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Cambodia: Staff Report For The 2016 Article IV Consultation

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2016
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Context

1. Context. Cambodia is a fast-growing, highly open economy, and attained lower-middle income status this year. Over the last two decades, Cambodia grew rapidly (average real GDP growth of around 8 percent) and its integration with the global economy increased sharply, accompanied by an impressive decline in poverty. Going forward, Cambodia’s strategic location, China’s changing trade patterns, and ongoing regional integration provide further opportunities.1 Important steps have been taken by the government that will help Cambodia capitalize on these opportunities, including energy-related investments to help reduce the cost of doing business and measures to facilitate trade, payments and business registration. Nonetheless, further measures are needed to support sustained growth, including reforms to improve the business climate and policies to mitigate rising financial sector vulnerabilities.

2. Past Fund advice. Policies have generally been in line with past Fund advice, but implementation should be accelerated in key areas. Consistent with past Fund recommendations, the authorities are implementing the Revenue Mobilization Strategy (RMS) and improving revenue administration, and strengthening public financial management. The National Bank of Cambodia (NBC) recently introduced the Liquidity Coverage Ratio (LCR) to improve liquidity regulation, and raised minimum capital requirements to build capital buffers. Going forward, the key policy focus should be to secure sustained growth and mitigate growing financial sector vulnerabilities, along with continuing efforts to meet the sustainable development goals and promote inclusion.

Developments, Outlook, and Risks

3. Growth and inflation. The economy grew at 7 percent in 2015, supported by strong garments exports, real estate and construction activity, as well as the reduction in oil prices, notwithstanding weaker agricultural and tourism growth.2 Growth is projected to remain robust at 7 percent for 2016–17. Medium-term growth is projected to decline to around 6¼ percent by 2021, due to a moderation in the credit cycle and challenges in economic diversification. To sustain growth at around 7 percent and above (through 2021), expeditious implementation of business climate reforms coupled with targeted investments, particularly in agriculture and transportation infrastructure, as well as measures to protect financial stability are needed (Box 1). Inflation unexpectedly picked up at end-2015 to 2.8 percent due to higher food prices resulting from extreme weather, and is projected to rise modestly to 3.2 percent by end 2016.

Box 1.Cambodia: Proactive Policy Reform and Weak Reform Scenarios1

This box illustrates projections of medium-term GDP growth in a proactive policy reform scenario, compared with a weak-reform scenario. The scenarios suggest that (1) decisively moderating the pace of credit growth and boosting potential growth through supply-side reforms will yield substantial benefits, after an initial adjustment period, in terms of higher and safer growth. Conversely (2) in the weak-reform scenario, growth may initially be somewhat higher but at the cost of significantly weaker growth down the road and, most importantly, and increasing risk of a ‘hard landing” (sharply reduced growth and/or financial crisis).

  • Proactive policy reform scenario. This assumes implementation of key structural reforms, including the investment law, which would boost investor confidence, timely management of planned infrastructure projects, and investments in education and skills building. These policies are projected to boost the country’s growth potential. At the same time, policies that mitigate rising financial sector vulnerabilities and engineer a soft landing of the real estate and credit cycle will reduce risk of a ‘hard landing’ and boost confidence in the government’s policy framework. These measures together are predicted to generate economic growth that averages 7 percent or above. Thus, by 2021, GDP would be about 8 percent higher than in the weak reform scenario, and—most importantly—the risk of a hard landing/financial crisis would be much reduced.
  • Weak reform scenario.2 This scenario assumes no significant supply-side reforms and continuing rapid credit growth. In particular, the ‘credit-to-GDP ratio’ would continue to grow over the medium term, to around 125 percent by 2021. As a result, the risk of a sharp slowdown of growth or a financial crisis—which is already non-trivial given the duration of the credit boom since 2011—would continue to grow (quantified based on the BIS framework for crisis probability in a credit boom). The resulting risk-adjusted growth outlook in the weak-reform scenario is shown as a ‘fan chart’ below the projected non-crisis path of GDP in the baseline.

Figure 1.Real GDP Growth

(Year-on-year percent change)
1 Prepared by Mari Ishiguro and Sohrab Rafiq.2 The upper bound (blue line) in weak reform scenario refers to a scenario absent of proactive reforms and crisis and is equivalent to the baseline scenario in the macroframework, while the lower bound refers to growth in a ‘hard-landing’ scenario adjusted by the probability of such a scenario.

4. Credit cycle. Credit growth has been rapid, leading to one of the fastest financial deepening episodes by historical cross-country standards. Private sector credit growth has averaged nearly 30 percent (year-on-year) over the past three years, doubling the credit-to-GDP ratio to 62 percent by end-2015, which exceeds the median emerging market level and is double the median low-income country (LIC) level. While credit to the manufacturing and agricultural sectors slowed, real estate and mortgage lending continue to grow rapidly, averaging 50 percent in 2015 and H1 2016. Broad money growth slowed as deposit growth fell to 19 percent in the first half of 2016, from 25 percent in the first half of 2015. Banks are relying more on foreign borrowing to maintain credit growth, and the average loan-to-deposit (LTD) ratio reached 108.5 percent in June 2016, from 79 percent in 2010. The financial system remains highly dollarized, with foreign currency deposits constituting 95 percent of total deposits.

Credit Growth at Similar GDP Levels

(PPP per capita, Five-year average)

Credit growth by Economic Sector

(In percent)

5. External sector outlook. The current account deficit (CAD) is projected to narrow to 10.2 percent of GDP in 2016, from 10.6 percent in 2015, due to reduced imports following the completion of major hydro projects, low commodity prices and growing remittances. Over the medium-term, the CAD is forecast to decline to around 8½ percent of GDP, as major power projects are completed (and related imports decline), exports and tourism grow (aided by an expansion of US GSP access for specific travel-related items) with some product diversification amid ASEAN Economic Community integration. Indeed, recent FDI trends point to early signs of diversification into other manufacturing products as regional producers attempt to diversify their supply chains. FDI and official sector flows are expected to continue financing the CAD over the medium-term. Gross official reserves are projected to increase to US$6.3 billion as of end-2016 (around 4½ months of total imports) and to continue rising over the medium term.

6. External sector assessment and policies. Based on the IMF’s External Balance Assessment-lite methodology, the external position is assessed to be moderately weaker than suggested by fundamentals and desirable policies (Box 2). The moderate overvaluation of the real effective exchange rate (REER), in the absence of an independent exchange rate regime, calls for policies to improve productivity and competitiveness.3 Measured against traditional metrics, reserves appear to be adequate; however, there are benefits to building reserves further given high dollarization and elevated financial vulnerabilities. The current exchange rate regime, based on keeping the riel broadly stable against the U.S. dollar, is appropriate given high dollarization and a concentration in U.S. dollar-invoiced exports (primarily garments). Over time, as dollarization declines, capacity improves, and the economy diversifies, gradually introducing greater exchange rate flexibility is recommended to better absorb external shocks and enable implementation of an independent monetary policy.

Box 2.Cambodia: External Sector Assessment1

The external position is assessed to be moderately weaker than implied by fundamentals and desirable policy settings. The real effective exchange rate is assessed to be moderately overvalued by around 5–10 percent. There is room to build reserves given high dollarization and elevated financial vulnerabilities.

BoP Developments. Cambodia’s external position in 2015 (CA balance of -10.6 percent of GDP) is assessed to be moderately weaker than suggested by fundamentals and desirable policy settings. The estimated cyclically-adjusted current account deficit is slightly larger than the norm determined by fundamentals and desirable policies (2.6 percentage points of GDP weaker than the norm using the macro balance approach of the Fund’s EBA-lite exercise, which translates into a REER overvaluation of around 5.7 percent). Much of the misalignment in the external sector can be explained by the current calibration of credit and monetary (and to a lesser extent fiscal) policies away from the most desirable policy settings, which are looser than would be optimal given the economic cycle.

External Balance Assessment Results
Current account gap

(percent of GDP)
2.6
Implied over(+)/under(−)

valuation from CA
5.7
REER gap, level regression

(percent)
10.1
Source: IMF Staff estimates
Source: IMF Staff estimates

Exchange Rate Assessment. Since end-2015, the REER has appreciated by around 8 percent (year-on-year). The appreciation reflects the nominal rise in the US dollar against major trading partner countries (EU and China), buoyant economic growth, and inflows of foreign banking flows. The REER is assessed to be overvalued by around 5–10 percent, which implies that a 5–10 percent real effective depreciation would be necessary to close the gap between the underlying current account and the level that can be explained by fundamentals and desirable policies. The overvaluation, in the absence of an independent exchange rate regime, calls for policies to slow credit growth in the near term, and consolidate the fiscal position and improve productivity and competitiveness over the medium term.

Reserve Adequacy

(2015)

Sources: IMF staff calculations.

Reserve Adequacy. Reserve coverage, in terms of FX deposits, has been declining. In December 2015, reserves were equivalent to about 4 months of prospective imports of goods and services. Measured against several traditional metrics, Cambodia’s gross international reserves appear to be adequate, also considering the long-term nature of most of Cambodia’s external debt. Reserve adequacy metrics for LICs suggests the optimal level of reserves in an open economy with a managed exchange rate like Cambodia to be around 4 months of imports.2 However, foreign currency deposits are still more than two times gross official reserves, which severely limits the central bank’s lender of last resort capacity, and is lower than regional comparators. Customizing the Jeanne and Ranciere (2006) model, which incorporates high dollarization and financial fragilities when assessing reserve adequacy, suggests that the optimal level of reserves ranges from 28 to 30 percent of GDP, which is equivalent to additional reserves of US$250 to US$480 million. The authorities should continue to accumulate reserves beyond the level suggested by traditional reserve adequacy metrics to enhance resilience against financial sector vulnerabilities and rapid capital flow reversals.

1 Prepared by Sohrab Rafiq.2 See External Balance Assessment method in the 2015 External Sector Report. Also see Board paper “Assessing Reserve Adequacy—Specific Proposals” (2015).

7. Risks. The outlook is subject to downside risks:

  • External risks: A significant slowdown in China would spill over through the FDI, banking and tourism channels (Box 3). A surge in the US dollar and/or weaker growth in Europe could constrain garments exports, particularly amid stiff competition from other low-cost producers (see Appendix I, Risk Assessment Matrix). In the near term, the Brexit referendum result is not expected to have a large direct impact on Cambodian exports (despite Cambodia’s trade export exposure to the UK being the highest in the ASEAN at close to 6 percent of GDP) due to UK-bound Cambodian exports being relatively income inelastic. A more important headwind for Cambodian exports could be the increasing redirection of new garment orders to Vietnam as a result of the TPP agreement, which would lead to declining FDI growth in the Cambodian garment sector. Also, sharper-than-anticipated tightening in global financial conditions could raise funding costs and heighten liquidity risks for Cambodian banks and MFIs, which have become increasingly reliant on foreign funding.
  • Macro-financial risks. Rising financial sector vulnerabilities amid a credit boom pose significant risks to macro-financial stability.
    • Several macroeconomic shocks may adversely affect the financial system.
      • Macroeconomic shocks could potentially lead to a funding squeeze and result in a credit crunch. Possible shocks include a sharper-than-anticipated global liquidity tightening, and a significant slowdown in China.
      • A sharp slowdown in economic growth could lead to an increase in bad loans in specific sectors (e.g. slower-than-expected growth in the EU and China can affect garments exports and construction).
    • Vulnerabilities in certain banks or MFIs and in the real estate market may lead to a financial system-wide shock, which could spill over to the macro economy.
      • Growing oversupply in the real-estate sector could trigger a disorderly price correction.4 This in turn could lead to rising defaults (as collateral values fall) and a spike in NPLs, which would pose a drag on credit growth and economic activity.
    • Other domestic risks include fiscal pressures and the erosion of competitiveness from wage hikes potentially outstripping productivity increases.
    • Upside risks. Faster structural reforms and efforts to slow credit and channel it to more productive sectors will lead to faster and more durable growth over the medium term (Box 1).
    • Policy response. Policy options in case financial sector risks materialize are limited in view of high dollarization and a lack of monetary instruments, as well as the projected lack of fiscal space over the medium term. There is a need to build up the crisis management framework by bolstering the financial safety net, including instituting deposit insurance, putting in place a robust bank resolution framework, and strengthening the lender of last resort function of the NBC.

Box 3.Cambodia: Real and Financial Spillovers from China to Cambodia1

Increased economic integration over the last 15 years has resulted in larger real and financial spillovers from China to Cambodia. To preserve macro stability in the face of rising vulnerability to regional shocks, policy frameworks, including moving towards greater monetary flexibility, need to be strengthened.

A high degree of openness suggests that Cambodia is vulnerable to spillover effects from China via a number of potential transmission channels:

  • - FDI and official flows: Chinese companies invest in the garment sector to take advantage of Cambodia’s preferential tariffs with the EU. China is the largest provider of official flows to Cambodia.
  • - Banking sector flows: Chinese banks, reliant on wholesale funding, have sizeable market share in Cambodia.
  • - Tourism: Chinese citizens have contributed most to Cambodia tourism growth in recent years.

Growth elasticity of a China growth slowdown on Cambodia, Lao and Vietnam

Sources: IMF staff calculations.

Trade and financial linkages between Cambodia and China have grown. To assess the spillovers from Chinese economic shocks to Cambodia (real and financial effects), a time-varying structural dynamic factor model is estimated.2 The main results are:

  • - Cambodia’s growth elasticity to China’s growth is around 0.2 percent. This is double the magnitude compared to 10 years ago, which is consistent with Cambodia’s strengthening regional trade and financial integration.
  • - A slowdown in Chinese growth tightens credit conditions in Cambodia and leads to declining credit growth. This effect has strengthened since the global financial crisis. The findings imply that stronger growth in China, through a compression in risk premia, could contribute to the pro-cyclicality of credit flows into Cambodia.

Response of Cambodia Credit Growth to a One Percent China Slowdown

(percent (y/y))

As trade and financial linkages grow, Cambodia is increasingly likely to be buffeted by external shocks, including from China. To preserve financial stability, policy frameworks need to be strengthened, including reforms to allow for greater monetary flexibility to cope with regional shocks, and financial safety nets need to be widened and deepened to build resilience. The findings also call for enhancing surveillance of cross-border financial flows to derive a more comprehensive picture of the deeper network of interconnections and spillovers to Cambodia, as well as identification of associated data gaps and working toward their closure.

1 Prepared by Sohrab Rafiq.2 Rafiq, S. (2016), “When China Sneezes, Does ASEAN Catch a Cold?,” IMF Working Paper (forthcoming).

Macro-Financial Links in Cambodia

8. Authorities’ views. The authorities broadly shared staff’s assessment of the outlook and risks. Over the medium term, they also project growth to fall absent further diversification. They had a similar assessment of macro-financial risks and emphasized their plans to mitigate them, while closely monitoring the impact on growth. They expressed concerns regarding spillovers from EU growth on garment exports, while noting that Brexit and Vietnam’s inclusion in the TPP agreement were unlikely to hurt exports (and FDI) significantly over the next few years, but could weigh on medium-term prospects. To support exports, a short-term priority for the government is to expand US GSP access to other garments. The authorities considered minimum wage negotiations, rather than further appreciation of the U.S. dollar, as the biggest near-term risk to competitiveness. Reserve accumulation in 2016 thus far has exceeded the authorities’ expectations, and is projected to remain strong for the rest of the year.

Key Policy Issues

9. The key policy challenges are to secure sustained growth and mitigate growing financial sector vulnerabilities. Along with building resilience, efforts are needed to meet the sustainable development goals and promote inclusion. Policy efforts should focus on: (i) containing growing macro-financial risks, (ii) maintaining fiscal sustainability, (iii) boosting competitiveness and diversification, and (iv) expediting financial market development.

10. Policy strategy. In view of rising financial sector vulnerabilities and elevated external risks, macroeconomic policies should be tightened to secure buffers, notwithstanding low debt levels. Fiscal policy should continue focusing on boosting revenues and rationalizing expenditure to maintain fiscal sustainability, amid rising wage pressures and needed capital and development spending, and to ensure sufficient fiscal buffers. Financial sector policies should focus on securing a soft landing of the credit cycle and building capital and liquidity buffers, using a well-coordinated and sequenced set of micro- and macroprudential policy tools, as well as upgrading regulation and supervision. Finally, structural reforms should be geared towards promoting diversification, enhancing competitiveness, and improving the business climate, to secure inclusive and sustained growth.

A. Containing Growing Macro-Financial Risks

11. Excessive credit growth. The duration of the current credit boom, which began at around end-2011, significantly exceeds the average length of past credit booms, leading to the buildup of financial stability risks. Credit growth is projected to remain high at around 25 percent over 2016–17, moderating only slightly due to tightening global financial conditions and the imposition of tighter liquidity regulations and higher capital requirements. This would result in an already-high credit/GDP ratio to continue rising sharply (to over 80 percent by 2017). The credit-to-GDP gap (a widely used cross-country indicator of potential crises/banking stress), which by end 2015 had already exceeded the pre-crisis peak reached in 2008, is projected to breach the 10-percent threshold by end 2017.5 Credit intensity of growth has trended up to 3.8 in 2015 from 3 in 2011–14 (average), implying that credit is becoming less efficient in generating growth and investment.6 Over the medium term, sustaining high economic growth and avoiding financial instability will require decisively moderating the pace of credit growth.7

Credit growth and credit to GDP 2010-2017

(In percent)

Credit Intensity and Domestic Private Investment Growth 1/

Sources: Data from Cambodian authorities; and IMF staff caluclation.

1/ Asia LIC include Bangladesh, Myanmar, Mongolia, Sri Lanka, and Vietnam. Asia EM include India, Indonesia, Malaysia, Philippines, and Thailand.

Credit Gap, 1996–20161

(In percent of GDP)

Source: IMF staff estimates.

1 The credit-to-GDP gap fan chart is based on a one-sided HP filter estimated using a Kalman filter, with multiple smoothing parameters to account for uncertainty regarding the extent of financial deepening.

Real estate, Construction and Mortgage, 2008-15

(In percent of GDP)

12. Intensifying credit risk in real estate. Real estate market expansion has continued unabated, with new construction permits continuing to rise. While credit growth has been broad-based, there is growing concentration in the real estate sector, leading to rising credit risk linked to asset prices. Rapid construction could eventually lead to an over-supply in the real estate market (especially for condominiums), which risks precipitating a large disorderly adjustment in real estate prices, adversely impacting the banking sector and economic activity.8

13. Increasing reliance on foreign funding. The banking sector has increased its reliance on foreign borrowing, further raising structurally high liquidity risks. The average LTD ratio reached 108.5 percent in June 2016 (20 banks with LTD ratios over 100 percent, and 14 banks over 200 percent).

Foreign Liabilities to Total Foreign Funding

(In percent)

14. Rising risks from the nonbank sector. Microfinance institutions (MFIs) are now playing a systemic role, with credit stock and flows from MFIs at 20 and 25 percent, respectively, of those in the banking system. A number of MFIs are now larger than some mid-sized commercial banks and accept deposits, thereby competing for the same client base while being subject to looser regulations.9 Moreover, large deposit-taking MFIs are heavily reliant on foreign funding, even more so than banks.

15. Financial Soundness Indicators. Financial soundness indicators (FSIs) appear healthy, suggesting adequate capitalization levels, low nonperforming loans (NPLs), and high profitability. However, healthy FSIs may mask the build-up of credit risk in individual banks given the lack of clarity in the classification of restructured loans. While the system NPL ratio is under 2 percent—suggesting robust asset quality—lack of detailed guidance on the treatment of restructured loans could possibly underestimate the NPL ratio and overstate capital adequacy. While the aggregate capital adequacy ratio is above 20 percent, the solvency ratio of many banks, including large ones, may be vulnerable to higher loan losses should defaults unexpectedly increase. Furthermore, liquid assets relative to total assets or short-term liabilities appear to be low, rendering many banks vulnerable to liquidity risks.

Selected Financial Soundness Indicators (FSIs), 2011-15(In percent)
20112012201320142015
Capital Adequacy
Regulatory capital to risk-weighted assets26.2325.0024.2320.4121.04
Asset Quality
Nonperforming loans to total gross loans2.132.012.301.621.59
Earnings and Profitability
Return on equity 1/9.7410.2512.1515.5416.34
Return on assets 1/1.761.722.402.873.98
Interest margin to gross income64.2766.6568.6072.9463.07
Liquidity
Liquid assets to total assets16.1615.3717.9316.2116.61
Liquid assets to short-term liabilities22.9621.2124.2423.1325.42
Source: National Bank of Cambodia.

Annualized.

Source: National Bank of Cambodia.

Annualized.

16. Containing growing financial risks. Cognizant of growing financial risks, the NBC has recently taken a number of pre-emptive steps to enhance the resilience of the financial system. Liquidity regulations have been strengthened by introducing a Basel-III compliant Liquidity Coverage Ratio (to be met by September 2016), and while it is too early to assess the impact, this regulation is expected to dent credit momentum and help build buffers against liquidity shocks. The NBC has also raised minimum capital requirements in March 2016 (to be in full effect in two years).10 The NBC’s plans to impose bank-specific prudential measures on institutions deemed to be engaged in excessive risk-taking is welcome. While these efforts are to be commended, further measures are needed to ensure financial stability. Therefore, the NBC should follow through on their plans to adopt a liquidity risk management framework in 2016, improve regulations on asset classification and provisioning, and refine the solvency ratio during 2017. Also, while supervisory capacity has improved, further efforts are required to close gaps in financial supervision.11 The government has recently tightened licensing and supervision on real estate developers, and improved the efficiency and expanded the coverage of stamp duty on real estate transactions. These measures are welcome and should be used more actively going forward as an additional counter-cyclical policy tool to help manage the real estate cycle.

17. Policy recommendations. The following policy measures are recommended to encourage financial institutions to build resilience and engineer a soft landing of the credit cycle. To this end, a range of tools should be implemented and coordinated among multiple government agencies in a well-designed and sequenced way. The recommended sequencing of specific measures is contained in the table on page 12.

  • Raise reserve requirements (RR). RR should be raised, particularly on short-term foreign currency deposits and foreign borrowing. This would also increase the size of NBC’s liquidity buffer that can be promptly released should liquidity conditions unexpectedly tighten.
  • Strengthen microprudential policies. The NBC should revisit loan classification, align provisioning rules with international best practices, improve asset classification regulation, and ensure that rules are consistently enforced by banks, particularly focusing on sound underwriting standards and prudent valuations.12 Capital adequacy regulations, which are based on Basel I, need to be upgraded to ensure financial institutions have adequate buffers commensurate with their risk profiles.
  • Put in place a comprehensive crisis management framework. First, the NBC should strengthen the existing prompt corrective action framework to enable it to take early action.13 Second, building on the memorandum of understanding (MOU) signed by the NBC, the Ministry of Economy and Finance (MEF), and the Securities and Exchange Commission of Cambodia (SECC) in 2014, the crisis management framework should provide a sound institutional arrangement with more explicit inter-agency coordination mechanisms, including the exchange of information, contingency planning, and reforms to the legal framework in line with 2010 FSAP recommendations.
  • Introduce macroprudential policies. (i) Sectoral tools: imposing sectoral concentration limits and/or higher risk weights for real-estate loans should be considered. Collection of real-estate data and household balance sheets should be expedited to enable the introduction of limits on debt-to-income ratio and loan-to-value ratios; (ii) Liquidity tools: funding requirements such as limits on LTD ratios would ensure that banks hold more internal and stable liabilities, and can also serve as an effective brake on excessive credit growth; (iii) Capital tools: counter cyclical capital requirements (tailored to Cambodia) could be implemented to build buffers in the financial system, which can be drawn upon in a downturn.
  • Strengthen non-bank regulation. The growing systemic relevance of large MFIs calls for strengthening regulation to prevent regulatory arbitrage (Box 4). Specifically, (i) revising the capital adequacy regulations, (ii) standardizing asset classification in line with banks, (iii) raising RR, and (iv) better monitoring of systemic linkages between MFIs and banks.
  • Implement complementary prudential measures. A coordinated policy response across government agencies, complementing actions taken by the NBC, is recommended to moderate rapid credit growth and contain rising financial stability risks. Well-designed and targeted fiscal measures, such as stamp duties and a capital gains tax, to augment the monetary prudential measures taken by the NBC, could be deployed to more decisively dampen excessive real estate price inflation. Such measures are especially useful when the real estate cycle is being driven by capital inflows that bypass the domestic banking system.

Box 4.Cambodia: Upgrading Nonbank Regulations1

Rapid growth of deposit-taking micro-finance institutions (MFIs) have rendered them systemically important. Regulations need to be tightened and be brought in line with banks to adequately contain potential risks and prevent regulatory arbitrage.

Regulators face the twin challenges of closing regulation gaps between banks and MFIs and mitigating stability risks from rapidly growing MFI lending. The bank assets-to-GDP ratio has grown from 55 percent in 2010 to 110 percent as of 2015, while MFI assets-to-GDP ratio has grown rapidly from 4 percent to 20 percent. The largest deposit-taking MFI (MDI) is equivalent in terms of total assets to the 7th largest bank. MDIs are competing with banks for the same funding base while being subject to different regulations, creating room for regulatory arbitrage. There are four possible financial stability risks that could result: (1) credit risk (risk of highly-indebted households rolling over debt), (2) liquidity risk (sudden withdrawals of deposits and/or squeeze in foreign borrowing), (3) FX risk (currency mismatch between deposits in U.S. dollars and lending in local currency), and (4) systemic risks due to increased interconnectedness between MFIs and banks.

Number of institutions and assets to GDP

in percent

In general, regulations on deposit-taking MFIs should be broadly in line with those of commercial banks though some principles require tailoring. As with other forms of financial regulation, the primary aim is to ensure the stability of the financial system and to protect depositors without imposing undue compliance burdens or stifling lending. MFIs pose an additional layer of complexity in that the industry’s need for flexibility to innovate and grow must be balanced with rules and restrictions to protect low-income and vulnerable clients (CGAP, 2012). Thus, regulations should aim to (i) reduce risk of regulatory arbitrage and (ii) minimize costs created by additional regulation for MFIs. Supervision should be proportionate to the risks involved, while keeping in mind stretched supervisory capacity.

Recommendations.

(1) The CAR should be aligned with Basel II and III principles. While current regulations apply equally to MDIs and banks, actual CARs are, on average, lower than that of banks. If MDIs’ ability to raise additional capital is limited compared to banks, or they exhibit a more pronounced risk profile, the minimum CAR should be set higher than that for banks.

(2) Asset classification should be standardized for all banks and MFIs.

(3) Reserve requirements (RR), including on foreign currency deposits, for MDIs should be adjusted to be in line with banks. Since MFIs are more reliant on foreign financing, RR on foreign borrowings should be instituted to all MFIs and applied based on the maturity profile of borrowings (short term borrowings). To limit the impact on the financial system and financial inclusion, implementation should be gradual.

(4) The NBC must constantly evaluate how effectively MFIs are managing potential currency mismatches, including cross-border financing arrangements with international lenders, and consider further restricting MDI’s net open position should risks abruptly rise.

(5) Clear identification of systemically important MDIs is needed and routine monitoring of interbank, inter-MFIs, inter-financial institutions linkages should be strengthened.

1 Prepared by Mari Ishiguro.

18. Authorities’ views. The authorities broadly agreed with staffs assessment and highlighted their efforts to incorporate staffs previous recommendations. They agreed that there is a need to engineer a soft landing of the credit cycle, including by focusing on strengthening regulation and improving institutional capacity. They noted that in addition to the speed of credit growth, they are closely monitoring the quality of credit and the sectoral allocation of credit with the objective of increasing credit to productive sectors. The authorities also broadly agreed with staffs proposed sequencing of financial sector policy recommendations, though they noted that the exact timing of additional measures would be contingent upon the assessment of past measures and the impact on credit growth and economic activity. The NBC has implemented microprudential and macroprudential measures such as reserve requirements on non-resident borrowings, liquidity coverage ratio and increase in minimum registered capital. The NBC has already started working on revising regulations on asset classification and provisioning, as well as on the prompt corrective action framework, and plans to upgrade solvency regulation. To curb credit, it is considering introducing targeted bank-by-bank level regulation. The NBC has launched a Financial Literacy Program to help support financial stability. Finally, the authorities highlighted progress in strengthening crisis preparedness, as the MEF and SECC have recently established financial stability working groups to improve information sharing, and have committed to set up, together with the NBC, a national financial stability committee that will establish a crisis management framework and strengthen financial stability oversight.

B. Maintaining Fiscal Sustainability

19. Fiscal outlook in 2016. The fiscal deficit is projected to widen to 2.6 percent of GDP (but remain below the budget target) from 1.6 percent of GDP in 2015 as rising current expenditure is expected to more than offset revenue mobilization efforts.14 Strong revenue performance, following the 2014 adoption of the government’s RMS, is expected to continue as the result of improvements in tax administration, and is projected to raise tax revenues by 0.3 percent of GDP (following 0.9 percent of GDP increase in 2015).15 However, wage pressures persist, and current expenditure is projected to rise by about 1.2 percent of GDP driven by an increase in the wage bill of about 0.2 percent of GDP and non-wage current expenditure by another 1 percent of GDP.16 Government deposits are projected to be 9.3 percent of GDP, a level that is considered adequate. In view of impending spending pressures over the medium term, any revenue over-performance should be saved and non-development current expenditure curtailed, by continuing to enhance spending efficiency.

Wage Spending, 2015

(In percent)

20. 2017 Preliminary budget. In the preliminary 2017 budget, the government plans to target a budget deficit of 2.6 percent of GDP. On the revenue side, the budget envisages a 0.5 percent of GDP increase in tax revenues owing to improvements in tax administration and compliance. On the spending side, the budget includes a 0.4 percent of GDP increase in the wage bill to 7.4 percent of GDP. Spending on social protection and pensions will also rise (by about 1 percent of GDP). Plans to increase social spending and growth-enhancing capital spending are welcome. However, revenue projections appear optimistic, and staff projects lower revenue growth and a higher fiscal deficit.

21. Medium-term fiscal pressures. Over the medium term, strong revenue administration efforts (based on RMS implementation) are expected to continue to boost revenues, but the pace of revenue gains is expected to moderate.17 Recent revenue increases relied heavily on strengthened auditing, which while welcome, should be accompanied by institutional improvements to sustain revenue performance.18 Furthermore, revenue performance could disappoint if there are delays in deeper and broader tax reforms, or if the economy weakens. At the same time, public wages are projected to continue rising, while the government is facing mounting social spending pressures (Cambodia’s development spending remains lower than that of peers). Reflecting these trends, the fiscal deficit is projected to widen to around 3½-4 percent of GDP and government deposits are projected to fall to 3.7 percent of GDP by 2021, below comfortable levels.19 In the absence of a government debt market, maintaining adequate government deposits (the main source of financing to conduct countercyclical fiscal policy) will be essential for maintaining macroeconomic stability as they act as a buffer in the event of shocks. Staff analysis suggests that a government deposit level of about 5.5 percent of GDP is adequate to withstand a major shock. This will necessitate consolidation over the medium term, even though the Debt Sustainability Analysis (DSA) indicates a low risk of debt distress (see DSA).20

22. Policy Recommendations.

  • Continued revenue increases are needed in view of rising spending pressures and to maintain an adequate fiscal buffer. The government’s target of raising domestic revenues by about 0.5 percent of GDP annually is welcome.21 However, achieving this goal will require continued improvements in revenue administration and a modernization of tax policy. To continue improving tax administration, the authorities should systematically implement the RMS and continue with the reforms to improve institutional capacity (Box 5). Tax policy reforms should initially focus on rationalizing tax incentives and excise taxes, and over the medium term aim at reforming VAT and personal income taxes, and increasing property taxes.
  • Development spending should be prioritized as revenue gains are secured. Recent plans to boost social protection spending are welcome. However, public expenditure on education and health will still remain below low-income and emerging Asia country averages.
  • Wage increases should be fiscally sustainable and accompanied by continued efforts to accelerate civil service reforms. Further wage increases should be contingent on meeting revenue targets and maintaining adequate fiscal buffers. The ongoing efforts to reform Cambodia’s civil service sector, especially to strengthen the monitoring of work attendance and compensation systems through the adoption of IT systems, are welcome. Commendable efforts are also being made to strengthen human resource planning and recruitment across sectors. These efforts should continue, including to increase skills and efficiency of civil servants at all levels including management, and to enhance the transparency of public sector operations. In particular, balancing the goals of fiscal sustainability and competitive civil service salaries will require careful targeting of incentives and higher pay increases to priority functions and good performers.
  • Domestically-financed public investment should be increased, while raising its efficiency and limiting contingent liabilities from Public Private Partnerships (PPPs). Specific recommendations include: (i) increasing domestically-financed public investment to maintain public investment at about 8.5 percent of GDP financed by boosting revenues (to prepare for an eventual decline in external concessional financing as Cambodia’s per capita income rises further); (ii) improving efficiency in all stages of the public investment process including planning, allocation and implementation, and (iii) developing an appropriately structured institutional framework for PPPs to reduce risks from contingent liabilities. In June 2016, the MEF adopted a policy on PPPs outlining legal, regulatory and institutional frameworks. In addition, a central PPP unit for risk management is being established in the MEF. Going forward, the preparation and selection of PPPs should be integrated with the overall investment strategy and the budget cycle, with clear procedures in place for budgeting, reporting, and accounting.
  • A Medium Term Fiscal Framework (MTFF) should be developed to systematically allocate expenditure and improve efficiency. A MTFF will also integrate capital expenditure into the budgetary process, and allow for a better assessment of the trade-offs between various types of expenditures and their medium-term impact.

Box 5.Cambodia: Domestic Resource Mobilization1

An ambitious set of tax reforms are needed to provide adequate resources to meet Cambodia’s development and infrastructure needs. The strategy should be two-pronged via strengthening tax policy and continuing improvements in revenue administration.

Tax Policy. There is room for improvement in productivity, efficiency and transparency. Significant reforms are needed across all tax categories with immediate emphasis on improving the productivity of business profits taxes. A priority is to eliminate the “tax notches” between small and medium enterprises by applying a flat tax rate structure to profits.

  • Tax incentives. The framework needs to be rationalized and streamlined, including for withholding taxes on interest, dividends and other payments to foreign investors.
  • Property taxes should be raised gradually.
  • Patent and business tax The patent tax should be eliminated, and the current system of minimum turnover tax should be replaced with a modern advanced payment system.
  • Excise taxes should be rationalized and all ad valorem rates should be replaced with specific rates.
  • VAT exemptions on utility sales (electricity and water) should eliminated.
  • Personal income tax. A comprehensive PIT scheme including on pensions and capital income should be developed, once a well-designed administrative framework is in place.

Tax Administration. Reforms on tax policy should move alongside the development of a strong institutional framework for revenue administration. The General Department of Taxation (GDT) needs to be strengthened to be able to implement the major tax policy reforms while increasing taxpayer compliance levels in an ever-more sophisticated economic environment. Thus, the GDT needs to establish an effective tax headquarters with the capacity to drive the ongoing reforms under the RMS and implement any proposed policy changes. This will involve:

  • Improving core functional areas such as taxpayer education to increase awareness of tax compliance laws, and return filing management and tax arrears collection that ensure equitable tax enforcement across businesses and sectors;
  • Implementing the simplified accounting format to replace the estimated regime and enhancing large and medium taxpayer compliance.
  • Strengthening performance monitoring including on RMS progress would require developing a set of broader performance indicators for the GDT that would also enhance transparency.

On the customs, the emphasis should be on effective implementation of the strategic plan adopted by General Department of Customs and Excise (GDCE) and program development capacities in customs valuation and post-clearance audit. GDCE’s customs enforcement and compliance strategy should also include an anti-smuggling policy and action plan. Opportunities also exist for increased cooperation and sharing of information between GDCE and GDT.

1 Prepared by Manuk Ghazanchyan, Debra Adams, David Wentworth, Hebous Shafik, and Janos Nagy.

Development Expenditures—Comparatives 1/

(In percent of GDP)

Sources: IMF staff estimates; World Bank.

1/ Dashline is the average of EMAsia

Wage Spending

(In percent of GDP)

23. Authorities’ views. The authorities broadly agreed with staffs assessment and key policy recommendations. On the revenue side, they agreed with the need to continue to boost revenues to maintain fiscal sustainability, but noted the need to strike a balance and meet other objectives such as promoting job creation and efficiency. They remained committed to continue implementing the RMS, along with improving the institutional framework for revenue administration. They plan to implement tax policy reforms over the medium term. On expenditures, they agreed on the importance of developing a MTFF to improve expenditure allocation efficiency and are currently reviewing the public expenditure framework. They are also planning to continue with civil service reforms to improve public services, but noted constraints to speedy implementation. They highlighted significant progress in increasing development spending, especially in health, primary education, and social assistance. They plan to use PPPs to enhance infrastructure and social spending, and acknowledged the need to develop a well-designed PPP framework.

C. Structural and Financial Sector Reforms to Enhance Sustainable and Inclusive Growth

24. Structural Constraints. Rapid growth over the past two decades has significantly reduced the poverty rate, which has fallen from 50 percent in 2005 to 18 percent in 2012, helping to reduce income inequality.22 However, a large share of the population remains vulnerable at just above the poverty line. Also, despite rapid credit growth, financial access remains limited, which indicates that financial deepening has not been broad based.23 Cambodia also faces structural constraints and vulnerabilities, including a narrow economic base, weak business climate, and high dollarization coupled with underdeveloped financial markets. These structural features constrain growth potential and render the economy and financial system vulnerable to shocks, while limiting the scope for responding to such shocks.

Poverty Cross-Country Comparison 1/

(Poverty headcount ratio in percent of population)

Sources: World Development Indicators; and IMF staff estimates.

1/ Poverty headcount ratio as $3.10 a day is 2011 PPP adjusted.

2/ For Nepal, poverty headcount ratio at national poverty lines is only available in 2010.

  • Narrow Economic Base. Despite some early signs of diversification, Cambodia’s export base remains narrow and reliant on low value-added garments. Garments production is highly substitutable between countries, and can migrate quickly to those with better price competitiveness. The government launched the Industrial Development Policy (IDP) in 2015 to attract FDI into non-garments labor-intensive manufacturing, and while recent FDI trends point to early signs of diversification, progress has been slow.
  • Weak Business Climate and Eroding Competitiveness. Rising minimum wages and stalled productivity improvements, along with heightened uncertainty from labor disputes, have been eroding competitiveness. The cost of doing business remains high due to inadequate transportation links, elevated energy costs, nontransparent and onerous government procedures.
  • Dollarization. High dollarization increases banks’ vulnerability to solvency and liquidity risks, and limits the scope for exchange rate and monetary policies.
  • Underdeveloped Financial Markets. There is no government bond market despite the need to channel domestic savings to finance growth-enhancing expenditure. The foreign exchange market remains thin and transactions center on small retail money changers. Limited financial markets impede the efficient allocation of resources and risk sharing, and constrain monetary policy implementation and the efficacy of fiscal policy, given the absence of financing instruments.

25. Business Climate Reforms. Efforts should focus on lowering the costs of doing business to boost competitiveness and create more employment opportunities in higher value-added industries. Priorities would include reducing energy costs, improving its reliability, enhancing transportation links, and addressing skills gaps via improving the quality of education and promoting technical and vocational training. Efforts should be made to accelerate the implementation of the IDP, which was formulated to improve the business climate. Additionally, strengthening the rule of law, and increasing the transparency of business regulation and tax compliance requirements will help create a more conducive business environment and encourage long-term investment.

26. Financial Market Development. Reforms should be geared towards increasing usage of the local currency and accelerating financial market development. While success in de-dollarization will be gradual, the development of interbank, government bond, and foreign exchange markets is needed to promote de-dollarization and allow for the eventual implementation of an effective monetary policy framework. Specifically, (i) expedite issuing shorter-term Negotiable Certificates of Deposits (NCD) to make the interbank market more liquid and move towards auction pricing, (ii) restructure the FX market and encourage banks (instead of money changers) to play a greater role, (iii) develop government bond markets in line with the authorities’ Financial Sector Development Strategy (2011-2020), (iv) ensure proper supervision and regulation, (vi) adopt measures to encourage de-dollarization, potentially based on the draft national strategy to promote increased usage of local currency (see below).24

27. Authorities’ views. The authorities remain committed to implementing the IDP and agreed with staff on the need to accelerate implementation. Both the Law on Investment and the Law on Special Economic Zones are under revision and aim to improve the business environment and support diversification, in line with IDP. The government has implemented various measures to promote securities market development, and has also prepared rules and regulations for a government bond market (to be finalized by 2018). The NBC highlighted their efforts to develop the interbank market by supporting greater usage of NCDs. In line with government policy, the NBC remains committed to promoting the usage of local currency and has recently launched a new electronic payments and FAST system (Fast and Secure Transfer) system to better facilitate riel transactions. The national strategy to increase local currency usage, drafted by the NBC, is currently at the Economic and Financial Policy Committee for consideration.

Staff Appraisal

28. Economic setting. Growth is projected to remain strong, driven by strong garments exports, real estate and construction activity as well as the reduction in oil prices, and notwithstanding weaker contributions from agriculture and tourism sectors. Inflation has increased slightly but is expected to remain well contained. Private sector credit growth has been and is projected to remain high, and is increasingly concentrated in the real estate and construction sectors. Medium-term growth is projected to moderate somewhat due to a gradual reduction in FDI, challenges in diversification, and a moderation in the credit cycle. The external position is assessed to be moderately weaker than suggested by fundamentals and desirable policies.

29. Risks. The outlook is subject to downside risks. On the external side, a significant slowdown in China would spill over through the FDI, banking and tourism channels. A surge in the US dollar and/or weaker growth in Europe could weigh on garments exports. Also, a sharper-than-anticipated tightening in global financial conditions could raise funding costs and heighten liquidity risks in the financial system. On the domestic side, the ongoing credit boom poses significant risks to macro-financial stability and growth. Other domestic risks include fiscal pressures and erosion of competitiveness from wage hikes potentially outstripping productivity gains.

30. Financial sector policies. Securing a soft landing of the credit cycle and continuing to build capital and liquidity buffers through well-coordinated and sequenced prudential policy tools will be key to containing rising macro-financial risks. On the micro-prudential side, regulations on asset classification, provisioning, and sectoral loan classification need to be strengthened. Well-designed macro-prudential tools should be gradually introduced, including implementing countercyclical capital buffers and provisions, imposing concentration limits and higher risk weights for real-estate loans, and instituting limits on LTD ratios. The prompt corrective action framework should be strengthened and a crisis management framework should be put in place with more explicit inter-agency coordination mechanisms.

31. Monetary policy and other prudential tools need to be used to further contain rapid credit growth. Reserve requirements should be raised, particularly on short-term foreign currency deposits and foreign borrowing. Well-designed and targeted fiscal measures, such as stamp duties, a capital gains tax, and tightening the issuance of new construction permits should be used to manage the real estate cycle.

32. Supervision and financial market development. Strong supervision is essential to ensure proper risk identification and enforce micro and macro prudential policies. In this respect, the implementation of FSAP recommendations should be expedited including continued supervisory capacity building. With the growing systemic relevance of large MFIs, strengthening regulation to prevent regulatory arbitrage is warranted. Reforms to reduce dollarization and to develop the interbank, government bond, and foreign exchange markets are needed to build an effective monetary policy framework.

33. Fiscal Policy. To ensure that the recent revenue gains are sustained over the medium-term, reforms should focus on modernizing tax policy and further improving revenue administration. Tax policy reforms should center on improving the productivity, efficiency and transparency of most taxes, and rationalize tax incentives, improve business taxation, and reform excise and property taxes. Tax administration reforms should focus on building a strong institutional framework to entrench recent administrative improvements and implement future reforms. On the expenditure side, developing a medium-term budget framework to systematically allocate expenditures and improve spending efficiency would be key going forward. An appropriately structured institutional framework for PPPs is also needed to limit contingent liabilities. Wage increases should be fiscally sustainable and be accompanied by continued efforts to enhance civil service reforms.

34. Structural reforms are needed to secure inclusive and sustained growth. These should include promoting diversification, enhancing competitiveness, and improving the business climate and inclusiveness. A focus should be on accelerating the implementation of the Industrial Development Policy to boost investor confidence, implementing key infrastructure projects (in energy and transportation), strengthening the rule of law and transparency/predictability of business regulation, and further investing in education and skills building.

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

Box 6.Cambodia: Public Investment, Efficiency, and Growth1, 2

Infrastructure gaps are large and the public investment management process is inefficient. Continuing to mobilize revenues and channeling them to public investment, while improving its efficiency, will boost growth.

Large infrastructure gaps exist in Cambodia, despite increasing public investment. Cambodia compares unfavorably on infrastructure outcomes relative to Emerging and Developing Asia (EDA). Lagging areas include electricity, public education, and public health outcomes. The last two decades have seen public investment (as percent of GDP) increase and converge to the EDA average. However, Cambodia’s public capital stock and private investment still lag the EDA average.

Text Figure 1.Cambodia: Public Capital and Infrastructure Indicators

Source: FAD; Staff assessments.

Low public investment efficiency has hampered public capital accumulation. Improvement is needed across all areas of the Public Investment Management Assessment (PIMA) framework including: (i) moving to multi year budgeting, (ii) protection of investment and monitoring of assets, (iii) budget comprehensiveness and fiscal rules and (vi) the management of PPPs. Strengthening the PPP framework requires better managing and monitoring fiscal risks related to PPPs, while fully integrating PPPs into the government’s overall investment strategy, medium-term fiscal framework, and budget cycle.

Limited domestic financing sources constrains any attempt to boost public capital spending. A projected decline in donor support with the attainment of LMIC status and limited progress in developing local debt markets, means options for increasing public investment going forward is tied to success in boosting revenues, and implementing well-structured PPPs.

Public investment is estimated to have a strong positive effect on growth in Cambodia. A gradual scaling up of public investment by around 2 p.p. of GDP over 8 years, in which investment is financed by improved revenue collection and learning-by-doing productivity improvements, would increase Cambodia’s real GDP growth by around 2 percentage points with little risk to long-term public debt sustainability.3

1 Prepared by Manuk Ghazanchyan.2 This box is based on the forthcoming IMF Working Paper, “Public Investment and Growth: Experience of Selected Asian Frontier Markets” by Manuk Ghazanchyan, Ricardo Marto, Jiri Jonas and Kaitlin Douglass. Cambodia is a pilot case in the on-going initiative on the Fund’s new focus on infrastructure investment, in the context of the “Infrastructure Policy Support Initiative.3 We adopted the DIG model for Cambodia from Buffie, Edward F., and others, 2012, “Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces,” IMF Working Paper 12/144 (Washington: International Monetary Fund).

Figure 1.Cambodia: Robust Growth Amid Elevated Risks

Sources: Cambodian authorities; IMF’s World Economic Outlook; and IMF staff estimates.

Figure 2.Cambodia: External Position Stable

Sources: Cambodian authorities; and IMF staff estimates.

Figure 3.Cambodia: Rising Risks from Rapid Credit Growth

Sources: Cambodian authorities; and IMF staff estimates.

Figure 4.Cambodia: Robust Revenues Performance Amid Spending Pressures

Sources: Cambodian authorities, IMF staff estimates.

Figure 5.Cambodia: Considerable Structural Challenges to Growth and Resilience

Sources: Cambodian authorities; IMF’s World Economic Outlook; and IMF staff estimates.

Table 1.Cambodia: Selected Economic Indicators, 2011-17
2011201220132014201520162017
Est.Proj.
Output and prices (annual percent change)
GDP in constant prices7.17.37.47.17.07.06.9
(Excluding agriculture)8.68.49.49.29.08.78.4
Inflation (end-year)4.92.54.71.02.83.22.9
(Annual average)5.52.93.03.91.23.12.7
Saving and investment balance (in percent of GDP)
Gross national saving11.812.511.211.111.812.713.6
Government saving0.81.92.23.44.03.42.5
Private saving11.010.69.07.77.89.411.0
Gross fixed investment22.023.523.523.222.422.923.0
Government investment8.79.08.97.97.07.88.1
Private investment 1/13.314.514.615.315.415.114.9
Money and credit (annual percent change, unless otherwise indicated)
Broad money21.420.914.629.914.719.910.2
Private sector credit31.228.026.731.327.126.024.4
Velocity of money 2/2.02.02.02.02.02.02.0
Public finance (in percent of GDP)
Revenue15.616.918.619.618.819.720.5
Domestic revenue12.414.114.616.716.617.817.9
Of which: Tax revenue10.211.311.813.714.614.915.0
Grants3.22.83.92.92.31.92.6
Expenditure19.720.720.720.920.422.323.4
Expense11.312.012.013.013.214.515.4
Net acquisition of nonfinancial assets8.48.78.77.97.27.88.0
Net lending (+)/borrowing(-)−4.1−3.8−2.1−1.3−1.6−2.6−2.9
Net lending (+)/borrowing(-) excluding grants 3/−7.5−6.3−6.4−4.2−2.9−4.3−5.5
Net acquisition of financial assets0.00.60.52.32.81.11.0
Net incurrence of liabilities 4/4.14.42.63.64.43.73.9
Of which: Domestic financing1.40.7−0.6−1.4−0.8−1.1−0.3
Government deposits4.64.95.06.89.19.38.7
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b. 5/5,0355,6336,5307,4088,4619,36310,337
(Annual percent change)28.911.915.913.414.210.710.4
Imports, f.o.b.−7,730−8,600−9,744−10,997−12,145−13,147−14,515
(Annual percent change)32.911.313.312.910.48.310.4
Current account (including official transfers)−1,303−1,547−1,880−2,032−1,889−1,969−1,973
(In percent of GDP)−10.2−11.0−12.3−12.1−10.6−10.2−9.4
Gross official reserves 6/3,0323,4633,6424,3915,2716,3227,421
(In months of prospective imports)3.63.63.43.74.14.54.8
External debt (in millions of dollars, unless otherwise indicated)
Public external debt3,8334,4744,8525,2915,6456,2386,926
(In percent of GDP)29.731.531.631.832.132.633.3
Public debt service7785112143172189249
(In percent of exports of goods and services)1.01.01.11.31.41.41.7
Memorandum items:
Nominal GDP (in billions of riels) 7/52,06956,68261,39067,74073,42381,97890,318
(In millions of U.S. dollars)12,81814,05715,24416,77817,78919,36820,937
Exchange rate (riels per dollar; period average)4,0624,0324,0274,0384,127
Sources: Cambodian authorities; and IMF staff estimates and projections.

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

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Trade data has been revised backward to 2008.

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.

GDP data have been revised backward to 2010.

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

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

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Trade data has been revised backward to 2008.

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.

GDP data have been revised backward to 2010.

Table 2.Cambodia: Medium-Term Macroeconomic Framework, 2011–21
20112012201320142015201620172018201920202021
Est.Proj.
Output and prices (percent change)
GDP at constant prices7.17.37.47.17.07.06.96.86.86.56.3
GDP deflator3.41.40.83.11.34.43.13.03.13.13.1
Consumer prices (end-year)4.92.54.71.02.83.22.93.03.03.03.0
Saving and investment balance (in percent of GDP)
Gross national saving11.812.511.211.111.812.713.614.114.614.614.6
Government saving0.81.92.23.44.03.42.51.40.90.90.9
Private saving11.010.69.07.77.89.411.012.613.713.713.7
Gross fixed investment22.023.523.523.222.422.923.023.023.023.023.0
Government investment8.79.08.97.97.07.88.18.08.18.28.3
Private investment 1/13.314.514.615.315.415.114.915.014.914.814.7
Private credit growth (percent change)31.228.026.731.327.126.723.922.022.022.022.0
Public finance (in percent of GDP)
Revenue15.616.918.619.618.819.720.521.322.021.321.5
Domestic revenue12.414.114.616.716.617.817.918.118.118.218.2
Of which: Tax revenue10.211.311.813.714.614.915.015.215.215.215.3
Grants3.22.83.92.92.31.92.63.33.83.13.3
Total expenditure19.720.720.720.920.422.323.424.625.325.425.6
Expense11.312.012.013.013.214.515.416.617.317.317.3
Net acquisition of nonfinancial assets8.48.78.77.97.27.88.08.08.18.18.3
Of which: Domestically-financed1.81.61.71.72.31.81.60.50.10.81.4
Net lending (+)/borrowing(-)−4.1−3.8−2.1−1.3−1.6−2.6−2.9−3.3−3.4−4.1−4.1
Net lending (+)/borrow ing(-) excluding grants−7.5−6.3−6.4−4.2−2.9−4.3−5.5−6.6−7.2−7.3−7.4
Net acquisition of financial assets0.00.60.52.32.81.11.00.30.2−0.1−0.9
Net incurrence of liabilities4.14.42.63.64.43.73.93.63.64.03.2
Domestic financing, net1.40.7−0.6−1.4−0.8−1.1−0.3−0.20.11.01.7
Government deposits4.64.95.06.89.19.38.78.27.45.73.7
Balance of payments (in percent of GDP, unless otherwise indicated)
Exports (percent change) 2/28.911.915.913.414.210.710.410.610.111.010.9
Imports (percent change) 3/32.911.313.312.910.4−8.3−10.5−10.9−10.6−9.8−9.3
Current account balance (including transfers)−10.2−11.0−12.3−12.1−10.6−10.2−9.4−8.9−8.4−8.4−8.4
(Excluding transfers)−13.3−13.1−14.2−13.9−12.3−11.9−12.0−12.1−11.9−11.6−11.2
Foreign direct investment 4/11.612.112.010.09.29.19.19.18.98.98.9
Other flows 5/2.01.91.56.56.26.45.55.35.04.74.0
Overall balance3.43.01.14.34.95.45.25.45.55.14.4
Gross official reserves (in millions of U.S. dollars) 6/3,0323,4633,6424,3915,2716,3227,4218,66910,05111,43012,734
(In months of next year’s imports)3.63.63.43.74.14.54.85.15.35.65.7
Public external debt (in millions of U.S. dollars)3,3373,8334,4745,0375,6456,2386,9267,6978,5059,35110,108
(In percent of GDP)29.731.531.631.832.132.633.334.034.635.135.0
Public external debt service (in millions of U.S. dollars)7785112143172189249306355448506
(In percent of exports of goods and services)1.01.01.11.31.41.41.71.92.02.32.4
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.

From 2011, includes FDI 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.

From 2011, includes FDI 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, 2011–21 (BPM5)
20112012201320142015201620172018201920202021
Est.Proj.
Current account (including official transfers)−1,303−1,547−1,880−2,032−1,889−1,969−1,973−2,025−2,076−2,267−2,435
(Excluding official transfers)−1,711−1,835−2,171−2,328−2,193−2,308−2,508−2,755−3,001−3,094−3,177
Trade balance−2,695−2,967−3,214−3,590−3,683−3,784−4,178−4,650−5,185−5,530−5,811
Exports, f.o.b.5,0355,6336,5307,4088,4619,36310,33711,43112,58913,97415,492
Of which: Garments3,9374,2454,9115,3346,2466,8487,4498,0958,8099,60110,478
Imports, f.o.b. 1/−7,730−8,600−9,744−10,997−12,145−13,147−14,515−16,081−17,775−19,504−21,304
Of which: Garments-related−1,752−2,012−2,483−2,694−3,216−3,493−3,799−4,128−4,405−4,608−4,610
Petroleum−1,118−1,179−1,123−1,397−1,106−1,012−1,297−1,503−1,716−1,940−2,173
Services and income (net)8121,0089549659469341,0831,2361,4421,6041,719
Services (net)1,4101,6581,7351,8151,9452,0382,1472,2832,4332,6092,779
Of which: Tourism (credit)2,0842,4632,6602,9473,0633,2333,4443,6803,9304,2084,465
Income (net)−598−649−781−850−999−1,105−1,064−1,047−991−1,006−1,061
Private transfers (net)17212489297544542586660742832915
Official transfers (net)408288291296304339535730925827743
Capital and financial account1,7411,9692,0472,4832,5852,8493,0603,2613,4463,6333,725
Medium- and long-term loans (net)490649613473390522588634662679584
Disbursements532695676555498648754835899975914
Amortization−41−47−63−83−108−126−165−201−237−296−331
Foreign direct investment 2/1,4841,6981,8261,6771,6451,7711,9112,0612,2112,3772,575
Net foreign assets of deposit money banks 3/40−330180−209550556561567572577566
Unrestricted foreign currency deposit at NBC127−256−59−95150152153155156156156
Commercial banks−87−73240−114400404408412416420410
Other short-term flows and errors and omissions−273−48−5715420000000
Overall balance4384231687298671,0401,0871,2361,3691,3661,290
Financing−438−423−168−729−867−1,040−1,087−1,236−1,369−1,366−1,290
Change in gross official reserves 4/−454−438−184−745−879−1,052−1,099−1,248−1,382−1,379−1,304
Use of IMF credit00000000000
Debt restructuring00000000000
Accumulation of arrears1615161612121212131314
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers−13.3−13.1−14.2−13.9−12.3−11.9−12.0−12.1−12.1−11.5−10.9
Including official transfers−10.2−11.0−12.3−12.1−10.6−10.2−9.4−8.9−8.4−8.4−8.4
Trade balance (in percent of GDP)−21.0−21.1−21.1−21.4−20.7−19.5−20.0−20.4−21.0−20.6−20.0
Gross official reserves 5/3,0323,4633,6424,3915,2716,3227,4218,66910,05111,43012,734
(In months of next year’s imports)3.63.63.43.74.14.54.85.15.35.65.7
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.

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.

Table 4.Cambodia: General Government Operations, 2010–21 (GFSM 2001)
20112012201320142015201620172018201920202021
ActualActualActualActualBudgetEstBudgetProj.Proj.Proj.Proj.Proj.Proj.
(In billions of riels)
Revenue8,1149,59011,39213,30412,15213,83714,28816,15918,52821,19623,99325,56928,200
Of which: Nongrant6,4368,0178,99111,30711,52512,16814,03814,61116,15017,93919,83621,79223,863
Tax5,2896,4247,2659,2979,42410,71911,45312,22213,53615,05416,60418,24220,104
Income, profits, and capital gains9601,2761,5611,9642,0692,4722,4723,0093,4473,7924,1724,7175,323
Good and services3,1233,8154,2105,4505,3956,2386,4626,9027,5618,4879,44610,31511,301
International trade and transactions1,2061,3331,4931,8831,9612,0092,5192,3112,5282,7752,9863,2103,481
Grants1,6781,5722,4011,9976271,6692501,5482,3793,2574,1573,7764,337
Other revenues 1/1,1471,5931,7262,0102,1011,4492,5852,3892,6142,8843,2323,5503,759
Total expenditure10,23611,74112,68614,16015,23114,97718,16318,27721,12724,47227,69930,52933,620
Expense5,8886,8187,3518,8389,9399,71711,88511,85913,86716,50218,89620,76522,716
Compensation of employees2,2902,6603,1193,9524,7684,9415,6365,6366,6978,0008,8479,71210,640
Purchase of goods and services1,9622,3102,4002,7982,9412,9413,4743,4304,1364,7775,7136,2716,871
Interest160305439232276223335337324328268295309
Expense not elsewhere classified1,4761,5431,3931,8561,9541,6122,4402,4562,7103,3984,0694,4874,896
Net acquisition of nonfinancial assets4,3484,9225,3355,3225,2915,2606,2796,4187,2607,9708,8029,76410,904
Of which: Externally financed3,4034,0234,3064,1473,6873,5944,2284,9825,8077,5028,7138,7509,001
Net lending (+)/borrowing(-)−2,123−2,151−1,294−856−3,078−1,139−3,875−2,118−2,598−3,276−3,706−4,960−5,420
Net acquisition of financial assets−33633081,564−1562,0700919919284250−102−1,214
Net incurrence of liabilities 2/2,1192,5141,6032,4202,9233,2093,8753,0373,5183,5603,9564,8574,206
Of which: External1,7792,3501,9432,1152,9231,8353,8753,1682,9733,6313,7793,9353,458
(In percent of GDP)
Revenue15.616.918.619.616.618.817.419.720.521.322.021.321.5
Nongrant12.414.114.616.715.716.617.117.817.918.118.118.218.2
Tax10.211.311.813.712.814.614.014.915.015.215.215.215.3
Income, profits, and capital gains tax1.82.32.52.92.83.43.03.73.83.83.83.94.0
Good and services tax6.06.76.98.07.38.57.98.48.48.58.68.68.6
International trade and transactions tax2.32.42.42.82.72.73.12.82.82.82.72.72.6
Grants3.22.83.92.90.92.30.31.92.63.33.83.13.3
Other revenues2.22.82.83.02.92.03.22.92.92.93.03.02.9
Total expenditure19.720.720.720.920.720.422.222.323.424.625.325.425.6
Expense11.312.012.013.013.513.214.514.515.416.617.317.317.3
Compensation of employees4.44.75.15.86.56.76.96.97.48.18.18.18.1
Purchase of goods and services3.84.13.94.14.04.04.24.24.64.85.25.25.2
Interest0.30.50.70.30.40.30.40.40.40.30.20.20.2
Expense not elsewhere classified2.82.72.32.72.72.23.03.03.03.43.73.73.7
Net acquisition of nonfinancial assets8.48.78.77.97.27.27.77.88.08.08.18.18.3
Of which: Externally-financed6.57.17.06.15.04.95.26.16.47.68.07.36.8
Net lending (+)/borrowing(-)−4.1−3.8−2.1−1.3−4.2−1.6−4.7−2.6−2.9−3.3−3.4−4.1−4.1
Net acquisition of financial assets0.00.60.52.3−0.22.80.01.11.00.30.2−0.1−0.9
Net incurrence of liabilities4.14.42.63.64.04.44.73.73.93.63.64.03.2
Of which: External3.44.13.23.14.02.54.73.93.33.73.53.32.6
Memorandum items:
Net lending (+)/borrowing(-) excluding grant 3/−7.5−6.3−6.4−4.2−4.9−2.9−4.8−4.3−5.5−6.6−7.2−7.3−7.4
Domestic financing1.40.7−0.6−1.40.2−0.80.0−1.1−0.3−0.20.11.01.7
Government deposits4.64.95.06.89.19.38.78.27.45.73.7
GDP (in billions of riels)52,06956,68261,39067,74073,42373,42381,97881,97890,31899,337109,297119,979131,442
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

The figure can be different from the domestic financing figure in Table 5 (GFSM 1986) because of differences in classification, in particular for capital revenue.

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

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

The figure can be different from the domestic financing figure in Table 5 (GFSM 1986) because of differences in classification, in particular for capital revenue.

Table 5.Cambodia: General Government Operations, 2011-16 (GFSM 1986)
2011 1/20122013201420152016
ActualActualActualActualBudgetEst.BudgetProj.
(In billions of riels)
Total revenue6,8228,5969,26411,58411,65912,53814,35914,742
Of which: Central government6,4178,1048,73810,96010,99411,20213,53813,921
Tax revenue5,0926,2087,0359,0929,80112,17612,33313,617
Direct taxes9601,2761,5611,9642,0692,4722,6473,009
Indirect taxes4,1324,9325,4747,1277,1008,3688,9089,077
Of which: Trade taxes1,0931,2181,3661,7601,8312,0092,1462,300
Provincial taxes3854655015916321,336778821
Nontax revenue9591,3441,4351,5801,7241,5771,8961,704
Capital revenue 2/386579293321134121131131
Total expenditure10,74412,17613,21314,41615,23014,64418,28418,291
Current expenditure5,9976,9467,6478,9599,9399,50711,82511,859
Wages2,2332,5983,0573,8624,5664,5175,6365,636
Nonwage3,5214,3484,5915,0974,7094,5505,5215,521
Provincial expenditure243308401532664440668668
Capital expenditure4,5485,1225,4755,3845,2915,1376,4586,432
Locally financed1,1451,1001,1691,2371,6041,5432,2311,450
Externally financed3,4034,0234,3064,1473,6873,5944,2284,982
Net lending19810791730000
Overall balance−3,922−3,579−3,949−2,832−3,571−2,106−3,924−3,550
Financing3,9223,5793,9492,8323,5712,1063,9243,550
Foreign (net)3,4573,9234,3444,1123,5503,5043,6124,716
Grants1,6781,5722,4212,0426271,4212501,548
Loans1,9432,5412,1652,3823,3602,4143,8713,681
Amortization−164−190−242−312−437−330−509−513
Domestic (net) 3/465−344−395−1,28021−1,398312−1,167
Total revenue13.115.215.117.116.017.117.518.0
Of which: Central government12.314.314.216.215.115.316.517.0
Tax revenue9.811.011.513.413.516.615.016.6
Direct taxes1.82.32.52.92.83.43.23.7
Indirect taxes7.98.78.910.59.811.410.911.1
Of which: Trade taxes2.12.12.22.62.52.72.62.8
Provincial taxes0.70.80.80.90.91.80.91.0
Nontax revenue1.82.42.32.32.42.12.32.1
Capital revenue 2/0.71.00.50.50.20.20.20.2
Total expenditure and net lending20.621.521.521.320.919.922.322.3
Current expenditure11.512.312.513.213.712.914.414.5
Wages4.34.65.05.76.36.26.96.9
Nonwage6.87.77.57.56.56.26.76.7
Provincial expenditure0.50.50.70.80.90.60.80.8
Capital expenditure2.29.08.97.97.37.07.97.8
Locally financed2.21.91.91.82.22.12.71.8
Externally financed6.57.17.06.15.14.95.26.1
Net lending0.40.20.10.10.00.00.00.0
Overall balance−7.5−6.3−6.4−4.2−4.9−2.9−4.8−4.3
Financing7.56.36.44.24.92.94.84.3
Foreign (net)6.66.97.16.14.94.84.45.8
Grants3.22.83.93.00.91.90.31.9
Loans3.74.53.53.54.63.34.74.5
Amortization−0.3−0.3−0.4−0.5−0.6−0.4−0.6−0.6
Domestic (net) 3/0.9−0.6−0.6−1.90.0−1.90.4−1.4
Memorandum item:
GDP (in billions of riels)52,06956,68261,39067,74072,76773,42381,97881,978
Government deposits (percent of GDP)4.64.95.06.89.19.3

Includes supplementary budget.

Includes privatization proceeds.

Includes statistical discrepancy. The figures is different from the domestic financing figure in Table 4 (GFSM 2001) because of differences in classification, in particular for capital revenue.

Includes supplementary budget.

Includes privatization proceeds.

Includes statistical discrepancy. The figures is different from the domestic financing figure in Table 4 (GFSM 2001) because of differences in classification, in particular for capital revenue.

Table 6.Cambodia: Monetary Survey, 2011-17
2011201220132014201520162017
DecMarJunSepDecDec

Proj.
Dec

Proj.
(In billions of riels)
Net foreign assets18,42621,26521,26026,70026,82327,97526,35926,66633,12739,717
National Bank of Cambodia16,01018,58319,53524,47624,90427,44327,48529,49036,53942,846
Foreign assets16,43519,00319,95724,88025,28427,83727,87629,87536,96843,275
Foreign liabilities425421421404380394391385428428
Deposit money banks2,4162,6821,7252,2241,919533−1,126−2,824−3,412−3,129
Foreign assets4,7148,7218,56410,0059,98110,45210,0679,43910,48711,264
Foreign liabilities2,2986,0386,8397,7828,0629,92011,19212,26313,89914,393
Net domestic assets5,2157,32711,50815,86016,86318,17820,60122,15825,40924,769
Domestic credit14,89819,31224,82731,88532,69535,32937,87439,64251,60665,787
Government (net)−2,123−2,486−2,795−4,359−5,064−5,666−5,933−6,429−6,436−6,426
Private sector17,02121,79327,60936,24537,75940,99543,80746,07158,04272,214
Other items (net)−9,684−11,985−13,318−16,026−15,832−17,151−17,273−17,485−26,197−41,018
Broad money23,64028,59232,76842,56043,68646,15446,96048,82358,53664,486
Narrow money3,9564,0464,8786,3086,6286,2936,2886,7418,0668,881
Currency in circulation3,7723,7564,4545,5935,8845,6335,6535,8977,0727,792
Demand deposits1852904247157446606358459931,090
Quasi-money19,68424,54627,89036,25137,05839,86140,67342,08250,47055,605
Time deposits5577809451,0901,0651,1591,4481,5501,8592,048
Foreign currency deposits19,12723,76626,94535,16135,99338,70139,22440,53248,61253,557
(12-month percentage change)
Net foreign assets8.015.40.025.614.96.6−1.7−0.124.219.9
Private sector credit31.228.026.731.332.133.931.827.126.024.4
Broad money21.420.914.629.924.220.615.214.719.910.2
Of which: Currency in circulation21.7−0.418.625.621.618.710.15.419.910.2
Foreign currency deposits20.724.313.430.524.320.714.715.319.910.2
(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets7.012.00.016.60.43.3−0.8−0.113.211.3
Net domestic assets14.38.914.613.32.96.111.614.86.7−1.1
Domestic credit 1/20.818.719.321.52.39.014.718.224.524.2
Government (net)0.0−1.5−1.1−4.8−2.0−3.4−3.9−4.90.00.0
Private sector20.820.220.326.44.312.418.623.124.524.2
Other items (net)−6.4−9.7−4.7−8.30.6−2.9−3.1−3.4−17.8−25.3
Memorandum items:
Foreign currency deposits (in millions of U.S. dollars)4,7365,9496,7458,6288,9769,4449,6239,69711,34412,334
(In percent of broad money)80.983.182.282.682.483.983.583.083.083.1
Riel component of broad money4,5134,8265,8237,3997,6937,4527,7368,2919,92510,929
(In percent of broad money)19.116.917.817.417.616.116.517.017.016.9
Credit to the private sector (in millions of U.S. dollars)4,2145,4556,9118,8949,41610,00410,74811,02213,54416,630
(In percent of GDP)32.738.445.053.551.455.859.762.770.880.0
Foreign Currency Loans16,58321,60927,36835,67737,20040,42143,23345,42457,22771,199
Loan-to-deposit ratio (in percent) 2/86.790.9101.6101.5103.4104.4110.2112.1117.7132.9
Velocity 3/2.02.02.02.01.71.71.62.02.02.0
Money multiplier (broad money/reserve money)2.12.22.22.32.32.32.32.22.12.1
Reserve money (12-month percent change)7.719.013.024.620.619.010.921.721.310.2
Sources: Cambodian authorities; and IMF staff estimates and projections

Revisions of monetary survey to exclude 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

Revisions of monetary survey to exclude 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 7.Cambodia: Core Financial Soundness Indicators (FSIs), 2013-15(In percent)
201320142015
Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.
Capital-based FSIs
Regulatory capital to risk-weighted assets2 4.925.025.224.223.922.621.320.422.021.620.921.0
Nonperforming loans net of provisions to capital3.43.74.13.93.33.74.03.34.14.64.43.3
Return on equity 1/14.313.013.212.115.315.715.815.517.417.517.216.3
Net open position in foreign exchange to capital1.51.30.91.21.11.41.41.31.21.21.11.1
Asset-based FSIs
Nonperforming loans to total gross loans2.12.32.32.31.91.92.01.61.92.01.91.6
Return on assets 1/2.72.52.62.43.03.03.02.95.14.85.04.0
Liquid assets to total assets1 6.216.016.817.915.217.817.616.216.616.315.516.6
Liquid assets to short-term liabilities2 1.521.423.224.221.525.124.623.123.923.823.325.4
Sectoral distribution of loans to total gross loans
Residents93.393.192.692.890.893.393.694.694.995.295.096.0
Deposit-takers0.50.50.61.10.90.51.11.41.41.51.51.8
Central bank
Other financial corporations0.00.10.10.10.10.10.10.10.10.1
General government0.00.00.0
Nonfinancial corporations75.474.473.371.972.574.774.374.874.974.872.372.1
Other domestic sectors17.418.318.719.617.317.918.118.318.418.821.222.0
Nonresidents6.76.97.47.29.26.76.45.45.14.85.04.0
Income- and expense-based FSIs
Interest margin to gross income6 9.767.969.368.671.672.972.572.950.557.360.263.1
Noninterest expenses to gross income4 9.551.351.052.456.655.355.255.167.463.561.560.6
Source: National Bank of Cambodia.

Annualized.

Source: National Bank of Cambodia.

Annualized.

Table 8.Cambodia: Key FSAP Recommendations of High Priority
RecommendationTimeframe 1/Status
General Stability
I. 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
II. Ensure that banks retain an appropriate level of liquid assets to be able to meet short-term obligations by enforcing existing regulations.Short-termIn process
III. 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-termIn process
IV. 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
V. 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
VI. Develop supervisory strategy to deal with banks that cannot meet the new capital. requirement.Short-termDone
VII. Conduct comprehensive upgrades to the legal framework.Short-termIn process
VIII. Reprioritize the work performed by the staff to facilitate forward-looking, risk-based supervision.Short-termIn process
IX. Impose a moratorium on the issuance of new bank licenses as long as supervisory capacity and resources remain inadequate.Short-termUnder NBC review
Non-Bank Financial Sector
X. Revise capital regulations in concert with liability, investment and accounting rules to better reflect the risks in a growing insurance market.Short-termDone
XI. Enhance powers for intervention, corrective measures, and enforcement.Short-termIn process
XII. Conduct a readiness study prior to the launch of the stock exchange.Short-termDone
Access to Finance
XIII. 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
XIV. Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on the solvency ratio.Medium-termIn process
XV. 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
XVI. Develop a crisis management framework.Medium-termIn preparation
Transparency of Monetary and Financial Policies
XVII. 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
XVIII. 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
XIX. Draft and/or implement banking regulations on internal audit and controls, risk management, and compliance functions at banks.Short-termDone
AML/CFT2/
XX. 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. In July 2014 Cambodia exited the APG’s (Asia/Pacific Group on Money Laundering) enhanced follow-up process and was placed on regular follow-up (also removed from the FATF’s On-Going Global AML/CFT Compliance Process in February 2015). The authorities are encouraged to continue to address the full range of issues identified in its mutual evaluation report and to effectively implement the AML/CFT framework.

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. In July 2014 Cambodia exited the APG’s (Asia/Pacific Group on Money Laundering) enhanced follow-up process and was placed on regular follow-up (also removed from the FATF’s On-Going Global AML/CFT Compliance Process in February 2015). The authorities are encouraged to continue to address the full range of issues identified in its mutual evaluation report and to effectively implement the AML/CFT framework.

Table 9.Cambodia: Millennium Development Goals (MDG) Indicators, 1990-2015
19901995200020052009201020112012201320142015

MDG

Target
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent8.5811
Population below minimum level of dietary energy consumption (percent)3321
Poverty headcount ratio at $1.25 per day (PPP, percent of population)494013111020
Poverty headcount ratio at national poverty line (percent of population)5024222118
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)678790989898100
Primary completion rate, total (percent of relevant age group)42478588919398100
Proportion of pupils starting grade 1 who reach grade 563558566100
Youth literacy rate (percent of ages 15-24)7376798387100
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)81021212020202030
Ratio of girls to boys in primary and secondary education (percent)73..82..100
Ratio of young literate females to males (percent ages 15-24)8184899097100
Share of women employed in the nonagricultural sector (percent)....41..
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12-23 months)34626579929393939090
Infant mortality rate (per 1,000 live births)87878073393736343350
Under five mortality rate (per 1,000)11911910796464442403838
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)....3244717480
Maternal mortality ratio (modeled estimate, per 100,000 live births)450540206170250
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)585557530505451437424411400
Prevalence of HIV, total (percent of population 15-49)211111
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)0193864666971
Access to improved sanitation (percent of population)081632333537
Nationally protected areas (percent of total land area)24262626
Goal 8: Develop a global partnership for development
Aid per capita (current U.S. dollars)450313951515454
Fixed line and mobile phone subscribers (per 100 people)0018455998132137
Internet users (per 1,000 people)00311356
Personal computers (per 1,000 people)013
Total debt service (percent of exports of goods and services)..11111112
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)65433333
GNI per capita, Atlas method (current U.S. dollars)..280280450690740810880950
GNI, Atlas method (current, in billions of U.S. dollars)3.23.66.21011121314
Gross capital formation (percent of GDP)815181821171719
Life expectancy at birth, total (years)505870717171
Literacy rate, adult total (percent of people ages 15 and above)62646874
Population, total (millions)101113141414151515
Trade (percent of GDP)1978112137105114114140
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. Cambodia—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 deleveragingIncrease 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 RisksStructurally weak growth in Euro areaShort-termHigh/MediumHighWeaker garment export growthExpedite structural reforms to accelerate diversification, by expanding the narrow range of export products, while finding new export markets for existing products.
Significant China slowdownShort-termLow/MediumMedium/HighLower exports coupled with weaker FDI and banking sector flows.Expedite structural reforms to accelerate diversification. Ensure adequate emergency liquidity.
Sharp asset price decline and decompression of global credit spreadsShort-termMediumHighFX 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 during episodes of capital inflows would create a buffer that could be liberated when foreign deposits flow out in response to external shocks.
Surge in the U.S. dollarShort-termMediumMediumWeaker exports, tourism receipts, FDI, and bank lending from other partner countriesMaintain 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.
1See “China and the CLMV: Integration, Evolution, and Implications” (IMF, 2016).
2Garment exports, accounting for 74 percent of exports, grew at around 15 percent (y/y) in 2015, which was above expectations, despite exchange rate appreciation and weak trading partner growth (particularly in the EU).
3The de jure exchange rate arrangement is a managed float. The de facto exchange rate arrangement is a “other managed” arrangement.
4According to a report by the real estate company, Knight Frank, while the supply of retail and office space will approximately double by 2018, the supply of condominiums will increase more than six fold.
5Credit-to-GDP gap is considered a leading indicator for financial sector stress or crises or a sharp growth slowdown. Following the BIS methodology, a threshold of 10 percent is considered a strong signal of an impending crisis (Drehman and others, 2010). The credit gap discussed here is based on the HP filter, and is at the lower bound of the range of estimates.
6Credit intensity is defined as nominal credit growth divided by nominal GDP growth.
7Dell’Ariccia and others (2012) found that while it is difficult to tell “bad” from “good” credit booms, bad booms tend to be larger and last longer. Roughly half of the booms lasting longer than six years ended in a severe financial downturn.
8There is currently no official housing data, which poses serious challenges to analyzing the link between housing boom and credit boom. There is also limited data on household balance sheets and leverage. Data from a real estate agency suggests that Phnom Penh’s land price for residential and office space increased 26 percent and 19 percent, respectively, year-on-year in 2015; the highest growth among Asian cities. Since 95 percent of loans in Cambodia are collateralized against land, a negative shock in the real estate sector could put more debtors in negative equity, which in turn could prompt rising defaults and fire sales.
9MFIs are expanding loans at a faster pace to maintain growth targets and average loan size has risen sharply. Also, more than 20 percent of MFI customers have multiple loans, which is partly due to the highly-saturated MFI industry and the ensuing competition.
10Minimum capital requirements for commercial banks were raised from $37.5 million to $75 million, and for deposit-taking MFIs from $2.5 million to $30 million.
11The discrepancies are attributable to both the limited number and technical capabilities of supervisors. Capacity building efforts are thus crucial, and the NBC has requested IMF assistance in a number of areas.
12The regulations should provide more detailed guidance on the treatment of restructured loans. For instance, a bank should be required to limit the number of times an individual loan may be restructured, formally agree on new terms of agreement with borrowers, and have in place policies and procedures approved by the Board. Restructured loans should also attract a higher risk weight under the capital adequacy framework reflecting a higher probability of default. Many of these minimum standards did not appear to be in place or observed by the banks.
13As a first step, the NBC should consider introducing triggers for domestic systematically important banks with regard to asset quality and liquidity position, in addition to existing legal triggers on the regulatory minimum for solvency ratio, for prompt corrective action.
14The 2015 fiscal deficit (-1.6 percent of GDP) was much smaller than the budget target of −4.2 percent of GDP, due to robust revenue growth, following the implementation of the RMS.
15Initiated in late 2012, the RMS focuses on strengthening revenue administration, revenue policy and the institutional framework in order to continue raising domestic revenue by at least ½ percent of GDP annually over the medium term. Improved tax administration includes enhanced taxpayer registration, filing support, auditing, and arrears management. For customs, the focus is on strengthening clearance processes (customs declaration, risk management, and audit) and cross border control (smuggling, valuation). On revenue policy, the RMS focuses on excises, VAT, widening the tax base, rationalizing tax incentives and holidays, and imposing property taxes.
16In late 2014, the government pledged to raise the civil servants’ minimum monthly wage to US$250 by 2018 from about US$100 in 2013/14, matching the opposition’s campaign promise.
17Staff has estimated the revenue to GDP norm for Cambodia, and the results indicate that Cambodia has scope to increase revenues by about 2-2.5 percent of GDP. However, between 2013-2015, the revenue-to-GDP ratio increased by 2.8 pp of GDP. Given the higher base and the authorities’ plans to focus only on strengthening revenue administration (in line with the RMS) without introducing any new taxes until 2018, the pace of revenue gains in the near term is likely to moderate.
18In particular, progress in other key areas of the RMS, such as return filing management, arrears collection, transparent and simplified tax accounting and performance monitoring, is needed.
19Relative to the last Article IV Consultation, medium-term projections assume higher concessional project loans which finance increased development (education) and capital expenditures. Project loans are below the line, and the commensurate increases in expenditures have widened the fiscal deficit modestly over the medium term.
20Notwithstanding the low risk of debt distress, debt sustainability continues to be vulnerable to the materialization of contingent liabilities related to financial sector risks and PPPs.
21The average level of government deposits for 2000–15 was 4.6 percent of GDP. In the baseline (including gains from RMS reforms), their level is projected to decline below 4 percent of GDP by 2021. Furthermore, if the revenue-to-GDP ratio remains flat and concessional borrowing does not materialize, the fiscal deficit will widen while government deposits will be depleted. Thus, continued revenue efforts are needed to maintain adequate government deposits (estimated at about 5.5 percent of GDP).
22Recent rapid growth has been associated with a reduction of inequality in Cambodia, with Gini coefficient falling from 0.41 in 2007 to 0.31 in 2012 (World Bank’s World Development Indicators).
23According to the World Bank’s Global Findex, the percentage of population having accounts increased (from 3.7 percent in 2011 to 22.2 percent in 2014), but remains low.
24Specific measures to encourage de dollarization, as noted in past Article IV staff reports, include imposing higher reserve requirements on foreign currencies liabilities relative to riel liabilities.

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