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Cambodia: Staff Report for the 2017 Article IV Consultation

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2017
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Recent Developments, Outlook and Risks

1. Context. Cambodia is a fast-growing, small, open economy. Robust growth over the past few years has benefited from a stable macroeconomic environment, efficiency improvements supported by an open and market-oriented economy, as well as the country’s geographical location in the world’s fastest-growing region and its relatively young population. Poverty has fallen, although a significant share of the population still lives just above the poverty line.

Cambodia: Poverty Reduction and Income Inequality, 2002–2013 1/

(Annual change, period average)

Sources: World Bank; and IMF staff calculations.

1/ Selected countries: low income countries and lower middle income countries; selected period: closest period to 2002–2013. National Poverty line is used to measure poverty rate.

2. Robust economic activity. Domestic investors are in wait-and-see mode ahead of next year’s national elections. Real GDP growth is nevertheless expected to remain robust at around 7 percent this year, with moderating private investment offset by higher public spending and robust construction and tourism activity. Headline inflation rose to 3 percent (average) in 2016 and around 3.5 percent (average) in the first half of 2017, mainly driven by higher food and energy prices (Box 1).

3. Slower credit growth. Bank credit growth has slowed to about 15 percent (year-on-year) in May 2017, from an average of 30 percent over the past few years. This moderation is due in part to policy measures, as well as lower demand for credit for private investment owing to election related uncertainties. While the number of microfinance institutions (MFIs) continues to grow, MFI credit growth also slowed down (to 24 percent at end-2016 compared with over 50 percent the past few years).1 Real estate sector-related bank credit growth remains strong, supported by demand for housing from Cambodia’s young and growing middle-income population. Anecdotal evidence, however, suggests that some segments of the property market are cooling.

Cambodia: Credit and Deposit Growth

(In percent of y/y change)

Sources: Cambodian authorities; and Fund staff calculation.

Cambodia: Contribution to Credit Growth

(In percent, year-on-year)

Sources: NBC; and IMF staff calculations.

4. Moderating current account deficit. The current account deficit narrowed to 8.8 percent of GDP in 2016. While the first half of 2017 saw a slowdown in garment exports growth, tourist arrivals grew by a robust 12.8 percent (compared to 2.6 percent last year), primarily driven by arrivals from China. Significant FDI and other capital inflows have helped fuel construction and real estate sector growth. As a result, foreign reserves continued to grow, reaching $7.9 billion in June 2017, about 5.5 months of next year’s imports.

5. Widening fiscal deficits. Continued Revenue Mobilization Strategy (RMS) implementation coupled with robust growth and administrative efforts, such as more stringent audits, have boosted tax revenues from around 11 percent of GDP in 2012 to 15.3 percent in 2016. While the authorities again outperformed their revenue target in 2016, higher current spending resulted in an increase of the fiscal deficit to around 2.8 percent of GDP (compared with 1.6 percent in 2015). The fiscal deficit is expected to widen further this year owing to higher public sector wages and other current spending.

6. Positive outlook. Real GDP growth is projected to remain robust at around 7 percent over the next few years. Growth is then expected to slow down over the medium-term to around 6 percent, owing to moderation in the credit and real-estate cycles, coupled with ongoing challenges in improving economic diversification and competitiveness. The garment sector is expected to grow at a slower pace owing to increasing competition from neighboring countries and a higher minimum wage. Manufacturing exports will benefit from an extension of preferential US trade access for specific travel-related items and some product diversification. Continued regional economic integration is expected to support Foreign Direct Investment (FDI) and other capital inflows. These factors should support economic activity and narrow the current account deficit over the medium-term. Inflation is projected to rise in the short-term, reflecting higher food and energy prices as well as demand pressures from higher public spending and wages. A moderation in the pace of government revenue growth and rising spending pressures, including public wage increases and spending to support social programs and infrastructure, are expected to result in higher fiscal deficits and lower government deposits over the medium term.

7. Significant downside risks. While overall credit growth has moderated, concerns about credit quality, concentration in the real estate sector, reliance on external funding, and growing importance of MFIs continue to pose risks to financial and macroeconomic stability. With a closely managed exchange rate, large increases in the minimum wage could further erode competitiveness, particularly in the key garment sector. Potential social unrest in the run-up to next year’s general elections could dampen confidence. External risks include weaker growth in China, which would have significant negative spillovers through FDI, banking, and tourism channels. A growth slowdown in advanced economies, stronger-than-expected U.S. dollar, or rise in protectionism could dent garments exports and tourism growth. Sharper than expected global financial tightening could raise funding costs and heighten liquidity risks (Appendix I)

8. Authorities’ views. There was a broad agreement on the macroeconomic outlook and risks. The authorities continue to aim for sustained growth at 7 percent and agreed on the need to implement structural reforms to achieve that goal over the medium-term. The authorities emphasized their efforts to mitigate potential macro-financial risks. On external risks, the authorities considered that positive investor sentiment and strong domestic fundamentals would mitigate the impact of a potential tightening of global financial conditions on capital inflows.

Managing Macro-Financial Risks

9. Sustained financial deepening. Rapid credit growth, sustained for the past several years, has led to significant increase in the bank credit-to-GDP ratio (to close to 70 percent). The real per capita credit gap, a measure of excessive credit growth, peaked in early 2016 and, while having declined, remains high at around 10 percent.2 While distinguishing between healthy financial development and excess credit is fraught with challenges, the level of financial development is closely related to a country’s economic development. Benchmarking against other emerging and frontier market economies also suggests that credit growth has been faster than implied by structural fundamentals (“the financial possibility frontier”). 3 Credit has continued to grow in 2017, albeit at a less rapid pace, and the banking sector continues to attract sizeable FDI inflows. Credit growth is expected to moderate somewhat this year and next, in part owing to lower private investment and policy measures, but—barring additional measures to contain it—is projected to remain elevated over the medium term. Projections assume that the real per capita credit gap declines to about 5 percent over the medium-term, reflecting tightening global financial conditions and maturation of the credit and real-estate cycles.

Cambodia: Financial Possibility Frontier

(Log of real credit per capita)

Sources: Cambodian authorities; WDI; WEO; and Fund staff calculation

10. Elevated macro-financial risks. Despite slower credit growth, elevated financial sector vulnerabilities related to (i) credit quality, (ii) real-estate sector concentration, (iii) significant reliance on external funding and (iv) growing importance of MFIs continue to pose significant risks. First, deficiencies in the current regulatory framework complicate early identification of emerging risks. Existing loan classification definitions are drawn too broadly and fail to capture adequately potential evergreening. While the system-wide non-performing loan (NPL) ratio remains low at 2.5 percent in June 2017, weaknesses in loan classification may result in underreporting and, coupled with difficulties in asset classification, lead to an overstatement of the system-wide capital adequacy ratio. Second, credit to the real estate-related and construction sectors continues to grow rapidly, with growth of about 33 percent (year-on-year) in June 2017, contributing to growing sectoral concentration and heightened credit risks associated with a potential fall in real estate prices. Third, the banking sector continues to rely on external borrowing, with the system wide loan-to-deposit (LTD) ratio reaching 105 percent in May 2017. Finally, while less stringent regulation has allowed the MFI sector to contribute to improving financial inclusion, recent growth of large deposit taking MFIs (MDIs) has further increased their systemic role. They rely mainly on external borrowing and receive some funding from domestic banks, with MDIs’ LTD ratio at more than 200 percent on average.

Combodia Number of Institutions and Assets to GDP

(In percent)

Text Figure 1.Cambodia: Funding for the Real Estate Sector

Source: IMF Staff.

11. Policies to address stability risks. The authorities have introduced several policy measures, including (i) continued phased implementation of a Liquidity Coverage Ratio and higher minimum capital requirements4; (ii) bank-specific prudential measures (including higher minimum capital requirements and strengthened governance) for institutions deemed to be taking excessive risks; and (iii) liquidity-providing collateralized operations, established in October 2016 to provide lower-cost local currency (Riel) liquidity. The authorities are also preparing regulation to improve loan classification, introduce a liquidity management framework and capital conservation buffers, and strengthen regulation of microfinance institutions. The MFI interest rate cap (at 18 percent) introduced in April this year is expected to result in challenges for some institutions, likely leading to consolidation and reduction in financial access, and could potentially encourage informal lending practices, particularly in rural areas. International evidence suggests that interest rate caps are not an effective tool to increase access to low-cost credit, and that fundamental reforms to reduce funding and operational costs, and to improve financial literacy and consumer protection are needed instead.

12. Policy recommendations. Near-full financial dollarization and commitment to a closely managed exchange rate leave little room for independent monetary policy. The authorities are encouraged to continue building foreign reserves given elevated vulnerabilities and high dollarization, and to maintain sufficient government deposits. While recent steps to strengthen prudential policies are to be commended, further efforts are required, including to expedite the implementation of outstanding FSAP recommendations. The authorities should continue to seek measures that address risks without aiming to limit capital flows.

  • Better managing credit risk. The authorities should focus on (i) implementing the revised regulation on loan classification to improve bank reporting of NPLs; (ii) revising existing regulations on related-party lending and large exposures to align them with international best practice; and (iii) conducting regular validation exercises to ensure accurate reporting.

  • Targeted prudential policies. A further gradual increase in reserve requirements on foreign exchange liabilities is needed to ensure sufficient liquidity buffers and promote use of the Riel. Other measures targeted at specific vulnerabilities include: (i) improving sectoral asset classification would enable the introduction of sectoral concentration limits and/or higher risk weights for real-estate loans; (ii) expedited collection of data on the real-estate sector and household balance sheets to enable the introduction of limits on debt-to-income and loan-to-value ratios; (iii) introduction of a liquidity risk management framework; (iv) potential funding requirements such as limits on LTD ratios would ensure that banks hold more internal and stable liabilities; (iv) introduction of capital conservation buffers and counter-cyclical capital requirements as tools to further build buffers.

  • Strengthening non-bank regulation. The systemic relevance of MFIs calls for strengthening regulation to prevent regulatory arbitrage. Policies should standardize asset classification, unify accounting and provisioning standards between MFIs and banks, adjust reserve requirements for deposit-taking MFIs to be in line with banks and improve monitoring of systemic linkages. The need to strengthen regulatory capacity and move to risk-based supervision also applies to the emerging insurance sector.

  • Introducing a comprehensive crisis management framework. Further work towards a comprehensive framework is needed. The National Bank of Cambodia (NBC) is working to introduce a framework for prompt corrective action and progress has been made in establishing a multi-agency financial stability committee and introducing a deposit protection scheme.

13. Authorities’ views. The authorities agreed with the need for further measures, broadly in line with staff’s recommendations. However, they argued that before introducing further measures that could slow credit growth down further more time was needed to assess the impact from past measures. The authorities agreed on the need to better monitor risks related to the real estate sector and have established an inter-agency working group to collect data. They noted strong demand for affordable housing from the emerging middle-class and continued monitoring banks’ internal rules governing LTV ratios for mortgages, which appear conservative. The authorities argued that external funding consisted of mostly longer-term funding from parent banks (to banks) and from financial institutions with development purposes (to MFIs), thus mitigating liquidity risks. They agreed that the interest rate cap on MFI lending could lead to challenges, but expect that over time, it could also lead to efficiency improvements by encouraging consolidation and reductions in operational costs.

Safeguarding Fiscal Sustainability

14. Fiscal outlook. The authorities continue to rely largely on administrative measures, such as more stringent audits, to mobilize revenues. While the budget revenue target is likely to be exceeded slightly this year, the fiscal deficit is expected to widen (to about 3.7 percent of GDP) owing to higher capital spending, increases in public sector wages and other election-related spending. Government deposits are projected to be around 9.7 percent of GDP in 2017, a level that is considered adequate. Priorities for the 2018 budget include a further increase in public wages, support for education (including for vocational training) and agriculture, as well as higher infrastructure investment. Preliminary budget figures suggest a further increase in the fiscal deficit to about 4.6 percent of GDP in 2018. Public sector salaries are projected to rise further while capital spending is projected to increase to 8.5 percent of GDP.5

15. Rising medium-term fiscal pressures. A moderation in the pace of revenue growth and rising spending pressures would—absent corrective measures— result in elevated fiscal deficits over the medium term which in turn would erode government deposits below comfortable levels. On the revenue side growth in international trade taxes is expected to decline as tariffs are cut in line with regional free trade arrangements, while growth in domestic taxes is expected to moderate as gains from RMS implementation mature. Moreover, development-related grants are expected to decline due to the achievement of lower middle-income status. On the expenditure side, the government is facing mounting pressure to increase social spending, which remains the lowest in the region. Public wage pressures are likely to remain strong (even though staff projections keep them at pace with nominal GDP growth) and investment spending needs will remain large given significant infrastructure gaps. Reflecting these trends, and absent additional measures, fiscal deficits are projected to trend upward, the expenditure mix to deteriorate and become less growth-friendly and government deposits to fall below comfortable levels. In the absence of alternative financing sources due to under-developed capital markets, adequate government deposits (an important fiscal anchor) will be essential to maintain sufficient buffers in the event of shocks.6 The Debt Sustainability Analysis suggests that the risk of debt distress remains low, but increasing risks to the debt outlook call for continuous monitoring of debt dynamics.

Cambodia: Social Assistance Spending

(In percent of GDP)

Sources: : IMF FAD Expenditure Assessment Tool (EAT), World Economic Outlook, ASPIRE, and IMF Pension Indicators.

Cambodia: Government Education Expenditure, Latest Value Available

Source: IMF FAD ExpenditureASsessment Tool (EAT), World Bank.

16. Policy recommendations. Against this background, further efforts starting next year are needed to moderate spending growth and sustain revenue performance (see Text Table 3).

Text Table 1.Cambodia: Selected Financial Soundness Indicators (FSIs), 2011–17(In percent)
2011201220132014201520162017
Mar.
Capital Adequacy
Regulatory capital to risk-weighted assets26.225.024.220.420.320.922.6
Asset Quality
Nonperforming loans to total gross loans2.12.02.31.61.62.12.2
Earnings and Profitability
Return on equity 1/9.710.312.115.516.314.515.2
Return on assets 1/1.81.72.42.92.92.52.6
Interest margin to gross income64.366.768.672.963.165.363.5
Liquidity
Liquid assets to total assets16.215.417.916.216.615.816.2
Liquid assets to short-term liabilities23.021.224.223.125.424.324.9
Sensitivity to Market Risk
Net open position in foreign exchange to capital3.92.09.44.13.62.62.1
Source: National Bank of Cambodia.

Annualized.

Source: National Bank of Cambodia.

Annualized.

Text Table 2.Cambodia: Policy Recommendations for Safeguarding Financial Stability
* Measures: Macro-prudential measures
* Measures: Macro-prudential measures
Text Table 3.Cambodia: Active Fiscal Policy Scenario (GFSM 2001)(In percent of GDP)
201720182019202020212022
Revenue19.519.720.020.520.520.9
of which: Tax Revenues15.315.515.615.816.016.3
Expenditure23.224.124.124.124.224.2
Wage7.98.48.48.48.48.4
Non-wage7.17.27.37.37.37.3
Net Acquisition of Non-Financial Assets8.28.58.58.58.58.5
Overall Balance−3.7−4.4−4.1−3.7−3.6−3.3
Government Deposits9.78.57.57.06.66.6
Memorandum items:
Baseline Overall Balance−3.7−4.6−4.4−4.0−4.0−3.8
Baseline Government Deposits9.78.37.16.25.65.1
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.
  • Containing near-term fiscal deficits. To safeguard fiscal and external sustainability, and in view of medium term spending pressures, any revenue overperformance should be saved and non-development current expenditure curtailed, by continuing to enhance spending efficiency, particularly regarding public sector wages. Together with other policy measures, lower near-term deficits would help stabilize government deposits at around 6.5 percent of GDP over the medium-term.

  • Ensuring sustained revenue improvement. The authorities should re-invigorate the RMS to ensure sustained revenue improvement. Strengthening the institutional development of the tax administration agency, especially the Large Taxpayer Department, is needed to facilitate future tax policy reforms. In preparation for the next RMS, the authorities should consider undertaking a tax administration diagnostic assessment. A new diagnostic would provide an up-to-date assessment of tax administration benchmarked against good practices, and thereby provide targeted policy advice on priority areas. Tax policy reforms are needed to sustain improvements in tax revenue over time and should initially focus on tax incentives (to improve their effectiveness and efficiency) and excise taxes, and over the medium term aim at reforming VAT and personal income taxes, and increasing property taxes.

  • Prioritizing development spending. Plans to boost social protection spending, as reflected also in the government’s Social Protection Policy Framework, are welcome. However, public education and health expenditure is expected to remain below peers and further prioritization is needed as revenue gains are secured.

  • Sustainable wage increases. Keeping wage increases on a sustainable path will help moderate growth in current spending and support a more growth and development friendly composition of spending over the medium term. Further wage increases should be contingent on meeting revenue targets and maintaining adequate fiscal buffers, and accompanied by further progress in public administration reforms. This includes strong efforts to strengthen human resource management, including to increase skills and labor productivity, improve spending efficiency, and enhance transparency. Balancing fiscal sustainability and competitive civil service salaries will require careful targeting of incentives.

  • Medium Term Fiscal Framework (MTFF). The authorities should push ahead with developing a multi-year budget framework to allocate expenditure more systematically.

17. Financing infrastructure investment. Infrastructure gaps remain large, especially in electricity, health, education and road infrastructure, where Cambodia scores below regional peers.7 This calls for increasing domestically financed public investment to maintain public investment at about 8.5 percent of GDP (see Text Table 3). With lower access to concessional finance in the coming years (owing to the attainment of lower middle income status), and slow progress in developing domestic debt markets, the authorities plan to increase the share of PPPs in public investment. They have established a roadmap to have a full set of PPP mechanisms in place by 2020. The aim is to limit fiscal costs and keep government debt low, while closing the large infrastructure gap. Although PPPs can increase efficiency and increase value for money relative to public financing, their fiscal implications are hard to monitor and control. Managing fiscal costs and risks will therefore require strengthening the PPP framework (Box 2).

Cambodia: Measures of Infrastructure Access

(Most Recent Year)

Source: World Bank Development Indicators.

18. Authorities’ views. The authorities broadly agreed with staff’s assessment and key policy recommendations. On the revenue side, they agreed with the need for higher revenues to meet rising spending pressures, especially in wage and infrastructure. While arguing that significant progress had been made in RMS implementation, the authorities concurred that achieving further gains through administrative measures would become increasingly challenging. They expected the next RMS phase (from 2019–2023) to focus on reforms in tax policies to boost revenues and improve efficiency. On expenditures, Public Financial Management (PFM) reforms, which include an expansion of program budgeting to almost all line ministries, had improved spending control. The authorities agreed on the importance of developing a MTFF, which they hoped to introduce in the medium term. They would continue to monitor the public wage bill closely to ensure sustainability and link medium term wage increases with progress in public administration reforms. They also acknowledged the need to develop a well-designed PPP framework and expected to remain conservative in their approach to external borrowing.

Reforms to Support Growth, Resilience and Inclusion

19. Structural policies to address constraints to growth and enhance resilience. Structural constraints include: (i) a narrow economic base, with exports relying largely on low-value added garments and footwear; (ii) weak business climate reflected in high cost of doing business, poor infrastructure, weak governance and low competitiveness (also owing to rising minimum wages); and (iii) underdeveloped financial markets. Accelerated implementation of the Industrial Development Policy (IDP) would spur growth of small-and-medium-sized enterprises and help Cambodia find a place in regional value chains. The planned National Logistics Council would help coordinate infrastructure plans. Recent education reforms include reforming the examination system, and increasing the quality of teaching by offering more training and increasing teachers’ salaries on a merit basis. The authorities should continue focusing on reforms to provide low-cost, reliable and adequate electricity, enhancing transportation links, addressing skill gaps, strengthening governance, the rule of law and increasing transparency of business regulation.8 The authorities are urged to address the issues identified in the recently-conducted AML/CFT mutual evaluation. Climate change is expected to have negative impact on climate-sensitive sectors, especially agriculture and tourism, with spillover effects on other sectors as well as on poverty reduction efforts. Internalizing climate change impact in the design of macroeconomic policies as well as structural reforms to improve productivity, especially in agriculture, and to diversify the economy would increase resilience (Box 3).

Cambodia: Ease of Doing Business

(Distance from the frontier; 0=farthest, 100=closest)

Source: World Bank, Ease of Doing Business 2017.

Cambodia: Minimum Monthly Wages - Garment Industry

(US dollars)

Sources: Cambodian, Bangladeshi and Vietnamese authorities; and IMF staff estimates and calculations.

20. Encouraging Riel use. High dollarization increases banks’ vulnerability to liquidity risks in the context of rapid financial deepening and limits the scope for exchange rate and monetary policies. The authorities have taken welcome measures to promote Riel use, including by requiring a minimum of 10 percent of the loan portfolio to be in Riel by 2019 and obliging businesses registered with government to post prices in Riel. Further recommended measures include: (i) reallocating the renumeration currently paid on USD reserve requirement to Riel denominated reserve requirement, Negotiable Certificates of Deposits (NCDs), and excess reserves; (ii) gradually increasing the reserve requirement on foreign exchange liabilities, a key prudential tool in dollarized economies; (iii) monitoring unhedged exchange rate risk exposures and ensuring that they remain within prudent limits; and (iv) systematically factoring in dollarization risk in prudential regulation. Beyond these measures, encouraging Riel use requires a multi-pronged approach and close inter-agency collaboration. This includes effectively enforcing the requirement for prices to be labeled in Riel, requiring all government transactions to be based on Riel, and other market-based policies to improve Riel’s attractiveness, such as ensuring convenient banknotes and payment methods.

Cambodia: Dollarization

(In percent; the share of foreign currency deposits in total deposits; data as of 2015)

Sources: IMF staff estimates and calculations.

21. Advancing financial sector development. Promoting development of the interbank, equity (including for small and medium-sized enterprises), government and corporate bond, and foreign exchange markets could further promote local currency usage and allow for the eventual implementation of an effective monetary policy framework. Specifically, authorities should improve functioning of the market for NCDs and develop an online trading platform to make the interbank market more liquid and move towards auction pricing and, continue restructuring the foreign exchange market and encourage banks (instead of money changers) to play a greater role.

Cambodia: Financial Development Index

Sources: Financial Development Index; Rethinking Financial Deepening: Stability and Growth in Emerging Markets; and IMF Staff calculations.

22. Policies to further financial inclusion. Financial deepening has improved inclusion, including through access to MFI credit and emerging use of mobile services. However, there are still large gaps in access and use of formal financial services. Few households have an account and firms identify access to finance as one of their major constraints (Box 4). The authorities have made efforts to incorporate financial literacy into education programs, introduced a literacy campaign and plan to reduce operational costs of smaller financial institutions by improving interoperability between ATMs and point of sale systems. Further inclusion can be achieved by promoting the use of financial technology, reducing costs (including through development of the interbank market to mobilize excess Riel reserves and developing financial infrastructure), diversifying products, as well as improving financial literacy. Finally, an adequate legal and regulatory framework is needed to protect consumers, and to effectively address all relevant risks (including those emerging from new actors and products), while at the same time fostering innovation and competition.

23. External sector assessment. The current account deficit is projected to remain broadly stable over the medium-term. Based on the IMF’s External Balance Assessment (EBA)-lite methodology, the external position is assessed to be moderately weaker than the level implied by fundamentals and desirable policies (Appendix III). The moderate REER overvaluation calls for policies to consolidate the fiscal position, diversify export markets and improve productivity and competitiveness, including ensuring that future wage increases are linked to productivity improvements. While reserves appear adequate when measured against traditional metrics, there are benefits to further reserve accumulation given high dollarization and elevated financial vulnerabilities. The current closely managed exchange rate regime is appropriate given high dollarization and a concentration in U.S. dollar-invoiced exports (primarily garments). As capacity improves and the economy diversifies, gradually introducing greater flexibility is recommended to better absorb external shocks, enable monetary policy implementation and to support further Riel use.

24. Authorities’ views. The authorities remain committed to IDP implementation and emphasized their efforts to improve the business environment, including through more power generation capacity, improving reliability and reducing the cost of electricity, as well as education reforms (especially vocational training). They pointed to progress in promoting financial inclusion, including improvements in payments infrastructure, and were formulating a financial inclusion strategy. The recent Financial Sector Development Strategy outlined comprehensive measures to support further financial market development. The authorities agreed with staff on measures to promote use of Riel, stressing the importance of collaboration and building confidence in local currency. The authorities noted their efforts to diversify their Cambodia’s export products and destinations to compensate for the eventual loss of trade preferences owing to their graduation to lower-middle income status. Foreign reserves increased strongly in the first half of 2017, and the authorities projected moderate further accumulation going forward.

Staff Appraisal

25. Economic outlook and risks. Growth is projected to remain robust, supported by higher public spending and strong construction and tourism activity. Inflation is expected to remain elevated in the short-term. Private sector credit growth, increasingly concentrated in real estate related sectors, has slowed and is projected to moderate further looking forward. Growth is projected to decline over the medium-term owing to a moderation in the credit and real estate cycles and ongoing challenges in improving economic diversification and competitiveness. The external position is assessed to be moderately weaker than suggested by fundamentals and desirable policies. This positive outlook is subject to significant downside risks. These include, in particular, risks stemming from elevated financial sector vulnerabilities and the impact of wage increases on competitiveness, as well as risks related to the external outlook, including from weaker growth in China.

26. Macro-financial policies. Continuing to build resilience through targeted prudential policies will be key to containing macro-financial risks. Priorities include strengthening regulations on loan classification to better manage credit risk; introduction of further well-designed and targeted macro-prudential policies, including gradually increasing reserve requirements on foreign exchange liabilities to build liquidity buffers; and expediting collection of data on the real-estate sector. Improving sectoral asset classification would enable the introduction of sectoral concentration limits and/or higher risk weights for real-estate loans. With the growing systemic relevance of large MFIs, strengthening regulation to prevent regulatory arbitrage is warranted. The authorities should introduce a comprehensive crisis management framework. Strong supervision, supported by sufficient resources to respond to increasing demands, is essential to ensure proper risk identification and enforcement of prudential policies. In this respect, the implementation of outstanding FSAP recommendations should be expedited.

27. Financial market development. High dollarization increases banks’ vulnerability and limits the scope for exchange rate and monetary policies. Further measures are needed to encourage Riel use, including reallocating the remuneration currently paid on U.S. dollar reserves to Riel denominated reserves; gradually increasing the reserve requirement on foreign exchange liabilities; monitoring unhedged exchange rate risk exposures; systematically factoring in dollarization risk in prudential regulation and enforcing the requirement for businesses to post prices in Riel. Moreover, a multi-pronged strategy and close inter-agency collaboration is needed. Reforms to develop the equity, interbank, government and corporate bond, and foreign exchange markets in line with the Financial Sector Development Strategy are needed to promote local currency use and build an effective monetary policy framework.

28. Financial inclusion. Financial access, especially in rural areas, has increased thanks to rapid growth of MFIs and mobile banking services, and welcome steps taken by the authorities to promote inclusion. Further efforts should focus on reducing costs, diversifying products and services, and improving financial literacy and consumer protection, as well as promoting the use of financial technology. A comprehensive financial inclusion strategy would help address risks while at the same time fostering innovation and competition.

29. Fiscal policy. Fiscal deficits should be contained to safeguard fiscal and external sustainability. To ensure that the recent revenue gains are sustained over the medium term, further improvements in revenue administration and modernizing tax policy are needed. On the expenditure side, further public wage increases should be fiscally sustainable and be accompanied by continued progress in public administration reforms. This includes strong efforts to strengthen human resource management, including to increase skills and labor productivity, improve spending efficiency, and enhance transparency. The planned framework for social protection is welcome but education and health spending should be prioritized. Developing a medium-term budget framework to systematically allocate expenditures and improve spending efficiency remains a priority. While PPPs can increase efficiency relative to public financing for investment, they do not necessarily increase fiscal space, and strengthening the PPP framework is needed to manage fiscal costs and risks.

30. Structural reforms. Accelerated implementation of structural reforms is needed to increase resilience and secure strong, sustained and inclusive growth. These should include promoting diversification, enhancing competitiveness, and improving the business climate and inclusiveness. A focus should be on accelerating IDP implementation to boost investor confidence, implementing key infrastructure projects, strengthening governance, the rule of law and transparency of business regulation, and further investing in education. Including climate change impact in the design of macroeconomic and structural policies, especially in the agriculture sector, would improve resilience.

31. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Box 1.Cambodia: Inflation Drivers1

Recent pick-up in inflation has been driven by higher food and fuel prices, in part owing to imported inflation, and some upward pressure from rising wages. Policies should aim to contain production and transportation costs and link wage increases to improvements in productivity.

Food and energy prices are the main drivers. Food accounts for close to 45 percent of the CPI basket while energy, combined with electricity, directly accounts for about 10 percent. Food prices are affected by weather-related supply shocks and, recently, upward pressure from rising wages and imported inflation. However, food prices also often move in tandem with energy prices, suggesting indirect effects from energy prices and related products/services (especially transportation) on food production costs. Core inflation has closely followed movements in food and energy prices, suggesting pass-through to prices of other goods and services in the economy. Finally, wage increases in both private and public sectors have contributed to higher domestic demand and production costs.

CPI Inflation

(In percent, y/y)

Sources: Cambodian authorities; and IMF staff estimates and calculations.

Imported inflation has become more important. Food prices traditionally move in line with rice prices, reflecting its importance in the economy (despite its small share in CPI, at about 6 percent). However, imports of some food components, especially meat and vegetables (which account for large shares, about 10 and 5 percent of CPI, respectively) have recently increased.2 As a result, those prices move more closely with prices in main import partners, with a significant impact on food CPI.

Food Prices: Contribution to Yearly Change

(In percent)

Sources: Cambodian authorities; and Fund staff calculation.

Policies should aim to contain increases in production and transportation costs, and wages. The focus should be on structural policies to support a stable food supply and reduction in production and transportation costs. Investments in energy and transport infrastructure, as well as to increase agricultural productivity (e.g. through irrigation) should be prioritized. Wage increases should be linked to improvements in productivity to maintain competitiveness and stable inflation. At the same time, policy-makers should remain vigilant for any signs of overheating and undue inflation pressures from possible second-round effects on inflation expectations.

1/ Prepared by Tadaaki Ikoma.2/ About half of the vegetables consumed in the country are estimated to be imported.

Box 2.Cambodia: Managing Fiscal Costs and Risks from PPPs1

Infrastructure bottlenecks remain a critical constraint for economic diversification and sustainable growth. However, the use of PPPs to finance public infrastructure calls for strengthening the institutional, legal and budgetary frameworks to better manage fiscal costs and risks.

Although PPPs offer many benefits, they do not necessarily increase fiscal space. Investment financed by PPPs has grown considerably, especially in the electricity sector, and Cambodia now stands as a leader relative to its peers. The government has plans to further expand public investment through PPPs, including projects in electricity, roads, ports, railways, water, education and health.2 PPPs can increase efficiency and help transfer risks, thus providing value for money relative to public financing. However, off-balance sheet obligations arising from PPPs are difficult to control and make the fiscal position more vulnerable to shocks. Obligations to make payments to PPPs over the long term also reduce the governments’ future financial flexibility, much as traditional debt does.

Public-Private Partnerships Capital Stock

In percent of GDP

Source: FAD’s public investment and capital stock database.

Improvements in the PPP framework are needed. The government has already initiated important changes in the framework for PPPs.3 Priority reforms include:

  • Accounting for and controlling fiscal costs. The government’s accounting system, designed to control publicly-financed investment, does not help monitor PPP-related obligations. The MEF has introduced a 4-percent of GDP limit on guaranteed payments for PPPs in the electricity sector. Although this is a positive development, the current limit is too high to fully protect against excessive exposure. As an alternative, the government could limit the present value of guaranteed payments and total annual investments in PPPs.

  • Strengthening the institutional framework for managing PPPs. The role of the MEF under the current institutional framework is limited to endorsing the final decision. The MEF should be responsible for safeguarding public finances through a gateway process, which would empower it to veto a project if it does not offer value for money or is not fiscally affordable.

  • Strengthening the PPP legal framework. Changes in the institutional framework should be accompanied by changes in PPP governance, including the legal and regulatory framework. The MEF should be given the authority to apply the gateway process and to establish mechanisms for competitive bidding. Budgeting, accounting and reporting requirements should be strengthened to ensure a more consistent monitoring of liabilities and provision of on fiscal risks.

Strengthening public investment management (PIM). PPP projects should be reclassified as public investments and be subject to the same planning and allocation processes. Before fully integrating PPPs in the PIM process, all PPP proposals should be reviewed by the new inter-ministerial committee in charge of PPPs until the formal gateway process is put in place. Finally, the government should include information about financial obligation arising from PPPs in its budget documents.

1/ Prepared by Maximilien Queyranne, Genevieve Verdier and Yong Sarah Zhou.2/ Planned investments amount to more than $6billion over time.3/ See government’s policy paper “PPPs for Public Investment Project Management”.

Box 3.Cambodia: Macroeconomic Implications of Climate Change1

Climate change risks having a negative impact on climate-sensitive sectors, especially agriculture, lowering growth and worsening the fiscal position. The impact would be aggravated by low adaptive capacity.

Recent extreme weather events suggest that climate change may already be having an impact. Climate change leads to higher temperature, more frequent and intensified extreme weather events – like severe droughts in 2004 and 2015/16 and floods in 2000, 2011, and 2013 in Cambodia – and sea level rise. Its direct impact on the economy includes reduced agricultural production, tourists shifting their destination to less affected regions, and lower labor productivity due to increased climate-related diseases and heat stress. Extreme weather events have already had a significant negative impact on agricultural production in Cambodia.

Rice: Production and Fields Damaged by Natural Disasters

Sources: Cambodian authorities; FAOSTAT; and Fund staff calculations.

Cambodia is among the most vulnerable countries. Cambodia, along with other countries in Southeast Asia, is expected to be severely affected by climate change. Cambodia is particularly vulnerable, given the importance of climate-sensitive sectors, especially agriculture and tourism (agriculture alone accounts for about 30 percent of total GDP and half of total employment). Weak adaptation capacity, including low income, gaps in key infrastructure (e.g., lack of irrigation), and low literacy rate add to vulnerabilities. Cambodia Climate Change Financing Framework (2015) estimates that Cambodia’s cumulative output loss would be equivalent to about 25–50 percent of its potential GDP by 2050.

Negative growth impact and adaptation costs would have negative spillovers. Climate related expenditure is currently estimated at just below 2 percent of GDP, mostly focused on adaptation and funded by donors.2 Future fiscal costs for adaptation would be large and thus put further pressures on fiscal position.3 Agricultural losses would also result in worsening of the trade balance, increased non-performing agricultural loans, aggravation of poverty given both reliance on agriculture and low adaptive capacity among rural, low-income households.

Impacts warrant integration of climate change issues into the macroeconomic policy framework. Preserving debt sustainability requires accounting for fiscal risks from climate change, improving spending efficiency, and mobilizing further revenues (including through introduction of carbon taxes). Structural reforms to improve productivity especially in agriculture and to diversify the economy and livelihoods, i.e. reducing dependency on climate-sensitive sectors, would increase resilience.

1/ Prepared by Tadaaki Ikoma.2/ Climate Public Expenditure and Institutional Review (2012).3/ The optimal level of adaptation costs could amount to around 3.3 percent of GDP annually over the long term (Cambodian Climate Change Financing Framework).

Box 4.Cambodia: Advancing Financial Inclusion1

Financial deepening has improved inclusion, including through access to microfinance credit and emerging use of mobile services. However, gaps remain and further efforts are needed to reduce transaction costs, expand products, and promote financial literacy and consumer protection.

Financial inclusion remains low despite rapid financial deepening. The growth of MFIs has increased access to credit, especially in rural areas, with MFIs serving more than twice the clients served by commercial banks. The rapid penetration of mobile financial services provides access to low-cost services, including in areas that are otherwise underserved by financial institutions. Nevertheless, financial inclusion, as reflected in the share of the population with accounts and SME access to financing, remains relatively low.

Limited access reflects high costs, limited products and services, and low financial literacy. Providing financial services in remote rural areas, poor information on customers and weak contract enforcement result in high intermediation costs, especially for small transactions. High funding costs, especially for Riel, also constrain financial access.2 Mobile financial services provide low-cost services, but the service is mostly limited to payments and use remains low among the low-income and less-educated population.3

Financial Depth and Access

Sources: Global Financial Development Database (data as of 2014).

There is scope for further gains. Promoting the use of financial technology (e.g. through improving internet access in rural areas), promoting low-cost funding markets and developing financial infrastructure (e.g. improving information provided by the credit registry) will lower costs. Improving financial literacy is also key – the government’s plan to incorporate financial education into national curriculum will help close the knowledge gap.

Improvements are needed to effectively address risks and protect consumers. Developing a consumer protection framework is crucial to address concerns, such as over-indebtedness related to high cost borrowing. An adequate legal framework protects the rights of consumers, mitigates credit risks from limited information, and ensures equity and transparency among participants. Also, policies to broaden financial access (i.e. on mobile financial services) require a concomitant widening of the regulatory and supervisory perimeter to minimize regulatory arbitrage and financial stability risks, while at the same time fostering innovation and competition.

1/ Prepared by Tadaaki Ikoma and Yong Sarah Zhou2/ For example, the weighted-average deposit rate in Riel is about 2 percent higher than in USD, resulting also in a higher Riel lending rate (by about 4 percent).3/ FinScope Survey (2016) shows limited knowledge among top reasons for not using mobile services. Based on UNCDF-FinMark Trust 2015 survey, which covers broader financial services, the formal financial inclusion rate in Cambodia is 59 percent, of which 42 percent is through MFIs.

Figure 1.Cambodia: Robust Growth and Increasing Inflation

Figure 2.Cambodia: Elevated Vulnerabilities Despite Moderating Credit Growth

Figure 3.Cambodia: Stable External Position

Figure 4.Cambodia: Robust Revenue Performance Amid Spending Pressures

Figure 5.Cambodia: Structural Challenges to Growth

Table 1.Cambodia: Selected Economic Indicators, 2012–18
2012201320142015201620172018
Est.Proj.Proj.
Output and prices (annual percent change)
GDP in constant prices7.37.47.17.27.06.96.8
(Excluding agriculture)8.39.59.29.28.58.38.0
Inflation (end-year)2.54.71.02.83.93.13.4
(Annual average)2.93.03.91.23.03.73.5
Saving and investment balance (in percent of GDP)
Gross national saving15.310.513.413.114.113.613.4
Government saving1.92.23.43.82.81.50.4
Private saving13.48.410.09.311.312.213.0
Gross fixed investment23.523.523.222.422.922.222.0
Government investment9.08.98.06.97.88.28.6
Private investment14.514.615.215.515.114.013.4
Money and credit (annual percent change, unless otherwise indicated)
Broad money20.914.629.914.718.014.412.9
Private sector credit38.317.331.327.122.512.510.0
Velocity of money 1/2.22.01.81.61.61.41.3
Public finance (in percent of GDP)
Revenue16.918.519.818.819.819.519.6
Domestic revenue14.214.616.916.517.918.018.1
Of which : Tax revenue11.311.813.814.515.315.315.3
Grants2.83.93.02.32.01.51.5
Expenditure20.720.721.020.422.723.224.1
Expense12.012.013.113.214.915.015.6
Net acquisition of nonfinancial assets8.78.77.97.17.88.28.5
Net lending (+)/borrowing(-)−3.8−2.1−1.1−1.6−2.8−3.7−4.6
Net lending (+)/borrowing(-) excluding grants 2/−6.3−6.4−4.2−3.2−4.7−5.2−6.0
Net acquisition of financial assets0.60.52.32.82.10.6−0.5
Net incurrence of liabilities 3/4.42.63.54.44.94.24.1
Of which: Domestic financing0.7−0.5−1.5−0.70.20.01.0
Government deposits4.95.06.99.110.19.78.3
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.5,6336,5307,4078,4539,23310,11211,041
(Annual percent change)11.915.913.414.19.29.59.2
Imports, f.o.b.−8,139−9,749−10,613−11,920−12,649−13,717−15,053
(Annual percent change)13.419.88.912.36.18.49.7
Current account (including official transfers)−1,150−1,979−1,641−1,694−1,776−1,904−2,098
(In percent of GDP)−8.2−13.0−9.8−9.3−8.8−8.6−8.6
Gross official reserves 4/3,4633,6424,3915,0936,7318,0978,955
(In months of prospective imports)3.63.53.84.25.05.55.6
External debt (in millions of dollars, unless otherwise indicated)
Public external debt4,8525,2695,6106,4577,2678,2169,100
(In percent of GDP)31.631.631.830.831.932.834.0
Public debt service112143172239244192313
(In percent of exports of goods and services)1.31.41.51.91.81.31.9
Memorandum items:
Nominal GDP (in billions of riels)56,65061,41467,48573,69481,70390,32599,753
(In millions of U.S. dollars)14,04915,24916,71418,15020,15722,25224,307
Exchange rate (riels per dollar; period average)4,0324,0274,0384,0604,053
Sources: Cambodian authorities; and IMF staff estimates and projections.

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Sources: Cambodian authorities; and IMF staff estimates and projections.

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Table 2.Cambodia: Medium-Term Macroeconomic Framework, 2012–22
20122013201420152016201720182019202020212022
Est.Proj.
Output and prices (percent change)
GDP at constant prices7.37.47.17.27.06.96.86.86.56.36.0
GDP deflator1.40.92.61.93.63.43.43.53.43.53.4
Consumer prices (end-year)2.54.71.02.83.93.13.43.23.13.03.0
Consumer prices (average)2.93.03.91.23.03.73.53.33.23.13.0
Saving and investment balance (in percent of GDP)
Gross national saving15.310.513.413.114.113.613.413.513.413.413.6
Government saving1.92.23.43.82.81.50.40.81.72.42.6
Private saving13.48.410.09.311.312.213.012.811.711.011.0
Gross fixed investment23.523.523.222.422.922.222.022.021.821.721.6
Government investment9.08.98.06.97.88.28.68.58.58.58.6
Private investment 1/14.514.615.215.515.114.013.413.513.313.213.0
Private credit growth (percent change)38.317.331.327.122.512.510.011.011.011.011.0
Public finance (in percent of GDP)
Revenue16.918.519.818.819.819.519.619.720.120.220.4
Of which: Tax revenue11.311.813.814.515.315.315.315.315.515.715.8
Grants2.83.93.02.32.01.51.51.41.31.11.1
Total expenditure20.720.721.020.422.723.224.124.124.124.224.2
Expense12.012.013.113.214.915.015.615.715.715.715.7
Net acquisition of nonfinancial assets8.78.77.97.17.88.28.58.58.58.58.5
Of which: Domestically-financed1.61.71.72.32.52.42.93.03.23.33.4
Net lending (+)/borrowing(-)−3.8−2.1−1.1−1.6−2.8−3.7−4.6−4.4−4.0−4.0−3.8
Net lending (+)/borrowing(-) excluding grants−6.3−6.4−4.2−3.2−4.8−5.2−6.0−5.8−5.3−5.1−4.9
Net acquisition of financial assets0.60.52.32.82.10.6−0.5−0.5−0.2−0.10.0
Net incurrence of liabilities4.42.63.54.44.94.24.13.93.83.93.8
Domestic financing, net0.7−0.5−1.5−0.70.20.01.01.10.90.80.7
Government deposits4.95.06.99.110.19.78.37.16.25.65.1
Balance of payments (in percent of GDP, unless otherwise indicated)
Exports (percent change) 2/11.915.913.414.19.29.59.29.710.29.88.5
Imports (percent change) 3/13.419.88.912.36.18.49.79.59.89.48.2
Current account balance (including transfers)−8.2−13.0−9.8−9.3−8.8−8.6−8.6−8.5−8.4−8.3−8.0
(Excluding transfers)−10.2−14.9−11.8−11.3−10.7−10.1−10.1−9.9−9.7−9.5−9.1
Foreign direct investment12.112.010.09.110.710.910.610.310.09.79.4
Other flows 4/−1.13.44.34.52.43.81.61.41.61.71.6
Overall balance2.82.44.54.34.36.13.53.23.23.03.0
Gross official reserves (in millions of U.S. dollars) 5/3,4633,6424,3915,0936,7318,0978,9559,81110,73911,69912,714
(In months of next year’s imports)3.63.53.84.25.05.55.65.65.65.65.7
Public external debt (in millions of U.S. dollars)4,8525,2695,6106,4577,2678,2169,10010,00611,00612,06813,187
(In percent of GDP)31.631.631.830.831.932.834.034.434.835.135.5
Public external debt service (in millions of U.S. dollars)112143172192244192313362382411412
(In percent of exports of goods and services)1.31.41.51.91.81.31.92.12.02.01.8
Sources: Cambodian authorities; and IMF staff estimates and projections.

Includes nonbudgetary, grant-financed investment, and, from 2011, public-private partnerships in the power sector projects.

Excludes re-exported goods.

Excludes imported goods for re-export; from 2011, includes imports related to public-private power sector projects.

Net official disbursements, exceptional financing, and official transfers.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF.

Sources: Cambodian authorities; and IMF staff estimates and projections.

Includes nonbudgetary, grant-financed investment, and, from 2011, public-private partnerships in the power sector projects.

Excludes re-exported goods.

Excludes imported goods for re-export; from 2011, includes imports related to public-private power sector projects.

Net official disbursements, exceptional financing, and official transfers.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF.

Table 3.Cambodia: Balance of Payments, 2012–22 (BPM5)(In millions of U.S. dollars, unless otherwise indicated)
20122013201420152016201720182019202020212022
Proj.
Current account (including official transfers)−1,150−1,979−1,641−1,694−1,776−1,904−2,098−2,250−2,438−2,617−2,733
(Excluding official transfers)−1,438−2,270−1,966−2,043−2,162−2,246−2,453−2,618−2,803−2,979−3,108
Trade balance−2,506−3,219−3,206−3,467−3,415−3,605−4,012−4,381−4,770−5,173−5,554
Exports, f.o.b.5,6336,5307,4078,4539,23310,11211,04112,10713,34214,64615,892
Of which: Garments4,2454,9115,3345,8816,3476,7487,1607,6258,1208,6679,168
Imports, f.o.b. 1/−8,139−9,749−10,613−11,920−12,649−13,717−15,053−16,488−18,112−19,819−21,446
Of which: Garments-related−2,012−2,483−2,572−2,950−3,226−3,430−3,639−3,876−4,127−4,406−4,660
Petroleum−1,179−1,123−1,145−1,300−1,465−1,626−1,703−1,859−2,014−2,175−2,339
Services and income (net)9448609729257287799011,0171,1261,2471,385
Services (net)1,6581,7351,9272,0321,9752,1372,3662,5952,8223,0683,334
Of which: Tourism (credit)2,4632,6602,9533,1363,2123,6394,0044,3574,7125,0925,344
Income (net)−714−875−955−1,107−1,247−1,358−1,465−1,578−1,697−1,821−1,949
Private transfers (net)124892684985255806587468419471,061
Official transfers (net)288291325350386342355368365362375
Capital and financial account1,5382,3412,3962,4692,6493,2702,9563,1063,3673,5773,748
Medium- and long-term loans (net)6496134734515178068578819039971,059
Disbursements6956765555586899591,0461,1031,1761,2931,387
Amortization−47−63−83−108−172−152−189−222−274−296−328
Foreign direct investment 2/1,6981,8251,6771,6542,1662,4252,5772,7362,8953,0543,210
Net foreign assets of deposit money banks 3/445−600−213986−224−134−649−683−602−646−693
Unrestricted foreign currency deposit at NBC−256−59−95−257−657−398−399−418−322−351−383
Commercial banks701−541−1181,243433264−250−265−280−295−310
Other short-term flows and errors and omissions−1,475227117−89919000000
Overall balance3883637557758731,3668588569299601,015
Financing−388−363−755−775−873−1,366−858−856−929−960−1,015
Change in gross official reserves 4/−388−363−755−775−873−1,366−858−856−929−960−1,015
Accumulation of arrears00000000000
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers−10.2−14.9−11.8−11.3−10.7−10.1−10.1−9.9−9.7−9.5−9.1
Including official transfers−8.2−13.0−9.8−9.3−8.8−8.6−8.6−8.5−8.4−8.3−8.0
Trade balance (in percent of GDP)−17.8−21.1−19.2−19.1−16.9−16.2−16.5−16.5−16.5−16.4−16.3
Gross official reserves 5/3,4633,6424,3915,0936,7318,0978,9559,81110,73911,69912,714
(In months of next year’s imports)3.63.53.84.25.05.55.65.65.65.65.7
Current account (including official transfers)−8.2−13.0−9.8−9.3−8.8−8.6−8.6−8.5−8.4−8.3−8.0
(Excluding official transfers)−10.2−14.9−11.8−11.3−10.7−10.1−10.1−9.9−9.7−9.5−9.1
Trade balance−17.8−21.1−19.2−19.1−16.9−16.2−16.5−16.5−16.5−16.4−16.3
Exports, f.o.b.40.142.844.346.645.845.445.445.646.146.546.5
Of which: Garments30.232.231.932.431.530.329.528.728.127.526.8
Imports, f.o.b. 1/−57.9−63.9−63.5−65.7−62.7−61.6−61.9−62.1−62.6−62.9−62.8
Of which: Garments-related−14.3−16.3−15.4−16.3−16.0−15.4−15.0−14.6−14.3−14.0−13.6
Petroleum−8.4−7.4−6.9−7.2−7.3−7.3−7.0−7.0−7.0−6.9−6.8
Services and income (net)6.75.65.85.13.63.53.73.83.94.04.1
Services (net)11.811.411.511.29.89.69.79.89.79.79.8
Of which: Tourism (credit)17.517.417.717.315.916.416.516.416.316.215.6
Income (net)−5.1−5.7−5.7−6.1−6.2−6.1−6.0−5.9−5.9−5.8−5.7
Private transfers (net)0.90.61.62.72.62.62.72.82.93.03.1
Official transfers (net)2.11.91.91.91.91.51.51.41.31.11.1
Capital and financial account10.915.414.313.613.114.712.211.711.611.411.0
Medium- and long-term loans (net)4.64.02.82.52.63.63.53.33.13.23.1
Disbursements4.94.43.33.13.44.34.34.24.14.14.1
Amortization−0.3−0.4−0.5−0.6−0.9−0.7−0.8−0.8−0.9−0.9−1.0
Foreign direct investment 2/12.112.010.09.110.710.910.610.310.09.79.4
Net foreign assets of deposit money banks 3/3.2−3.9−1.35.4−1.1−0.6−2.7−2.6−2.1−2.1−2.0
Unrestricted foreign currency deposit at NBC−1.8−0.4−0.6−1.4−3.3−1.8−1.6−1.6−1.1−1.1−1.1
Commercial banks5.0−3.5−0.76.82.11.2−1.0−1.0−1.0−0.9−0.9
Other short-term flows and errors and omissions−10.51.50.7−5.00.10.00.00.00.00.00.0
Overall balance2.82.44.54.34.36.13.53.23.23.03.0
Financing−2.8−2.4−4.5−4.3−4.3−6.1−3.5−3.2−3.2−3.0−3.0
Change in gross official reserves 4/−2.8−2.4−4.5−4.3−4.3−6.1−3.5−3.2−3.2−3.0−3.0
Accumulation of arrears0.00.00.00.00.00.00.00.00.00.00.0
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers−10.2−14.9−11.8−11.3−10.7−10.1−10.1−9.9−9.7−9.5−9.1
Including official transfers−8.2−13.0−9.8−9.3−8.8−8.6−8.6−8.5−8.4−8.3−8.0
Trade balance (in percent of GDP)−17.8−21.1−19.2−19.1−16.9−16.2−16.5−16.5−16.5−16.4−16.3
Gross official reserves 5/24.623.926.328.133.436.436.836.937.137.237.2
(In months of next year’s imports)3.63.53.84.25.05.55.65.65.65.65.7
Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Includes unrestricted foreign currency deposits (FCDs) held as reserves at the National Bank of Cambodia (NBC).

Excludes changes in unrestricted FCDs held as reserves at the NBC, and changes in gold holdings and valuation.

Excludes unrestricted FCDs held at the NBC; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million; starting 2016, renminbi holdings are considered part of reserves following inclusion of renminbi in the SDR basket.

Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Includes unrestricted foreign currency deposits (FCDs) held as reserves at the National Bank of Cambodia (NBC).

Excludes changes in unrestricted FCDs held as reserves at the NBC, and changes in gold holdings and valuation.

Excludes unrestricted FCDs held at the NBC; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million; starting 2016, renminbi holdings are considered part of reserves following inclusion of renminbi in the SDR basket.

Table 4.Cambodia: General Government Operations, 2012–22 (GFSM 2001)
20122013201420152016201720182019202020212022
ActualActualActualActualBudgetProj.BudgetProj.Proj.Proj.Proj.Proj.Proj.
(In billions of riels)
Revenue9,59011,37213,39513,83814,28816,21416,31417,61719,51021,75924,43126,96929,878
Of which: Nongrant8,0178,97111,39812,16914,03814,58915,71516,22618,05320,23122,89825,43628,271
Tax6,4247,2659,29710,71911,45312,52113,36013,79615,24916,85518,79520,91623,163
Income, profits, and capital gains1,2761,5611,9642,4722,4722,9533,2763,3743,8354,2804,8565,4486,212
Good and services3,8154,2105,4506,2386,4627,4237,8848,1569,0129,90811,00012,20513,373
International trade and transactions1,3331,4931,8832,0092,5192,1452,2002,2662,4022,6672,9383,2643,579
Grants1,5722,4011,9971,6692501,6255991,3901,4571,5271,5331,5341,607
Other revenues 1/1,5931,7062,1011,4502,5852,0692,3552,4312,8043,3764,1034,5205,107
Total expenditure11,74112,68614,16015,00018,16318,52420,01120,94324,05426,60129,29732,26635,455
Expense6,8187,3518,8389,74011,88512,14913,54313,54315,52717,26519,00620,90422,955
Compensation of employees2,6603,1193,9524,9415,6365,8057,1347,1348,3379,21210,14711,16012236.9
Purchase of goods and services2,3102,4002,7982,9413,4743,2564,3474,3474,8015,3055,8446,4277,047
Interest305439232223335336342342424421399431436
Expense not elsewhere classified1,5431,3931,8561,6352,4402,7521,7201,7201,9652,3272,6162,8863,235
Net acquisition of nonfinancial assets4,9225,3355,3225,2606,2796,3756,4687,4008,5279,33710,29111,36112,499
Of which: Externally financed4,0234,3064,1473,5664,2284,3564,2845,2175,6846,0366,3946,9447,480
Net lending (+)/borrowing(-)−2,151−1,314−765−1,161−3,875−2,309−3,794−3,326−4,543−4,843−4,866−5,296−5,576
Net acquisition of financial assets3633081,5642,07001,7200500−480−514−204−10556
Net incurrence of liabilities 2/2,5141,6232,3293,2313,8754,0293,7943,8264,0634,3284,6625,1925,632
Of which: External2,3501,9432,1151,8063,8752,2963,7943,4653,7203,8664,0084,4634,784
(In percent of GDP)
Revenue16.918.519.818.817.519.818.119.519.619.720.120.220.4
Nongrant14.214.616.916.517.217.917.418.018.118.418.919.019.3
Tax11.311.813.814.514.015.314.815.315.315.315.515.715.8
Income, profits, and capital gains tax2.32.52.93.43.03.63.63.73.83.94.04.14.2
Good and services tax6.76.98.18.57.99.18.79.09.09.09.19.19.1
International trade and transactions tax2.42.42.82.73.12.62.42.52.42.42.42.42.4
Grants2.83.93.02.30.32.00.71.51.51.41.31.11.1
Other revenues2.82.83.12.03.22.52.62.72.83.13.43.43.5
Total expenditure20.720.721.020.422.222.722.223.224.124.124.124.224.2
Expense12.012.013.113.214.514.915.015.015.615.715.715.715.7
Compensation of employees4.75.15.96.76.97.17.97.98.48.48.48.48.4
Purchase of goods and services4.13.94.14.04.34.04.84.84.84.84.84.84.8
Interest0.50.70.30.30.40.40.40.40.40.40.30.30.3
Expense not elsewhere classified2.72.32.82.23.03.41.91.92.02.12.22.22.2
Net acquisition of nonfinancial assets8.78.77.97.17.77.87.28.28.58.58.58.58.5
Of which: Externally-financed7.17.06.14.85.25.34.75.85.75.55.35.25.1
Net lending (+)/borrowing(-)−3.8−2.1−1.1−1.6−4.7−2.8−4.2−3.7−4.6−4.4−4.0−4.0−3.8
Net acquisition of financial assets0.60.52.32.80.02.10.00.6−0.5−0.5−0.2−0.10.0
Net incurrence of liabilities4.42.63.54.44.74.94.24.24.13.93.83.93.8
Of which: External4.13.23.12.54.72.84.23.83.73.53.33.33.3
Memorandum items:
Net lending (+)/borrowing(-) excluding grant−6.3−6.4−4.1−2.9−4.8−4.6−4.7−5.2−6.0−5.8−5.3−5.1−4.9
Domestic financing0.7−0.5−1.5−0.70.00.21.00.01.01.10.90.80.7
Government deposits4.95.06.99.110.19.78.37.16.25.65.1
GDP (in billions of riels)56,65061,41467,48573,69481,70381,70390,32590,32599,753110,221121,416133,535146,417
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

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

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

Table 5.Cambodia: Monetary Survey, 2012–18
2012201320142015201620172018
Proj.
(In billions of riels)
Net foreign assets18,17221,28526,74226,70731,81436,60845,054
National Bank of Cambodia18,58319,53524,47629,49036,33642,25848,263
Foreign assets19,00319,95724,88029,87536,70742,62948,633
Foreign liabilities421421404385371371371
Deposit money banks−4111,7502,266−2,782−4,522−5,650−3,209
Foreign assets5,6288,58910,0489,48110,87511,99113,214
Foreign liabilities6,0386,8397,78212,26315,39717,64116,423
Net domestic assets10,42011,48315,81722,11625,80229,32029,383
Domestic credit21,05624,82731,88539,64248,31055,37761,729
Government (net)−2,486−2,795−4,359−6,429−8,148−8,139−8,139
Private sector23,53727,60936,24546,07156,45963,51669,868
Other items (net)−10,636−13,344−16,068−17,526−22,508−26,057−32,346
Broad money28,59232,76842,56048,82357,61765,92874,437
Narrow money4,0464,8786,3086,7417,2738,3209,391
Currency in circulation3,7564,4545,5935,8976,4737,4078,364
Demand deposits2904247158458009131,027
Quasi-money24,54627,89036,25142,08250,34457,60865,046
Time deposits7809451,0901,5502,3862,7313,083
Foreign currency deposits23,76626,94535,16140,53247,95754,87761,963
(12-month percentage change)
Net foreign assets−1.417.125.6−0.119.115.123.1
Private sector credit38.317.331.327.122.512.510.0
Broad money20.914.629.914.718.014.412.9
Of which: Currency in circulation−0.418.625.65.49.814.412.9
Foreign currency deposits24.313.430.515.318.314.412.9
(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets−1.110.916.7−0.110.58.312.8
Net domestic assets22.03.713.214.87.66.10.1
Domestic credit 1/26.013.221.518.217.812.39.6
Government (net)−1.5−1.1−4.8−4.9−3.50.00.0
Private sector27.614.226.423.121.312.29.6
Other items (net)−4.0−9.5−8.3−3.4−10.2−6.2−9.5
Memorandum items:
Foreign currency deposits (in millions of U.S. dollars)5,9496,7458,62810,00811,87913,44615,017
(In percent of broad money)83.182.282.683.083.283.283.2
Riel component of broad money4,8265,8237,3998,2919,65911,05112,474
(In percent of broad money)16.917.817.417.016.816.816.8
Credit to the private sector (in millions of U.S. dollars)5,8926,9118,89411,37613,98515,56216,932
(In percent of GDP)41.545.053.562.768.770.270.1
Foreign Currency Loans23,34527,36835,67745,42455,74162,70968,979
Loan-to-deposit ratio (in percent) 2/98.2101.6101.5112.1116.2114.3111.3
Velocity 3/2.22.01.81.61.61.41.4
Money multiplier (broad money/reserve money)2.22.22.32.22.02.12.2
Reserve money (12-month percent change)19.013.024.621.725.010.110.1
Sources: Cambodian authorities; and IMF staff estimates and projections.

Excludes banks’ credits to nonresident.

Foreign currency loans and deposits only.

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

Sources: Cambodian authorities; and IMF staff estimates and projections.

Excludes banks’ credits to nonresident.

Foreign currency loans and deposits only.

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

Table 6.Cambodia: Core Financial Soundness Indicators (FSIs), 2013–17(In percent)
20132014201520162017
Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.
Capital-based FSIs
Regulatory capital to risk-weighted assets24.925.025.224.223.922.621.320.422.021.620.920.320.820.621.020.922.6
Regulatory tier 1 capital to risk-weighted assets26.125.725.924.825.124.122.921.725.124.122.921.720.419.218.016.820.1
Nonperforming loans net of provisions to capital3.43.74.13.93.33.74.03.34.14.64.43.45.16.56.44.54.8
Return on equity 1/14.313.013.212.115.315.715.815.517.417.517.216.316.816.015.414.515.2
Net open position in foreign exchange to capital2.93.44.69.44.34.44.24.13.63.83.83.62.93.23.32.62.1
Asset-based FSIs
Nonperforming loans to total gross loans2.12.32.32.31.91.92.01.61.92.01.91.62.12.62.72.12.2
Return on assets 1/2.72.52.62.43.03.03.02.93.13.13.12.92.92.72.62.52.6
Liquid assets to total assets16.216.016.817.915.217.817.616.216.616.315.516.615.916.115.315.816.2
Liquid assets to short-term liabilities21.521.423.224.221.525.124.623.123.923.823.325.424.424.423.624.324.9
Sectoral distribution of loans to total gross loans
Residents93.393.192.692.890.893.393.694.694.995.295.096.095.898.098.799.598.2
Deposit-takers0.50.50.61.10.90.51.11.41.41.51.51.81.91.91.41.41.3
Central bank
Other financial corporations0.00.10.10.10.10.10.10.10.10.10.10.10.10.10.1
General government
Nonfinancial corporations75.474.473.371.972.574.774.374.874.974.872.372.171.472.472.873.172.1
Other domestic sectors17.418.318.719.617.317.918.118.318.418.821.222.022.423.624.524.924.7
Nonresidents6.76.97.47.29.26.76.45.45.14.85.04.04.22.01.30.51.8
Income- and expense-based FSIs
Interest margin to gross income69.767.969.368.671.672.972.572.950.557.360.263.170.566.267.465.363.5
Noninterest expenses to gross income49.551.351.052.456.655.355.255.167.463.561.560.656.559.659.359.758.7
Source: National Bank of Cambodia.

Annualized.

Source: National Bank of Cambodia.

Annualized.

Table 7.Cambodia: Key FSAP Recommendations of High Priority
RecommendationTimeframe 1/Status
General Stability
  • Improve the quality of data to enable an appropriate assessment of risks, and to enhance the reliability of stress tests, including through strengthening supervision; and collecting additional credit-related information.

Short-termIn process
  • Ensure that banks retain an appropriate level of liquid assets to be able to meet short-term obligations by enforcing existing regulations.

Short-termImproved but still in process
  • Upgrade law to formalize delineation of responsibilities among supervisors, and establish procedures, through MOUs, for practical information exchange, coordination and accountability among domestic supervisors (NBC, MEF, SECC), and with foreign supervisors.

Short-termImproved but still in process
  • Upgrade both the number and capacity of staff in the areas of banking, insurance, securities and payment system supervision; develop training programs for financial institutions on accounting, corporate governance, risk management, and for the external audit profession.

Medium-termIn process
  • Develop and implement a strategic plan to address the conflicts and overlaps in the financial sector legal and regulatory framework.

Medium-termIn process
Supervision and Regulation
Banking
  • Develop supervisory strategy to deal with banks that cannot meet the new capital. requirement.

Short-termDone
  • Conduct comprehensive upgrades to the legal framework.

Short-termIn process
  • Reprioritize the work performed by the staff to facilitate forward-looking, risk-based supervision.

Short-termIn process
  • Impose a moratorium on the issuance of new bank licenses as long as supervisory capacity and resources remain inadequate.

Short-termOverruled: large increase of the number of banks and MFIs
Non-Bank Financial Sector
  • Revise capital regulations in concert with liability, investment and accounting rules to better reflect the risks in a growing insurance market.

Short-termDone
  • Enhance powers for intervention, corrective measures, and enforcement.

Short-termIn process
  • Conduct a readiness study prior to the launch of the stock exchange.

Short-termDone
Access to Finance
  • Enhance supervisory practices to keep pace with the development of microfinance deposit-taking institutions, and impose a moratorium as long as supervisory capacity and resources remain inadequate.

Medium-termIn process
Crisis Management Framework
  • Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on the solvency ratio.

Medium-termIn process
  • Introduce regulation allowing banks to use their fixed deposits at the NBC and any issue of government (including government bodies) or government-guaranteed securities as eligible collateral for interbank and NBC repos.

Short termDone
  • Develop a crisis management framework.

Medium-termIn preparation
Transparency of Monetary and Financial Policies
  • Introduce due process for the dismissal of NBC Board members and the Governor by specifying the legal grounds for doing so, and defining an appeal process.

Medium-termIn preparation
  • Amend the law to reduce the government’s representation on the Board of the NBC; and to reflect the practice of appointing two Deputy Governors.

Short-termIn preparation
Corporate governance of banks
  • Draft and/or implement banking regulations on internal audit and controls, risk management, and compliance functions at banks.

Short-termRisk management to be done
AML/CFT2/
  • Introduce new rules measures for conducting overall AML/CFT risk assessments and risk profiling of financial institutions.

Short-termIn process
Source: IMF staff.

Short term: up to one year; medium term: one to three years.

Since the 2010 FSAP, Cambodia has made progress in addressing deficiencies in its legal and regulatory framework against the 2003 FATF standard, and was removed from the FATF’s On-Going Global AML/CFT Compliance Process in February2015. However, the issues identified in the 2016 APG (Asia/Pacific Group on Money Laundering) assessment against the 2012 FATF standard need to be urgently addressed.

Source: IMF staff.

Short term: up to one year; medium term: one to three years.

Since the 2010 FSAP, Cambodia has made progress in addressing deficiencies in its legal and regulatory framework against the 2003 FATF standard, and was removed from the FATF’s On-Going Global AML/CFT Compliance Process in February2015. However, the issues identified in the 2016 APG (Asia/Pacific Group on Money Laundering) assessment against the 2012 FATF standard need to be urgently addressed.

Table 8.Cambodia: Millennium Development Goals (MDG) Indicators, 1990–2015
199019952000200520092010201120122013201420152015

MDG Target
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent8.5889911
Population below minimum level of dietary energy consumption (percent)2932211717171616151421
Poverty headcount ratio at $1.25 per day (PPP, percent of population)553220
Poverty headcount ratio at national poverty line (percent of population)24222118
Prevalence of underweight in children (under five years of age)4340282926
Goal 2: Achieve universal primary education
Net primary enrollment (percent of relevant age group)929398979589100
Primary completion rate, total (percent of relevant age group)42478583858793949695100
Proportion of pupils starting grade 1 who reach grade 56369737058100
Youth literacy rate (percent of ages 15–24)8792100
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)7102121202020202030
Ratio of girls to boys in primary and secondary education (percent)82100
Ratio of young literate females to males (percent ages 15–24)8184899097101100
Share of women employed in the nonagricultural sector (percent)414141
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12–23 months)346265799289837976808190
Infant mortality rate (per 1,000 live births)858880534037343128262550
Under five mortality rate (per 1,000)117122108654743393633312938
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)32447172748980
Maternal mortality ratio (modeled estimate, per 100,000 live births)1020730484315217202188178173167161250
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)585557575511450436423411400390380
Prevalence of HIV, total (percent of population 15–49)01211111111
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)2330425362646769717376
Access to improved sanitation (percent of population)38162532343537394142
Nationally protected areas (percent of total land area)02326
Goal 8: Develop a global partnership for development
Aid per capita (current U.S. dollars)552324051515454545243
Fixed line and mobile phone subscribers (per 100 people)0018455998132137135135
Internet users (per 1,000 people)000113571419
Total debt service (percent of exports of goods and services)1111146666
Goal 9: De-mining, UXO and assistance
Annual numbers of civilian casualties recorded1,6917972442862402400
Percentage of suspected contaminated areas cleared105053595656100
Other
Fertility rate, total (births per woman)65433333333
GNI per capita, Atlas method (current U.S. dollars)30030046069075081088096010201070
GNI, Atlas method (current, in billions of U.S. dollars)34610111213141617
Gross capital formation (percent of GDP)15181821171719202222
Life expectancy at birth, total (years)5455586366666767686869
Literacy rate, adult total (percent of people ages 15 and above)7478
Population, total (millions)911121314141515151516
Trade (percent of GDP)78112137105114114121128129128
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2009); UN Human Development Indicators Report (2003); Cambodia MDG 2011 update; UN MDG Indicators 2011 (http://mdgs.un.org); and IMF staff estimates.
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2009); UN Human Development Indicators Report (2003); Cambodia MDG 2011 update; UN MDG Indicators 2011 (http://mdgs.un.org); and IMF staff estimates.
Appendix I. Risk Assessment Matrix
EventRisk HorizonUp/Down-sideProb.ImpactTransmissionPolicy Recommendations
Domestic RisksRevenue shortfallMedium-termHighMediumFiscal position deteriorates -fiscal deficits widen and government deposits deplete sharply.Steadfast implementation of RMS, while rationalizing non-developmental current expenditure.
A large correction in real estate prices.Short-termMediumHighTurning of the credit cycle and fallout from excess household and corporate leverage (incl. in FX) as investors withdraw FX deposits, generating disorderly deleveraging.Increase reserve requirements to slow down credit growth, implement macro prudential measures, strengthen micro-prudential regulation and supervision, ensure adequate emergency liquidity, strengthen supervision and regulation for MFIs. Preemptively strengthen the crisis management framework.
Recurrent political uncertainty and/or labor market disruptionsShort-termMediumHighLarge deposit withdrawal, drag in FDI and export growth and weaker investor confidence.Ensure continued macroeconomic stability to support confidence in the economy
Extreme weatherShort-termMediumMediumWeaker agricultural production and exports, weaker tourism, and wider income inequality.Expedite structural reforms to accelerate diversification, improve infrastructure, and increase transfers to the rural poor after creating fiscal space.
External RisksRetreat from cross-border integrationShort-termMediumHighWeaker garments export growth.Expedite structural reforms to accelerate diversification, by expanding the narrow range of export products, while finding new export markets for existing products.
Structurally weak growth in key advanced economiesShort-termHighHighWeaker garments export growth.Expedite structural reforms to accelerate diversification, by expanding the narrow range of export products, while finding new export markets for existing products.
Significant China slowdownShort-termMediumMedium/HighLower exports coupled with weaker FDI and banking sector flows.Expedite structural reforms to accelerate diversification. Ensure adequate emergency liquidity.
Tighter global financial conditions and strengthening of the US dollarShort-termHighHighHigher rates would lead to FX deposit outflows, foreign reserves fall.Build up foreign reserve buffers against external shocks; where appropriate release limited short-term liquidity to troubled banks; expedite work on a crisis management framework; increasing reserve requirements on foreign deposits substantially would create a buffer that could be liberated when foreign deposits flow out in response to external shocks.
MediumStronger US dollar would lead to weaker exports, tourism receipts, FDI, and bank lending from other partner countries.Maintain macroeconomic stability and develop interbank and foreign exchange markets to enhance monetary policy effectiveness and to reduce dollarization. Expedite structural reforms to boost non-price competitiveness.
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.
Appendix II. Past Fund Advice

The authorities are strengthening public financial management, in line with past Fund advice. They continue to improve tax administration by implementing their Revenue Mobilization Strategy (RMS). Notable progress has been made in strengthening core tax functions, improving human resource management and increasing automation. The government has been expanding the role of public-private partnerships (PPPs) for infrastructure financing. Progress has been slower in adopting other tax policy and administration reforms, public administration reform, as well as developing a medium-term budget framework. The authorities are implementing policies, such as the newly introduced liquidity coverage ratio and higher minimum capital requirements, to address financial stability risks and are in progress of introducing further prudential measures based on past Fund advice. Finally, the authorities are undertaking reforms in the education sector to improve the quality of basic education.

Appendix III. External Sector Assessment1

The external position of Cambodia in 2016 was moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings. Policies to consolidate the fiscal position diversify export markets, and improve productivity and competitiveness should help improve the external balance position. There is room to build reserves given high dollarization and elevated financial vulnerabilities.

1. Foreign asset and liability position. Cambodia’s Net Foreign Asset (NFA) position was -48 percent of GDP in 2016, placing it in the mid-range of its peers (Figure 2). It is almost entirely composed of FDI liabilities and as such does not pose a major concern for external sustainability at the moment. The NFA position is projected to increase over the medium term, in line with continuing FDI inflows. Based on the External Sustainability (ES) model a current account (CA) norm that stabilizes the NFA at its 2016 level implies 7.3 percent REER overvaluation, using EBA-lite elasticities.2 Allowing NFA to reach 60 percent over the medium term would imply an overvaluation of 5.3 percent.

2016 External Balance Assessment Results
CA modelREER modelES model1/
Actual CA−8.8−8.0
CA norm−3.9−4.2
CA gap−4.9−3.8
REER gap2/9.518.87.3

For External Sustainability (ES) model, actual CA is the medium-term CA projection and CA norm is the CA that stabilizes NFA at the 2016 level of 48 percent GDP.

Implied over(+)/under(-) valuation.

For External Sustainability (ES) model, actual CA is the medium-term CA projection and CA norm is the CA that stabilizes NFA at the 2016 level of 48 percent GDP.

Implied over(+)/under(-) valuation.

2. Current account. The CA deficit narrowed from 9.3 percent of GDP in 2015 to 8.8 percent in 2016, led by declining imports. The 2016 CA is assessed to be moderately weaker than the CA norm of 3.9 percent, which is the CA level suggested by fundamentals and desirable policy settings using the CA model. The resulting CA gap of -4.9 percent of GDP translates into an REER overvaluation of 9.5 percent. Part of this gap reflects the fact that the CA model does not fully take into account the very young population in Cambodia, which implies a fundamentally lower level of savings and a higher CA deficit. If the model were to use total instead of old-age dependency ratio, the CA norm would be expected to show a larger deficit, resulting in a smaller CA gap.

3. Real effective exchange rate. The REER on average appreciated by 4 percent between 2015 and 2016, reflecting a stronger U.S. dollar, buoyant economic growth, and capital inflows. In 2016 it was 16 percent higher than the 10-year average. Given that Cambodia primarily trades with advanced economies, the inflation differential is likely to contribute to further REER appreciation, until Cambodia diversifies into other markets. The REER model of EBA-lite suggests a somewhat higher level of overvaluation at 19 percent compared to the level implied by fundamentals and desirable policies. These results need to be taken with caution as the REER model is sensitive to the time sample used and may not fit well countries that are undergoing rapid structural change, such as Cambodia. While the REER in Cambodia continued to appreciate, it did so less than in peer countries and Cambodia’s export market share continued to improve (Figure 2).

Cambodia: Real Effective Exchange Rate (REER)

(Index, 1995=100)

Sources: INS; and IMF staff estimates.

4. Recommended policies. To improve the external balance position and adjust the CA deficit to a more sustainable level, a policy package will be needed to consolidate the fiscal position diversify export markets, and improve productivity and competitiveness including through moderating minimum wage growth and improving infrastructure and education.

5. Capital flows. Cambodia continues to attract sizable capital inflows, with FDI inflows more than financing the CA deficit and contributing to the reserves buildup. While the composition of flows has a favorable risk profile, there is a risk that FDI inflows are helping fuel rapid real estate growth (Figure 1) and that Cambodia may experience smaller inflows as the global financial conditions tighten.

6. FX intervention and reserve adequacy. The current exchange rate regime is based on keeping the Riel broadly stable against the U.S. dollar and is appropriate for Cambodia given high dollarization and a concentration in U.S. dollar-invoiced exports. Over the last seven years, Cambodia has been consistently accumulating international reserves. Measured against several traditional metrics, Cambodia’s gross international reserves appear to be adequate.3 As of end 2016, reserves were equivalent to about 5 months of prospective imports of goods and services and 50 percent of broad money. Given the long-term nature of Cambodia’s external debt, the third traditional metric – reserves in percent of short-term debt – is not as relevant. Applying the Assessing Reserve Adequacy (ARA) tool for Credit-Constrained Economies with fixed exchange rate regime to Cambodia suggests an optimal level of reserves of 4 months of current imports of goods and services, which is below the current reserve level.4 However, gross official reserves covered only 57 percent of foreign currency deposits, which severely limits the central bank’s lender of last resort capacity and is below regional comparators. Continued financial deepening in the context of near full dollarization suggests that foreign currency deposits are likely to continue to grow. This suggests that further accumulation of reserves beyond the level indicated by traditional reserve adequacy metrics, along with measures encouraging use of the Riel, are necessary to enhance resilience against financial sector vulnerabilities and rapid capital flow reversals.

Reserve Adequacy, 2016

Sources: IMF staff calculations.

Official MFI credit growth is 4.8 percent at end-2016. However, this partly reflects a merger between a second-largest MFI (Sathapana Microfinance) and a bank (Maruhan Bank) in 2016.

The gap is defined as the deviation of real credit (deflated by CPI inflation) per capita from its trend. Other gap measures point to similar conclusions. A threshold of 10 percent is considered a strong signal of an impending crisis (see e.g., Drehman et al., 2010).

For the methodology, see Barajas et al. (2013) “Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe,” IMF Working Paper No. 13/81.

The NBC raised minimum capital requirement for banks from $37.5 million to $75 million, for branches of foreign banks with an investment grade rating from $12.5 million to $50 million, and for deposit-taking microfinance institutions from $2.5 million to $30 million. Banks are mandated to increase their capital by at least half of the additional required capital by March 2017 and to meet the requirement in full by March 2018.

The government has previously pledged to increase minimum wages for civil servants, military and armed police to US$250 dollars by 2018.

Staff analysis presented in the 2015 Article IV report suggests a floor on the level of government deposits at about 5.5 percent of GDP.

The 2016 Article IV identified large infrastructure gaps. Higher public investment, financed by improved revenue collection and productivity improvements, is estimated to have a strong positive growth impact.

For example, according to the World Bank’s Doing Business indicator, contract enforcement takes too long and is too costly, and as a result, Cambodia stands towards the bottom (at 178 out of 190 economies) on the ease of enforcing contracts.

Prepared by Katsiaryna Svirydzenka.

See “Methodological Note on EBA-Lite” (2016).

See “Guidance Note on Assessing Reserve Adequacy and Related Considerations” (2016).

Cambodia is assessed to be “credit constrained” for the purposes of this exercise given that it does not regularly borrow from international capital markets – defined as at least one issuance of bonds per year in the last five years – and is not rated to be “investment grade.”

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