American credit rating agency Moody’s has given a B3 rating with a positive outlook to the Government of Laos, citing the country’s high economic growth potential.
However, the rating agency pointed out that the country’s weak executive institutions, limited transparency, and small economy could be challenges.
The rating is the first Laos receives from one of the Big Three credit rating agencies. The other two are Standard & Poor’s (S&P) and Fitch Group.
A credit rating enables sovereign wealth funds, pension funds, and other investors to gauge the creditworthiness of a particular country. Thus, it has a significant impact on the country’s borrowing cost.
Moody’s rating scale ranges from a maximum Aaa to a minimum C, consists of 21 notches and two categories, namely the investment category for the financially sound companies or countries and speculative category for the companies or countries with a higher risk of default.
Moody’s divides rating B into B1, B2, and B3. The rating falls into the speculative category, and the agency suggests that it is “subject to high credit risk.”
Other countries with the B3 rating include Angola, Belarus, Belize, Ecuador, El Salvador, Mongolia, Niger, and Pakistan.
Moody’s outlined four factors that support the rating.
The agency gave Laos “ba3” for economic strength, which balances the country’s high economic growth potential against relatively low incomes, the small size of the economy, and exposure to environmental risks.
The country received “b3” for the institutions and governance strength. This rating balances weak executive institutions, low administrative capacity, and minimal transparency and accountability against a lengthening track record of effective monetary management.
Laos got “caa1” for fiscal strength, which reflects a high government debt burden for the size of the economy and the government’s narrow revenue base that constrains budgetary flexibility. However, the mostly concessional debt supports debt affordability.
The country earned “ba” for the susceptibility to event risk, driven by external vulnerability risk given structural current account deficits and low foreign exchange reserve buffers.
The positive outlook reflects Moody’s assessment that measures undertaken by the Lao government would deliver net positive benefits to the economy and the government’s financial position.
These moves include the effective implementation of ongoing infrastructure investment and fiscal reforms.
These actions would strengthen Laos’s credit metrics to be consistent with a higher rating, Moody’s said in a report on January 8.
Picture credit: The Laotian Times
