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Cambodia: Joint IMF/World Bank Debt Sustainability Analysis 20091

Author(s):
International Monetary Fund
Published Date:
December 2009
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I. Introduction

1. Cambodia’s DSA indicates that the risk of debt distress remains moderate. Under the baseline scenario, external debt burden indicators do not breach the relevant indicative thresholds. However, in alternative scenarios and stress tests, the debt indicators breach several indicative thresholds.

2. Staffs have analyzed an additional scenario of a delay in fiscal adjustment in a partial equilibrium setting. In the face of weak export performance and uncertain growth prospects, the government could possibly maintain an accommodative fiscal stance. However, given limits to domestic financing and to avoid pressure on reserves, this could result in a large external financing requirement. In the event, external debt burden indicators would breach several indicative thresholds.

II. Background and Assumptions

Cambodia’s external public and publicly-guaranteed (PPG) debt stock was around 25 percent of GDP in nominal terms and 20 percent in net present value (NPV) terms at end-2008.4 Until last year, strong economic growth and favorable external conditions contributed to a decline in debt ratios. With an expected contraction in Cambodia’s economy and increased assistance from donors in the face of global recession in 2009, the stock of external PPG is projected to rise to 29 percent of GDP by year end. Cambodia’s debt stock and debt service indicators are below the policy-based indicative thresholds. The nominal debt stock in PV terms as a share of exports of goods and nonfactor services and of government revenues is projected at 49 percent and 197 percent in 2009, respectively.

Cambodia: External Public Debt Indicators at End-2008
Indicative

Thresholds
End-2008
NPV of debt, as a percent of:
GDP3019.8
Exports10036.7
Revenue200164.9
Debt service, as a percent of:
Exports150.9
Revenue254.2
Sources: Cambodian authorities; and IMF and World Bank staff estimates.
Sources: Cambodian authorities; and IMF and World Bank staff estimates.

4. Around half of external debt in Cambodia is held by multilateral creditors, mainly the Asian Development Bank (30 percent) and the World Bank’s International Development Association (20 percent). China is currently the largest bilateral creditor, accounting for about 63 percent of total bilateral disbursement in 2009. As new creditors emerge and increase their presence in Cambodia, the government should ensure appropriate concessionality from these lenders, given Cambodia’s development needs and its capacity to service new debt. This further underscores the need for the authorities to strengthen the capacity in debt management and ensure that new debt is contracted on a sustainable basis.

Cambodia: Stock of Public and Publicly-Guaranteed External Debt at End-2008
As a Share of Total External DebtIn percent of GDP
Total10025
Multilateral4913
Bilateral5112
Of which: Nonrescheduled debt
with the United States and287
Russian Federation
Sources: Cambodian authorities; and IMF and World Bank staffs’ estimates.
Sources: Cambodian authorities; and IMF and World Bank staffs’ estimates.

5. The size of domestic public debt is currently small and negative on a net basis due to government deposits. At end-2008, the stock of recorded domestic public debt was equivalent to slightly less than 1 percent of GDP, while government deposits amounted to about 6 percent of GDP. The relatively large fiscal deficit projected in 2009 is expected to be financed, in part, by a significant drawdown in government deposits. Over the medium term, assuming a return to a path of fiscal consolidation, government’s net domestic financing requirement would be eliminated. The baseline scenario assumes that the authorities take adjustment measures to reduce the deficit starting in 2010, which would lead to a stabilization of the debt stock in the medium and long term.

6. Cambodia remains in arrears to the Russian Federation and the United States. Following a Paris Club agreement in 1995, Cambodia concluded agreements with France, Germany, Italy, and Japan. Negotiations of outstanding debt obligations with the Russian Federation and the United States are ongoing, with their status unchanged since the last DSA. Currently, Cambodia is not servicing its debt with either of these creditors, and efforts to conclude agreements with each under the framework of the Paris Club are required. Since prospects for resolution are unclear, the current DSA assumes no restructuring in its baseline, with arrears continuing to build up throughout the projection period. In measuring debt levels, the DSA incorporates the negotiated debt stock for the Russian Federation (US$457 million) and the agreed amount of total principal due for the United States (US$162 million).5

7. The main underlying macroeconomic assumptions are presented in Box 1. They reflect the impact of the global recession and weakened economy, marked in Cambodia by a significant reduction in garment export, construction, and tourism activities in 2009. Prospects for a rapid recovery are uncertain, with only a modest growth rebound expected over the near term. Inflation is expected to remain moderately low, predicated on relatively stable commodity prices. The development of extractive industries is not factored into the baseline, given uncertainties about the timing and impact of new oil, gas, and mineral production. Additional resources from the IMF’s new SDR allocations made in 2009 are presumed to remain locked in, reflecting the need for Cambodia to build its reserve position and protect against vulnerabilities arising from the global financial crisis.

Box 1:Main Assumptions for the Baseline Scenario (2009–29)

  • Real GDP growth is projected at minus 2.7 percent in 2009, reflecting the impact of global recession, with a sharp contraction in garment exports, construction activities, and tourism. Given uncertain prospects for a global recovery and heavy export concentration in garments (nearly two-thirds of which go to the United States), growth is expected to rebound modestly to 4.3 percent in 2010—far below the 9 percent annual average during 2006–09. Growth is projected to rise to around 7 percent in 2011 as global and domestic conditions improve, before stabilizing at 6–7 percent over the medium and longer term. Important drivers of future growth will be new export opportunities in light manufactures and agribusiness, as well as more expansive tourism activity. This in turn will depend on an improved investment climate as well as a recovery in foreign direct investment (FDI) starting in 2010, following a sharp projected reduction in 2009 by nearly 30 percent from the previous year’s level owing to global financial conditions. Over the longer term, FDI is expected to be sustained at around 5–6 percent of GDP a year, leading to stronger export growth and supported by stable macroeconomic conditions.

  • The external current account deficit (including official transfers) is projected to improve in 2009 to 5½ percent of GDP, compared to 10½ percent in 2008, as sharp declines in garment exports and tourism receipts are more than offset by falling import demand and lower oil prices. The trade deficit is expected to widen in 2010 and 2011 as garment export demand remains sluggish initially, but with construction-and consumer-related imports rising sharply and higher oil prices also affecting import levels. The macroeconomic framework incorporates recent projects in the power sector (some of which are already underway), which increases imports and FDI in the near term. Over the longer term, the current account deficit is expected to settle in the range of 5–6 percent of GDP a year. Official assistance (grants and loans) would decline gradually as a share of GDP, while FDI and other private inflows would rise gradually. The baseline scenario also assumes that an increasing but moderate level of external borrowing would be on less concessional terms, including from some bilateral creditors (the average grant element is assumed to be some 20 percentage points lower starting in the medium term than in the previous DSA, mostly reflecting a lower discount rate). Gross official reserves, which are expected to be around US$2.2 billion (3.5 months of next year’s imports) at end-2009, would decline slowly through 2012 to US$1.9 billion (2.4 months of imports) before gradually increasing with more stable import demand to the equivalent of around three months over the longer term.

  • Macroeconomic stability is underpinned by resumption of a more prudent fiscal stance from 2010 onward While fiscal easing was an appropriate policy response to the slowdown in 2009, very large increases in wage and allowances are expected to contribute to a widening of the overall fiscal deficit (excluding grants) to around 6.7 percent of GDP in 2009, compared to 2.8 percent in 2008. Thereafter, the deficit is projected to decline gradually to around 3.4 percent by 2014. Revenue would rise to around 14½ percent of GDP by 2014 from a broadening of the tax base, further administrative improvements, and buoyancy from the projected recovery, with more moderate increases thereafter. Grants are projected to decline as a share of GDP from around 3 percent in recent years to 2 percent by 2020. Expenditure would decline to slightly below 18 percent by 2014, from nearly 19 percent in 2009, with some slowing in the growth of recurrent spending and a return of capital spending to the range of 6–6½ percent of GDP under more normal growth conditions.

8. Large contingent liabilities exist in several areas that bear close watch, given the potential burden on external and public debt. Cambodia has signed several build-operate-transfer (BOT) projects—mainly related to new projects in the power sector. Possible contingent liabilities arising from these types of contracts are not incorporated in this DSA due to lack of detailed information on the scope and terms of these agreements. While assurances have been given that no explicit government guarantees have been provided, greater transparency is needed in this area to facilitate the monitoring of these potential quasi-fiscal liabilities and mitigation of any associated fiscal risks. In view of Cambodia’s need for major infrastructure investment and given limited debt service capacity, the authorities should monitor these types of commitments closely and transparently, including developing and maintaining an inventory of all concessions granted and building and improving capacity to analyze the impact of contingent liabilities on debt sustainability, should they arise. Other contingent liabilities could arise if the mitigation of risks in the banking sector necessitated government guarantees.

III. External Debt Sustainability

9. All external debt indicators remain below the policy-dependent debt burden thresholds under the baseline scenario, but thresholds are breached under some of the standard bound tests.6 The main results of the external DSA are as follows:

  • Under the baseline scenario, which assumes a return to a path of fiscal consolidation in 2010, the NPV of external debt-to-GDP ratio is expected to remain below the 30 percent indicative threshold through 2029 (Table 1a) under the baseline scenario. However, in two bound tests, the indicative thresholds are breached for five years or more before declining for the rest of the projection period, specifically for (i) net nondebt creating flows at the historical average minus one standard deviation in 2010–11, and (ii) a one-time 30 percent nominal depreciation of the Cambodian riel vis-à-vis the U.S. dollar relative to the baseline in 2010 (Table 1b and Figure 1).

  • The NPV of external debt-to-revenue ratio remains below the threshold for all years in the baseline scenario, declining from 197 percent in 2009 to 164 percent by 2014, and further decreasing over the long term. However, thresholds are breached in five out of six standard bound tests. Under the two above-mentioned bound tests, the NPV of debt-to-revenue ratio exceeds the 200 percent threshold for more than five years. The thresholds are also breached for five years or longer under the combination of bound tests using one-half standard deviation shocks.

  • The debt service-to-exports and debt service-to-revenue ratios stay well below the indicative threshold throughout the entire projection period, as existing debts are highly concessional.

Table 1a.Cambodia: External Debt Sustainability Framework, Baseline Scenario, 2006–29 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical AverageStandard DeviationProjections
2006200720082009201020112012201320142009–14 Average201920292015–29 Average
External debt (nominal)1/31.029.624.629.230.129.728.928.427.922.314.5
Of which: Public and publicly-guaranteed (PPG)31.029.624.629.230.129.728.928.427.922.314.5
Change in external debt-3.9-1.3-5.14.60.9-0.4-0.8-0.5-0.5-1.0-0.8
Identified net debt-creating flows-10.7-13.3-3.60.73.94.12.81.30.3-1.3-0.8
Noninterest current account deficit0.31.510.22.63.15.310.911.810.38.67.75.24.65.0
Deficit in balance of goods and services7.18.114.510.416.116.715.613.912.910.18.8
Exports68.764.953.848.947.647.045.745.444.941.436.2
Imports75.872.968.359.363.763.761.259.357.851.545.0
Net current transfers (negative = inflow)-10.9-10.7-8.2-8.93.5-7.8-7.9-7.4-7.8-7.6-7.4-6.3-4.9-5.9
Of which: Official-6.5-6.4-4.9-5.1-4.8-4.4-4.0-3.7-3.4-2.3-1.0
Other current account flows (negative = net inflow)4.04.14.02.62.62.52.52.42.21.30.7
Net FDI (negative = inflow)-6.7-10.0-7.2-4.53.2-5.5-6.2-6.1-6.1-6.2-6.3-5.7-5.2-5.5
Endogenous debt dynamics2/-4.3-4.8-6.60.9-0.8-1.5-1.3-1.2-1.1-0.7-0.2
Contribution from nominal interest rate0.40.30.20.20.40.40.40.40.50.70.7
Contribution from real GDP growth-3.2-2.6-1.50.7-1.2-1.8-1.7-1.6-1.6-1.4-0.9
Contribution from price and exchange rate changes-1.4-2.4-5.3
Residual (3–4)3/6.812.0-1.43.9-3.1-4.6-3.6-1.8-0.80.40.0
Of which: Exceptional financing1.1-0.20.0-0.2-0.2-0.1-0.1-0.1-0.10.00.0
Present value (PV) of external debt 4/19.823.724.524.524.224.123.919.613.4
In percent of exports36.748.551.452.152.953.053.247.336.9
PV of PPG external debt19.823.724.524.524.224.123.919.613.4
In percent of exports36.748.551.452.152.953.053.247.337.0
In percent of government revenues164.9196.9184.9178.4172.0167.2164.3131.180.4
Debt service-to-exports ratio (in percent)1.11.10.90.91.51.51.51.82.23.43.9
PPG debt service-to-exports ratio (in percent)1.11.10.90.91.51.51.51.82.23.43.9
PPG debt service-to-revenue ratio (in percent)6.75.94.23.85.55.35.05.76.99.38.4
Total gross financing need (billions of U.S. dollars)-0.4-0.70.40.00.60.80.70.50.40.20.7
Noninterest current account deficit that stabilizes debt ratio4.22.815.30.610.012.211.09.28.26.15.3
Key macroeconomic assumptions
Real GDP growth (in percent)10.810.26.79.52.2-2.74.36.86.26.06.24.56.86.76.8
GDP deflator in U.S. dollar terms (change in percent)4.38.621.65.57.0-1.23.84.44.94.03.23.23.63.73.6
Effective interest rate (percent) 5/1.21.10.81.10.10.91.31.31.31.61.91.43.35.13.9
Growth of exports of goods and services (G&S) (U.S. dollar terms, in percent)23.913.07.716.67.5-12.75.49.98.49.68.34.88.89.49.1
Growth of imports of G&S (U.S. dollar terms, in percent)21.315.121.517.94.3-16.516.211.47.26.86.95.38.69.58.8
Grant element of new public sector borrowing (in percent)20.018.819.117.217.818.818.617.49.914.9
Government revenues (excluding grants, in percent of GDP)11.511.912.012.013.213.714.014.414.515.016.715.5
Aid flows (in billions of U.S. dollars) 7/0.30.40.60.30.30.30.30.40.40.61.2
Of which: Grants0.20.20.30.30.30.30.30.40.40.61.2
Of which: Concessional loans0.10.20.20.00.00.00.00.00.00.00.0
Grant-equivalent financing (in percent of GDP) 8/3.43.23.02.82.72.72.31.62.0
Grant-equivalent financing (in percent of external financing) 8/52.854.055.456.856.957.758.655.857.0
Memorandum items:
Nominal GDP (billions of U.S. dollars)7.38.711.310.811.713.114.616.117.629.280.3
Nominal dollar GDP growth15.619.629.8-3.98.211.511.510.39.67.910.710.710.6
PV of PPG external debt (in billions of U.S. dollars)2.22.52.93.23.53.94.25.710.8
(PVt-PVt-1)/GDPt-1 (in percent)3.03.02.82.52.32.12.61.40.81.2
Sources: Cambodian authorities; and staffs’ estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections, also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Cambodian authorities; and staffs’ estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections, also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.Cambodia: Sensitivity Analysis for Key Indicators of Public and Publicly-Guaranteed External Debt, 2009–29(In percent)
Projections
200920102011201220132014201520192029
PV of Debt-to GDP Ratio
Baseline242424242424232013
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009–29 1/2418127420-20
A2. New public sector loans on less favorable terms in 2009–29 2/242526262627262419
A3. Alternative Scenario: Delayed fiscal adjustment242628313232312617
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010–11242525252525242014
B2. Export value growth at historical average minus one standard deviation in 2010–11 3/242631313030282314
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2010–11242628272727262215
B4. Net nondebt creating flows at historical average minus one standard deviation in 2010–11 4/243136353433322614
B5. Combination of B1–B4 using one-half standard deviation shocks242833323131292414
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010 5/243434343434322819
PV of Debt-to-Exports Ratio
Baseline485152535353524737
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009–29 1/48382515951-61
A2. New public sector loans on less favorable terms in 2009–29 2/485355575859595751
A3. Alternative scenario: Delayed fiscal adjustment485560687072716447
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010–11485152535353524737
B2. Export value growth at historical average minus one standard deviation in 2010–11 3/485877777676736544
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2010–11485152535353524737
B4. Net nondebt creating flows at historical average minus one standard deviation in 2010–11 4/486476767574716239
B5. Combination of B1–B4 using one-half standard deviation shocks485767686766645739
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010 5/485152535353524737
PV of Debt-to-Revenue Ratio
Baseline19718517817216716415813180
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009–29 1/197135855029152-162
A2. New public sector loans on less favorable terms in 2009–29 2/197190188185183184180159111
A3. Alternative scenario: Delayed fiscal adjustment197197206220222222216177103
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010–1119718618417817317016313583
B2. Export value growth at historical average minus one standard deviation in 2010–11 3/19719923021921020419515683
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2010–1119719620219518918617814891
B4. Net nondebt creating flows at historical average minus one standard deviation in 2010–11 4/19723026024623522821717185
B5. Combination of B1–B4 using one-half standard deviation shocks19720823822621721120216287
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010 5/197260251242235231222184113
Debt Service-to-Exports Ratio
Baseline122222334
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009–29 1/111101100
A2. New public sector loans on less favorable terms in 2009–29 2/111122234
A3. Alternative scenario: Delayed fiscal adjustment111234565
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010–11111122223
B2. Export value growth at historical average minus one standard deviation in 2010–11 3/112223344
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2010–11111122223
B4. Net nondebt creating flows at historical average minus one standard deviation in 2010–11 4/112222344
B5. Combination of B1–B4 using one-half standard deviation shocks111222333
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010 5/111122223
Debt Service-to-Revenue Ratio
Baseline455567998
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009–29 1/4432122-1-1
A2. New public sector loans on less favorable terms in 2009–29 2/444556789
A3. Alternative scenario: Delayed fiscal adjustment4455811161711
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2010–11445556776
B2. Export value growth at historical average minus one standard deviation in 2010–11 3/4456678107
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2010–11455556887
B4. Net nondebt creating flows at historical average minus one standard deviation in 2010–11 4/4467779118
B5. Combination of B1–B4 using one-half standard deviation shocks4556678107
B6. One-time 30 percent nominal depreciation relative to the baseline in 2010 5/46667810109
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/131313131313131313
Sources: Cambodian authorities; and staffs’ estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP, and nondebt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Cambodian authorities; and staffs’ estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP, and nondebt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.Cambodia: Indicators of Public and Publicly-Guaranteed External Debt under Alternatives Scenarios, 2009–29 1/

Sources: Cambodian authorities; and staffs’ estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2011. In figures b to e, it corresponds to net non-debt creating flows at historical average minus one standard deviation in 2010–11; in figure f, a one time 30 percent nominal depreciation relative to baseline in 2010.

10. However, the assumed fiscal consolidation is far from assured, with failure to undertake adjustment posing significant risks to macroeconomic stability. In recent years, Cambodia has maintained a prudent fiscal stance, characterized by relatively low fiscal deficits financed largely through external resources. Under these conditions, the exchange rate has remained stable vis-à-vis the U.S. dollar. Starting in 2009 and in response to effects of the global recession, the government adopted a more accommodative fiscal stance, which is in part expected to be financed domestically, mainly through a drawdown in government deposits. Such a sizable injection of riel liquidity could put pressure on both domestic prices and the exchange rate, which could lead to possible reserve losses, increasing Cambodia’s vulnerability. The baseline assumes a return to a more prudent fiscal stance by 2010, characterized by a moderate reduction in the overall fiscal deficit and no net domestic financing requirement.

11. As an additional alternative scenario, this DSA considers the impact on debt sustainability of a delay in fiscal adjustment in a partial equilibrium setting. Under this scenario, the level of primary balance is assumed to remain at the projected level in 2009 (minus 4 percent of GDP) for the period 2010–12 (i.e., no fiscal adjustment), and then gradually return to the baseline level by 2017. Owing to a limited amount of government deposits and lack of capacity to issue domestic debt, the government would be expected to rely largely on additional external financing. In the event, the NPV of debt-to-GDP ratio would exceed the indicative threshold for five years, and the debt-to-revenue ratio would breach the threshold for six years (see Table 1b).

12. In staffs’ view, Cambodia faces a moderate risk of debt distress. This assessment is based not only on the bound tests and an additional scenario of delayed fiscal consolidation, but also on the uncertainty related to implicit contingent liabilities. Moreover, the impact of delaying policy adjustment could be much more severe if possible exchange rate and inflationary pressures resulting from higher government spending and larger fiscal deficits are fully taken into account. Under these circumstances, the potential loss in competitiveness would point to the need for greater exchange rate flexibility.

IV. Public Debt Sustainability

13. Given that most public debt is external, the dynamics of public debt behave similarly to those of external debt in the DSF. The nominal stock of public debt, equivalent to 26 percent of GDP at end-2008, is expected to rise to 30 percent by end-2009 (Table 2a and Figure 2), reflecting the accommodative fiscal stance. Under the baseline, it would begin to decline as a share of GDP in 2011, as the DSA is based on current policies, which at present do not anticipate issuance of domestic debt.

  • The NPV of public sector debt-to-GDP ratio—21 percent at end-2008—would rise to around 25 percent by 2009 and further in 2010, before gradually declining to 14 percent by 2029 (Table 2b).

  • The NPV of public debt-to-revenue ratio (inclusive of grants), which is estimated to be 138 percent in 2008, would decline to 74 percent by 2029.

  • The debt service-to-revenue ratio remains low in most scenarios for the entire projection period under the baseline.

Table 2a.Cambodia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006–29(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
200620072008AverageStandard Deviation2009201020112012201320142009–14 Average201920292015–29 Average
Public sector debt1/32.830.525.530.230.730.229.428.928.322.614.6
Of which: Foreign-currency denominated31.029.624.629.230.129.728.928.427.922.314.5
Change in public sector debt-4.4-2.3-5.04.70.5-0.5-0.8-0.5-0.5-1.0-0.8
Identified debt-creating flows-6.3-4.5-6.85.10.6-0.8-1.5-1.4-1.4-1.1-1.0
Primary deficit0.00.5-0.41.61.63.92.82.01.20.90.61.90.5-0.20.3
Revenue and grants14.014.115.114.715.816.116.416.716.816.918.2
Of which: Grants2.52.23.12.62.62.42.32.32.21.91.5
Primary (noninterest) expenditure14.014.514.618.518.718.117.617.517.417.418.0
Automatic debt dynamics-5.2-5.0-6.41.2-2.2-2.8-2.8-2.3-2.0-1.6-0.8
Contribution from interest rate/growth differential-4.3-3.6-2.40.7-1.0-1.8-1.8-1.8-1.7-1.2-0.5
Of which: Contribution from average real interest rate-0.7-0.5-0.50.00.20.2-0.1-0.10.00.30.4
Of which: Contribution from real GDP growth-3.6-3.0-1.90.7-1.2-2.0-1.8-1.7-1.7-1.5-1.0
Contribution from real exchange rate depreciation-0.8-1.4-4.00.6-1.2-1.0-0.9-0.5-0.3
Other identified debt-creating flows-1.10.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)-1.10.00.00.00.00.00.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes1.92.21.9-0.4-0.10.30.70.90.90.10.2
Other sustainability indicators
PV of public sector debt24.823.720.724.625.125.024.624.524.319.913.5
Of which: Foreign-currency denominated22.622.719.823.724.524.524.224.123.919.613.4
Of which: External22.622.719.823.724.524.524.224.123.919.613.4
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/3.32.80.94.94.13.22.42.12.02.11.3
PV of public sector debt-to-revenue and grants ratio (in percent)176.6168.5137.5167.9158.6155.0150.4147.1144.9117.574.4
PV of public sector debt-to-revenue ratio (in percent)215.7199.4172.8204.8189.5182.4175.5170.5167.3132.881.0
Of which: External 3/196.6191.0164.9196.9184.9178.4172.0167.2164.3131.180.4
Debt service-to-revenue and grants ratio (in percent) 4/4.24.44.03.14.64.54.55.06.08.27.7
Debt service-to-revenue ratio (in percent) 4/5.15.25.03.85.55.35.35.86.99.38.4
Primary deficit that stabilizes the debt-to-GDP ratio4.42.84.5-0.82.32.52.11.41.21.50.6
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)10.810.26.79.52.2-2.74.36.86.26.06.24.56.86.76.8
Average nominal interest rate on forex debt (in percent)1.21.10.81.10.10.91.31.31.31.61.91.43.35.13.8
Average real interest rate on domestic debt (in percent)-4.2-5.9-17.6-6.55.6-0.2-4.4-4.0-4.5-3.8-3.2-3.3-3.5
Real exchange rate depreciation (in percent, + indicates depreciation)-2.7-5.0-14.6-2.65.32.2
Inflation rate (GDP deflator, in percent)4.66.521.96.16.70.74.84.44.94.13.53.83.94.04.0
Growth of real primary spending (deflated by GDP deflator, in percent)0.20.10.10.10.10.20.00.00.00.10.10.10.10.10.1
Grant element of new external borrowing (in percent)20.018.819.117.217.818.818.617.49.9
Sources: Cambodian authorities; and staffs’ estimates and projections.

Comprises general government debt excluding state-owned enterprises.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium- and long-term debt.

5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Cambodian authorities; and staffs’ estimates and projections.

Comprises general government debt excluding state-owned enterprises.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium- and long-term debt.

5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Figure 2.Cambodia: Indicators of Public Debt Under Alternative Scenarios, 2009–29

Sources: Cambodian authorities; and staffs’ estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2019.

2/ Revenues are defined inclusive of grants.

Table 2b.Cambodia: Sensitivity Analysis for Key Indicators of Public Debt 2009–29
Projections
20092010201120122013201420192029
PV of Debt-to-GDP Ratio
Baseline2525252525242014
A. Alternative Scenarios
A1. Real GDP growth and primary balance are at historical averages2523232223232323
A2. Primary balance is unchanged from 20092526283032354354
A3. Permanently lower GDP growth 1/2525262627272839
B. Bound Tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010–112525262627272420
B2. Primary balance is at historical average minus one standard deviations in 2010–112526272626262114
B3. Combination of B1–B2 using one half standard deviation shocks2524252424241912
B4. One-time 30 percent real depreciation in 20102534333232312619
B5. 10 percent of GDP increase in other debt-creating flows in 20102535343333322617
PV of Debt-to-Revenue Ratio2/
Baseline16815915515014714511774
A. Alternative Scenarios
A1. Real GDP growth and primary balance are at historical averages168147140137137140140132
A2. Primary balance is unchanged from 2009168173172182195209256296
A3. Permanently lower GDP growth 1/168161160158159161164212
B. Bound Tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010–11168160163161160160142110
B2. Primary balance is at historical average minus one standard deviations in 2010–1116816116516015615312377
B3. Combination of B1–B2 using one half standard deviation shocks16815415514914514311367
B4. One-time 30 percent real depreciation in 2010168218207197190186151105
B5. 10 percent of GDP increase in other debt-creating flows in 201016822221320419619215192
Debt Service-to-Revenue Ratio2/
Baseline35455688
A. Alternative Scenarios
A1. Real GDP growth and primary balance are at historical averages3444341217
A2. Primary balance is unchanged from 200935558111812
A3. Permanently lower GDP growth 1/3555571328
B. Bound Tests
B1. Real GDP growth is at historical average minus one standard deviations in 2010–113555571114
B2. Primary balance is at historical average minus one standard deviations in 2010–1135556898
B3. Combination of B1–B2 using one half standard deviation shocks35445686
B4. One-time 30 percent real depreciation in 20103666791517
B5. 10 percent of GDP increase in other debt-creating flows in 2010357716161511
Sources: Cambodian authorities; and staffs’ estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Cambodian authorities; and staffs’ estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

14. Public debt ratios are sensitive to continued accommodative fiscal stance and a permanent growth shock. Under two of the alternative scenarios—the primary balance unchanged from 2009 and the GDP growth permanently lower by one percentage point—the level of public debt (as a share of GDP) continues to rise over the projection period, reaching 54 percent and 39 percent, by 2029. Under the latter scenario, the debt service-to-revenue ratio would reach nearly 30 percent by 2029. Bound tests also reveal sensitivity of public debt ratios to permanently lower growth, a one-time 30 percent real depreciation, and a 10 percent increase in other debt creating flows. The last is particularly relevant given the potential risks posed by implicit contingent liabilities.

V. Conclusion

15. Staffs conclude that Cambodia faces a moderate risk of debt distress. While no thresholds are breached under the baseline scenario, some are breached under the standard stress tests and alternative scenarios. Moreover, an additional scenario reflecting delayed fiscal adjustment indicates that external debt indicators could exceed indicative thresholds. This outlook could be further weakened in the event actual liabilities arise from contingent obligations, mainly those related to infrastructure development, which further underscores the rationale for the current classification of risk.

16. Given the uncertainty about near-to medium-term prospects, staffs urge the Royal Government of Cambodia to continue pursuing a sound strategy for public debt management. Careful consideration is needed in advance of possibly contracting less concessional loans and providing direct and indirect government guarantees, as they could impair sustainability, in particular if the revenue base remains low and institutions weak. Stronger capacity in debt management is an essential prerequisite for less concessional borrowing. To this end, a full accounting of all commitments, including from newly emerging creditors, and better monitoring of contingent liabilities will be necessary to ensure debt sustainability. Moreover, given the high dollarization of economy and lack of domestic debt instruments, the DSA points to the need for an exchange rate policy that is consistent with the fiscal stance. Staffs also encourage the authorities to continue seeking agreements to resolve outstanding arrears.

This DSA was prepared jointly by the IMF and World Bank. Staffs also collaborated with the Asian Development Bank. Debt data for this exercise were provided by the Cambodian authorities and donor partners.

See “Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/020304.htm and IDA/SECM2004/0035, 2/3/04) and “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/091004.htm and IDA/SECM2004/0629, 9/10/04), “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief,” (www.imf.org/external/np/pp/eng/2006/110606.pdf and IDA/SecM2006–0564, 8/11/06), and “A Review of Some Aspects of the Low-Income Country Debt Sustainability Framework” (IDA/SecM2009-49870, 8/23/09 and http://www.imf.org/external/np/pp/eng/2009/080509a.pdf).

The low-income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels for debt indicators are policy dependent. Cambodia’s policies and institutions, as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA), averaged 3.22 over the past three years, placing it as a “weak performer.” The relevant indicative thresholds for this category are: 30 percent for the NPV of debt-to-GDP ratio, 100 percent for the NPV of debt-to-exports ratio, 200 percent for the NPV of debt-to-revenue ratio, 15 percent for the debt service-to-exports ratio, and 25 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly-guaranteed external debt.

Comprises general government debt excluding state-owned enterprises.

For this DSA, staffs continue to apply the standard 70 percent discount to the nominal value of debt owed to the Russian Federation.

Historical averages are generally inadequate as a basis for generating stress tests and alternative scenarios for Cambodia because the post-conflict period between 1995 and 2005 was characterized by rapid catch-up growth from a very low base. Therefore, staffs have adjusted the historical averages to exclude data prior to 2000 but to include those in 2009, which results in a set of more severe but realistic stress tests.

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