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USD/LAK forecast: Laos kip under persistent pressure from raging inflation, economy on the brink

By Nicole Willing

Edited by Valerie Medleva

09:41, 31 August 2022

USA and Laos currencies codes on national flags background.
LAK is facing its largest loss against USD since the Asian financial crisis in 1997-1998. What’s next for the currency? Photo: An147yus / Shutterstock

A plunge in the value of the Lao kip (LAK) against the US dollar (USD) this year has contributed to a debt crunch that threatens to bring the southeast Asian nation to economic collapse.

High external debt, rising inflation, falling currency reserves and a strong US dollar are combining to push the Lao People's Democratic Republic (Laos) towards default. 

The kip has plunged in value since last September, losing 36% against the dollar. As well as the Thai baht (THB), the currency is facing its largest loss against the dollar since the Asian financial crisis in 1997-1998.

What drives the value of the Lao kip against the US dollar? Will the LAK continue depreciating? 

In this article, we look at the performance of the kip and the latest US dollar to Laos kip forecast outlook.

What drives the USD/LAK exchange rate?

In foreign exchange (forex) trading, the USD/LAK currency pair represents how many Lao kip – the quote currency – are needed to buy one US dollar – the base currency. The number of LAK needed to buy $1 soared to 15,400.2 on 29 August, compared with 9,530.09 a year ago.

The value of a currency is typically driven by a nation’s economic growth, international trade balance, cash reserves and monetary policy such as interest rates. These all determine whether the country is attractive for investors and if  there's potential for the value of the currency to increase.

The US dollar is the world’s reserve currency. Its exchange rates are driven by sentiment on the state of the global economy and US domestic economic activity. Investors turn to the dollar – also known as the greenback, in reference to the colour of its notes – as a safe haven during times of economic and geopolitical uncertainty. That has been evident in 2022 as the US Dollar Index (DXY), which measures the value of the dollar against a basket of other currencies, has soared to a 20-year high. 

The US Federal Reserve’s (Fed) decision to raise interest rates at the fastest pace in decades to tackle soaring inflation has been a key driver, with higher interest rates making a currency more attractive to investors.

In contrast, Laos is one of the poorest countries in southeast Asia, with around 9.3% of the population living below the $1.90 purchasing power parity (PPP) international poverty line, according to the Asian Development Bank (ADB).

Laos imports a large proportion of its consumer goods from neighbouring China, Thailand and Vietnam. It conducts minimal trade with the West. The country’s balance of trade is a primary driver for the value of the LAK, along with its gross domestic product (GDP) growth and foreign currency reserves. 

Laos is heavily indebted to China, which completed construction of a $6bn high-speed rail link in December 2021 and accounted for 87.65% of the country’s foreign direct investment (FDI) in 2020, according to a Bank of the Lao PDR (BOL) annual report.

According to the Hinrich Foundation:

“Therefore, Lao PDR is dependent on FDI to fund the current account deficit. Where a gap remains, external debt fulfils this role; there are no capital markets to attract portfolio flows. Government external debt now amounts to 55% of GDP, but public-private partnership debt to external investors would suggest external indebtedness is higher.”

The country’s current account deficit has consistently been at a high rate relative to GDP, ranging between 7% and 15% from 2012 to 2019, the foundation said. The current account returned close to balance in 2020 because the Covid-19 related economic slowdown cut imports by 11% while the country’s electricity exports increased.

USD/LAK rate soars as Laos economic crisis grows

USD/LAK chart

The USD/LAK exchange rate was relatively stable around the 8,000 level from 2013 until 2020. The pair began to rise over the course of 2020 as the dollar strengthened, moving above the 9,000 mark. But the LAK sharply devalued against the dollar, starting in September 2021. 

By early October 2021 the USD/LAK rate was over 10,000 and the pair ended the year above 11,000. Another sharp rise in the rate in April 2022 lifted the dollar to more than 12,000 LAK. It reached 15,400 in August.

As in many other countries, the rate of inflation is soaring to more than 20-year highs in Laos. Inflation climbed by 23.6% year on year in June and by 25.6% in July, according to data from the Lao Statistics Bureau.

The Russian invasion of Ukraine and the associated spike in the cost of fuel has exacerbated Laos’s economic problems, resulting in petrol shortages. The rise in the value of the dollar combined with higher oil prices has made it difficult for importers to buy enough petrol to meet local demand.

By raising US interest rates, the Fed has increased the value of the dollar against other currencies, which typically prompts investors to take their money out of emerging markets, particularly countries that have large deficits. Central banks in emerging markets typically offset this risk by maintaining large foreign currency reserves to support domestic currencies.

However, Laos has long faced a shortage of dollars because of a lack of foreign investment, and has seen a rush on the local gold market as Laotians look to exchange their kip before it devalues further.

In June the black market exchange rate ranged between 19,000- 21,000 kip to one US dollar – the gap relative to the official exchange rate widening to 25%.

AUD/USD

0.67 Price
-0.320% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00006

AUD/USD_zero

0.67 Price
-0.320% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00006

USD/JPY

156.66 Price
-0.540% 1D Chg, %
Long position overnight fee 0.0108%
Short position overnight fee -0.0190%
Overnight fee time 21:00 (UTC)
Spread 0.010

EUR/USD

1.09 Price
+0.050% 1D Chg, %
Long position overnight fee -0.0087%
Short position overnight fee 0.0005%
Overnight fee time 21:00 (UTC)
Spread 0.00006

On 13 June, the BOL announced it was issuing a tranche of 5 trillion kip in BOL bills to sell to the public “with a purpose to stabilize macroeconomic conditions amid the recent rise in domestic inflation, exchange rate volatility and high growth of money supply.” On 23 June, the Laos government appointed a new governor of the BOL in response to rising unrest and protests.

In June, Moody's Investors Service downgraded the Government of Laos's long-term local and foreign-currency issuer ratings to Caa3 from Caa2 and changed the outlook to ‘stable’ from ‘negative.

“The decision to downgrade the rating to Caa3 reflects the elevated liquidity and external vulnerability risks that Laos continues to be exposed to and its high debt metrics, together with institutional and governance weaknesses that compound these vulnerabilities.,” Moody’s said. 

“A rapidly climbing rate of inflation, currency depreciation, and material contingent liabilities add risks around securing, and ultimately repaying, debt obligations. These factors all point to a higher probability of default than previously captured at a Caa2 level.”

“The stable outlook is based on Moody's view that fundamentals will begin to normalise around current levels, in turn allowing default risks to stabilise at levels consistent with a Caa3 rating. Fiscal and external imbalances as reflected in the structural budget deficit and current account deficit remain contained. Growth prospects are somewhat favourable, as the economy opens up to tourism and the inauguration of the China-Laos railway improves the outlook for trade. All of this suggests some possibility of debt stabilisation. However, default risk will remain high given very weak governance, a very high debt burden and insufficient coverage of external debt maturities by FX reserves.”

Based on its debt maturity schedule and potential financing options available, Moody's expects that risks to the government’s liquidity will remain elevated for at least the next three years. The country’s debt service repayments amount to $1.1bn this year and $1.4bn in 2023. Inflation and currency depreciation have increased risks to domestic market funding. 

In December 2021, “domestic banks' funding of the government increased by 122% year-on-year, indicating narrowing financing options for Laos. If the government relies more heavily on domestic borrowing in the absence of other external financing sources materialising, it could face difficult policy choices between curbing inflationary pressures and addressing repayment on domestic debts or public services at a time when the population faces a sharp increase in cost of living,” Moody’s said. 

Moody’s estimated that government debt stood at 81% of GDP in 2021 and could peak at 87.9% in 2022, edging down to around 84% by 2025.

“Moreover, given that nearly all of Laos's debt is denominated in foreign currency, further currency depreciation will add to debt servicing costs; while refinancing foreign-currency debt in local-currency will weigh on already thin reserves.”

Following a steady decline in foreign reserves since 2020, Moody's expects Laos’s reserves to hover between $1.2bn in 2022 and $1bn in 2023 – equivalent to only 1.5-2 months of total imports and below the total amount of external debt due each year. 

Fitch Ratings has similarly downgraded its Laos Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC-' from 'CCC'. It affirmed the Long-Term Local-Currency IDR at 'CCC' and the Country Ceiling at 'B-', noting:

“The downgrade of Laos' Long-Term Foreign-Currency IDR reflects a further rise in external liquidity risks, driven most recently by the spike in commodity prices and tightening global financing conditions. Laos' external debt repayment profile is challenging amid narrow financing options, surging inflation, currency depreciation and low foreign-exchange reserves. The Lao government has prioritised repayment of private debt obligations in recent years, but we believe risks are growing due to these external liquidity strains.”

“Foreign-exchange reserves have remained stable at around USD1.2 billion through March 2022, despite the building pressure on the currency. Nevertheless, reserve cover relative to imports (about 1.5 months of import cover) and external debt repayments is low. We forecast foreign-exchange reserves to begin to decline towards USD900 million by end-2022.”

Will these economic conditions continue to drive the LAK lower against the USD, or will the country find some relief from currency depreciation?

USD/LAK forecast: Will the LAK devaluation continue? 

Analysts at Singapore-based bank DBS expect the US dollar index to weaken from the June high in the second half of the year, which could provide some relief to the USD/LAK exchange rate.

“The strong USD seen in 1H22 might not extend into 2H22. The US fundamentals that propelled the DXY to a 20-year high of 105.5 in June have eroded. Apart from record-wide trade deficits and elevated inflation, US GDP contracted by an annualised 1.5% q/q saar in 1Q22. At the June FOMC meeting, the Fed acknowledged that frontloading hikes to control elevated inflation would lower economic growth below its long-term potential of 1.8%,” wrote DBS currency strategist Philip Wee in the bank’s quarterly FX outlook.

However, analysts expect the LAK to remain under pressure, which could outweigh weakness in the dollar. Trading Economics is bearish on the outlook for the kip in its USD/LAK forecast. The data provider expects the kip to trade at 15,492.88 against the dollar by the end of the quarter, and weaken further to trade at 16,133.32 in 12 months’ time, based on global macro models and analysts’ expectations.

Fitch Ratings also expects the kip to weaken further in its USD/LAK prediction: 

“A higher import bill from the surge in global commodity prices and high debt repayments have driven up demand for foreign exchange amid increasingly scarce supply... The authorities have taken steps that have stabilised the official rate since end-June, but we expect some further depreciation in the remainder of 2022.”

Fitch forecasts that Laos’s current account deficit will widen to 5% of GDP in 2022 because of the rise in oil and other import prices. The ratings agency expects the country’s public and publicly guaranteed debt ratio to climb to about 108% of GDP this year, “well above the roughly 70% peer median, from 73% in 2020. The surge in the debt level is largely due to significant depreciation of the Lao kip against the US dollar over the past couple of years given the large share of foreign-currency debt of about 90% of total debt.”

The USD/LAK forecast for 2022 from Wallet Investor was also bearish on the outlook for the kip, at the time of writing (30 August), predicting that the dollar will trade up to 15,659.54 by the end of the year and hit 17,062.83 by the end of 2023. The algorithm-based service’s USD/LAK forecast for 2025 had the pair trading up to 19,866.95 by the end of 2025.

The USD/LAK forecast for 2022 from Gov Capital predicted that the pair could trade at 16,049.57 by the end of the year and 22,970.07 by the end of 2023, based on its deep learning technical analysis. Analysts were yet to issue a USD/LAK forecast for 2030.

When considering any USD/LAK forecast, it’s important to remember that forex markets are highly volatile, making it difficult for analysts and algorithm-based forecasters to come up with accurate long-term predictions. 

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

FAQs

Why has USD/LAK been rising?

The USD/LAK exchange rate has soared in the past year as high debt levels, rising inflation and the strength in the value of the US dollar have devalued the Lao kip.

Will USD/LAK go up or down?

The direction of the pair will likely depend on monetary policy in Laos and the US as well as geopolitical events, among other factors.

When is the best time to trade USD/LAK?

Forex markets are open around the clock on weekdays, but the most active trade on the USD/LAK market is around the release of major economic data and monetary policy announcements, such as on inflation and interest rates. Such releases can drive price volatility and increase liquidity, creating opportunities for traders to profit. However, you should keep in mind that high volatility increases risks of losses.

Is USD/LAK a buy, sell or hold?

Whether you should trade the USD/LAK pair is a personal decision depending on your risk tolerance, investing strategy and portfolio composition. You should do your own research into the economic data, government policies and other factors that drive the exchange rate to make an informed decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

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