Lao P.D.R.—Round Table Implementation meetingStatement by Mr. Benedict Bingham, IMF Senior Resident Representative
Vientiane, November 24, 2008
1. Let me first say that it is a pleasure to represent the IMF at this Round Table Implementation Meeting. This meeting is particularly timely given developments in the global economy, and I would like to thank the Government for the opportunity to discuss the outlook for the Lao economy at this difficult juncture. I will focus my remarks today on an overview of the global economic outlook and the challenges that it may pose for Lao P.D.R.
Global Economic Developments
2. Let me start with our latest assessment of global economic developments. As you know, the outlook for the global economy has weakened significantly in the face of ongoing strains in the global financial system and declining producer and consumer confidence. The turmoil in financial markets that started in advanced economies has spread to emerging and developing economies, raising concerns of a synchronized economic slowdown. While extraordinary policy actions have helped avert a collapse, financial markets are likely to remain under considerable stress for some time to come. Aggressive policy easing in the major economies is expected to lay the groundwork for an economic recovery in late 2009, however the recovery is likely to be gradual and there is still great uncertainty about the duration and depth of the downturn.
3. In our latest projections, world output is projected to expand by only 2¼ percent in 2009, almost 3 points lower than in 2007. Output in advanced economies is projected to contract in 2009, the first such decline since World War II, and while growth in emerging economies is expected to remain more robust, it too is projected to decline appreciably. Growth in Asia is expected to slow substantially along with the rest of the world, as exports weaken and the spillovers from the global financial turmoil weigh on domestic activity. The weakening growth outlook, coupled with global de-leveraging, is also depressing commodity prices. Oil prices have declined by over 50 percent since their peak, and copper and other commodity prices have fallen similarly, with the price of gold also down significantly. While lower oil and food prices have eased inflationary pressures around the world, it will lower income and growth prospects in commodity exporting economies such as Lao PDR.
Lao P.D.R.’s Economic Outlook
4. The impact of the global economic crisis on Lao P.D.R. has been limited so far because of little direct exposure to global financial markets and volatile external capital flows. However, the impact could be more significant going forward, especially if the global recession is deeper and more prolonged than forecast. Potential channels through which the global economic slowdown could feed through to Lao P.D.R. include:
• Exports. A downturn in the global economy would likely decrease export demand. Tourism, garments, timber, and other agricultural products are all likely to be affected. A sharp drop in commodity prices will also affect exports, most obviously in the mining sector, but also other exports, especially agricultural commodities.
• Foreign Direct Investment. Weaker demand in export markets, lower export prices, and rising funding costs, could have a material impact on foreign investment inflows. Already, there are indications that investments in the mining sector are being deferred. Delays in the hydropower projects are becoming more likely, and investments in other sectors, notably the agriculture sector, may also be affected. Local ancillary activities, such cement production, would be impacted by the slower pace of project implementation.
• Remittances. A significant economic downturn will have a material impact on remittances, both from advanced economies and from migrant labor in the region. These remittances are an important source of income support for many families, and may also have been an important source of investment, especially in the land and property sectors.
• Domestic demand. Lower growth in exports, investment, and remittances, will likely result in a more generalized slowdown in economic activity, especially if it is associated with declining consumer and business confidence.
5. The near-term outlook could be the most challenging that Lao P.D.R. has had to face in over a decade, especially as these external challenges are compounded by the impact of recent floods. Our latest projections reflect these challenges:
• We expect growth to moderate to 5¾ percent in 2009, from around 7 percent in 2008, on the back of weaker exports, investment inflows, and domestic demand, with risks still pointing to the downside.
• Inflation pressures should continue to moderate, with headline inflation declining further to around 5 percent in line with easing fuel and food commodity prices.
• The outlook for the balance of payments is more uncertain. Although the negative impact of lower gold and copper prices is expected to be more than offset by a lower oil import bill, the external position could come under some pressure, especially if the expected decline in foreign exchange inflows coincides with an excessive easing of monetary and fiscal policies (see below).
6. The outlook is subject to a significant degree of uncertainty. On the one hand, a deeper global downturn would weaken further the outlook for exports and remittances, and tighter global financial conditions would have adverse implications for investment inflows. Adverse shifts in confidence towards the Kip, especially among domestic investors, could add to pressure on the external position. However, on the upside, interest in Lao P.D.R. from regional investors appears to remain robust, and this may support economic activity and the external position. Domestic demand may also prove more resilient than we have projected.
Meeting the Challenges
7. The immediate priority is to steer the economy safely past these near-term difficulties, and ensure macroeconomic and financial stability as the global economy goes through this severe economic downturn. The emphasis must be on safeguarding the economic progress Lao P.D.R. has made in the past few years. The first challenge is establish contingency measures to address the challenges posed by the weakening global economy. This will require a careful assessment of the potential vulnerabilities in the economy, as well as a recognition that economic policy may need to respond quickly to fast moving events.
8. Let me make one remark at this point, as an aside. The lack of data on key economic and financial variables is a major impediment to sound policy making. While this issue has been a long-standing concern, the need to improve the quality and timeliness of economic data has taken on an added urgency now that the economy is operating in a much less benign environment. Given the challenges that the economy is facing, the most critical needs are to improve monetary, fiscal, and balance of payments data, as well as data on banking operations. We stand ready to assist the authorities in this area.
9. The second challenge is to craft macroeconomic policies that will navigate the economy past the near term risks. To this end, we would suggest that policies be guided by the following considerations:
• Fiscal policy. The budget framework for 2008/09 may need to be reassessed. Lower commodity prices will reduce mining and petroleum revenues, and preliminary estimates suggest the loss of revenue could be significant (around 1 percent of GDP). Lower economic activity could also affect collections from corporate profits, as well as from import duties and excises. On the expenditure side, increased support for vulnerable groups may be needed, and the budgetary implications of the SEA games is still unclear. Additional donor support may be required, as the scope for domestic financing remains constrained.
• Monetary policy. Renewed efforts are needed to contain the current pace of credit expansion, which at over 65 percent could put pressure on the external position, especially if deposit mobilization continues to decelerate. In September, the latest data currently available, deposit growth had fallen to around 23 percent, down from 44 percent at the beginning of the year. The main priority is to rein in credit expansion by the state-owned commercial banks, which was running at close to 80 percent in September.
• Banking. Close monitoring of the banking system will be needed as economic activity slows in the months ahead. Having expanded credit so rapidly this year, the financial condition of the state-owned commercial banks will need to be watched particularly closely, especially as they have accumulated large exposures to small- and medium-scale enterprises, which may be specially vulnerable in an economic downturn.
10. Structural Reforms. I have focused on the near-term macroeconomic challenges, but I would like to conclude by emphasizing the importance of the broader structural reform agenda, especially to improve the overall business environment and investment climate. Maintaining the momentum of these reforms is important not only for the longer-term competitiveness of the Lao economy; it would also help bolster investor confidence and interest while the economy goes through this difficult period.
11. Let me thank you once again for this opportunity to participate in these discussions. On behalf of the IMF, let me reiterate our continued commitment to providing Lao P.D.R. with the best possible policy advice and support at this difficult juncture.