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1、NO.278DECEMBER2023AdbbriefsKEY POINTS The LaoPeoples Democratic Republic has unique comparative advantages in green growth, which are incorporated into its social and economic planning framework, but not yet embedded in the financial sector and public finance management policies. Macroeconomic press
2、ures arising from unsustainable public debt and a weak Lao kip make the country vulnerable to shocks, including from volatility in commodity prices and changes in rainfall patterns, with climate change posing further risks to macroeconomic and financial sector stability. To support progress on its N
3、ationally Determined Contributions to achieve the Paris Agreement objectives by 2030, as well as the Sustainable Development Goals, the Lao People,s Democratic Republic needs to address ics debt sustainability challenges, including constraints relating to institutional and technical capacities and r
4、egulatory gaps, to improve its creditworthiness for increasing access to domestic and international green finance.Emma R. AllenSenior Country Economist Lao PDR Resident Mission ADBStrengtheningFoundationstoUnlockGreenFinanceintheLaoPeople,sDemocraticRepublicDavidBolandSDGFinancingSpecialist(Consulta
5、nt)1.aoPDRResidentMissionAsianDevelopmentBankFrankN.ThomasSDGImplementationandFinancingSpecialist(Consultant)Strategy,Policy,andPartnershipsDepartmentADBINTRODUCTIONThisAsianDevelopmentBank(ADB)briefprovidesasnapshotofcurrenteffortstopursueagreenergrowthpathintheLaoPeoplesDemocraticRepublic(LaoPDR),
6、tomitigatethefinancialimpactsthatareanticipatedunderprojectedscenariosofclimatechangeandnaturalresourcedegradation,andthechallengesthatthecountryfacesinaccessingfinancetohelpaverttheserisks.Itdescribeschallengestopromotingdevelopmentofagreenfinancialsector,andhowtomitigaterisksandaddressconstraints.
7、ItstressestheimportanceOfaddreSSingdebtsustainabilitychallengestosupportprogressontheSustainableDevelopmentGoals(SDGs)targetsandthecountrysnationallydeterminedcontributions(NDCs)toachievetheobjectivesoftheParisAgreementby2030.CHALLENGESInitsNinthNationalSocioeconomicDevelopmentPlan,2021-2025,theGove
8、rnmentoftheLaoPDRtargetskeygoalsforthecountrythatincludeenhancingenvironmentalprotectionandreducingdisasterriskswhilealsogrowingtheeconomyandimprovingNote: ADB recognizes *Hong Kong as Hong Kong. China; and Vietnam as Viet Nam. In this publication. $(* refers to United Sutes dollars.ADBISBN978-92-92
9、70-513-8(print)ISBN978-92-9270-514-5(electronic)ISSN2071-7202(print)ISSN2218-2675(electronic)PublicationStockNo.BRF230574-2DOI:httpdx.doi.orgl0.22617BRF230574-2livelihoodsandwell-being.Thecountry,sannualeconomicgrowthwashigh,averaging8%inthedecadeto2016,butthepandemic,vulnerabilitytoclimateandextern
10、alshocks,andworseningmacroeconomicimbalances-notablysteepcurrencydepreciation,highinflation,andrisingpublicdebt-moderatedaveragegrowthfrom2017onward., Asian Development Bank. 2023. Mjan DeVeIOPment OUHOOk (ADO) SePtember 2023. Manila.Itsgrowthhasbeennarrow,drivenprimarilybyexport-oriented,capital-in
11、tensiveforeigninvestmentinnaturalresources,largelyhydropowerandmining,andmorerecentlyintransportThegrowthslowdowninrecentyearsnarrowedfiscalspace,resultinginincreasedvulnerabilitytoarangeofeconomic,climate,environmental,andhealthshocks.Macroeconomicpressuresarisingfromunsustainablepublicdebtandaweak
12、Laokipmakethecountryvulnerabletoshocks,includingfromvolatilityincommoditypricesandchangesinrainfallpatterns,withclimatechangeposingfurtherrisks.Forexample,withtheonsetofElNinoweatherdisturbancesin2023,lectriciteduLaosGenerationPublicCompany(EDL-Gen)isatriskofsufferingrevenuelosseslinkedtolowerwateri
13、nflowinitsbasinsforhydropower.InAugust2022,heavyrainshitthecountryfollowedbyatropicalstormthatcausedwidespreadfloodsandresultedinthelimitedavailabilityofkeyfarminputs.In2020,halfofallfarmersexperienceddisastersdrought,flood,animaldisease,pestinfestations-whichreducedcapacitytogenerateincomeby20%ormo
14、reforthoseaffected.In2018,LaoPDRsuffereditsmostcostlyfloodsinadecade,withapost-disasterneedsassessmentestimatingtotaldamagesof$371.5million,equivalentto2.1%oftheGDP,andrecoveryneedsestimatedat$520million.TheLaoPDRishighlyvulnerabletodisasterstriggeredbynaturalhazards,withannualexpectedlossesforflood
15、eventsashighas3.6%ofGDP,makingsystematicriskreductioncritical., Government of the Lao PDR. 2018. POSt-DiSaSterNeedSASSeSSment: 2018 FlOC)ds, Lao PDR. Vientiane.Furthermore,economicestimatesofenvironmentalandnaturalresourcedegradationexceed$800millionperannum., World Bank. 2021. La。PDR: the Health, E
16、nVirOnment. and SUStainabie EConomiC ReCOVerV Nexus, Washington DC. Note: GDP in current United States dollars was $ 15 billion in 2022. World Bank. 2023. Maao PoVeHy Ou。:for EaSt Asia and te Pacific. Washington DC.Duetohighvulnerabilities,economicfoundationsneedtobestrengthenedinordertounlockopport
17、unitiesforgrowingthegreenfinancesectorandscalingupinvestmentsinfloodriskmanagementanddisasterriskfinancing. Note: Not all of which necessarily constitutes green finance; disaster risk financing may also fund other recovery and reconstruction activities devoid of green.Thecountryspublicdebtatcritical
18、levelimplieslimitedfiscalspacetorespondtochallenges,whichmayseethescaleofadverseimpactsoffutureshocksincrease.Addressingeconomicchallengesandbuildinggreaterresiliencerequirescriticalreformstoraisedomesticrevenue,transparentdebtmanagement,andstrengtheningfinancialsectorstability,includinginareasrelat
19、edtoclimatefinance,amongothers.Thecountryhasarobustplanningframeworkforpromotingresilientandsustainableeconomicgrowth,includingtheGreenGrowthStrategyto2030,theNationalStrategyonDisasterRiSkReduction2021-2030,andthecountry,sNDCstoachievetheobjectivesoftheParisAgreementby2030.TheLaoPDRisplanningtoredu
20、ceitsgreenhousegasemissionsby60%by2030fromabaselineof2000andistargetingnetzerocarbonemissionsby2050.iGovernment of the Lao PDR. 2021. NationaIlV Determined Contribution.Targetsforforestconservation,greenerproductionandconsumption,andeffectiveregulatoryenforcementareoutlinedinthecountrysNationalBiodi
21、versityStrategyandActionPlanfor2016-2025. Government of the Lao PDR. 2016 NatiQnH BiOdiVerSitVStrateQV and Action PIan 2016-2025. Vientiane: Ministry of Natural Resources and EnvironmentHowever,severaloftheplannedtargetswillbechallengingtoachieveinthefaceofdebtdistressandothermacroeconomicinstabilit
22、y,bothofwhichincreaseeconomicvulnerabilitiesandwidenthegapbetweenfinancialresourcesanddevelopmentMITIGATINGRISKSClimatechangeandenvironmentaldegradationarerecognizedasasubstantialthreattofinancialstabilityinmanycountries.Climatechangecouldcausea32%lossofSoutheastAsia,sgrossdomesticproduct(GDP)by2100
23、underahighemissionsscenario.r ADB. 2023. Asia in the GlObal TranSitiOn t。NetZerO-ASian DeVeloPment OUHoOk 2023 Them(ItiC RePOrt Manila.Theeconomicimpactsofclimatechangedisproportionatelyaffectwomen,children,andothervulnerablegroupsbyexacerbatingexistingvulnerabilitiesrelatedtolivelihoods,health,safe
24、ty,andaccesstoresources.Over50%oftheLaopopulationisactiveintheagriculture,naturalresources,andruraldevelopmentsector,forincome,employment,andfoodpurposes.Lao Bureau of Statistics. 2021. The 3rd Lao Census of Agriculture 2019/2020 Volume 2. Vientiane.Further,16%ofGDPcomesfromtheagriculturesectorandaf
25、urther10%ofGDPcomesfromthepowersector,mostofwhichisderivedfromhydropower. Changing rainfall patterns, more intense events, and longer droughts are expected to undermine electricity generation, with hydropower capacity factors forecast to drop by as much as 7% between 2020 and 2059 in the Lao PDR. Th
26、e reduction in hydropower capacity is estimated against a baseline period of 1970-2000. International Energy Agency. 2021. Climate Impacts on South and Southeast Asian Hydropower. Paris.Givenhowvulnerablethesesectorsaretoclimatefactors,andbecauseofthesectorscontributiontotheoveralleconomy,climate-re
27、latedimpactsontheeconomymayaffectthefinancialsectoranditsstability. Bank of the Lao PDR. 2021. AnCU/ EConOmiC RePOrt 202L Vientiane. ADB recently published its first dimate-Bnancial disci。SUreS report providing an overview on progress made by the bank in analyzing and mitigating its own financial ri
28、sks due to climate change.Institutionsthatprovidedinsuranceorloanstoindividualsandbusinesses,whicharethenaffectedbychangesintheenvironmentortheclimate,willlikelyseehigherlevelsofclaimsandlossesintheirportfolios,withborrowersfromlargehydropowercompaniestosmallholderfarmersatriskofmeetingtheirdebtobli
29、gations.Thisaffectsdomestic,internationalfinancialinstitutions,andmultilateraldevelopmentbanks,includingtheADB,throughvarioustransmissionchannelsincludingphysicalandtransitionrisks(Box2).BoxI:WhatisGreenFinance?Greenfinanceisrecognizedasaninnovativenewsourceofcapitalandanimportantopportunitytosuppor
30、teconomicgrowthforacceleratingprogressontheSDGs.Greenfinanceencapsulatesabroadersphereofactivitiesthanclimatefinancealoneandcanbedefinedasdenotingallfinancinginstruments,investments,andmechanismsthatcontributetoaclimateplusapproach,impactingbothclimateandenvironmentalsustainabilitygoals(FigureI).Ata
31、broadlevel,itincludes:,policymeasures,publicandprivate,governinginstitutionalconduct,transparency,andprudentialrisks. financialinstrumentsforgreeninvestments,suchasgreenbondsandloans,andassociatedcreditenhancementandblendinginstruments. thefundingarchitecture,includingtheglobalclimatechangeandenviro
32、nmentfunds(GreenClimateFund,GlobalEnvironmentFacility),aswellasdomesticmechanismsfordelivery(suchastheLaoEnvironmentProtectionFund).Theimpactofgreenfinanceistoembedenvironmentalexternalitiesinmarkettransactionsanddecisions,supporttransparencytoreducerisksanduncertainty,andreflectalongertimeframepers
33、pectiveforinvestmentanalysis.GreenfinancetherebysupportsprogressonSDGs,particularlygoals13(ClimateAction)and15(LifeonLand),whileatthesametimedrivingmuchneededeconomicgrowth.AlthoughthereiscurrentlynostrategicframeworkfordevelopingagreenfinancialsectorintheLaoPDR,effortsareunderwaytoassesslocalmarket
34、readiness,establishataxonomyforclassifying,green,activitiesorprojects,anddevelopregulationsforgoverninggreenbondissuances.IncreasingdomesticandinternationalinvestmentingreengrowthisalreadyamajorpriorityforthegovernmentOnthedomesticside,improvinglocalrevenuegenerationandconsolidation,targetingofbudge
35、tallocations,curbingillegalloggingandwildlifetrade,andenvironmentalfiscalreformsareeitherbeingimplementedorproposed.Tosupportaccessandstrategicplanningforinternationalfinancing,theLaoEnvironmentProtectionFundisbeingestablishedasaNationalAccreditedEntityundertheGreenClimateFund.Figure 1: ASimplifiedS
36、chemaforSustainable,Green,andClimateFinance,Low-carbon*ClimateGreenSocioenvironmental“Sustainable”Source:UnitedNationsEnvironmentProgramme.2016.InquiryintotheDesignofaSustainableFinancialSystem-DefinitionsandConcepts:BackgroundNote.Foracountrysoreliantonnaturalresources,itisthereforeimportantthatapp
37、ropriatefinancialproductsincludingdisasterriskinsurance,areavailabletosafeguardagainstclimaterisks.Themagnitudeofriskstothefinancialsectorfromclimatechangeandenvironmentaldegradationisuncertain.Howfutureweatherpatternswillchange,andhowpolicies,inscitutionsandeconomieswillchangegloballyandadaptareunc
38、ertainaswell.IntheLaoPDR,theimpactsofphysicalrisksincludethoserelatedtochangesinrainfallandtemperaturesuchasdelaysintheonsetofthewetseasons,moreintenserainfallsthatresultsinflooding,anddroughtsthatarelinkedtoinuncontrolledburninginthedryseason.Mountainousanduplandregionsinparticularfacethreatsfromsl
39、ash-and-burnagriculture,deforestationformajorprojects,logging,andlandandforestdegradation.Hydropowerfacesrisksfromlesswaterflowingintoitscatchmentareas.Thesehavesubstantialimpactsoneconomicinfrastructure,agriculturalproduction,energygeneration,forestryassets,andrurallivelihoods.Increasingresiliencet
40、otheseimpactsisanationalpriority.Asnaturalcapitalisbeingdepleted,itposesasignificantrisktothecountrysgrowthopportunities,andchallengestoachievingpovertyreductionandsustainabledevelopmentobjectives.IntheLaoPDR,thecostsofenvironmentaldegradationthatarewellrecognizedincludeincreasedfloodanddroughtrisk,
41、airandwaterpollution,riverinefisheryimpacts,andsoildegradation.Therefore,acomprehensiveclimatechangeandrelatedrisksapproachneedstobeadopted.Thisincludesbuildingcapacitytounderstandrisk,includingbothfinancialandfiscalrisk,consideringfutureclimatechangeandeconomicgrowthscenarios,andtoappraisetheeconom
42、iccostbenefitofclimateanddisasterriskreductionandadaptationmeasuresaswellasrisktransfersolutionstotheinsuranceandcapitalmarket.Thiswillsupportthecaseforgreeninvestmentsandmakeitsfinancingmoreresilientandsustainable.Thetransitionrisksthatcanbeassociatedwithaglobalshifttowardalowercarboneconomyareless
43、wellacknowledgedintheLaoPDR.Globaleffortstomitigateclimatechangecanreducephysicalrisksgloballybutcanalsoincreasethetransitionriskforalleconomies,iftheycauserapidorunanticipatedchangesinthevaluesofassets,commodities,ormarketstructure.Changesinassetvaluesorincreasedcostsofdoingbusinessforaffectedcompa
44、niescanleadtoincreasedfinancialrisktoexposedlenders.Theimpactofthesetransitionsislikelytobehigheronlower-incomecountriessuchastheLaoPDR.TheabilityoftheLaoPDRtomitigatephysicalandtransitionrisks,anditsachievementofrelacedSDGtargets,willdependonthesuccessofitspoliciesandplanstorestoredebtsustainabilit
45、yaswellasitsapproachtoencouragingandimplementinggreenfinance.ADDRESSINGCONSTRAINTSTheFinancingStrategyfortheNinthNSEDPnotesthattheinvestmentneedsforsupportingthecountrysprogressonitsNDCstoachievetheobjectivesoftheParisAgreementby2030aswellastheSDGsaresubstantial,andthatcontributionsfromallsourcesoff
46、inance-domesticandinternational,public,andprivate-willberequired.Itfurthernotesthatseveraltargetsoftheplanwillbechallenginginthefaceofdebtdistressandothermacroeconomicchallenges,whichhaveincreasedeconomicvulnerabilitiesandwidenedthegapbetweenfinancialresourcesanddevelopmentneeds.KeychallengesfortheL
47、aoPDRinmobilizinggreenfinanceincludepublicdebtatacriticallevel,institutionalandtechnicalcapacityconstraints,andregulatorygaps.FiscalConstraintsTheLaoPDR,spublicandpubliclyguaranteeddebt-alargeportionofwhichisexternalwasreportedbythegovernmentat112%ofGDPin2022,upfrom90%in2021.Averageannualdebtservici
48、ngobligationsover2023-2027arehigh,estimatedat$1.3billion,equivalentto8%ofGDP.Highdebtserviceamidlowrevenuecollectionsreducestheavailabilityoffundstofinancepublicservices,includingadaptationmeasurestostrengthenresilienceagainstclimatechangeanddisasters.Thehighlevelofdebtisnotonlycrowdingoutfiscalspac
49、eforpublicBox2:TransmissionChannelsofClimateRiskontheFinanceSectorTherearetwomainrecognizedtransmissionchannelsthroughwhichclimatechangeandenvironmentaldegradationcancontributetofinancialrisk:Physicalrisks.Changingclimatecontributestoshiftingweatherpatternsandmorefrequentoccurrencesoftyphoons,heatwaves,fires,floods,andstorms,theresultingdestruction,displacement,disrup
