IMF LOWERS ESTIMATE OF 2009 LAO GDP GROWTH TO 4.5%

UNCLAS VIENTIANE 000179 SENSITIVE SIPDIS STATE FOR EAP/MLS TREASURY FOR SUSAN CHUN COMMERCE FOR HPPHO E.O. 12958: N/A TAGS: ECON EFIN EINV PREL LA SUBJECT: IMF LOWERS ESTIMATE OF 2009 LAO GDP GROWTH TO 4.5% REF: 08 VIENTIANE 202 ¶1. (SBU) SUMMARY: On March 11 a visiting IMF team told a donor group that the IMF now projects 2009 Lao GDP growth at 4.5%, down from about 7% in 2008, due primarily to slowdowns in mining, hydropower, and construction. The budget deficit is expected to increase from 2% to 5% of GDP; the Government of Laos (GOL) is neither planning to request IMF assistance nor to borrow on international capital markets to close this gap. Although the kip is expected to depreciate slightly against the dollar, inflation remains moderate. The IMF team suggested the Bank of Laos (BOL) needs to slow credit growth, and urged the government to recognize on budget land swaps used to finance the South East Asia (SEA) Games this December. The team's visit was to prepare the IMF's 2009 Outlook for Laos, scheduled for release in April. End Summary ¶2. (SBU) An IMF team of David Cowen (team leader),Susan Baker (senior economist),and Ben Bingham (senior resident representative),was in Laos March 9-11 researching the 2009 IMF Outlook for Laos. The team briefed interested donors March 11. The IMF's current 2009 real GDP growth projection for Laos is 4.5%, below its own late 2008 projection of 5.75% and 2.5% below 2008's GDP growth of "about 7%." The IMF team said it sees little sign of recovery in the global economy and expects 2010 economic growth in Laos to be "challenging." Sectors such as mining and hydropower, large draws for foreign direct investment (FDI) in recent years, are no longer booming. While mining output is steady, investment has essentially stopped. The hydropower sector is expected to weaken considerably in the medium term, although the beginning of commercial operations at the Nam Theun II dam at the end of 2009/beginning of 2010 will provide a boost to GDP. Although remittances have fallen, tourism appears to be holding up, possibly due to Laos' reputation as an affordable destination. A general slowdown in construction will also act as a drag on the Lao economy. Although preparations for the SEA Games in December 2009 will provide some support, much of the large scale construction for these events is almost finished (and was in any case done primarily by Chinese laborers.) ¶3. (SBU) The global slowdown is translating into a 2008-2009 government deficit now projected at 5% of GDP (6.5% if grants are excluded),up from 2% in 2007-2008. The Lao GDP is estimated at $5 billion. According to the IMF, the GOL is currently neither pursuing external borrowing nor requesting IMF assistance. Expectations are that the GOL will first seek out additional donor assistance to help close the gap, then draw down its foreign exchange reserves. The 2009-2010 budget deficit could be even larger, as projected profits from mining taxes have fallen sharply as well. Expectations are that the recurrent budget, scheduled to grow by 50% in 2008-2009, will be cut. The capital budget, supported recently by BOL direct lending to local authorities for infrastructure projects, also faces cuts. ¶4. (SBU) Despite the large projected budget deficit and slowing economy, the IMF expects the kip to depreciate only slightly against the dollar in 2009. Inflation has remained moderate, helped by a strong kip and the collapse in oil prices. According to Mr. Cowen, the IMF urged the BOL to slow credit growth, which has risen substantially in the past year. His team also raised the issue of SEA Games financing, noting that the government should recognize on budget land swaps used to finance the SEA Games. (ref a) The IMF will return in mid-May with a larger team for the annual Article IV consultations. ¶5. (SBU) COMMENT: The GOL continues to proclaim a goal of 8% economic growth in 2009, an increasingly unlikely target. Aware that the global slowdown is hitting some of its largest taxpayers hard, it has begun to work with major investors such as Phu Bia Mining, taking action on long-requested items to support and ease continued business operations in Laos. As yet few donors have shown much appetite for providing additional budget support to the GOL, and anecdotal tales of aid drying up are now circulating. Although copper prices have risen about 42% in 2009, to around $4,000 a ton, they remain some 50% below their 2008 highs, and the copper mines are unlikely to deliver the revenue bonanza the GOL needs to bring its budget closer to balance. END COMMENT. HUSO