Cambodia Investment Review
Moody’s Investors Service has revised its outlook on the Government of Cambodia to stable from negative, while affirming the B2 long-term issuer rating. This decision, announced on May 16, 2024, reflects significant improvements in Cambodia’s external position, marked by a narrowed current account deficit and a gradual recovery in tourism and foreign direct investment (FDI) inflows.
The current account deficit has notably improved, shrinking from 19% of GDP in 2022 to just 1.3% in 2023. This reduction is largely due to a significant decrease in non-monetary gold imports, which had previously skewed external metrics during the pandemic. Additionally, a strong recovery in tourism and moderating growth in merchandise imports have contributed to this improvement. The number of international tourist arrivals surged to 5.4 million in 2023, reaching 82% of pre-pandemic levels. However, the recovery in tourism receipts has been slower due to a shift in the origin of tourists, with fewer arrivals from China and more from neighboring countries.
Bolstering Cambodia’s External Financial Stability
Remittances and FDI inflows have also rebounded, bolstering Cambodia’s external financial stability. The FDI remained stable at around 10% of GDP in 2022-23. Despite concerns over the structural slowdown in China, which is a major source of FDI for Cambodia, and rising geopolitical risks, the government’s efforts to diversify investment sources and streamline investment incentives have mitigated these risks. Cambodia’s foreign exchange reserves have recovered to $15 billion as of September 2023 from a low of under $14 billion in November 2022, providing 7.4 months of import cover. Moody’s projects that reserves will remain stable, reaching approximately $17 billion by the end of 2024.
Despite these positive developments, Moody’s highlighted potential downside risks to Cambodia’s financial stability, particularly within the real estate sector. Credit growth has moderated to 13.1% in 2023, down from an average of 25% year-on-year over the previous four years. Nevertheless, the credit-to-GDP ratio remains high, exceeding 120% of GDP. The real estate sector faces challenges from an oversupply of properties and a cyclical downturn, which could result in liquidity concerns for developers and dampen private consumption, posing risks to economic recovery.
The banking sector has seen an increase in non-performing loans (NPLs), with the rate rising to 5.4% in the banking sector and 6.7% in the microfinance sector in 2023, up from 3.2% and 2.6%, respectively, in 2022. Higher funding costs and a surge in loan-loss provisions have further weakened the sector’s profitability. However, the capital buffers in the banking sector remain robust at above 20%. In response, the central bank raised the reserve requirement for foreign currency deposits to 12.5% from 9.0% in 2024 to ensure adequate liquidity among financial institutions.
Increased Government Revenue Generation Prior To The Pandemic
Moody’s affirmation of Cambodia’s B2 rating balances the country’s weak institutional framework, low income levels, and political risks against strong growth prospects and a highly affordable government debt burden. The country’s governance challenges include low rankings in governance indicators, high levels of dollarization limiting monetary policy effectiveness, and transparency issues. However, fiscal policy effectiveness has strengthened, evidenced by increased government revenue generation prior to the pandemic.
Political risks also remain a concern. The recent handover of the prime ministership and the longstanding dominance of a single party have contributed to low domestic political accountability. This situation could impact geopolitical relations, potentially affecting preferential trade access, government funding, and FDI flows. Any materialization of these risks could weaken Cambodia’s growth, public finances, and ability to finance the current account deficit.
Looking ahead, Moody’s identified factors that could lead to an upgrade of Cambodia’s rating. These include successful reforms addressing institutional weaknesses, enhanced policy effectiveness, structural reforms supporting economic diversification and higher incomes, and reduced macroprudential and banking sector risks. Conversely, factors that could lead to a downgrade include prolonged strains on asset prices affecting banking system liquidity and solvency, a sharp slowdown in economic growth, or a significant reduction in FDI inflows due to domestic or external shocks.
Moody’s final assessment underscores Cambodia’s stable general government debt burden, projected to remain around 27-30% of GDP until 2025, well below the B-rated median of 53-55%. The majority of Cambodia’s external public debt is bilateral, with China as the largest creditor, followed by the Paris Club and multilateral lenders like the Asian Development Bank and the World Bank. This reliance on concessional financing with long maturities and grace periods limits debt servicing pressures and supports low government liquidity risks.
