Laos - 6-Financial Sector
Capital Markets and Portfolio Investment
Laos does not have a well-developed capital market, although government policies increasingly support the formation of capital and free flow of financial resources. The Lao Securities Exchange (LSX) began operations in 2011 with two stocks listed, both of them state-owned; the Banque Pour l’Commerce Exterieur (BCEL), and the power generation arm of the electrical utility, Electricité du Laos - Generation (EDL-Gen). In 2012, the Lao government increased the proportion of shares that foreigners can hold on the LSX from 10 to 20 percent. As of April 2017, there are only five companies listed on the LSX: BCEL, EDL-Gen, Petroleum Trading Laos (fuel stations), Lao World (property development and management), and Souvanny Home Center (home goods retail). News and information about the LSX is available at online at the exchange’s website.
Businesses report that they are often unable to exchange kip into foreign currencies through central or local banks. Analysts have suggested that concerns about dollar reserves have led to temporary issues with the convertibility of the national currency. Private banks allege that the central bank withholds dollar reserves. In response, the Bank of Lao PDR similarly alleges that the private banks already hold sizable reserves and have been reluctant to give foreign exchange to their customers in order to maintain unreasonably high reserves. The tightness in the forex market led to a temporary 5 to 10 percent divergence between official and gray-market currency rates in late 2016.
Lao and foreign companies alike note that there is a lack of long-term credit in the domestic market. Loans repayable over more than five years are very rare, and the choice of credit instruments in the local market is limited. The Credit Information Bureau, developed to help inject more credit into markets, still has very little information and has not yet succeeded in mitigating lender concerns about risk.
Money and Banking System
The banking system is under the supervision of the Bank of Lao PDR, the central bank, and includes more than 40 banks. Private foreign banks can establish branches in all provinces, and ATMs have become ubiquitous in urban centers. Technical assistance to Laos’ financial sector has led to some reforms but overall capacity within the financial governance structure remains weak.
The banking system is dominated by large, government-owned banks. The health of the banking sector is difficult to determine given a lack of reliable data, though banks are widely believed to be poorly regulated and there is broad concern about bad debts and non-performing loans that have yet to be fully reconciled, in particular by the state-run banks. The IMF and others have encouraged the central bank to facilitate recapitalization of the state-owned banks to improve the resilience of the sector.
Concerns over weak local banking regulation, lax enforcement, and exposure to risk stemming from a lack of money-laundering controls has led some western banks to terminate correspondent banking relationships with Lao banks. The central bank temporarily ceased licensing new banks in 2014, justifying the move as a means to better regulate existing banks and assess their compliance with existing regulations.
While there is no publicly available data on non-performing loans, it is widely believed that they pose a major concern in the financial sector, fueled in part by years of rapid growth in private lending. The government's fiscal difficulties in 2013 and 2014 led to non-payment on government infrastructure projects. The construction companies implementing the projects in turn could not pay back loans for capital used in construction. Many analysts believe the full effects of the government's fiscal difficulties have not yet worked their way through the economy.
Foreign Exchange and Remittances
Foreign Exchange
There are no published, formal restrictions on foreign exchange conversion, though restrictions have previously been reported. Due to the small size of the market for Lao kip, the currency is rarely convertible outside the immediate region. In 2013, the economy suffered fiscal and monetary difficulties, which resulted in low levels of foreign reserves. In response, the Bank of the Lao PDR imposed daily limits on converting funds from Lao kip into U.S. dollars and Thai baht, leading to challenges in obtaining foreign exchange in Laos. Again in late 2016, banks and some businesses reported restrictions on foreign currency conversion, though others claimed they had no trouble accessing foreign currency.
In order to facilitate business transactions, foreign investors generally open commercial bank accounts in both local and foreign convertible currency at domestic and foreign banks in Laos. The Enterprise Accounting Law places no limitations on foreign investors transferring after-tax profits, income from technology transfer, initial capital, interest, wages and salaries, or other remittances to the company’s home country or third countries provided that they request approval from the government. Foreign enterprises must report on their performance annually and submit annual financial statements to the Ministry of Planning and Investment (MPI).
The central bank, Bank of Lao PDR, maintains an adjustable peg against the U.S. dollar for the Lao kip, or LAK, and allows fluctuations within a band of plus or minus five percent. The peg is adjusted to account for fluctuations in value of both the U.S. dollar and the Thai baht. In recent years, the kip's value has fluctuated far less than the allowed five percent from the adjustable peg. In 2016, the kip appreciated against the Thai baht while depreciating slightly against the U.S. dollar.
Remittance Policies
Formally, all remittances abroad, transfers into Laos, foreign loans, and payments that are not denominated in Lao kip must be approved by the Bank of Lao PDR, the central bank. In practice, many remittances are understood to flow into Laos informally, and relatively easily, from a sizeable Lao workforce based in Thailand. Remittance-related rules can be vague and official practice is reportedly inconsistent. There have been no recent changes to remittance laws or policies in Laos.
Sovereign Wealth Funds
There are no known sovereign wealth funds in Laos.
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