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Cambodia

Author(s):
International Monetary Fund
Published Date:
February 2009
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I. Macroeconomic and Financial Developments

1. Cambodia’s exceptional growth performance the past five years is coming under increasing strain from the global financial crisis and weakening external demand (Box 1). The economy has been particularly vulnerable to recent shocks given its narrow production base, concentration of exports by product and destination, and dependence on external inflows. As a result, economic activity is slowing in most sectors and liquidity conditions are tightening as funding sources dry up. Rapid credit expansion since 2007 combined with long-standing weaknesses in bank oversight and now falling property prices have heightened credit and solvency risk among a number of banks, including a few systemically important ones.

2. Core macroeconomic developments are summarized as follows:

  • Real GDP growth is projected at 6½ percent in 2008, compared to 10¼ percent in 2007 (Table 1). Garment exports and tourism activity moderated as external demand weakened. Tourism has also been adversely affected by border tensions that emerged between Cambodia and Thailand in mid-2008. Agricultural growth is expected to be below-trend due to adverse weather. New construction activity—strong in the first half of the year—faltered, as foreign direct investment (FDI) slowed and credit growth decelerated.

  • Inflation pressures intensified in the second half of 2007 and first half of 2008 because of rising commodity prices, a weakening in the U.S. dollar against major currencies, and domestic demand pressures. As these factors reverse, headline inflation is expected to be around 15½ percent (y/y) in December 2008, compared to a peak of 26 percent in May 2008.

  • The current account deficit rose sharply in 2008 due to high oil prices and strong non-oil imports. As a share of GDP, the deficit (including transfers) is projected at 12 percent in 2008 compared to about 3½ percent in 2007 (Table 2). Notwithstanding recent developments, the overall external position for 2008 should improve on strong official inflows as well as private inflows earlier in the year, with gross official reserves projected at US$2.0 billion (3.5 months of prospective imports) by year-end, compared to US$1.6 billion (2.5 months) at end-2007.

Table 1.Cambodia: Selected Economic Indicators, 2005–09
Nominal GDP (2007):$8.69 billionGDP per capita (2007):$649
Population (2007):13.4 millionPoverty rate (2005):35 percent
Main exports (2007):Garments (73.7 percent of total)Fund Quota:SDR 87.5 million
200520062007200820082009
Est.Latest 1/Proj.Proj.
Output and prices (annual percent change)
GDP in constant prices13.310.810.26.54.8
(excluding agriculture)8.117.312.28.15.3
Real agricultural output15.75.55.02.03.5
GDP deflator6.14.66.515.38.0
CPI Inflation (end-year) - Phnom Penh, old6.72.810.815.715.57.4
(Annual average)5.84.75.919.520.08.2
Saving and investment balance (in percent of GDP)
Gross national saving14.619.917.49.111.9
Government saving1.91.82.93.42.7
Private saving12.718.114.55.79.2
Gross fixed investment18.520.620.821.019.0
Government investment4.95.76.15.66.3
Non-budgetary grant-financed investment3.03.62.41.91.7
Private investment10.511.212.313.511.0
Money and credit (annual percent change, unless otherwise indicated)
Broad money16.138.262.919.54.92.6
Net credit to the government 2/-4.9-10.6-12.4-11.1-9.5-5.1
Private sector credit31.851.676.075.560.010.0
Velocity of money 3/5.44.93.93.53.64.0
Public finance (in percent of GDP)
Revenue 4/10.311.511.910.512.512.1
Of which: Tax revenue7.67.99.58.610.19.9
Expenditure12.814.214.711.114.215.4
Current expenditure7.98.58.76.88.69.1
Capital expenditure 5/4.95.76.14.35.66.3
Overall budget balance (excluding grants)-2.5-2.7-2.9-0.6-1.7-3.2
Foreign financing, net4.94.85.03.44.34.6
Domestic financing, net 6/-2.4-2.0-2.2-2.8-2.6-1.3
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.2,9103,6944,0894,3634,197
(Annual percent change)12.426.910.76.7-3.8
Imports, f.o.b.-3,904-4,727-5,419-6,523-5,798
(Annual percent change)19.421.114.620.4-11.1
Current account (including official transfers)-240-47-296-1,268-845
(In percent of GDP)-3.8-0.6-3.4-11.9-7.1
Gross official reserves 7/9151,0971,6162,0932,0331,933
(In months of prospective imports)2.02.12.53.63.53.1
External debt (in millions of dollars, unless otherwise indicated)
Public external debt 8/9/2,1202,2542,5822,8093,087
(In percent of GDP)35.031.029.726.826.0
Public debt service (cash basis)2828362846
(In percent of exports of goods and services)0.70.60.60.50.8
Memorandum items:
Nominal GDP (in billions of riels)25,75429,84935,03948,99948,691
(In millions of U.S. dollars)6,2867,2648,690
Exchange rate (riels per dollar; period average)4,0974,1094,0324,064
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

CPI is as of November; money and credit is as of end-October; public finance is as of end-October; and gross official reserves are as of December 5, 2008. The exchange rate is the year-to-date average through December 21, 2008.

Contribution to broad money growth.

Ratio of nominal GDP to the average stock of broad money.

In 2006, includes transfer from the IMF of Multilateral Debt Relief Initiative (MDRI) proceeds as capital revenue.

In 2005, includes repayment of arrears.

Includes funds in transit and payment orders in excess of cash released.

Excludes unrestricted foreign currency deposits held as reserves at NBC and valuation changes.

From 2006, includes the impact of debt forgiveness from the IMF under the MDRI.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

CPI is as of November; money and credit is as of end-October; public finance is as of end-October; and gross official reserves are as of December 5, 2008. The exchange rate is the year-to-date average through December 21, 2008.

Contribution to broad money growth.

Ratio of nominal GDP to the average stock of broad money.

In 2006, includes transfer from the IMF of Multilateral Debt Relief Initiative (MDRI) proceeds as capital revenue.

In 2005, includes repayment of arrears.

Includes funds in transit and payment orders in excess of cash released.

Excludes unrestricted foreign currency deposits held as reserves at NBC and valuation changes.

From 2006, includes the impact of debt forgiveness from the IMF under the MDRI.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Table 2.Cambodia: Balance of Payments, 2005–09(In millions of U.S. dollars, unless otherwise specified)
20052006200720082009
Est.Projection
Current account (including official transfers)-240-47-296-1,268-845
(Excluding official transfers)-606-522-694-1,725-1,311
Trade balance-993-1,034-1,330-2,160-1,601
Exports, f.o.b.2,9103,6944,0894,3634,197
Of which: Garments2,2062,6632,8402,9382,857
Imports, f.o.b.-3,904-4,727-5,419-6,523-5,798
Of which: Garments sector-1,106-1,298-1,376-1,473-1,393
Petroleum-841-1,123-1,347-1,981-1,172
Services and income (net)17919725985-35
Services (net)483516644488346
Of which: Tourism (credit)8409631,1491,2121,086
Income (net)-304-319-384-403-380
Private transfers (net)209315377350325
Official transfers (net)365475398457466
Capital and financial account3052407241,648715
Medium- and long-term loans (net)170118251196253
Disbursements177132269221288
Amortization-7-14-19-25-35
Capital transfers 1/076000
Foreign direct investment375483866785488
Net foreign assets of deposit money banks (change, + decrease) 2/-16-181-3848068
Errors and omissions 3/-224-257-9-139-34
Overall balance65193427379-130
Financing-65-193-427-379130
Change in gross official reserves 4/-77-138-447-400110
Use of IMF credit-9-82000
Purchases/disbursements00000
Repurchases/repayments 5/982000
Debt restructuring 5/06000
Accumulation of arrears2221202119
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers-9.6-7.2-8.0-16.3-11.0
Including official transfers-3.8-0.6-3.4-11.9-7.1
Trade balance (in percent of GDP)-15.8-14.2-15.3-20.4-13.5
Gross official reserves9151,0971,6162,0331,933
(In months of prospective imports)2.02.12.53.53.1
(In percent of commercial banks’ foreign currency deposits)105.085.770.890.286.6
Net official international reserves8341,0971,6162,0331,933
Public external debt 6/2,1202,2542,5822,8093,087
(In percent of GDP)35.031.029.726.826.0
(NPV in percent of GDP)24.223.124.226.724.5
Public external debt service (Including IMF, cash basis)2828362846
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Debt forgiveness from the IMF of debt incurred before 2005 under the MDRI.

Includes unrestricted foreign currency deposits held as reserves at the NBC.

Includes unidentified short-term flows.

Excludes unrestricted foreign currency deposits held as reserves at NBC and valuation changes.

Reflects the impact of MDRI debt forgiveness.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Debt forgiveness from the IMF of debt incurred before 2005 under the MDRI.

Includes unrestricted foreign currency deposits held as reserves at the NBC.

Includes unidentified short-term flows.

Excludes unrestricted foreign currency deposits held as reserves at NBC and valuation changes.

Reflects the impact of MDRI debt forgiveness.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Cambodia: Sources of Growth, 2003–09

(Year-on-year percent change)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Cambodia: Inflation Developments, 2004–08

(Year-on-year percent change)

Source: Data provided by the Cambodian authorities; and IMF staff estimates.

1/ Excludes food, beverages and tobacco, and transportation and communication components of the consumer price index (Phnom Penh, old series).

Cambodia: Current Account Balance and Financing Flows

(In billions of U.S. dollars)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

1/ Excluding official transfers.

Box 1.Cambodia: Effects of the Global Crisis

  • On the real side, garment export growth has fallen sharply in Cambodia, consistent with weak retail sales in the United States (around three-quarters of the market). Garment sector employment (the largest source of formal employment) is also declining, down 6 percent (y/y) for the year ending July 2008, or to 330,000 workers. Near-term prospects for the sector are poor from both an output and employment perspective, because of demand concentration in the U.S. and competition abroad (see Box 4).

  • Tourist arrivals are also slowing given external conditions, with rising costs and regional instability also factors. Growth was 3 percent (y/y) in the third quarter of 2008, compared to 17 percent in the same quarter last year. As a further indicator, ticket sales at Angkor Wat were up only ½ percent in the first eight months of 2008, compared to 36 percent for the same period in 2007. With the peak travel season now upon Cambodia, hotel operators are reporting a significant drop in forward bookings for this period compared to the previous year. A prolonged downturn could have serious fiscal implications, given the sector’s contribution to domestic revenues, in particular the VAT.

  • Construction approvals were up 38 percent in the first nine months of 2008, compared to 100 percent in the same period last year. Property prices in and around Phnom Penh are reportedly down as much as 25 percent from historic highs in mid-2008, after rising 50–100 percent in the preceding year. Since the global financial crisis hit, a few major urban projects have been scaled back or cancelled outright, as foreign investors (mainly from Korea) reassess their commitments in the face of tighter funding conditions abroad and weaker near-term prospects in Cambodia.

  • However, lower commodity prices have helped bring down inflation and temper the rise in the current account deficit. Since the May 2008 peak, food and fuel prices are responsible for around 80 percent of the decline in headline inflation. In the event world oil prices had stayed at mid-year levels, the oil import bill for Cambodia would likely be around US$210 million (2 percent of GDP) higher in 2008 than currently projected.

Cambodia: Garment Exports and U.S. Retail Sales Growth, 2006–08

(Seasonally adjusted, 3-month moving average)

Sources: Data provided by the Cambodian authorities; U.S. Federal Reserve Bank; and IMF staff estimates.

Cambodia: Total Tourist Arrivals and Angkor Wat Revenue, 2006–08

(Year-on-year growth, in percent)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

1/ Revenue from ticket sales.

Cambodia: Contribution to Month-on-Month Headline Inflation, 2007–08

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

3. The fiscal stance continued to underpin the government’s stabilization efforts in 2008. The overall deficit is expected at around 1¾ percent of GDP, against an official target of 4¼ percent and an outturn of around 3 percent in 2007 (Table 3). Revenue continues to rise (including as a share of GDP), owing to a buoyant domestic economy and improved tax and customs administration, with a pilot of the ASYCUDA system launched and ad hoc tariff exemptions reduced. Current expenditure has been in line with planned allocations, including a mid-year fiscal package.1 Capital expenditure is expected to be slightly higher than budgeted, but precise estimates of actual spending are hampered by weaknesses in recording payment orders and slow progress in budget integration.

Table 3.Cambodia: General Government Operations, 2005–09
20052006200720082009
Est.BudgetStaff

Proj.
BudgetStaff

Proj.
(In billions of riels)
Total revenue2,6533,4314,1654,1095,3775,3975,907
Of which: Central government2,5593,2403,9623,9575,1225,1055,604
Tax revenue1,9482,3723,3433,2414,3574,3424,834
Direct taxes222331480486687746797
Indirect taxes1,6471,9202,6762,6243,4333,3243,755
Of which: Trade tax5736449038581,0821,0321,153
Provincial taxes79121187131237272282
Nontax revenue578681705710796871889
Capital revenue 1/127377117157223183183
Of which: MDRI capital transfer 2/034100000
Total expenditure3,3034,2445,1645,6806,1117,4177,487
Current expenditure2,0322,5273,0433,5693,6994,6584,408
Wages8359751,0581,2421,4361,7301,730
Nonwage1,0661,3721,7662,1202,0572,5722,322
Of which: Interest payments5550707556100100
Provincial expenditure130180220207207357357
Capital expenditure1,2721,7162,1212,1112,4122,7593,079
Locally financed315381436709630966966
From MDRI capital transfer0022839292
Externally financed 3/9561,3361,6821,4001,6991,7002,021
Current balance4945261,0043831,4545551,315
Overall balance (excluding grants)-650-813-1,000-1,571-734-2,020-1,581
Financing6508131,0001,5717342,0201,581
Foreign (net)1,2751,4181,7681,8611,8611,8952,216
Disbursements1,3121,4741,8701,6211,9812,0352,356
Grants5517617648831,0301,0781,078
Loans7617121,1067389519571,278
Amortization-38-55-102-120-120-140-140
Domestic (net)-624-606-76870-1,127125-635
Bank financing (net)-212-532-863120-1,077155-605
Other-412-7494-50-50-30-30
(In percent of GDP)
Total revenue10.311.511.910.912.511.112.1
Of which: Central government9.910.911.310.511.910.511.5
Tax revenue7.67.99.58.610.19.09.9
Nontax revenue2.22.32.01.91.91.81.8
Capital revenue 1/0.51.30.30.40.50.40.4
Total expenditure12.814.214.715.114.215.315.4
Current expenditure7.98.58.79.58.69.69.1
Of which: Wages3.23.33.03.33.33.63.6
Nonwage4.14.65.05.64.85.34.8
Capital expenditure 3/4.95.76.15.65.65.76.3
Current balance1.91.82.91.03.41.12.7
Overall balance (excluding grants)-2.5-2.7-2.9-4.2-1.7-4.2-3.2
Financing (net)2.52.72.94.21.74.23.2
Foreign4.94.85.04.04.33.94.6
Disbursements5.14.95.34.34.64.24.8
Grants2.12.52.22.32.42.22.2
Loans3.02.43.022.02.22.02.6
Amortization-0.1-0.2-0.3-0.3-0.3-0.3-0.3
Domestic-2.4-2.0-2.20.2-2.60.3-1.3
Bank financing (net)-0.8-1.8-2.50.3-2.50.3-1.2
Other-1.6-0.20.3-0.1-0.1-0.1-0.1
Memorandum items:
Social spending (in percent of GDP)2.92.82.42.42.4
Overall balance (including grants, in percent of GDP)-0.4-0.2-0.7-1.80.7-1.9-1.0
GDP (in billions of riels)25,75429,84935,03937,69442,99948,44648,691
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Capital revenue includes privatization proceeds.

The full amount of MDRI proceeds (CR 341 billion) was recorded as capital revenue in 2006. In subsequent years, spending under MDRI has been recorded as capital expenditure.

Capital expenditure (externally financed) includes a statistical discrepancy, reflecting the difference between actual and recorded disbursements.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Capital revenue includes privatization proceeds.

The full amount of MDRI proceeds (CR 341 billion) was recorded as capital revenue in 2006. In subsequent years, spending under MDRI has been recorded as capital expenditure.

Capital expenditure (externally financed) includes a statistical discrepancy, reflecting the difference between actual and recorded disbursements.

Cambodia: Gross Official Reserves

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Cambodia: Fiscal Deficit and Financing, 2003–09

(In percent of GDP)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

4. Monetary conditions have tightened as external inflows slow and policy measures take hold. Broad money growth is expected to decline from 63 percent at end-2007 to around 5 percent by end-2008 (Table 4). In response to excessively loose conditions in the first half of 2008, the National Bank of Cambodia (NBC) doubled the reserve requirement on foreign currency deposits (FCDs) to 16 percent in June.2 It also placed caps on banks’ lending to the real estate sector. Credit growth, which exceeded 100 percent (y/y) in mid-2008, is expected to fall to around 60 percent by year-end. Despite recent global developments, the riel has remained generally stable against the U.S. dollar since mid-year. Lacking an effective interbank market, the NBC continued to use foreign exchange market intervention to inject riel liquidity necessary to meet transaction demand, with the effect of limiting riel strengthening.

Table 4.Cambodia: Monetary Survey, 2006–09
2006200720082009
Dec.Dec.MarchJuneSept.Oct.Dec.

Proj.
Dec.

Proj.
(In billions of riels)
Net foreign assets7,22410,73510,91111,35310,8099,8649,3938,942
National Bank of Cambodia (NBC)5,7298,5799,70610,78311,18710,3859,9769,156
Foreign assets5,7298,5799,70610,78311,18710,3859,9769,156
Foreign liabilities00000000
Deposit money banks (DMBs)1,4962,1561,205570-378-521-583-214
Foreign assets1,9213,3112,5972,3142,4151,9891,7001,454
Foreign liabilities4261,1561,3911,7442,7922,5102,2831,668
Net domestic assets-2825761,1361,3451,7482,0172,4733,238
Domestic credit2,6764,5705,6506,5277,1287,1967,3237,738
Government (net)-953-1,816-2,400-2,678-2,653-2,747-2,894-3,500
NBC-807-1,632-2,187-2,435-2,405-2,474-2,655-3,261
DMBs-146-184-213-244-248-274-239-239
Private sector3,6286,3858,0499,2059,7809,94310,21611,237
Other items (net)-2,959-3,994-4,514-5,182-5,380-5,179-4,500-4,500
Broad money6,94211,31112,04712,69812,55711,88111,86512,180
Narrow money1,6582,0522,3892,4672,3352,2122,4582,840
Currency in circulation1,6001,9902,3242,3492,2592,1272,3882,770
Demand deposits58626511876857070
Quasi-money5,2859,2599,65810,23110,2239,6699,4089,340
Time deposits89121126150181167166192
Foreign currency deposits5,1969,1389,53210,08110,0429,5019,2429,148
(12-month percentage change)
Net foreign assets31.948.635.425.510.70.3-12.5-4.8
Private sector credit51.676.098.0102.982.075.560.010.0
Broad money38.262.954.643.126.719.54.92.6
Of which: Currency in circulation24.824.434.141.134.523.120.016.0
Foreign currency depostis44.875.961.443.424.718.31.1-1.0
(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets34.850.636.626.010.50.3-11.9-3.8
Net domestic assets25.812.418.017.116.219.216.86.4
Domestic credit14.0-17.435.438.233.331.924.38.2
Government (net)-10.6-12.4-15.7-14.4-11.2-11.1-9.5-5.1
Private sector24.639.751.152.644.543.033.98.6
Other items (net)-10.7-14.9-17.4-21.1-17.1-12.7-7.62.9
Memorandum items:
Foreign currency deposits (in millions of U.S. dollars)1,2792,2832,3842,4612,4402,3092,2542,231
(In percent of broad money)74.880.879.179.480.080.077.975.1
Riel component of broad money1,7462,1732,5152,6172,5152,3792,6233,032
(In percent of broad money)25.219.220.920.620.020.022.124.9
Credit to the private sector (in millions of U.S. dollars)8931,5952,0132,2472,3762,4172,4912,741
(In percent of GDP)12.218.219.221.422.723.023.823.1
Loan-to-deposit ratio (in percent) 1/67.167.482.088.794.6101.7106.1104.4
Velocity 2/4.93.93.63.53.53.53.64.0
Money multiplier (broad money/reserve money)2.12.22.122.11.92.02.02.0
Reserve money (12-month percent change)28.348.652.253.152.939.416.32.7
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Foreign currency loans and deposits only.

The ratio of nominal GDP to the year-to-date average stock of broad money.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Foreign currency loans and deposits only.

The ratio of nominal GDP to the year-to-date average stock of broad money.

Cambodia: Monetary Developments, 2005–08

(Contribution to broad money growth, in percent)

Source: Data provided by Cambodian authorities; and IMF staff estimates

1/ Year-on-year percent change.

Cambodia: Deposit and Credit Growth, 2007–08

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

5. As noted, the banking system is under increasing strain. The global financial crisis has exposed vulnerabilities among Cambodia’s banks and is beginning to affect their financial soundness (Box 2 and Table 5). Liquidity shortages have arisen at some banks. In response, banks have been raising deposit rates, drawing excess reserves and, in few cases, borrowing from abroad (mainly from parent institutions).3 At the same time, loan rates have been sticky, suggesting bank spreads are narrowing and profits may be squeezed going forward. The number of banks has also increased rapidly during the past two years—by nearly 50 percent to 28 licensed institutions in late 2008, putting added pressure on the NBC’s supervisory capacity.

Cambodia: Net U.S. Dollar Purchases, Exchange Rates, and Riel Circulation, 2005–08

Source: Data provided by the Cambodian authorities; and IMF staff estimates.

1/ Official mid-rate.

Box 2.Cambodia: Global Volatility and Bank Vulnerabilities

The global financial crisis has increased risks and exposed weaknesses in Cambodia’s highly dollarized banking system. Liquidity risk is an upfront concern, compounded by a potentially volatile deposit base. Bank deposit growth (resident and nonresident) has slowed significantly in recent months, turning negative (month-on-month) since September 2008. Large withdrawals have reportedly been made by firms concentrated in the property sector, notably at Korean-owned banks. Combined with rapid credit growth, the loan-to-deposit ratio for commercial and specialized banks breached 100 percent for the first time in October 2008—up from 68 percent one year before. Currently, the nine largest banks control nearly 90 percent of deposits, with six having an average level of deposits in excess of US$10,000. Credit risk may also be increasing as growth slows and property prices decline. Asset quality at some banks has been compromised by poor risk management and weak internal controls. Loan delinquencies appear on the rise, in particular in construction and real estate, and loan recoveries may face difficulties owing to a weak legal system and poor collateral quality. New banks with loans concentrated in the property sector and large banks with weak capital bases are especially vulnerable.

Financial soundness indicators (FSIs) show that banks remain well capitalized, hold sizable liquid assets, and have low nonperforming loans (NPLs), but the picture could be misleading (Table 5). First, rapid credit growth since 2007 may have masked emerging NPL problems. Second, banks’ compliance with prudential regulations remains weak. Mid-year audits by the National Bank of Cambodia revealed NPLs (as a share of loans) higher by two percentage points than previously reported by banks. Third, the FSIs show a move toward more risky lending activities, as suggested by the sharp increase in large exposures in 2008, partly related to real estate, and a continuing rise in consumer loans, mainly mortgage lending. Regarding liquidity, the decline in the liquid asset ratio net of short-term liabilities in 2008 is partly due to the increasing reliance on short-term external financing, mainly by foreign banks from their overseas parents, in light of tighter liquidity conditions.

Sensitivity analysis performed on the nine largest banks reveals the following:

  • Credit risk: Different assumptions were used for the quality of the banks’ loan portfolio, with higher NPLs assumed for real estate and textile sector loans, followed by new loans (see table below). In the most benign scenario (1), average NPLs would increase by about 4 percentage points to 6.5 percent, bringing the risk-weighted capital-asset ratio (RWKA) below the regulatory minimum of 15 percent for four banks. In the most extreme scenario (3)—with average NPLs increasing to 13 percent—six banks fall below the RWKA required minimum, with the capital deficiency equivalent to 1.2 percent of GDP.

Liquidity risk: Different scenarios for a decline in deposits bring the average liquid asset to deposit ratios (LAD) to between 38–45 percent. However, a deposit reduction by 20 percent (Scenario 2) would take the LAD below 15 percent for a few banks (i.e. below required reserves). At a reduction by 25 percent, four banks would see their LAD decline below 20 percent, extremely low for a financial system lacking liquidity instruments and central bank facilities.

Risks may compound if the global financial environment deteriorates further. Deposit growth could slow more. Banks’ access to external financing could also become restrictive, with foreign parents facing their own financial strain. In the event, banks in Cambodia might be unable or reluctant to renew credit lines, which could affect borrowers’ capacity to repay.

Cambodia: Sensitivity Analysis for the Nine Largest Commercial Banks(Number of banks, unless otherwise specified)
Credit RiskLiquidity Risk
Risk-Weighted Capital-Asset Ratio (RWKA)Liquid Assets to Total Deposits Ratio (LAD)
< 1515 to 2020 to 25>25Average< 1515 to 2020 to 50>50Average
PercentPercentPercentPercentNPLsRWKAPercentPercentPercentPercentLAD
Baseline04322.419.4004553.5
Scenario 142216.516.4015345.3
Scenario 252119.813.9123341.9
Scenario 3620113.111.2312338.0
Credit Risk ScenariosLiquidity Risk Scenarios
Additional NPLs (percent of loans)Deposit reduction (in percent)
New

Loans
Real

Estate


Textile


Other
Scenario 1510102.515
Scenario 2101515520
Scenario 31520201025
Source: Cambodian banks’ financial statements; and IMF staff estimates.
Source: Cambodian banks’ financial statements; and IMF staff estimates.
Table 5.Cambodia: Financial Soundness Indicators, 2006–08
200620072008
Dec.JuneDec.JuneSept.
Number of banks2021242528
Commercial banks1516172022
Of which: State-owned banks11111
Specialized banks 1/55756
Bank concentration—number of banks accounting for:
25 percent of banks’ total assets22222
75 percent of banks’ total assets77676
Capital adequacy (in percent)
Regulatory capital to risk-weighted assets26.526.823.625.625.6
Capital to assets20.018.117.019.419.5
Nonperforming loans net of provisions to capital19.411.98.25.34.9
Asset quality (in percent)
Non-performing loans to regulatory total loans9.95.93.42.62.7
Large exposures to capital60.410.67.343.438.7
Sectoral distribution of loans (in percent of total loans)
Real estate8.69.17.97.07.6
Construction7.710.510.27.06.8
Consumer10.214.319.720.321.5
Earnings and profitability (in percent)
Return on assets2.83.52.83.43.1
Return on equity14.219.316.617.615.8
Liquidity (in percent)
Liquid assets ratio 2/41.743.148.437.738.6
Liquid assets to total deposits56.656.965.655.060.9
Liquid assets ratio net of short-term liabilities49.450.243.530.427.8
Loan-to-deposit ratio 3/60.556.962.782.485.5
Foreign exchange exposure (in percent)
Foreign currency deposits to total deposits97.297.297.798.298.2
Foreign currency loans to total loans96.797.397.697.196.9
Memorandum item:
Banks’ assets (in percent of GDP)26.031.238.440.943.1
Sources: National Bank of Cambodia; and IMF staff estimates.

Specialized banks are lending institutions that do not take deposits and are subject to lower capital requirements than commercial banks.

Net of gross interbank transactions with resident banks.

Commercial banks only.

Sources: National Bank of Cambodia; and IMF staff estimates.

Specialized banks are lending institutions that do not take deposits and are subject to lower capital requirements than commercial banks.

Net of gross interbank transactions with resident banks.

Commercial banks only.

II. Outlook and Risks

6. The near-term outlook for Cambodia points to a further slowing in economic activity in 2009, as the impact of negative external shocks becomes more pronounced.

  • Growth is projected at 4.8 percent in 2009. While agricultural output is expected to pick up, garments and tourism would act as a significant drag given weak external conditions. Real estate and construction activity is expected to decelerate further, as investment becomes more constrained by inflows and credit.

  • Inflation should continue to fall, based on the IMF’s latest commodity price outlook and moderating demand pressures. Headline inflation is projected to decline to around 7½ percent (y/y) by end-2009. However, the lagged effects of high inflation in 2008 could still yield upward wage pressures.

  • The current account deficit is expected to decline to around 7 percent of GDP in 2009, but the overall external position will likely deteriorate. Factors that drove the deficit higher in 2008 are expected to reverse and more than offset a sharp drop in export growth. Official inflows should remain strong, but FDI and other private inflows are expected to decline, likely resulting in a moderate deterioration in the overall external position in 2009. Based on this outlook, gross official reserves would fall to around US$1.9 billion (3.1 months of imports) by end-2009.

Cambodia: Export Developments

(Contribution to growth, in percent)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Cambodia: Import Developments

(Contribution to growth, in percent)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

7. The balance of risks is clearly to the downside, because of uncertainty about the length and depth of the global recession and its impact on trade and capital flows. Adding to pressures is a recent loss in competitiveness stemming from high domestic inflation coupled with U.S. dollar strength vis-à-vis most major currencies, leading to a sizable real appreciation. In the event of a sharper pullback in external demand or reversal in foreign inflows, with high dollarization, Cambodia could experience a pronounced liquidity contraction and possible large reserve loss, with limited policy options available to cushion the adjustment. A risk scenario such as this would put an even tighter squeeze on private credit availability, increase risks in the banking system, and raise external vulnerability.

8. Medium-term prospects depend on maintaining macroeconomic and financial stability, improving governance and infrastructure, and taking other actions to strengthen competitiveness. Under the current baseline, growth is projected to rise gradually to 7–7½ percent a year (Table 6), driven by FDI-promoted export opportunities, broader tourism development, and higher agricultural yields—each critical to sustained growth and poverty reduction, including meeting the Millennium Development Goals (Table 7).4 The current account deficit would narrow to 5–6 percent of GDP with further export diversification, even accounting for large investment-related imports. Under this scenario, the reserve cover would settle around 2½–3 months of imports. Underpinning stabilization efforts would be modest fiscal consolidation over the medium term, with the overall budget deficit narrowing to less than 2 percent of GDP by 2012.

Table 6.Cambodia: Medium-Term Macroeconomic Framework, 2006–14
200620072008200920102011201220132014
Est.Proj.
Output and prices (percent change)
GDP in constant prices10.810.26.54.86.06.67.17.47.6
GDP deflator4.66.515.38.03.74.54.64.14.1
Consumer prices (end-year)2.810.815.57.44.34.34.34.34.3
Saving and investment balance (in percent of GDP)
Gross national saving13.412.84.78.09.411.112.413.615.4
Government saving1.82.93.42.73.23.53.73.73.6
Private saving11.69.91.45.36.17.68.79.911.8
Gross fixed investment20.620.821.019.020.020.521.021.522.5
Government investment5.76.15.66.36.36.25.95.75.6
Non-budgetary grant-financed investment3.62.41.91.71.71.20.80.60.4
Private investment11.212.313.511.012.013.114.315.216.5
Public finance (in percent of GDP)
Revenue 1/11.511.912.512.112.512.913.413.513.6
Of which: Tax revenue7.99.510.19.910.310.711.111.311.3
Expenditure14.214.714.215.415.215.215.215.215.2
Current8.58.78.69.18.99.19.39.59.6
Capital5.76.15.66.36.36.25.95.75.6
Current balance1.82.93.42.73.23.53.73.73.6
Primary balance (including grants)0.0-0.50.8-0.8-0.5-0.10.50.60.5
Overall balance (excluding grants)-2.7-2.9-1.7-3.2-2.7-2.3-1.8-1.7-1.6
(Including grants)-0.2-0.70.7-1.0-0.7-0.20.30.40.4
External financing, net (including grants)4.85.04.34.64.34.13.73.53.2
Domestic financing, net-2.0-2.2-2.6-1.3-1.6-1.8-1.9-1.8-1.6
Balance of payments (in percent of GDP, unless otherwise indicated)
Exports (percent change) 1/27.69.56.5-4.07.49.910.410.810.7
Imports (percent change) 2/20.914.021.8-11.49.710.310.710.510.5
Current account balance (including transfers)-0.6-3.4-11.9-7.1-7.0-6.1-5.7-5.3-4.7
(Excluding transfers)-7.2-8.0-16.3-11.0-10.6-9.4-8.6-7.9-7.1
Foreign direct investment (in millions of U.S. dollars)483866785488551623710817947
Net official capital flows 3/7.17.56.16.15.75.14.43.93.5
Overall balance2.74.93.6-1.1-0.20.10.60.91.4
Gross official reserves (in millions of U.S. dollars)1,0971,6162,0331,9332,2551,9582,0742,2552,564
(In months of imports of goods and services)2.12.53.53.12.82.52.42.42.5
External public debt (in millions of U.S. dollars) 4/5/2,2542,5822,8093,0873,3793,6773,9454,2114,492
(In percent of GDP)31.129.726.826.025.925.324.223.222.1
External public debt/service ratio (accrual basis) 6/1.11.00.81.21.31.31.21.31.4
(Cash basis) 7/0.60.70.50.81.01.01.01.11.3
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Excludes re-exported goods.

Excludes imported goods for re-export.

Net official disbursements, exceptional financing, and official transfers.

From 2006, includes the impact of debt forgiveness from the IMF under the MDRI.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

As a percent of domestic exports of goods and services.

Excludes the accumulation of arrears on debt owed to the Russian Federation and United States.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Excludes re-exported goods.

Excludes imported goods for re-export.

Net official disbursements, exceptional financing, and official transfers.

From 2006, includes the impact of debt forgiveness from the IMF under the MDRI.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

As a percent of domestic exports of goods and services.

Excludes the accumulation of arrears on debt owed to the Russian Federation and United States.

Table 7.Cambodia: Millennium Development Goals
1990199520002002200320042005200620072015
MDG

Target
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent8.5711.0
Population below minimum level of dietary energy consumption (percent)3320.5
Poverty headcount, national (percent of population)473519.5
Prevalence of underweight in children (under five years of age)4526.2
Goal 2: Achieve universal primary education
Net primary enrollment (percent of relevant age group)6785939196100
Primary completion rate, total (percent of relevant age group)555554575587100
Proportion of pupils starting grade 1 who reach grade 56361606362100
Youth literacy rate (percent of ages 15–24)7376798083100
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)8771010101030
Ratio of girls to boys in primary and secondary education (percent)7382858687908993100
Ratio of young literate females to males (percent ages 15–24)818489909090100
Share of women employed in the nonagricultural sector (percent)4146525353
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12–23 months)34626552658079787890
Infant mortality rate (per 1,000 live births)84897867656550
Under 5 mortality rate (per 1,000)11612310485828238.3
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)32444480
Maternal mortality ratio (modeled estimate, per 100,000 live births)450540540250
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)57754953050515550505500500
Prevalence of HIV, total (percent of population 15–49)3321
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)346565
Access to improved sanitation (percent of population)162828
Nationally protected areas (percent of total land area)1924
Goal 8: Develop a global partnership for development
Aid per capita (current U.S. dollars)45031373835393737
Fixed line and mobile phone subscribers (per 100 people)02134781218
Internet users (per 1,000 people)6303541446670
Personal computers (per 1,000 people)01222
Total debt service (percent of exports of goods and services)12111111
Goal 9: De-mining, UXO and assistance
Annual numbers of civilian casualties recorded1,6917970
Percentage of suspected contaminated areas cleared1050100
Other
Fertility rate, total (births per woman)64443333
GNI per capita, Atlas method (current U.S. dollars)280280300340380440490540
GNI, Atlas method (current, in billions of U.S. dollars)3.13.64.04.55.36.27.07.9
Gross capital formation (percent of GDP)81517202218202122
Life expectancy at birth, total (years)50545454585959
Literacy rate, adult total (percent of people ages 15 and above)6264686974
Population, total (millions)9.611.212.713.213.413.614.014.213.4
Trade (percent of GDP)1980114127133146137134145
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2006); UN Human Development Indicators Report (2003); Cambodia MDG 2005 update; and IMF staff estimates.
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2006); UN Human Development Indicators Report (2003); Cambodia MDG 2005 update; and IMF staff estimates.

III. Policy Discussions

9. Policy discussions centered on formulating effective responses to the sharp global slowdown. Given recent developments, the policy focus has shifted quickly away from dealing with excessive inflation pressures to preventing a sharp economic downturn. The authorities recognized that sudden and rapid change in underlying macroeconomic and financial conditions required careful policy considerations, in particular to manage the impact of a weakening economy and external inflows on the banking sector. Staff urged quick and decisive action on all fronts to contain the impact of the global crisis through moderate fiscal easing, improved liquidity management, and measures to protect the banking system. The authorities generally concurred with these priorities.

A. Fiscal Policy

10. In view of the near-team outlook, a countercyclical easing of fiscal policy is being targeted in 2009. The authorities proposed a preliminary 2009 budget with an overall budget deficit of 4¼ percent of GDP. Staff indicated a deficit of around 3¼ percent of GDP in 2009 would provide an adequate fiscal impulse without undermining stabilization efforts (Box 3). The main difference is the revenue outlook. The authorities argued that revenue would decline more sharply (as a share of GDP) than staff envisaged, due mainly to lower expected automobile imports. Staff noted that even taking into account expected weaknesses in import growth and corporate profits, revenue would only be expected to decline by around ½ percent of GDP, absent any new measures. However, staff recognized that in the event of a sharper-than-expected growth slowdown, scope could remain for even further easing, in the form of select (temporary) tax relief and spending aimed at protecting the most vulnerable groups. In this case, caution was urged, taking into account limited implementation capacity, with a view to avoiding any serious recourse to domestic financing or weakening in the external position.5

Cambodia: Government Revenue, 2003–09 1/

(In percent of GDP)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Cambodia: Government Expenditure, 2003–09

(In percent of GDP)

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Box 3.Cambodia: 2009 Budget—Fiscal Impulse1

Cambodia’s 2009 draft budget is significantly more expansionary than recent outturns. This was also true for the 2008 budget, but the actual outturn is likely to be contractionary (consistent with the authorities’ policy response to domestic inflation pressures).

The 2009 budget yields a fiscal impulse of 2¼ percentage point of GDP compared to the projected outturn for 2008.2 The staff’s 2009 outlook is also expansionary, but less so than the draft budget.

Under both the draft budget and staff projections for 2009, the stimulus effect would come from revenue and expenditure. For the budget, the revenue impulse is more pronounced, mainly because of lower expected trade tax collections. Staff projections are already conservative here, with trade taxes as a share of retained imports expected to remain constant in 2009 despite further expected administrative improvements (imports exclude those for garment production and changes in oil prices—the latter due to the use of fixed reference prices on petroleum taxation). On the other hand, staff projections yield a slightly larger expenditure impulse than the 2009 budget, due mostly to higher capital spending coming from recently announced loans from China, partially offset by lower recurrent spending.

Cambodia: Fiscal Impulse by Composition, 2006–09

1 The fiscal impulse measures the fiscal position net of the impact of output effect on the budget. For the revenue impulse: (+) contractionary (-) expansionary; for the expenditure impulse: (+) expansionary (-) contractionary.2 Cyclical components were extracted using trend GDP (calculated by the HP filter with a smoothing parameter of 6.25).

11. Main policy recommendations focused on improving revenue performance, ensuring proper spending allocation, and strengthening public financial management (PFM).

  • On revenue, staff argued that as conditions improve, new revenue measures should be considered, in keeping with the government’s medium-term revenue strategy. Additional revenue could come from a gradual rise in the reference price for petroleum taxation (unchanged since 2004), select increases in excises (mainly beer and cigarettes), and a broadening of the VAT base, including covering utilities—all in keeping with previous recommendations to improve tax efficiency. The authorities indicated tax increases, in particular on petroleum, remained politically sensitive, but that they planned to expand the VAT base in 2009 to cover electricity in line with their medium-term revenue strategy, which staff welcomed. Staff also continued to urge adoption of transparent fiscal regime for extractive industries, in the context of amending the Law on Taxation, which the authorities broadly agreed.

  • On expenditure, staff noted that the large budgeted increase in nonwage recurrent spending should be oriented toward pro-poor social outlays (including locally-financed capital expenditure) to mitigate the impact of the projected growth slowdown.6 The authorities mostly agreed, but explained the final budget might need to accommodate higher military spending. Staff also noted concerns about rising government wage and administration costs, including those associated with a recently expanded cabinet, and urged further wage increases be linked to comprehensive civil service reform given still limited capacity and skill deficiencies.7 The authorities noted staff’s concerns, but cited the wage bill is lower as a share of GDP than neighboring countries and that cabinet-related expenses are needed to accommodate the political process.

  • In line with IMF technical assistance (TA) recommendations, staff urged PFM reforms be accelerated, including tackling budget integration, particularly as it pertains to the recording of donor-financed capital spending. The authorities agreed that reform efforts had been slower than desired due to the elections and adoption of new procurement procedures, and reiterated their commitment to renew momentum.

B. Monetary and Exchange Rate Policy

12. The current monetary stance is seen as broadly appropriate, but conditions have tightened rapidly, bearing close watch. Staff recommended that as credit growth decreases and inflation pressures subside, a moderate cut in the reserve requirement on FCDs would be justified. Under the current baseline, broad money is expected to increase by only around 2½ percent in 2009, with weak inflows significantly constraining liquidity growth. As a result and also reflecting demand conditions, private sector credit growth is expected to expand by only 10 percent (y/y) in 2009. Staff and authorities agreed temporary liquidity shortages could arise in individual banks over the near term, but that these would be better handled through improved liquidity operations rather than through general policy easing.

13. With strains already emerging, discussions focused on need to strengthen liquidity management at the NBC and reduce liquidity risk among banks. Staff and the authorities recognized an effective policy response continues to be constrained by an underdeveloped operational framework, lack of instruments, and weak banking sector, with dollarization limiting available options. The authorities concurred immediate priority should be placed on (i) improving the liquidity monitoring framework through more frequent reporting of banks’ liquidity position to better understand factors driving their reserves at the NBC; and (ii) developing an overdraft facility to address temporary liquidity shortages, with new regulations being formulated, including on acceptable collateral. With government securities nonexistent, staff cautioned the need under this facility to assess carefully any assets banks pledge as collateral. The authorities also agreed improvements are needed in the required reserve system—mainly reducing the maintenance period from 28 to 14 days, so banks can better manage their own liquidity needs.

14. Staff recommended steps be taken over the medium term toward greater exchange rate flexibility. In the past, the exchange rate served as a useful nominal anchor, given Cambodia’s low level of financial development, ongoing need to improve bank soundness, and until recently, moderate imported inflation. Staff noted that greater flexibility could help deepen the foreign exchange market and facilitate an orderly progression toward de-dollarization, supported by more effective monetary controls. The authorities agreed on a more flexible exchange rate regime as a medium-term policy objective, but for now viewed the heavily managed float vis-à-vis the U.S. dollar as appropriate. Staff urged that intervention be limited to smoothing short-term volatility, so as to maintain adequate reserves in the event of a further sharp deterioration in external conditions or the NBC were called to act as lender of last resort.

C. Banking Sector Issues

15. Excessive credit growth, regulatory forbearance, and now tighter funding conditions have heightened risks to the banking sector. Staff urged much closer monitoring by the NBC of banks’ compliance with prudential regulations to prevent systemic problems. The NBC continues to improve supervisory capacity, with plans in 2009 for more intensive on-and off-site monitoring. However, enforcement remains weak, in particular dealing effectively with capital adequacy and loan provisioning. Staff also noted that bank licensing procedures need to be strengthened, with new entry reserved to those entities with a significant banking background. To this end, the NBC was urged to ensure close coordination between its recently established Financial Intelligence Unit and Banking Supervision Department to ensure new and existing banks complied fully with anti-money laundering guidelines. Finally, staff welcomed the updating of fit-and-proper rules.

16. To safeguard against risks, staff urged the NBC take quick and forceful action in several critical areas. First, loan classification standards should be revised to force banks to take into account borrowers’ ability to repay and underlying risks. Closer monitoring of large exposure loans is also necessary, and higher risk weights should be attached to more risky types of lending, including to the real estate sector (in place of sector lending caps). Second, new minimum capital requirements established to take effect in 2010 should be brought forward for banks facing elevated solvency risk.8 Third, given limited resources, bank supervisors should prioritize their inspections and coordinate with external auditors, focusing on those banks with a history of lax adherence to prudential regulations and on the large systemically-important banks. Finally, banking resolution plans should be formulated facilitating bank consolidation, if necessary; designating a clear role for the NBC as lender of last resort; and providing a credible settlement mechanism, for which the authorities requested IMF TA. They also indicated interest in pursuing a Financial Sector Assessment Program (FSAP) to ensure proper oversight of the financial sector.

D. Competitiveness and Sustainability

17. Competitiveness will be tested, in particular over the near term, given recent developments. An exchange rate assessment reveals that the riel is overvalued in the range of 11–13 percent (Box 4). The government’s policy framework presented to the new National Assembly in September 2008 places increasing competitiveness at its core.9 Staff encouraged efforts to improve trade facilitation, including further streamlining customs clearance and improving port and border infrastructure. The authorities indicated they are seeking continued dialogue with the European Union to relax the restriction on local input content on garment from 45 to 25 percent, which by their estimates could boost the EU’s share of garment exports by 10 percentage points. Cambodia also continues to seek preferential treatment for garment exports to the United States by taking advantage of its low income country status.

Cambodia: Public External Debt and Debt

Sources: Data provided by Cambodian authorities; and IMF staff estimates and projections.

1/ In percent of government revenue.

2/ In percent of exports of goods and services.

Box 4.Cambodia: Exchange Rate Assessment and External Stability

Based on the CGER-type assessments, Cambodia’s current exchange rate appears overvalued in the range of 11–13 percent. However, these are broad estimates and should be interpreted cautiously, as structural changes in the economy and weak macroeconomic data complicate the analysis. For the garment industry, the U.S. dollar-Cambodian riel exchange rate per se may be less of a factor than external demand conditions, given mostly U.S. dollar-denominated costs. Nevertheless, an overvalued riel could hurt some producers, as well as the tourism industry, combined with other factors constraining competitiveness.

Effective Exchange Rates, 2000–08 1/

(2000=100)

Sources: IMF, Information Notice System; and IMF staff estimates.

The main findings of this assessment are summarized as follows:

  • Macroeconomic balance approach: The current account (CA) norm is estimated at minus 4 percent of GDP and the underlying CA at minus 7 percent of GDP. This implies that a riel depreciation of about 13 percent is needed to close output gaps with partner countries and allow lagged effects of past exchange rates to be fully realized.

  • Equilibrium REER approach: Cambodia’s equilibrium exchange rate has depreciated in recent years largely due to a deterioration in its terms of trade. However, with the recent REER appreciation, the riel appears overvalued at around 11 percent.

Cambodia: Real Effective Exchange Rate, 2000–08

(2000=100) 1/

Citation: 2009, 47; 10.5089/9781451821864.002.A001

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

1/ Annual averages.

The need to improve productivity is more important than ever. Greater regional competition in garment exports, rising local wages (in dollars), and higher material costs portend difficulties ahead, including further loss in market share.1 Moreover, global business climate indicators tend to rank Cambodia at the lower end. Better infrastructure (notably roads and electricity), a more skilled workforce, and less burdensome business regulation, along with maintenance of a stable macroeconomic environment, would address the major impediments to improving competitiveness.

Assessment of Business Climate
20082009 Doing2007–08
CPI 1/Business 2/GCI 3/
CountriesRankRankRank
Singapore417
China728334
Thailand841328
Vietnam1239248
Cambodia162135110
Total180181122
Sources: Transparency International, World Bank, and World Economic Forum.

Corruption Perception Index by Transparency International.

By the IFC.

Global Competitiveness Index by the World Economic Forum.

Sources: Transparency International, World Bank, and World Economic Forum.

Corruption Perception Index by Transparency International.

By the IFC.

Global Competitiveness Index by the World Economic Forum.

1 Since 2006, Cambodia’s share of U.S. garment imports has risen by 0.3 percentage points to 2.6 percent (for the year ending September 2008). During the same period, the share of imports from Vietnam and China increased from 3.6 to 5.8 percent and from 29.0 to 34.4 percent, respectively (based U.S. Department of Commerce data).

18. Debt Sustainability Analysis (DSA): Given longer-term prospects, Cambodia currently faces a moderate risk of external debt distress. In the DSA, no thresholds are breached under the baseline scenario and standard stress tests and alternative scenarios, except one bound tests (Appendix I). However, this benign outlook is subject to substantial downside risk, as shown in the DSA, in the event of a prolonged economic downturn, but the likelihood of debt distress remains moderate. Under the baseline scenario, the public external debt (projected at 27 percent of GDP at end-2008) should decline steadily over the medium term. The debt service-to-exports ratio is expected to stay below 3 percent. These results presume that external borrowing would gradually move toward less concessional terms and no resolution of external debt arrears with either the Russian Federation or United States takes place.

IV. Staff Appraisal

19. Cambodia is facing its most challenging macroeconomic and financial conditions this decade. External shocks have been magnified by the concentration of economic activity, dependence on external inflows, and weaknesses in the banking system. The Cambodian authorities have swiftly recognized the serious challenges that lie ahead and agree on the necessity of a clear and timely policy response to manage the risks and avoid an even deeper downturn.

20. Fiscal policy is expected to continue to underpin stabilization efforts, with a more expansionary stance in 2009 appropriate. The government is to be commended for strong budget performance so far in 2008, especially given potential pressures arising from national elections, border security issues, and a weakening economy. Moderate fiscal easing in 2009 could help mitigate the impact of an expected growth slowdown, focused on higher pro-poor social and infrastructure outlays. However, continued efforts are needed to strengthen revenue administration and, as conditions permit, broaden the tax base. More control should also be exercised over the government’s wage bill, with future increases linked to comprehensive civil service reform. Recognizing security concerns, military spending should avoid crowding out other essential spending. Concerted efforts are also needed to strengthen PFM, in particular on improving Treasury management and budget coordination and integration, including the recording of donor inflows. Finally, to maximize public gain, future oil and mineral production should be guided by a transparent fiscal regime.

21. The current monetary stance is broadly appropriate, but conditions require close watch to avoid excessive tightening and aggravating risks to banking system. As credit growth drops and inflation pressures subside, moderate easing could be justified. However, further steps are needed to improve policy effectiveness along the lines of longstanding IMF TA recommendations. Sound monetary operations at the NBC also hinge on better internal coordination to ensure policy consistency. A more developed framework will be needed in the years ahead, with a new nominal anchor that relies more on market-based instruments and prioritizes greater inflation control.

22. A clear strategy must be put in place to manage liquidity risk. Upfront action should be taken to strengthen the liquidity management framework to deal with potential pressures. The NBC’s recent moves toward putting in place an overdraft facility is a critical step in this direction, but caution will need to be exercised in assessing eligible collateral and distinguishing liquidity from solvency pressures facing banks. In providing any liquidity support, the NBC should consider potential risks to its own balance sheet in the event banks are unable to repay, since reserve losses could further undermine confidence and increase external vulnerability. Staff urges equally swift measures be enacted to improve the required reserve system.

23. Beyond immediate actions to contain liquidity risk, swift and comprehensive measures are needed to improve banking soundness, including on solvency issues. The NBC continues to strengthen the prudential framework, but more systematic efforts are needed in supervising banks and enforcing regulations, given the likelihood nonperforming loans will rise as the economy further slows. The authorities should also develop banking resolution plans, in view of solvency risk faced by some banks, and strengthen bank licensing procedures. New minimum capital requirements should be brought forward, with those banks facing heightened solvency risks required to be in compliance immediately. An FSAP could help identify other vulnerabilities to the financial system and prioritize further policy actions.

24. In light of recent developments, more efforts are needed to improve external competitiveness. The exchange rate assessment points to an overvaluation of the riel. However, with a highly dollarized economy, exchange rate adjustment would play a limited role in resolving imbalances. On the other hand, competition gains should arise from maintaining a stable macroeconomic environment, along with taking steps to develop a more skilled workforce, improve public services and infrastructure, and streamline business regulation.

25. Risk of external debt distress is moderate, but could become more pronounced with a prolonged downturn. In light of this possibility and given a large external borrowing requirement, prudent debt management remains essential, with Cambodia expected continue to borrow on largely concessional terms in the foreseeable future. The authorities are also encouraged to continue seeking agreements to resolve outstanding debt obligations with the Russian Federation and United States.

26. If the need were to arise and understandings could be reached on outstanding debt arrears, staff would support a request for a new PRGF arrangement. Any such arrangement would need to be underpinned by a strong reform agenda aimed at strengthening competitiveness, reducing vulnerabilities, and ensuring a viable external position. Under any circumstances, staff urge the authorities to carry on their reform efforts, which the IMF will continue to support through intensive TA and policy dialogue.

27. It is recommended that Cambodia remain on the 12-month consultation cycle.

The main elements were new allowances for military personnel and salary supplements for civil servants. In addition, the package included direct subsidies to Electricité du Cambodge and subsidized loans to rice millers.

For riel deposits, the reserve requirement was kept at 8 percent, but few banks hold significant amounts.

As of end-October 2008, banks’ excess reserves were 94 percent of required reserves, but down from 227 percent at end-June 2008, immediately following the latest hike in the reserve requirement on FCDs.

As with the 2007 Article IV consultation, the baseline scenario does not incorporate prospective oil production. Currently, Chevron Corporation is evaluating its test wells. Sector development also awaits improved legal certainty, in particular passage of the Petroleum Law and amendment of the Taxation Law.

The government issues no securities. Thus, any domestic financing would come as a reduction in deposits held in the banking system. As of end-October 2008, these deposits were equivalent to around 6½ percent of GDP.

The government has indicated it will use Multilateral Debt Relief Initiative (MDRI) proceeds to address rural infrastructure gaps.

Under the PFM reform program, the Merit-Based Pay Initiative was launched in 2005 on a pilot basis at the Ministry of Economy and Finance; it is now being extended to donor-financed activities in other ministries.

The minimum capital requirement has been tripled to CR 150 million or around US$37 million. It applies to all commercial banks, except foreign subsidiaries of investment-grade banks. As of November 2008, 10 of the 20 banks to which the new requirement will apply were already in compliance.

The government’s “Rectangular Strategy” seeks to (i) raise agriculture productivity through output diversification and land reform; (ii) expand and improve infrastructure, concentrating on water and transport; (iii) encourage private sector development, focusing on small-to-medium scale enterprises, and (iv) build human capacity, in particular in education and health services.

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