American credit rating agency Fitch Ratings has downgraded Laos’ issuer default rating, a sign of investor skepticism that the landlocked Southeast Asian country will be able to make its looming debt payments. The downgrade to CCC- from CCC—already well into junk territory—comes amid a deepening debt crisis that has brought Vientiane within arms-length of default.
Like many other frontier markets, Laos has been hit hard by inflation, spiking commodity prices and a harsh environment for international finance. In June, inflation in Laos reached a 22-year high of 23.6%, according to macroeconomic data firm Trading Economics. The country’s debt has snowballed to $14.5 billion, bringing the country to the brink of default, Le Monde reports.
More than half of Laos’ foreign debt is owed to neighboring China. Laos has been a key focus of China’s Belt and Road strategy, with new China-funded railroads and hydropower plants dotting its landscape. While China will be eager to recoup its loans, analysts say a Lao debt default could harm China’s reputation as a partner for the developing world and feed allegations of debt-trap diplomacy, Deutsche Welle reports.