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Laos: Market Profile

Picture: Laos factsheet
Picture: Laos factsheet
 

1. Overview

Laos’ GDP growth averaged 7.8% over the last decade, with the use of the country’s natural resources – mostly hydropower potential, minerals and forests – accounting for around one third of this growth. While Laos’ economic growth has moderated in recent years, economic growth remained vibrant in 2017. An expansion in power generation, manufacturing, and agriculture was offset by a slight deceleration in investment, slower credit growth, and a drop in tourism. The country continues to face a challenging macroeconomic situation in the near term. The fiscal deficit remains high, limiting the fiscal space and keeping public debt levels elevated. Growth is expected to further ease slightly in 2018 as current trends continue, before picking up in 2019-2020, supported by increased power generation and growing opportunities in the non-resource sectors from closer regional integration and reforms to improve the business environment.

Source: World Bank

2. Major Economic/Political Events and Upcoming Elections

April 2016
National Assembly at its five-year congress appoints Bounnhang Vorachit as president and leader of the ruling Lao People's Revolutionary Party (LPRP), succeeding Choummaly Sayasone, who has served as the ruling party's General Secretary and President of Laos from 2006.

September 2016
Former US President Barack Obama becomes the first sitting US president to visit Laos. US commits USD90mn dollars over three years to help clear unexploded bombs that the US dropped on Laos during the Vietnam War.

December 2016
Construction of the China-Laos railway officially begins. This is a 417km railway which will stretch from the Boten-Mohan border (between Laos and China) ending in Vientiane when completed.

Source: BBC country profile – Timeline, BMI Political Risk Analysis

3. Major Economic Indicators

Graph: Laos real GDP and inflation
Graph: Laos real GDP and inflation
Graph: Laos GDP by sector (2016)
Graph: Laos GDP by sector (2016)
Graph: Laos unemployment rate
Graph: Laos unemployment rate
Graph: Laos current account balance
Graph: Laos current account balance

Note: (e) estimate, (f) forecast
Source: IMF, World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Laos merchandise trade
Graph: Laos merchandise trade
Graph: Laos major export commodities (2016)
Graph: Laos major export commodities (2016)
Graph: Laos major export markets (2016)
Graph: Laos major export markets (2016)
Graph: Laos major import commodities (2016)
Graph: Laos major import commodities (2016)
Graph: Laos major import markets (2016)
Graph: Laos major import markets (2016)

Note: (e) estimate
Source: WTO, World Bank WITS database

4.2 Trade in Services

Graph: Laos trade in services
Graph: Laos trade in services

5. Trade Policies

  • Lao PDR became the 158th WTO member on 2 February 2013.

  • Laos' trade policies prioritise the protection of local industries. The average trade tariff rate in the country is 5.2%.

  • Individual companies in the petrochemical industry are required to file an annual import plan. The government controls the retail price and profit margins of gasoline and diesel, which weakens profitability and flexibility in this sector. Other goods prohibited for import and export range from explosives and weapons to certain forestry products and wildlife.

  • In May 2016, Laos Prime Minister Thongloun Sisoulith issued a moratorium on the export of logs and timber in order to decrease the pervasive shipments of illegally obtained logs, timber, processed wood, roots, branches, and trees from natural forests. Despite the moratorium, illegal timber sales continue with the support of local governments in Laos. There are allegations that provincial governors are profiting through the management of sawmills and trade with neighbouring Vietnam.

Source: WTO – Trade Policy Review

6. Trade Agreements

 Multinational Trade Agreements

Active

  1. Lao PDR became the 158th WTO member on 2 February 2013.

  2. Association of South East Asian Nations, ASEAN-The ASEAN Free Trade Area (AFTA) is a trade bloc agreement supporting local manufacturing in all ASEAN countries. Laos benefits from increased regional integration and tariff liberalisation that includes the elimination of import duties in various sectors and classes of goods and maximum tariffs of up to 5% between members. These factors will help reduce input costs for businesses and will increase the country's exporting capacity and industrial base in the long term. The 10 member states are Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Myanmar, Cambodia, Laos and Vietnam. Exports from Laos destined to these markets are subject to 0% tariff rates for most agricultural and industrial products, except for those under the General Exception List (GEL) as well as under the Sensitive List (SL) exporting to newer ASEAN members (Cambodia, Myanmar and Vietnam), which will be cut to a 0% rate by 2018. Being a member of ASEAN also opens the economy to other significant trade agreements with key regional markets such as China and India.

  3. Thailand-Laos benefits from a preferential trade agreement in terms of tariff exemption or reduction under the Laos-Thailand Preferential Trading Arrangement. Thailand is an important market for Laos, serving as the country's second largest export destination, and largest import source.

  4. China-Laos benefits from trade preference in terms of tariff exemption or reduction under the ASEAN-China Free Trade Agreement (ACFTA). China is an important market for Laos; it is the country's major trading partner and an important source of investment. There are also ongoing negotiations about the Regional Comprehensive Economic Partnership (RCEP) which is a regional economic agreement being negotiated between the ASEAN governments and their six FTA partners: Australia, China, India, Japan, New Zealand and South Korea. The RCEP would lower tariffs and other barriers to the trade of goods among the 16 countries that are in, or have existing trade deals with, ASEAN. Unlike the TPP and other US-led trade deals, however, the RCEP wouldn't require its members to take steps to liberalise their economies, protect labour rights and environmental standards and protect intellectual property.

  5. Japan-Laos benefits from trade preference in terms of tariff exemption or reduction under the ASEAN-Japan Free Trade Agreement (AJFTA). Japan is a large developed market and one of Laos' major trade partners.

  6. ASEAN-Korea Free Trade Agreement (AKFTA) - Laos benefits from trade preference in terms of tariff exemption or reduction under the ASEAN-Korea Free Trade Agreement (AKFTA) which is a trade bloc agreement between South Korea and ASEAN.

  7. ASEAN-India Free Trade Agreement (AIFTA) - Laos benefits from trade preference in terms of tariff exemption or reduction under the ASEAN-India Free Trade Agreement (AIFTA) which is a trade bloc agreement between India and ASEAN; this will help Laos in terms of trade growth and diversification given the size and performance of the Indian economy and other ASEAN member states.

  8. Vietnam-Apart from ASEAN, Laos also benefits from reciprocal access under the trade agreement between Laos and Vietnam for 32 tariff lines with 50% of the AFTA rate, while all other products are 0% rate, except for 155 tariff lines which fall under the GEL of Vietnam. Vietnam is a high-growth developing market and Laos' third highest import source and export destination.

Source: WTO Regional Trade Agreements database, European Commission

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Laos FDI stock
Graph: Laos FDI stock
Graph: Laos FDI flow
Graph: Laos FDI flow

Note: The value of outward FDI stock was less than US$0.1 bn, while outward FDI flow was less than US$0.5 mn during 2011-2016.

7.2 Foreign Direct Investment Policy

  1. The Laotian Investment Promotion Department (IPD) promotes FDI and evaluates foreign investment proposals. Laos has set up various special economic zones (SEZs) in the country, offering benefits like profit tax and value added tax reductions. The Law on Investment Promotion stipulated uniform business registration requirements and tax incentives for foreign and domestic investors. Government also provides special incentives for the prioritised sectors, including tourism, telecommunication and education. According to the 2009 Law on Investment Promotion, foreign and domestic investors are entitled to equal treatment and incentives within the market, though a few foreign companies have reported evidence to the contrary.

  2. Similarly, the 2010 Law on Investment Promotion states that foreign and domestic investors are offered the same tax incentives and business registration procedures.

  3. Non-residents are permitted to own property without a Saudi partner or sponsor. Saudi investment law allows 100% ownership of projects by foreigners (except for activities ruled out by the negative list) and relaxes rules for sponsoring foreign employees.

  4. Investment incentives for foreigners vary according to industrial sector and activities, as well as the level of infrastructure and socio-economic development in specific geographic zones. According to Articles 49, 50 and 51 of the Law on Investment Promotion, the government defines industry, agriculture, services and handicrafts as promoted activities. Laos divides its investment promotion into three levels (1 - high; 2 - medium; and 3 - low) and three zones with associated tax incentives.

  5. Under the 2010 Prime Ministerial Decree 443 on Special Economic Zones and Specific Economic Zones (SEZs), foreign investors are also encouraged to invest in the country's various economic zones.

  6. Foreign investors seeking to establish operations in Laos are typically required to go through several onerous steps prior to commencing operations. In addition to an investment license, foreign investors are required to obtain other permits, including; an annual business registration from the Ministry of Industry and Commerce; a tax registration from the Ministry of Finance; a business logo registration from the Ministry of Public Security; permits from each line ministry related to the investment; appropriate permits from local authorities; and an import-export license. Obtaining the necessary permits can pose a challenge, especially in areas outside the capital.

  7. Foreign partners in a joint venture must contribute at least 30% of the company's registered capital. Throughout the period of operation of a foreign enterprise, the local assets of the enterprise must not be less than its registered capital.

    The exploitation of natural resources of generation of energy requires a joint venture with a local party. Individual companies in the petrochemical industry are required to file an annual import plan. The government controls the retail price and profit margins of gasoline and diesel.

    Foreign individuals and entities are unable to own land in Laos, though may obtain extended leases of up to 99 years in some circumstances.

    There are also local equity ownership requirements in the areas of beer and other alcohol production, as well as the production of medicine and wholesale of beverages, tobacco, clothes and machinery.

  8. Laos does not allow for investors to participate in the security and defence industries, funerals and related services, religious education, manufacturing of cultural products that are damaging to national culture, chemical substances and industrial waste that may be hazardous to human health.

    Foreigners are also prohibited from producing a number of Lao cultural handicrafts, as well as from fishing and operating fish farms (unless certain conditions are met).

    The mining industry's future remains unclear as the negative environmental effects of mining activity worsen. In 2012, the government issued a moratorium on new mining ventures, and announced in November 2016 that it was considering a permanent ban on new projects in the sector. It is unlikely that this will be the case as Laos is heavily dependent on rents from the industry, but potential investors should expect increased regulatory oversight.

Sources: The International Trade Administration (ITA), U.S. Department of Commerce

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Zone 1 - Mountainous, plateau zones with no economic infrastructure

Under the 2010 Prime Ministerial Decree 443 on Special Economic Zones and Specific Economic Zones (SEZs), foreign investors are encouraged to invest in the country's various economic zones. According to Articles 49, 50 and 51 of the Law on Investment Promotion, the government defines industry, agriculture, services and handicrafts as promoted activities. Laos divides its investment promotion into three levels (1 - high; 2 - medium; and 3 - low) and three zones with associated tax incentives. The government also offers incentives for the education and healthcare sectors in the form of land lease exemptions or land concessions, ranging from three to 15 years depending on the zone.

- Level 1 investments receive profit tax exemptions for 10 years, Level 2 investments for six years and Level 3 investments for four years.

- The government also offers incentives for the education and healthcare sectors in the form of land lease exemptions or land concessions for 15 years.

- Exemption from profit tax in the next accounting year, if the net profit derived from business activities is used for business expansion.

- Exemption from import duties are applicable for the importation of raw material, equipment, spare parts and vehicles which are directly used for production.

- Exemption from export duties for exportation of general goods and products.

- If an investor suffers losses after completion of tax finalization with the tax office, the investor shall be permitted to carry the losses forward to three consecutive accounting years.

Zone 2 - Mountainous, plateau zones with a moderate level of economic infrastructureLevel 1 investments receive profit tax exemptions for six years, Level 2 investments for six years and Level 3 investments for two years.

The government also offers incentives for the education and healthcare sectors in the form of land lease exemptions or land concessions for 10 years.

Exemption from profit tax in the next accounting year, if the net profit derived from business activities is used for business expansion.

Exemption from import duties for the importation of raw material, equipment, spare-parts and vehicles which are directly used for production.

Exemption from export duties for exportation of general goods and products.

If an investor suffers losses after completion of tax finalization with the tax office, the investor shall be permitted to carry the losses forward to three consecutive accounting years.
Zone 3 - Mountainous, plateau zones with good economic infrastructureLevel 1 investments receive profit tax exemptions for four years, Level 2 investments for two years and Level 3 investments for one year.

Profit tax exemptions in all zones start from the date the enterprise commences operations. The government also offers incentives for the education and healthcare sectors in the form of land lease exemptions or land concessions for three years.

Exemption from profit tax in the next accounting year, if the net profit derived from business activities is used for business expansion.

Exemption from import duties for the importation of raw material, equipment, spare-parts and vehicles which are directly used for production.

Exemption from export duties for exportation of general goods and products.

If an investor suffers losses after completion of tax finalization with the tax office, the investor shall be permitted to carry the losses forward to three consecutive accounting years.

Source: Ministry of Planning and Investment, Investment Promotion Department

8. Taxation – 2017

  • Value added tax: 10%
  • Corporate income tax: 24%

Source: PwC Taxes at a Glance 2017

8.1 Important Updates to Taxation Information

According to Notification No. 0824/NSSFO of the Ministry of Labour and Social Welfare, the basic amount for the Social Security Scheme calculation changed from 2 million Lao kip (LAK) to LAK 4.5 million starting from 1 January 2017.

The passage of the revised State Budget Law (SBL) in December 2015 should help to strengthen public financial management in Laos over the coming years. According to the Ministry of Finance, the revised law, which will became effective in 2017, will help to strengthen the authority of the National Assembly in budget oversight as well as enhance the capacity of the Ministry of Finance in budget management. Greater fiscal discipline and monitoring as well as improving regional integration will have positive implications for the tax burden that firms and individuals in the country face.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax24% on deemed profit basis.
Dividends10% withholding tax on earnings.
Capital Gains Tax10% on income from sale of securities.
Value Added Tax10% on value of the products - applicable for businesses with annual income of LAK400mn (USD50,000) or more.
Social security contributions on income of up to LAK4.5mn1.5% on taxable earnings (where 6% is paid by employer, 5.5% by employee).


9. Foreign Worker Requirements

9.1 Localisation Requirements

Employers are required to give priority to Lao nationals. To employ foreign nationals, approval must be obtained from the Ministry of Labour and Social Welfare.

Companies must make a proposal through the Skills Development and Employment Department of the Ministry of Labour and Social Welfare, or through labour sections of provinces or municipalities, to utilise foreign employees.

The total percentage of foreign workers as a proportion of the total workforce is capped at 10% and 20%, for foreign workers undertaking menial labour and for professionals with specialised skills respectively.

Foreign workers are allowed to enter into employment agreements for an initial period of 12 months, renewable for another 12 months. The period of employment for a foreign worker in Laos cannot exceed five years in total.

Depending on the expertise of the employee and the requirements of the business, employers can request from the Labour Administration Authority a foreign worker to continue working for another additional period, which cannot exceed five years.

9.2 Obtaining Foreign Worker Permits for Skilled Workers

Foreign workers are legally required to have a valid employment visa and work permit before commencing work in Laos.

A sponsor is required from a locally licensed and incorporated entity in order to apply for work permits.

There are different types of work visas issued in Laos. A labour visa (LA-B2) is the most common type held for purposes of living and working in Laos.

Work visas may be valid for a period of 3-, 6- or 12-month durations and may also be renewable for a total period not exceeding five years.

9.3 Visa/Travel Restrictions

Laos is one of the countries with a very open visa policy. Japanese nationals and nationals of ASEAN member states do not require a visa to enter Laos (for a maximum stay).

Many nationals of many other countries can be issued a visa on arrival.

However, nationals of a few other countries are not eligible for a visa on arrival and must secure one in advance before arrival.

9.4 Religious/Cultural Barriers

Buddhism is the state religion, and the most dominant religion, practiced by nearly two-thirds of the population. Other common religions include Christianity (17%).

The Constitution of Lao PDR provides for freedom of religion; however, other laws and policies may restrict this right in practice.

The Prime Minister's Decree on Religious Practice (Decree 92) is the principal legal instrument defining rules for religious practice.

Authorities may, in practice, use Decree 92 to restrict the right to or some aspects of religion.

Source: National sources, BMI

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody'sNRNR
Standard & Poor'sNRNR
FitchNRNR

NR = No Rating

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
134/189139/190141/190
Ease of Paying Taxes Index
127/189146/190156/190
Logistics Performance Index
152/160N/AN/A
Corruption Perception Index
123/176135/180N/A
IMD World CompetitivenessN/AN/AN/A

Source: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank
42/202
Short-Term Economic Risk Score33.7534.5834.4
Long-Term Economic Risk Score37.2241.540.9
Political Risk Index Rank118/202
Short-Term Political Risk Score80.4280.4280.4
Long-Term Political Risk Score53.4255.7756.5
Operational Risk Index Rank  142/201
Operational Risk Score40.638.639.2

Source: BMI Research

10.4 BMI Political and Economic Risk Indices

BMI Risk Summary - Q2 2018

POLITICAL RISK
Laos has a largely stable political system, with the ruling Lao People's Revolutionary Party (LPRP) being the sole party in power since 1975.

ECONOMIC RISK
The country's high level of external debt (which stood at around 96% of gross national income [GNI] in 2014), and poor fiscal health resulting from the public sector wage increments in FY2012/13 (October 1- September 30) and FY2013/14 are acting as a significant drag. That said, ongoing efforts by the Laotian government to attract foreign direct investment (FDI) inflows to the hydropower and tourism sectors will keep the economy on a strong growth trajectory over the coming years. Laos' long-term economic risk outlook reflects the government's poor track record of managing its expenditure, the elevated external debt stock, as well as a rather underdeveloped financial system in the country. At the same time, a narrow economic base also poses risks to the country's ability to sustain its economic growth momentum.

OPERATIONAL RISK
As a developing state that is still in the process of implementing investor-friendly reforms and regional economic integration, Laos poses a number of pertinent operational risks to businesses. The small and largely undiversified labour market suffers from limited skills development, characterised by low literacy and weighed down by underfunding and endemic poverty, particularly in rural areas - resulting in a dearth of skilled labour in the country. The transport network is underdeveloped and inefficient and relies heavily on a poor-quality road system and limited alternative freight options, further increasing logistics costs, which are already elevated due to burdensome trade bureaucracy and high fuel costs.

Graph: Laos short term political risk index
Graph: Laos short term political risk index
Graph: Laos long term political risk index
Graph: Laos long term political risk index
Graph: Laos short term economic risk index
Graph: Laos short term economic risk index
Graph: Laos long term economic risk index
Graph: Laos long term economic risk index

Note: Higher score = Lower risk
Source: BMI Economic, Political Risk Indices, BMI Country Risk summaries

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskLogistics RiskTrade and Investment RiskCrime and Security Risk
Laos Score39.244.236.038.038.3
East and Southeast Asia Average55.356.554.455.754.7
East and Southeast Asia Position (Out of 18)1517151514
Asia Average48.950.647.147.750.0
Asia Position (Out of 35)2525242327
Global Average49.849.849.3
50.049.9
Global Position (Out of 201)142134147145135

Note: 100 = Lowest risk, 0 = Highest risk
Source: BMI Operational Risk Index

Graph: Laos vs global and regional averages
Graph: Laos vs global and regional averages
Country
Operational Risk
Labour Market RiskLogistics RiskTrade and Investment RiskCrime and Security Risk
Singapore82.977.8
74.7
89.9
89.3
Hong Kong81.271.2
75.9
88.589
Taiwan74.866.477.974.3
80.7
South Korea70.363.578.167.572
Malaysia68.361.675.473.562.5
Macau62.264.250.566.967.3
Brunei Darussalam60.262.85357.267.7
Thailand59.156.768.265.246.2
China56.653.965.852.254.3
Vietnam53.752.654.555.552.1
Indonesia52.751.557.653.947.8
Mongolia51.557.841.952.453.7
Philippines44.151.344.647.333.4
Cambodia42.646.737.94640
Laos39.244.236
3838.3
North Korea32.749.629.620.331.2
Timor-Leste32.240.52826.633.8
Myanmar32.145.529.528.225.4
Regional Averages55.356.555.455.754.7
Emerging Markets Averages46.848.045.847.546.1
Global Markets Averages49.849.849.350.049.9

Note: Higher score = Lower risk
Source: BMI Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Laos

Graph: Laos major export commodities to Hong Kong (2017)
Graph: Laos major export commodities to Hong Kong (2017)
Graph: Laos major import commodities from Hong Kong (2017)
Graph: Laos major import commodities from Hong Kong (2017)
Graph: Laos merchandise exports to Hong Kong
Graph: Laos merchandise exports to Hong Kong
Graph: Laos merchandise imports from Hong Kong
Graph: Laos merchandise imports from Hong Kong

2016
Growth rate (%)
Number of Lao residents visiting Hong Kong2,58925

Source: A Statistic review of Hong Kong Tourism 2016


2017
Growth rate (%)
Number of Lao residents in Hong KongN/A
N/A

Source: Hong Kong Immigration Department


2017
Growth rate (%)
Number of South and East Asia residents visiting Hong KongN/AN/A
Number of South and East Asia residents in Hong Kong2,784,870N/A

Source: UN

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Lao companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and Agreements between Hong Kong and Laos

Laos has double taxation agreements (DTA) with the China (mainland) concluded on January 25, 1999.

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

The main activities of HKAECF is to contribute to the fostering, promoting and facilitating of economic cooperation between Hong Kong and the 10 member countries of ASEAN (“1+10”), and between the ASEAN region and the PRC (“10+1”) with Hong Kong serving as a high value-adding and facilitating key international hub, bridge, connector, promotor and investor.

Address: Hong Kong-ASEAN Economic Cooperation Foundation Limited, G.P.O. Box 12779, Hong Kong
Email: secretariat@hk-asean.com

Source: Hong Kong-ASEAN Economic Cooperation Foundation Limited

Laotian Consulate General in Hong Kong
Address: Room 1402, Arion Commercial Centre, 2-12 Queen's Road West, 8 Cotton Tree Drive, Central, Hong Kong
Email: laoscghk@live.com
Hours of Business: Monday to Friday, 9:00 a.m. - 5:00 p.m.
Honorary Consul: Tardkham Phongphila, Consul General
Tel: (852) 2544 1186 / 2544 1129
Fax: (852) 2544 1187

Source: Hong Kong Protocol Division of Government Secretariat

11.5 Visa Requirements for Hong Kong Residents

Visa application has to be submitted by hand to the consulate. Electronic submission will not be accepted. HKSAR passport holders can apply for a visa upon arrival at Lao International Airports or Lao International border checkpoints for tourist purpose.

Source: Visa on Demand

Content provided by Picture: BMI Research
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