Economic Analysis - Strong Growth And External Vulnerability To Keep BoL On Hold - JUNE 2017

BMI View: We forecast the Laotian economy to expand by a relatively robust 6.8% in 2017 on the back of a strong infrastructure investment pipeline and higher commodity prices. Although the Laotian kip was relatively stable against the greenback in 2016, we believe that the currency remains vulnerable to external shocks. This will likely encourage the central bank to remain on hold in 2017 to maintain macroeconomic stability.

Over the course of 2017, we expect the central bank to stand pat on its monetary policy as the US Federal Reserve moves towards normalising interest rates, while the low foreign exchange reserves have already placed the Laotian kip in a precarious position. Meanwhile, we expect the gradual recovery of commodity prices and a strong railway and hydropower investment pipeline to support growth in the economy, reducing the need for the central bank to ease any further.

In a recent report released by the Bank of Lao (BoL), it was announced that the central bank had lowered its policy rate (for loans less than one week) back in Q316 by 25bps to 4.25%, from 4.50% previously, citing efforts to spur investment and support the economy. The corresponding two-week and one-year loan rates were also lowered to 5.31% (from 5.63% previously) and 10.63% (from 11.25%), respectively. Although the overall reserve requirement was left unchanged at 5.00% for local currency deposits and 10.00% for foreign currency deposits, the central bank raised the allowance for eligible bonds (that can be used in the composition of the reserve requirement) from 2.00% to 2.50% for both the LAK and foreign currency accounts.

Growth To Stabilise
Laos - Real GDP Growth, % chg y-o-y
Asian Development Bank

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