker food and fuel price momentum. However, the current account deficit is expected to remain large at 25 percent of GDP in 2014; and, at 1 month of prospective imports of goods and services, international reserves (US$0.7 billion, August 2014) do not offer adequate protection against external shocks. Domestic activity has slowed, and credit growth has declined from excessive levels.
Bank balance sheets are showing signs of weakness, with rising nonperforming loans (NPL) and weaker capital and profitability. Public and publicly guaranteed debt (excluding arrears) is projected at 60 percent of GDP in nominal terms (52 percent of GDP in present value terms) in 2014.
After years of rapid credit growth, financial stability concerns are coming to the fore. Accumulation of public investment arrears has led to losses in the business sector, with impact on banks. The system’s nonperforming loan ratio (NPL) is estimated to have doubled during the first half of 2014. In the same period, state-owned banks’ average NPL is reported to have increased from 2 percent to about 8 percent, with average capital-to-asset ratio declining to 3 percent. Direct exposure to foreign currency through lending and deposits remain high, with the foreign-currency shares in total lending and deposits standing at 48 percent, down from 50 percent in 2013.
