Cambodia’s local bond rating ‘not substantially impacted’ after Moody’s downgrades economic outlook to negative

Harrison White

Cambodia’s local bond ratings (kh XXX) will ‘not be substantially impacted’ by the recent downgrading of Cambodia’s outlook from ‘stable to negative by the international rating agency Moody’s – according to the local Ratings Agency of Cambodia (RAC).

In a statement released on November 15, Moody’s commented the negative outlook reflects a deteriorating external position as illustrated by the severe widening of the current account deficit, which Moody’s expects to remain wide (albeit narrowing) over the next few years, raising financing concerns.

Although Moody’s expects concessional funding to continue and foreign direct investment (FDI) to remain stable, other sources of financing remain opaque – highlighting the risk of a quicker erosion of foreign currency reserves than observed until now.

At the same time, a deceleration in activity in the luxury property sector poses broad risks to growth, which will amplify cyclical challenges coming from moderating exports growth in light of the adverse global macroeconomic environment, still low tourism arrivals, and weaker FDI due to tightening international markets and lower global growth, Moody’s added.

Not substantially impacted by Moody’s decision 

Cambodia currently has a sovereign rating of B2 set by Moody’s credit rating agency meaning all bonds and companies operating in the Kingdom have the same rating typically defined as not investment-grade or as high-yield bonds.

To overcome this, the regulator will allow a dual “Khmer” and “Global” rating structure that can provide much more depth to ratings for firms operating in the Kingdom by setting Cambodia’s sovereign rating at AAA under the local category.

To read more about the regulator granting the first bond rating license for Cambodia’s securities market click here.

Reflecting on the drop in market outlook Executive Director of RAC Chakara Sisowath told Cambodia Investment Review that Moody’s mentioned widening external deficits that caused a decline in foreign currency reserves placing Cambodia’s outlook as “Negative”.  

Executive Director of RAC Chakara Sisowath.

He added that such economic pressures are not surprising given the strains in the global economy and Cambodia’s exposure to them, especially through tourism and energy prices.

“At RAC we do not provide a sovereign rating on Cambodia since it is our policy to not perform unsolicited ratings. As regards our local “kh XXX” credit ratings, they are given within the context of local economic conditions and country risks, so to a large extent they are not substantially impacted by Moody’s decision,” Chakara Sisowath said.

“We do note however that the latest macroeconomic data point to positive trends with a gradual recovery in the global economy and energy prices off their highs. Importantly for Cambodia, international tourist arrivals for the first nine months of 2022 reached 1.2 million, up 861% compared with the same period last year,” he added.

Local advisory firm agrees with Moody’s outlook

Speaking to Cambodia Investment Review, Stephen Higgins co-founder of investment and advisory firm Mekong Strategic Partners commented that from his point of view it was hard to find fault with what the Moody’s analysts were saying.

He added that the current account deficit is too high, for reasons that aren’t entirely clear given the strong level of export growth over the past year, however considering future export growth may slow a little due to a global slowdown.

“Cambodia has done a great job over the past two decades in building up its foreign reserves to be at a really healthy level, but those reserves are now starting to shrink. Growth in the residential property market is decelerating, particularly in the condo market, but also now Boreys,” Higgins said.  

Stephen Higgins (second from right) at CBC panel discussion.

“Moody’s acknowledge that Cambodia’s government debt is well below the peer group, while also being on a long-term concessional basis, so there’s no real concern around that,” he added.

In September, the Asian Development Bank (ADB) maintained its economic growth forecast for Cambodia at 5.3% in 2022 but lowered the 2023 forecast to 6.2% from 6.5% due to weaker global growth.

To read more about how Cambodia can utilize post-COVID recovery for economic reform click here.

According to the Asian Development Outlook (ADO) 2022 Update, Cambodia’s garments, travel goods, and footwear outputs remained robust, registering 39.8% year-on-year growth in the first half of 2022, despite the economic slowdown in the United States and Europe.

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