Lao PDR Economic Monitor, May 2010

Real gross domestic product (GDP) growth, which was estimated at 7 percent in 2009, is expected to increase to 7.8 percent in 2010 driven largely by resource sectors. Out of this growth of 7.8 percent, around 3.3 percentage points comes from power sector (mainly NT2 - nearly 3 percentage points), 0.9 percentage points from agriculture, around 0.4 percentage points for each of mining and construction, 0.8 percentage points from manufacturing and about 1.7 percentage points from services sector (tourism and retail trade, financial sector services as a result of the recent sharp increases in bank lending, and transport and telecommunication services). Real gross national income (GNI) is expected to slow to nearly 6 percent this year compared to 9.5 percent in 2009 due to significant outflows of income (profit repatriation and interest payment) from resources sectors (mining and hydropower). Although international reserves remained fairly stable during the last six months, net foreign assets dropped by 25 percent. Gross official Reserves at the Bank of Lao PDR were estimated at about $635 million during Oct 2009-Mar 2010 of which $65 million can be attributed to an increase in the International Monetary Fund's (IMF's) SDR allocation in late 2009 and $63 million have been borrowed from domestic banks through sales of foreign currency denominated bonds by the Bank of Lao (BoL). Net foreign assets declined by 25 percent in 2009 and 23 percent in Mar 2010 due to rapid credit expansion and import growth. The current account deficit is projected to decline from 10.6 percent of GDP in 2009 to 7.7 percent in 2010 supported by strong export growth, and in particular NT2 exports of electricity to Thailand. The capital account surplus is expected to decrease slightly from 10.6 percent of GDP in 2009 to 10.1 percent this year although FDI started to rebound. The overall balance is likely to turn into surplus in 2010 to about 2.4 percent of GDP. Credit grew rapidly in 2009 and in the first quarter of 2010 but is expected to slow by end?2010. Credits grew by about 90 percent last year and during Jan-Mar 2010 partly due to BOL's direct lending to local projects to finance public infrastructure and associated imports (about 22 percentage points of total credit growth). As the Government of Lao (GOL) made a decision to stop quasi?fiscal activities in September 2009 and bank liquidity tightened (loan to deposit ratio increased significantly to 73 percent by end-2009 from 55 percent in 2008), credit growth is expected to slow in 2010.