NPLs rise to 4.5% of Cambodia’s GDP

Restructured loans of private borrowers in Cambodia have gone up to 13 percent of GDP as of June 2022 and non-performing loans (NPLs) have risen to nearly 4.5 percent of the Gross Domestic Product (GDP), according to the IMF Mission that completed its mandatory Article IV Consultation in the Kingdom recently.

The total outstanding private debts in the country have ballooned to 170 percent of the GDP, a matter of serious concern, said Alasdair Scott, the head of the IMF Mission recently, while briefing the media about the findings of the Consultation process.

The NPLs constituted only 2.1 percent of the GDP in December 2020 and only 1.8 percent in 2019.

The rapid rise in NPLs has been accounted as a fallout of the Covid-19 economic woes but the IMF Mission said it is time the National Bank of Cambodia (NBC) took action to control the trend.

“The level of private debt is very high, raising concerns about the drag on the economy if borrowers struggle to meet repayments. Credit growth has outstripped growth in nominal GDP for several consecutive years. The ratio of outstanding private sector credit is notably above those of other countries in the region. Moreover, these numbers do not account for credit issued by unsupervised lenders (such as real estate developers and pawn shops), which could be sizeable,” said a statement by the IMF Mission.

“The NBC needs to continue to normalize prudential conditions to pre-pandemic settings so that the financial system is able to withstand future shocks. In May 2020, the NBC introduced a policy to facilitate restructuring of loans; since December 2021, it has taken the welcome step of reintroducing provisioning requirements. It should continue with heightened supervision, including rigorous onsite inspections. It should be prepared to raise provisioning requirements and instruct lenders facing solvency problems to proactively increase capital. The potential for high debt levels to persist emphasizes the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks,” it said.

“To help rein in credit growth, the NBC should complement these measures by gradually restoring monetary conditions to pre-crisis levels. Minimum reserve requirements on financial institutions should be increased, with the priority to raise the minimum reserve ratio for foreign currency above that for local currency.”

The Mission, however, observed that the Cambodian economy is on the path of recovery after the Covid-19 setbacks, but is facing new challenges.

“GDP growth rebounded in the second half of 2021, driven mainly by exports of goods. But this year the economy has been buffeted by developments in China, the slowdown in consumer demand in advanced countries — the US and Europe are significant markets for Cambodian manufacturers — and tighter global financial conditions (mainly via external demand, but also funding costs for some financial institutions). Inflation hit 7.8 percent year-on-year in June 2022, following significant increases in fuel and fertilizer costs, although it receded to 4.9 percent in August. Export orders for the second half of the year have weakened, and the real estate market is slowing,” the statement said.

“The authorities have largely continued with crisis policy responses, such as loans and guarantees, tax breaks, wage subsidies and retraining, and cash transfers while withdrawing some Covid-19-related spending as the health situation improved,” the statement noted.

“Despite the new pressures, the recovery is projected to continue. Real GDP growth is forecast to be five percent in 2022, after the strong export performance earlier in the year, and nearly 5.5 percent in 2023, supported by the continued recovery of tourism and ongoing policy support, although dampened by external pressures and the impact of rising prices on real disposable income. Inflation is expected to peak this year, to be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.”

“The public finances are expected to gradually improve. Spending pressures and lower-than-expected tax revenue resulted in a fiscal deficit of just over seven percent of GDP in 2021. The deficit is expected to narrow to just over four percent of GDP in 2022 with a strong bounce-back in revenues, widen somewhat in 2023, and decrease further thereafter. Public debt-carrying capacity remains vulnerable to further shocks to exports and growth, but risks of external and overall debt distress remain low, so long as public debt is constrained in the future and the increase in private debt is not associated with an increase in contingent liabilities of the sovereign,” the statement noted.

“Demands on public spending increased during the pandemic and will likely increase further to meet existing infrastructure spending needs, increased demands on healthcare and for education, and climate change adaptation. Revenue mobilization (including rationalizing exemptions) and diversification are therefore paramount; simplification of the tax system would encourage compliance,” it added.

“The current account deficit has widened significantly, and the external position is estimated to remain substantially weaker than the level implied by medium-term fundamentals and desirable policies. Financial inflows overall have been steady, although investment approvals are noticeably down from previous years. Nonetheless, the exchange rate has remained steady. Foreign exchange reserves fell slightly in 2021, but are adequate, covering eight months of projected imports,” the statement noted.

The IMF team held discussions with senior officials of the government, NBC, and other public agencies, as well as a wide range of stakeholders, including representatives of the business and banking sectors, and development partners from September 7 to 20 as part of the annual Consultation.

The Mission will submit its report to IMF’s Executive Board for further discussions and decisions.