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Thursday, December 2, 2021

Fearing the influence of Beijing, Laos will open a railway built by China


Laos will open a 6 billion-dollar Chinese-built railway on Friday. This is the largest public works project in its history. Analysts warn that this may expose this poor Southeast Asian country to financial risks or politics from Beijing. Coercion.

This 414-kilometer route from Boding near the Chinese border to Vientiane, the capital, was built under China’s “One Belt, One Road” initiative, which is Xi Jinping’s iconic infrastructure project.

Lao officials hope that once the Covid-19 pandemic subsides and the border is reopened, the railway will reduce freight rates, promote exports and attract more foreign tourists.

The Chinese company has dug 75 tunnels, built a bridge across the Mekong River in Luang Prabang, and smoothed a large area of ​​rugged terrain, connecting inland Laos with Kunming, the capital of China, and helping the country enter the world. The market provides convenience.

But analysts warned that the project is a gamble for this heavily indebted country with a population of 7 million.

“The project has potential positive implications,” said Jeremy Zook, director of ratings for Asia Pacific at Fitch Ratings. “The downside is that this is a very expensive railway, so the question is whether these advantages are sufficient to make it economically meaningful in terms of cost-effectiveness.”

Map showing Laos high-speed rail lines

Just as some “Belt and Road” projects—especially a port built by China in Hambantota, Sri Lanka, which was leased to China after Colombo was unable to repay its debts—analysts questioned whether Laos could manage its finances.

“This is one of my main concerns: how they will repay their debts,” said Ruth Banomyong, a logistics professor at Bangkok Law and Political Science and Business School. “High-speed rail has always been questionable economically.”

The construction cost of this railway is almost equivalent to one-third of Laos’ GDP. Among them, the Lao China Railway Company, a special-purpose company that constructs and operates this railway, borrowed US$3.54 billion from the Export-Import Bank of China.

LCRC owns state-owned enterprises in China and Laos as its shareholders, and the shareholding ratio of China and Laos is 70:30%.

Bar chart as a percentage of GDP in 2020 showing total debt

In order to finance its equity, in addition to paying for the resettlement costs of villagers along the railway, Laos also borrowed US$480 million from the Export-Import Bank of China and invested US$250 million in its own funds.

But researchers affiliated with the AidData Laboratory at the University of William and Mary in Virginia Recent report Since the railway is a public infrastructure asset, if the LCRC defaults on its obligations to the bank, there is an “extraordinary possibility” for the Laotian or Chinese authorities, and they will feel the need to bail out the LCRC.

According to data from the World Bank, after financing power and other infrastructure projects, Laos must repay an average of US$1.3 billion in public external debt each year until 2025. Because the government relies on borrowing to finance energy and other projects, its total debt last year reached $13.3 billion, accounting for 72% of GDP.

The World Bank recently warned that the country’s foreign debt dilemma is still high and its foreign exchange reserves are very low, about US$1.2 billion as of May.

According to Reuters, Laos gave majority control of its power grid to a Chinese company last year because it was trying to avoid defaulting.

“Their sources of financing are becoming more and more limited, so they will face challenges in being able to repay and refinance some of their upcoming debts,” Zook said. He added that Fitch has assigned Laos a sovereign rating of three Cs, indicating that “default is a real possibility.”

Follow John Reid on Twitter: @JohnReedwrites

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