(KPL) Laos’ economic growth is projected to further moderate to 6.7 percent in 2017 as strong exports are weighed down by slowdown in investment, weaker tourism and stronger controls over government spending, World Bank said in its October 2017 edition of the “East Asia and Pacific Economic Update”.

An additional 250 mw of power generation is expected to come on stream in 2017, bringing total installed capacity to around 6,600 mw, most of which is exported.

Manufacturing exports continued to expand as new companies entered the two special economic zones while a good harvest and some recovery in commodity prices gave a boost to agriculture and mining exports.

On the other hand, delays on some power projects as well as a tighter fiscal stance resulted in slower investment activity.

Output in mining stagnated due to lower grade ores at one of the mines. The trend of declining number of tourist arrivals during 2016 continued in the first half of 2017. Weak oil prices, well-stocked food markets and moderating demand, kept inflation pressures subdued.

The growth in agriculture exports, in part reflects a restructuring in the agriculture sector characterized by increased participation of traditionally small scale farming households in the production of export linked communities.

Taken together with continued expansion in the special export zones, this points to better economic opportunities and improvements in household welfare in both rural and urban areas. Poverty reduction is thus expected to have continued.

The fiscal deficit is projected to reach 6.2% of GDP in fiscal year 2017. The removal of exemptions on fuel imports in 2016, recovering commodity prices (resulting in higher royalties and import duties) as well as efforts to expand tax base and improve compliance is helping offset the impact of moderating economic growth.

Still, revenues are likely to remain below ambitious target levels triggering an adjustment in spending, including stronger control on purchase of goods and services and lower transfers. Public debt is expected to edge towards 70 percent of GDP by the end of 2017.

The current account balance is expected to narrow this year. Exports of electricity, manufactures and agriculture products continued to perform well, while recovering copper prices supported mining exports.

Imports increased at a slower pace reflecting the slow recovery in oil prices, completion of some power project construction and gradual launch of the construction works on the Kunming – Vientiane railway line.

Imports are expected to pickup in the second half of the year as the project construction picks up.

Net services will decline as tourism activities slow. Reserves are expected to increase only slightly this year, but remain at around 2 months of imports and less than 25 per cent of foreign currency deposits.

In response to the large current account deficit and limited reserves, the kip depreciated by 2.1 percent and almost 7 percent, against the US dollar and the Thai baht, respectively since the start of 2017, helping reserve some of the strong appreciation in recent years. Consequently, the gap between the official and parallel market rate narrowed to 1.5 percent compared to above 3 percent at the start of the year.

While monetary conditions remain unchanged, credit growth decelerated to 17 percent year on year in June this year compared to 22 percent a year ago due to slight weakening in the loan portfolio, more modest deposit growth as well as tighter fiscal space.

Risks in the financial sector persist as some banks remain undercapitalized and overall profitability, while recovering, remains low.

KPL