## cr17325 ## Source details **Canonical URL:** [cr17325](https://www.imf.org/-/media/files/publications/cr/2017/cr17325.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17325.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17325.pdf.json) --- ### Recent developments and context - Cambodia continues to grow at an impressive pace supported by a stable macroeconomic environment, efficiency improvements, and a relatively young population. - Real GDP growth is expected to remain robust at around 7 percent this year. - Headline inflation rose to 3 percent (average) in 2016 and around 3.5 percent (average) in the first half of 2017, mainly driven by higher food and energy prices. - Domestic investors are in wait-and-see mode ahead of next year’s national elections, with moderating private investment offset by higher public spending and robust construction and tourism activity. - Foreign reserves continued to grow, reaching $7.9 billion in June 2017, about 5.5 months of next year’s imports. ### Financial sector and macro-financial risks - Bank and MFI credit: - Bank credit growth slowed to about 15 percent (year-on-year) in May 2017, from an average of 30 percent over the past few years. - MFI credit growth slowed to 24 percent at end-2016 compared with over 50 percent in prior years; official MFI credit growth is 4.8 percent at end-2016 (partly reflecting a merger between Sathapana Microfinance and Maruhan Bank in 2016). - Credit to real estate-related and construction sectors grew about 33 percent (year-on-year) in June 2017. - System indicators and vulnerabilities: - System-wide non-performing loan (NPL) ratio: 2.5 percent in June 2017. - System-wide loan-to-deposit (LTD) ratio: 105 percent in May 2017. - MDIs’ LTD ratio: more than 200 percent on average. - Bank regulatory capital to risk-weighted assets (2011–2017 Mar.): 26.2, 25.0, 24.2, 20.4, 20.3, 20.9, 22.6. - Nonperforming loans to total gross loans (2011–2017 Mar.): 2.1, 2.0, 2.3, 1.6, 1.6, 2.1, 2.2. - Return on equity (annualized, 2011–2017 Mar.): 9.7, 10.3, 12.1, 15.5, 16.3, 14.5, 15.2. - Return on assets (annualized, 2011–2017 Mar.): 1.8, 1.7, 2.4, 2.9, 2.9, 2.5, 2.6. - Authorities’ actions and planned measures: - Phased implementation of a Liquidity Coverage Ratio and higher minimum capital requirements. - Liquidity-providing collateralized operations established October 2016 to provide Riel liquidity. - NBC raised minimum capital requirement: - Banks: from $37.5 million to $75 million. - Branches of foreign banks with an investment grade rating: from $12.5 million to $50 million. - Deposit-taking microfinance institutions: from $2.5 million to $30 million. - Banks mandated to increase their capital by at least half of the additional required capital by March 2017 and to meet the requirement in full by March 2018. - MFI interest rate cap introduced in April (cap at 18 percent). ### Fiscal performance and risks - Revenue and deficit developments: - Tax revenue increased from around 11 percent of GDP in 2012 to 15.3 percent in 2016. - Authorities outperformed revenue target in 2016. - Fiscal deficit increased to around 2.8 percent of GDP in 2016 (compared with 1.6 percent in 2015). - Fiscal deficit expected to widen to about 3.7 percent of GDP in 2017 owing to higher capital spending, increases in public sector wages and other election-related spending. - Preliminary budget figures suggest a further increase in the fiscal deficit to about 4.6 percent of GDP in 2018. - Government deposits: 10.1 percent of GDP (2016); projected 9.7 percent of GDP (2017). - Staff and Directors recommend: - Contain spending pressures to safeguard fiscal and external sustainability. - Ensure further public wage increases are fiscally sustainable and accompanied by public administration reforms. - Safeguard spending on education and health. - Further improvements in revenue administration and tax policy modernization. - Develop a medium-term budget framework. - Strengthen the framework for public-private partnerships to better manage fiscal costs and risks. ### External sector and reserves - Current account and reserves: - Current account deficit narrowed to 8.8 percent of GDP in 2016. - Current account (including official transfers) in millions of dollars: -1,776 (2016), -1,904 (2017), -2,098 (2018). - Current account (In percent of GDP): -8.8 (2016), -8.6 (2017), -8.6 (2018). - Gross official reserves (millions of U.S. dollars): 6,731 (2016), 8,097 (2017), 8,955 (2018). - Gross official reserves (In months of prospective imports): 5.0 (2016), 5.5 (2017), 5.6 (2018). - Gross official reserves reached $7.9 billion in June 2017, about 5.5 months of next year’s imports. - External financing and FDI: - Significant FDI and other capital inflows have supported construction and real estate sector growth. - FDI (percent of GDP): 10.7 (2014), 10.9 (2015), 10.9 (2016); projected around 9.4 (2022). ### Outlook and projections - Growth and inflation: - Short-term: Real GDP growth projected to remain robust at around 7 percent over the next few years. - Medium-term: Growth expected to slow to around 6 percent due to moderation in the credit and real-estate cycles and challenges in economic diversification and competitiveness. - Inflation projected to rise in the short-term reflecting higher food and energy prices and demand pressures from higher public spending and wages. - Sectoral notes: - Garment sector expected to grow at a slower pace owing to increasing competition and a higher minimum wage. - Manufacturing exports may benefit from an extension of preferential US trade access for specific travel-related items and some product diversification. - Continued regional economic integration expected to support FDI and capital inflows. - Fiscal outlook: - Moderation in government revenue growth and rising spending pressures expected to result in higher fiscal deficits and lower government deposits over the medium term. ### Policy priorities and recommendations (staff summary) - Managing macro-financial risks: - Implement past measures to build liquidity and capital buffers; gradual increases in reserve requirements. - Introduce a crisis management framework. - Continue upgrading regulation and supervision, including for non-bank financial institutions. - Safeguarding fiscal sustainability: - Contain spending pressures; ensure wage increases consistent with fiscal sustainability. - Prioritize development spending. - Modernize tax administration and policies; develop an MTFF. - Improve PPP framework to manage fiscal costs and risks. - Reforms to support growth, resilience, and inclusion: - Increase competitiveness and encourage diversification through lower energy costs, upgrading human capital and infrastructure, and stronger rule of law and transparency. - Promote financial market development and reforms to encourage local currency use. - Use fintech, develop financial infrastructure, and improve financial literacy to expand financial inclusion. - Include climate change impacts and mitigation in policy design. ### Significant downside risks - Financial and macroeconomic stability risks from credit quality concerns, real estate concentration, reliance on external funding, and growing importance of MFIs. - With a closely managed exchange rate, large increases in the minimum wage could further erode competitiveness, particularly in the garment sector. - Potential social unrest ahead of general elections could dampen confidence. - External risks include: - Weaker growth in China. - Growth slowdown in advanced economies, stronger-than-expected U.S. dollar, or rise in protectionism. - Sharper than expected global financial tightening raising funding costs and liquidity risks. ### Managing macro-financial risks — findings and policy recommendations - Findings and projections: - Bank credit-to-GDP ratio: close to 70 percent. - Real per capita credit gap peaked in early 2016 and remains high at around 10 percent; projections assume it declines to about 5 percent over the medium-term. - Credit growth continued in 2017 at a less rapid pace; projected to moderate but remain elevated without further measures. - Policy recommendations to safeguard stability: - Implement revised regulation on loan classification and conduct validation exercises. - Revise regulations on related-party lending and large exposures. - Gradually increase reserve requirements on foreign exchange liabilities to build liquidity buffers and promote Riel use. - Improve sectoral asset classification; consider sectoral concentration limits and/or higher risk weights for real-estate loans. - Expedite collection of real-estate and household balance sheet data to enable limits on debt-to-income and loan-to-value ratios. - Introduce liquidity risk management framework, capital conservation buffers, and counter-cyclical capital requirements. - Standardize asset classification and provisioning between MFIs and banks; align reserve requirements for deposit-taking MFIs with banks. - Develop prompt corrective action, deposit protection scheme, and resolution framework; establish multi-agency financial stability committee. ### Authorities’ response and stance - Authorities broadly agree with staff on outlook and risks, aim for sustained growth at 7 percent, and emphasize measures to mitigate macro-financial risks. - Actions taken: - Established Real Estate Data Collection and Coordination Working Group (January 2017). - Implemented measures: LPCO, Riel lending requirement (at least 10 percent by 2019), reserve requirement re-imposition on foreign borrowing (2015). - Drafting of a National Policy to promote greater use of the Riel; a new PPP law is being drafted. - Authorities expect MFI interest rate cap (18 percent) to lead to consolidation and efficiency improvements over time, while acknowledging potential access reduction in the short term. - Authorities requested more time to assess impact of past measures before introducing further actions that could slow credit growth. ### Safeguarding fiscal sustainability — outlook, risks and recommendations - Fiscal projections and scenario (Active Fiscal Policy Scenario, GFSM 2001) selected figures (In percent of GDP): - Revenue: 19.5 (2017), 19.7 (2018), 20.0 (2019), 20.5 (2020), 20.5 (2021), 20.9 (2022). - Tax Revenues: 15.3 (2017), 15.5 (2018), 15.6 (2019), 15.8 (2020), 16.0 (2021), 16.3 (2022). - Expenditure: 23.2 (2017), 24.1 (2018), 24.1 (2019), 24.1 (2020), 24.1 (2021), 24.2 (2022). - Wage: 7.9 (2017), 8.4 (2018), 8.4 (2019), 8.4 (2020), 8.4 (2021), 8.4 (2022). - Non-wage: 7.1 (2017), 7.2 (2018), 7.3 (2019), 7.3 (2020), 7.3 (2021), 7.3 (2022). - Net Acquisition of Non-Financial Assets: 8.2 (2017), 8.5 (2018), 8.5 (2019), 8.5 (2020), 8.5 (2021), 8.5 (2022). - Overall Balance: -3.7 (2017), -4.4 (2018), -4.1 (2019), -3.7 (2020), -3.6 (2021), -3.3 (2022). - Government Deposits: 9.7 (2017), 8.5 (2018), 7.5 (2019), 7.0 (2020), 6.6 (2021), 6.6 (2022). - Memorandum items — Baseline Overall Balance: -3.7 (2017), -4.6 (2018), -4.4 (2019), -4.0 (2020), -4.0 (2021), -3.8 (2022). - Memorandum items — Baseline Government Deposits: 9.7 (2017), 8.3 (2018), 7.1 (2019), 6.2 (2020), 5.6 (2021), 5.1 (2022). - Fiscal policy recommendations: - Save revenue overperformance and curtail non-development current expenditure. - Enhance spending efficiency, particularly public sector wages. - Re-invigorate RMS and strengthen Large Taxpayer Department; consider tax administration diagnostic assessment. - Tax policy reforms to focus initially on tax incentives and excise taxes; medium-term reforms on VAT, personal income taxes, and property taxes. - Prioritize social protection and education and health spending as revenue gains are secured. - Further wage increases conditional on meeting revenue targets and maintaining fiscal buffers; accompany with public administration reforms. - Develop an MTFF to allocate expenditure more systematically. ### Financing infrastructure and PPPs - Infrastructure needs and PPP plans: - Infrastructure gaps large in electricity, health, education and roads; authorities should maintain public investment at about 8.5 percent of GDP. - Authorities plan to increase share of PPPs in public investment and have a roadmap to have full PPP mechanisms by 2020. - Planned PPP investments amount to more than $6billion over time. - Risks and recommendations for PPPs (Box 2 highlights): - Off-balance sheet obligations from PPPs are difficult to control and can reduce fiscal flexibility. - MEF introduced a 4-percent of GDP limit on guaranteed payments for PPPs in the electricity sector; staff view this limit as too high. - Recommended reforms: - Limit present value of guaranteed payments and total annual investments in PPPs. - Empower MEF via a gateway process to vet and potentially veto fiscally unaffordable projects. - Strengthen budgeting, accounting and reporting to monitor PPP liabilities; include PPP financial obligations in budget documents. - Reclassify PPP projects as public investments and subject them to public investment management processes. - Financial sector and currency recommendations affecting infrastructure financing: - Measures to promote Riel use: - Adopted/announced: require a minimum of 10 percent of loan portfolio to be in Riel by 2019; oblige businesses registered with government to post prices in Riel. - Further recommended: reallocate remuneration on USD reserve requirement to Riel reserve requirement, NCDs, and excess reserves; gradually increase reserve requirement on foreign exchange liabilities; enforce Riel pricing and government transactions in Riel. - Financial market development: - Promote interbank, equity, government and corporate bond, and FX markets; improve NCD market functioning and develop online trading platform; encourage banks to play a greater role in FX market. - Prudential measures to protect fiscal and financial stability: strengthen loan classification, expedite real-estate data collection, improve sectoral asset classification, strengthen regulation of large MFIs, and introduce comprehensive crisis management framework. ### Monetary developments and external position (selected figures) - Monetary and external indicators: - Broad money increased by 18 percent (y/y) by end 2016. - Broad money (annual percent change): 18.0 (2016); 14.4 (2017); 12.9 (2018). - Private sector credit (annual percent change): 22.5 (2016); 12.5 (2017); 10.0 (2018). - Gross official reserves (millions of U.S. dollars): 6,731 (2016); 8,097 (2017); projected 12,714 (2022) in Table 2. - Current account (including official transfers) in percent of GDP: projected steady around -8.6 to -8.0 across 2017–22. - Public external debt (millions of dollars): 7,267 (2016); 8,216 (2017); 9,100 (2018). In percent of GDP: 31.9 (2016), 32.8 (2017), 34.0 (2018). - FX intervention and reserve adequacy: - Exchange rate regime: keeping the Riel broadly stable against the U.S. dollar. - As of end 2016: reserves equivalent to about 5 months of prospective imports and 50 percent of broad money. - ARA tool for Credit-Constrained Economies suggests an optimal level of reserves of 4 months of current imports, below current level. - Gross official reserves covered only 57 percent of foreign currency deposits, limiting central bank’s lender-of-last-resort capacity. - Policy implication: further accumulation of reserves beyond traditional metrics is necessary; measures to encourage Riel use are needed. ### Debt sustainability and risk assessment - Public debt levels and composition (end-2016): - External public debt including arrears: around US$6.45 billion or about 32 percent of GDP (26 percent of GDP in PV terms). - PV of external debt reported: 25.4 percent of GDP at end-2016. - Composition (end-2016, U.S. dollar, U.S. millions): Total: 6,457; Multilateral: 2,088; Bilateral: 4,369. - China accounts for around 70 percent of total bilateral debt stock (including arrears). - Cambodia remains in arrears to the Russian Federation and the United States (nearly 10 percent of total debt and about 3 percent of GDP). - DSA outcomes: - Under baseline, Cambodia is at low risk of debt distress; PV of key ratios never breach policy-dependent indicative thresholds and are projected to decline. - External shocks and stress tests: - Export shock: PV of debt-to-GDP would reach 43 percent in 2019–20 and 42 percent in 2021–22 (above the indicative threshold of 40 percent) before declining. - Exchange rate shock: a large one-off depreciation would bring PV of debt-to-GDP to about 40 percent in 2022. - Mitigants: high dollarization, government revenues principally in US dollars, US dollar government deposits and international reserves, and commitment to closely managed exchange rate. - Policy implications: preserve macroeconomic stability, diversify the economy and exports, improve spending efficiency, and implement RMS successfully. ### Structural challenges, reforms, and FSAP priorities - Structural constraints: - Narrow economic base, weak business climate, poor infrastructure, weak governance, low competitiveness, and underdeveloped financial markets. - Access to electricity limited and relatively costly; costs of exports and imports higher relative to peers. - Quality of health and education services limited; Cambodia lags in secondary education achievement. - Priority reforms: - Accelerate Industrial Development Policy (IDP) to spur SME growth and regional value chain integration. - Implement National Logistics Council to coordinate infrastructure plans. - Continue education reforms, improve electricity provision, enhance transportation links, address skills gaps, strengthen governance and rule of law, and increase regulatory transparency. - Include climate change considerations in macroeconomic policy and structural reforms. - FSAP high-priority recommendations (selected): - Improve data quality for risk assessment and stress tests; collect additional credit-related information. - Enforce existing regulations to ensure banks retain appropriate liquid assets. - Upgrade legal framework and supervisory capacity; move to risk-based supervision for insurance sector. - Strengthen supervision of microfinance deposit-taking institutions; develop crisis management and PCA framework. - Enhance transparency and governance in the financial sector; address AML/CFT gaps. *Source: CAMBODIA STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17325).* ### 5.5 months of next year’s imports. ### 5.5 months of next year’s imports. ### Recent developments and context - Cambodia continues to grow at an impressive pace supported by a stable macroeconomic environment, efficiency improvements, and a relatively young population. - Real GDP growth is expected to remain robust at around 7 percent this year. - Headline inflation rose to 3 percent (average) in 2016 and around 3.5 percent (average) in the first half of 2017, mainly driven by higher food and energy prices. - Domestic investors are in wait-and-see mode ahead of next year’s national elections, with moderating private investment offset by higher public spending and robust construction and tourism activity. ### Financial sector and macro-financial risks - Bank credit growth slowed to about 15 percent (year-on-year) in May 2017, from an average of 30 percent over the past few years. - MFI credit growth slowed to 24 percent at end-2016 compared with over 50 percent in prior years; official MFI credit growth is 4.8 percent at end-2016 (partly reflecting a merger between Sathapana Microfinance and Maruhan Bank in 2016). - Real estate sector-related bank credit growth remains strong, supported by demand from Cambodia’s young and growing middle-income population, although anecdotal evidence suggests some market cooling. - Executive Directors and staff highlight elevated financial sector vulnerabilities from rapid financial deepening and recommend further targeted prudential policies, including: - Strengthening regulations on loan classification to better manage credit risk. - Introduction of additional targeted macro-prudential policies, including gradually increasing reserve requirements on foreign exchange liabilities to build liquidity buffers. - Expediting collection of data on the real-estate sector. - Strengthening prudential regulation for large deposit-taking micro-finance institutions and developing a comprehensive crisis management framework. - Implementing remaining FSAP recommendations and continued upgrading in regulation and supervision, including for non-bank financial institutions. ### Fiscal performance and risks - Tax revenue increased from around 11 percent of GDP in 2012 to 15.3 percent in 2016. - The authorities again outperformed their revenue target in 2016. - Higher current spending resulted in an increase of the fiscal deficit to around 2.8 percent of GDP in 2016 (compared with 1.6 percent in 2015). - The fiscal deficit is expected to widen further in the current year owing to higher public sector wages and other election-related current spending. - Staff and Directors recommend: - Containing spending pressures to safeguard fiscal and external sustainability. - Ensuring further public wage increases are fiscally sustainable and accompanied by progress in public administration reforms. - Safeguarding spending on education and health. - Further improvements in revenue administration and tax policy modernization to sustain recent gains. - Developing a medium-term budget framework to improve spending efficiency. - Strengthening the framework for public-private partnerships to better manage fiscal costs and risks. ### External sector and reserves - The current account deficit narrowed to 8.8 percent of GDP in 2016. - Tourist arrivals grew by 12.8 percent (first half of 2017 compared to 2.6 percent last year), primarily driven by arrivals from China. - Significant FDI and other capital inflows have supported construction and real estate sector growth. - Foreign reserves continued to grow, reaching $7.9 billion in June 2017, about 5.5 months of next year’s imports. - Table indicators (selected, exact figures preserved): - Gross official reserves: 6,731 (2016), 8,097 (2017), 8,955 (2018). - Gross official reserves (In months of prospective imports): 5.0 (2016), 5.5 (2017), 5.6 (2018). - Current account (including official transfers) in millions of dollars: -1,776 (2016), -1,904 (2017), -2,098 (2018). - Current account (In percent of GDP): -8.8 (2016), -8.6 (2017), -8.6 (2018). ### Outlook and projections - Short-term outlook: Real GDP growth projected to remain robust at around 7 percent over the next few years. - Medium-term outlook: Growth expected to slow to around 6 percent due to moderation in the credit and real-estate cycles and ongoing challenges in improving economic diversification and competitiveness. - Sectoral notes: - The garment sector is expected to grow at a slower pace owing to increasing competition from neighboring countries and a higher minimum wage. - Manufacturing exports are expected to benefit from an extension of preferential US trade access for specific travel-related items and some product diversification. - Continued regional economic integration is expected to support FDI and other capital inflows. - Inflation is projected to rise in the short-term reflecting higher food and energy prices and demand pressures from higher public spending and wages. - Fiscal outlook: A moderation in the pace of government revenue growth and rising spending pressures, including public wage increases and spending to support social programs and infrastructure, are expected to result in higher fiscal deficits and lower government deposits over the medium term. ### Policy priorities and recommendations (staff summary) - Managing macro-financial risks: - Effective implementation of past measures to build liquidity and capital buffers. - Gradual increases in reserve requirements. - Introduction of a crisis management framework. - Continued upgrading in regulation and supervision, including for non-bank financial institutions. - Safeguarding fiscal sustainability: - Contain spending pressures. - Ensure wage increases are consistent with fiscal sustainability. - Prioritize development spending. - Modernize tax administration and policies. - Develop a medium-term fiscal framework. - Improve public-private partnership framework to manage fiscal costs and risks. - Reforms to support growth, resilience, and inclusion: - Increase competitiveness and encourage diversification through lower energy costs, continued upgrading of human capital and infrastructure, and stronger rule of law and transparency. - Promote financial market development and reforms to encourage local currency use. - Use financial technology, develop financial infrastructure, and improve financial literacy to expand financial inclusion. - Include the impact of climate change and mitigating measures in policy design to improve resilience. *Source: CAMBODIA STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION (cr17325).* ### 7. Significant downside risks. While overall credit growth has moderated, concerns about ### 7. Significant downside risks. While overall credit growth has moderated, concerns about ### Significant downside risks - Financial and macroeconomic stability risks stem from concerns about credit quality, concentration in the real estate sector, reliance on external funding, and growing importance of MFIs. - With a closely managed exchange rate, large increases in the minimum wage could further erode competitiveness, particularly in the key garment sector. - Potential social unrest in the run-up to next year’s general elections could dampen confidence. - External risks noted: - Weaker growth in China with negative spillovers through FDI, banking, and tourism channels. - Growth slowdown in advanced economies, stronger-than-expected U.S. dollar, or rise in protectionism could dent garments exports and tourism growth. - Sharper than expected global financial tightening could raise funding costs and heighten liquidity risks. ### Authorities’ views - Broad agreement on the macroeconomic outlook and risks. - Authorities aim for sustained growth at 7 percent and agree on the need to implement structural reforms to achieve that goal over the medium-term. - Authorities emphasized efforts to mitigate potential macro-financial risks. - On external risks, authorities consider positive investor sentiment and strong domestic fundamentals would mitigate the impact of a potential tightening of global financial conditions on capital inflows. ### Managing macro-financial risks — findings and key statistics - Rapid credit growth has led to a significant increase in the bank credit-to-GDP ratio (to close to 70 percent). - The real per capita credit gap peaked in early 2016 and remains high at around 10 percent. - Benchmarking suggests credit growth has been faster than implied by structural fundamentals. - Credit growth continued in 2017 at a less rapid pace; projected to moderate somewhat this year and next, but—barring additional measures—projected to remain elevated over the medium term. - Projections assume the real per capita credit gap declines to about 5 percent over the medium-term. - Elevated macro-financial vulnerabilities related to: - (i) credit quality, - (ii) real-estate sector concentration, - (iii) significant reliance on external funding, - (iv) growing importance of MFIs. - System weaknesses and indicators: - System-wide non-performing loan (NPL) ratio remains low at 2.5 percent in June 2017, but loan classification weaknesses may lead to underreporting and overstatement of system-wide capital adequacy. - Credit to real estate-related and construction sectors grew about 33 percent (year-on-year) in June 2017. - System-wide loan-to-deposit (LTD) ratio reached 105 percent in May 2017. - MDIs’ LTD ratio at more than 200 percent on average. - Selected Financial Soundness Indicators (FSIs), 2011–2017 (selected rows from Text Table 1): - Regulatory capital to risk-weighted assets: 26.2, 25.0, 24.2, 20.4, 20.3, 20.9, 22.6 (2011–2017 Mar.) - Nonperforming loans to total gross loans: 2.1, 2.0, 2.3, 1.6, 1.6, 2.1, 2.2 (2011–2017 Mar.) - Return on equity 1/: 9.7, 10.3, 12.1, 15.5, 16.3, 14.5, 15.2 (2011–2017 Mar.) - Return on assets 1/: 1.8, 1.7, 2.4, 2.9, 2.9, 2.5, 2.6 (2011–2017 Mar.) - Liquid assets to total assets: 16.2, 15.4, 17.9, 16.2, 16.6, 15.8, 16.2 (2011–2017 Mar.) - Net open position in foreign exchange to capital: 3.9, 2.0, 9.4, 4.1, 3.6, 2.6, 2.1 (2011–2017 Mar.) - (Source: National Bank of Cambodia. 1/ Annualized.) ### Policies to address stability risks (measures taken and expected effects) - Authorities have introduced: - Continued phased implementation of a Liquidity Coverage Ratio and higher minimum capital requirements. - Bank-specific prudential measures (including higher minimum capital requirements and strengthened governance) for institutions deemed to be taking excessive risks. - Liquidity-providing collateralized operations (established October 2016) to provide lower-cost local currency (Riel) liquidity. - Authorities preparing regulation to: - Improve loan classification, introduce a liquidity management framework and capital conservation buffers, and strengthen regulation of microfinance institutions. - Specifics on minimum capital requirement increases: - NBC raised minimum capital requirement for banks from $37.5 million to $75 million, for branches of foreign banks with an investment grade rating from $12.5 million to $50 million, and for deposit-taking microfinance institutions from $2.5 million to $30 million. - Banks mandated to increase their capital by at least half of the additional required capital by March 2017 and to meet the requirement in full by March 2018. - MFI interest rate cap introduced in April (cap at 18 percent) is expected to lead to consolidation and reduction in financial access, and could potentially encourage informal lending practices, particularly in rural areas. - International evidence cited: interest rate caps are not an effective tool to increase access to low-cost credit; fundamental reforms are needed instead (reduce funding and operational costs, improve financial literacy and consumer protection). ### Policy recommendations for safeguarding financial stability (from Text Table 2 and text) - General guidance: - Continue building foreign reserves given elevated vulnerabilities and high dollarization, and maintain sufficient government deposits. - Expedite implementation of outstanding FSAP recommendations. - Seek measures that address risks without aiming to limit capital flows. - Better managing credit risk: - Implement the revised regulation on loan classification to improve bank reporting of NPLs. - Revise existing regulations on related-party lending and large exposures to align with international best practice. - Conduct regular validation exercises to ensure accurate reporting. - Targeted prudential policies: - Gradually increase reserve requirements on foreign exchange liabilities to ensure sufficient liquidity buffers and promote use of the Riel. - Improve sectoral asset classification to enable sectoral concentration limits and/or higher risk weights for real-estate loans. - Expedite collection of data on the real-estate sector and household balance sheets to enable limits on debt-to-income and loan-to-value ratios. - Introduce a liquidity risk management framework. - Consider potential funding requirements such as limits on LTD ratios to ensure banks hold more internal and stable liabilities. - Introduce capital conservation buffers and counter-cyclical capital requirements. - Strengthening non-bank regulation: - Standardize asset classification, unify accounting and provisioning standards between MFIs and banks. - Adjust reserve requirements for deposit-taking MFIs to be in line with banks. - Improve monitoring of systemic linkages. - Strengthen regulatory capacity and move to risk-based supervision for the emerging insurance sector. - Introducing a comprehensive crisis management framework: - Develop prompt corrective action to enable early action. - Develop deposit protection scheme and resolution framework. - Establish multi-agency financial stability committee (progress noted). ### Authorities’ response to recommendations - Authorities agreed with the need for further measures broadly in line with staff recommendations but requested more time to assess impact of past measures before introducing further actions that could slow credit growth. - Authorities established an inter-agency working group to collect data on the real estate sector. - Authorities noted strong demand for affordable housing and that banks’ internal LTV rules for mortgages appear conservative. - Authorities argued external funding is mostly longer-term from parent banks (to banks) and development-purpose institutions (to MFIs), mitigating liquidity risks. - Authorities acknowledged potential challenges from the MFI interest rate cap but expect it could lead to consolidation and efficiency improvements over time. ### Safeguarding fiscal sustainability — outlook and risks - Fiscal outlook: - Authorities rely largely on administrative measures (e.g., more stringent audits) to mobilize revenues. - Budget revenue target likely to be exceeded slightly this year, but fiscal deficit expected to widen to about 3.7 percent of GDP owing to higher capital spending, increases in public sector wages and other election-related spending. - Government deposits are projected to be around 9.7 percent of GDP in 2017. - Priorities for the 2018 budget include further increase in public wages, support for education (including vocational training) and agriculture, and higher infrastructure investment. - Preliminary budget figures suggest a further increase in the fiscal deficit to about 4.6 percent of GDP in 2018. - Public sector salaries are projected to rise further while capital spending is projected to increase to 8.5 percent of GDP. - (The government has previously pledged to increase minimum wages for civil servants, military and armed police to US$250 dollars by 2018.) - Rising medium-term fiscal pressures: - Moderation in revenue growth and rising spending pressures would, absent corrective measures, result in elevated fiscal deficits over the medium term and erode government deposits below comfortable levels. - Trade tax growth expected to decline as tariffs are cut; domestic tax growth expected to moderate as RMS implementation gains mature. - Development-related grants expected to decline due to achievement of lower middle-income status. - Public wage pressures likely to remain strong. - In absence of alternative financing sources due to under-developed capital markets, adequate government deposits are essential as a fiscal anchor. - Staff analysis from 2015 suggests a floor on government deposits at about 5.5 percent of GDP. - Maintaining government deposits around 6.5 percent of GDP over the medium-term would require lower near-term deficits. ### Fiscal policy recommendations and Active Fiscal Policy Scenario (Text Table 3) - Containing near-term fiscal deficits: - Any revenue overperformance should be saved and non-development current expenditure curtailed. - Enhance spending efficiency, particularly regarding public sector wages. - Lower near-term deficits would help stabilize government deposits at around 6.5 percent of GDP over the medium-term. - Ensuring sustained revenue improvement: - Re-invigorate the RMS to ensure sustained revenue improvement. - Strengthen institutional development of the tax administration agency, especially the Large Taxpayer Department. - Consider undertaking a tax administration diagnostic assessment in preparation for the next RMS. - Tax policy reforms should initially focus on tax incentives and excise taxes, and over the medium term aim at reforming VAT and personal income taxes, and increasing property taxes. - Prioritizing development spending: - Boost social protection spending while prioritizing public education and health expenditure as revenue gains are secured. - Sustainable wage increases: - Further wage increases should be contingent on meeting revenue targets and maintaining adequate fiscal buffers; accompanied by progress in public administration reforms and human resource management. - Medium Term Fiscal Framework (MTFF): - Develop a multi-year budget framework to allocate expenditure more systematically. - Active Fiscal Policy Scenario (GFSM 2001) selected figures (In percent of GDP): - Revenue: 19.5 (2017), 19.7 (2018), 20.0 (2019), 20.5 (2020), 20.5 (2021), 20.9 (2022) - of which: Tax Revenues: 15.3 (2017), 15.5 (2018), 15.6 (2019), 15.8 (2020), 16.0 (2021), 16.3 (2022) - Expenditure: 23.2 (2017), 24.1 (2018), 24.1 (2019), 24.1 (2020), 24.1 (2021), 24.2 (2022) - Wage: 7.9 (2017), 8.4 (2018), 8.4 (2019), 8.4 (2020), 8.4 (2021), 8.4 (2022) - Non-wage: 7.1 (2017), 7.2 (2018), 7.3 (2019), 7.3 (2020), 7.3 (2021), 7.3 (2022) - Net Acquisition of Non-Financial Assets: 8.2 (2017), 8.5 (2018), 8.5 (2019), 8.5 (2020), 8.5 (2021), 8.5 (2022) - Overall Balance: -3.7 (2017), -4.4 (2018), -4.1 (2019), -3.7 (2020), -3.6 (2021), -3.3 (2022) - Government Deposits: 9.7 (2017), 8.5 (2018), 7.5 (2019), 7.0 (2020), 6.6 (2021), 6.6 (2022) - Memorandum items: - Baseline Overall Balance: -3.7 (2017), -4.6 (2018), -4.4 (2019), -4.0 (2020), -4.0 (2021), -3.8 (2022) - Baseline Government Deposits: 9.7 (2017), 8.3 (2018), 7.1 (2019), 6.2 (2020), 5.6 (2021), 5.1 (2022) - (Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.) *Source: IMF staff report excerpt (cr17325).* ### 17. Financing infrastructure ### 17. Financing infrastructure ### Infrastructure gaps and investment needs - Infrastructure gaps remain large, especially in electricity, health, education and road infrastructure, where Cambodia scores below regional peers. - Authorities should increase domestically financed public investment to maintain public investment at about 8.5 percent of GDP (see Text Table 3). - With lower access to concessional finance in the coming years (owing to the attainment of lower middle income status), and slow progress in developing domestic debt markets, the authorities plan to increase the share of PPPs in public investment. - The authorities have established a roadmap to have a full set of PPP mechanisms in place by 2020. - Rationale for PPPs: can increase efficiency and increase value for money relative to public financing, but fiscal implications are hard to monitor and control. - Managing fiscal costs and risks will require strengthening the PPP framework (see Box 2). ### Authorities’ views on revenue, expenditure and PPPs - Authorities broadly agreed with staff’s assessment and key policy recommendations. - Revenue side: - Agreed on need for higher revenues to meet rising spending pressures, especially in wage and infrastructure. - Noted significant progress in RMS implementation but concurred further administrative gains will become increasingly challenging. - Expected the next RMS phase (from 2019–2023) to focus on reforms in tax policies to boost revenues and improve efficiency. - Expenditure side: - PFM reforms, including expansion of program budgeting to almost all line ministries, had improved spending control. - Agreed on the importance of developing a MTFF, which they hoped to introduce in the medium term. - Will continue to monitor the public wage bill closely to ensure sustainability and link medium term wage increases with progress in public administration reforms. - PPPs and borrowing: - Acknowledged the need to develop a well-designed PPP framework. - Expected to remain conservative in their approach to external borrowing. ### Staff appraisal — fiscal and PPP implications - Fiscal deficits should be contained to safeguard fiscal and external sustainability. - To sustain recent revenue gains over the medium term, further improvements in revenue administration and modernizing tax policy are needed. - On expenditures: - Further public wage increases should be fiscally sustainable and be accompanied by continued progress in public administration reforms. - Strengthen human resource management, increase skills and labor productivity, improve spending efficiency, and enhance transparency. - Prioritize education and health spending; the planned framework for social protection is welcome. - Developing a medium-term budget framework to systematically allocate expenditures and improve spending efficiency remains a priority. - PPPs: - While PPPs can increase efficiency relative to public financing for investment, they do not necessarily increase fiscal space. - Strengthening the PPP framework is needed to manage fiscal costs and risks. ### Key macro-financial and structural messages linked to infrastructure financing - External and exchange rate context: - The current account deficit is projected to remain broadly stable over the medium-term. - External position assessed to be moderately weaker than level implied by fundamentals and desirable policies (EBA-lite; Appendix III). - Moderate REER overvaluation calls for policies to consolidate the fiscal position, diversify export markets and improve productivity and competitiveness, including ensuring that future wage increases are linked to productivity improvements. - Current closely managed exchange rate regime is appropriate given high dollarization and concentration in U.S. dollar-invoiced exports (primarily garments); as capacity improves and economy diversifies, gradually introducing greater flexibility is recommended. - Growth and risks: - Growth projected to remain robust, supported by higher public spending and strong construction and tourism activity. - Inflation expected to remain elevated in the short-term. - Private sector credit growth, increasingly concentrated in real estate related sectors, has slowed and is projected to moderate further. - Growth is projected to decline over the medium-term owing to a moderation in the credit and real estate cycles and ongoing challenges in improving economic diversification and competitiveness. - Significant downside risks include elevated financial sector vulnerabilities, impact of wage increases on competitiveness, and external risks including weaker growth in China. ### Related financial sector and currency recommendations affecting infrastructure financing - High dollarization increases banks’ vulnerability to liquidity risks and limits scope for exchange rate and monetary policies. - Measures to promote Riel use (some already adopted and additional recommendations): - Adopted/announced measures: - Require a minimum of 10 percent of the loan portfolio to be in Riel by 2019. - Oblige businesses registered with government to post prices in Riel. - Further recommended measures: - Reallocate the renumeration currently paid on USD reserve requirement to Riel denominated reserve requirement, Negotiable Certificates of Deposits (NCDs), and excess reserves. - Gradually increase the reserve requirement on foreign exchange liabilities, a key prudential tool in dollarized economies. - Monitor unhedged exchange rate risk exposures and ensure they remain within prudent limits. - Systematically factor in dollarization risk in prudential regulation. - Enforce requirement for prices to be labeled in Riel and require all government transactions to be based on Riel. - Use market-based policies to improve Riel’s attractiveness, such as ensuring convenient banknotes and payment methods. - Financial market development measures relevant for mobilizing domestic resources for infrastructure: - Promote development of interbank, equity (including for SMEs), government and corporate bond, and foreign exchange markets to promote local currency usage and allow for eventual implementation of an effective monetary policy framework. - Improve functioning of the market for NCDs and develop an online trading platform to make the interbank market more liquid and move towards auction pricing. - Continue restructuring the foreign exchange market and encourage banks (instead of money changers) to play a greater role. - Financial sector prudential measures to protect fiscal and financial stability: - Strengthen regulations on loan classification to better manage credit risk. - Introduce further well-designed and targeted macro-prudential policies, including gradually increasing reserve requirements on foreign exchange liabilities to build liquidity buffers. - Expedite collection of data on the real-estate sector and improve sectoral asset classification to enable the introduction of sectoral concentration limits and/or higher risk weights for real-estate loans. - Strengthen regulation to prevent regulatory arbitrage given the growing systemic relevance of large MFIs. - Introduce a comprehensive crisis management framework and ensure strong supervision with sufficient resources. - Expedite implementation of outstanding FSAP recommendations. ### Structural reforms to support infrastructure and inclusive growth - Address structural constraints: narrow economic base, weak business climate (high cost of doing business, poor infrastructure, weak governance, low competitiveness), and underdeveloped financial markets. - Priority reforms: - Accelerate implementation of the Industrial Development Policy (IDP) to spur SME growth and help Cambodia find a place in regional value chains. - Implement National Logistics Council to coordinate infrastructure plans. - Continue education reforms (reforming examination system, increase quality of teaching via more training and merit-based increases in teachers’ salaries). - Focus on providing low-cost, reliable and adequate electricity, enhancing transportation links, addressing skill gaps, strengthening governance and rule of law, and increasing transparency of business regulation. - Include climate change considerations in macroeconomic policy and structural reforms, especially to improve agricultural productivity and diversify the economy to increase resilience. - Financial inclusion and infrastructure: - Improve payment infrastructure interoperability, reduce operational costs for smaller financial institutions, promote fintech, reduce costs through development of the interbank market to mobilize excess Riel reserves, diversify products, and improve financial literacy and consumer protection. *International Monetary Fund — Article IV staff report chapter: “17. Financing infrastructure”* ### Box 2. Cambodia: Managing Fiscal Costs and Risks from PPPs ### Box 2. Cambodia: Managing Fiscal Costs and Risks from PPPs ### Context and problem - Infrastructure bottlenecks remain a critical constraint for economic diversification and sustainable growth. - The use of PPPs to finance public infrastructure calls for strengthening the institutional, legal and budgetary frameworks to better manage fiscal costs and risks. - Although PPPs offer many benefits, they do not necessarily increase fiscal space. ### Recent developments and fiscal exposure - Investment financed by PPPs has grown considerably, especially in the electricity sector, and Cambodia now stands as a leader relative to its peers. - The government has plans to further expand public investment through PPPs, including projects in electricity, roads, ports, railways, water, education and health. - Planned investments amount to more than $6billion over time. - Off-balance sheet obligations arising from PPPs are difficult to control and make the fiscal position more vulnerable to shocks. - Obligations to make payments to PPPs over the long term also reduce the governments’ future financial flexibility, much as traditional debt does. - PPPs can increase efficiency and help transfer risks, thus providing value for money relative to public financing, but fiscal vulnerabilities remain. ### Priority reforms recommended - Accounting for and controlling fiscal costs - The government’s accounting system, designed to control publicly-financed investment, does not help monitor PPP-related obligations. - The MEF has introduced a 4-percent of GDP limit on guaranteed payments for PPPs in the electricity sector. - Although this is a positive development, the current limit is too high to fully protect against excessive exposure. - As an alternative, the government could limit the present value of guaranteed payments and total annual investments in PPPs. - Strengthening the institutional framework for managing PPPs - The role of the MEF under the current institutional framework is limited to endorsing the final decision. - The MEF should be responsible for safeguarding public finances through a gateway process, which would empower it to veto a project if it does not offer value for money or is not fiscally affordable. - Strengthening the PPP legal framework - Changes in the institutional framework should be accompanied by changes in PPP governance, including the legal and regulatory framework. - The MEF should be given the authority to apply the gateway process and to establish mechanisms for competitive bidding. - Budgeting, accounting and reporting requirements should be strengthened to ensure a more consistent monitoring of liabilities and provision of on fiscal risks. - Strengthening public investment management (PIM) - PPP projects should be reclassified as public investments and be subject to the same planning and allocation processes. - Before fully integrating PPPs in the PIM process, all PPP proposals should be reviewed by the new inter-ministerial committee in charge of PPPs until the formal gateway process is put in place. - The government should include information about financial obligation arising from PPPs in its budget documents. ### Key implications - Without reforms, PPPs could create large off-balance-sheet contingent liabilities that constrain fiscal flexibility and increase vulnerability to shocks. - Reforms centered on accounting, institutional authority (MEF gateway), legal/regulatory frameworks, and PIM integration are necessary to ensure PPPs deliver value for money while protecting public finances. *Prepared by Maximilien Queyranne, Genevieve Verdier and Yong Sarah Zhou.* ### 3.2 billion USD ### 3.2 billion USD (16% of GDP) ### Monetary Developments: Elevated vulnerabilities despite moderating credit growth - Broad money increased by 18 percent (y/y) by end 2016. - Net foreign assets (NFA) in the banking sector remains negative, reflecting a reliance on external borrowing. - Credit growth is moderating while credit-to-GDP ratio continues to rise. - Liquid assets to external borrowing has risen marginally. - Cambodia’s dollarization level remains high. - Excess reserves-to-GDP remains high reflecting underdeveloped interbank market and precautionary behavior. - Reported series and indicators (selected): - Broad money growth (year-on-year): 18 percent (end-2016). - Private sector credit: moderated (see tables for detailed annual percent changes). - Loan-to-deposit ratio and foreign liabilities to total foreign currency funding: elevated across 2008–2017 (chart series). - Liquid assets to total banks’ external borrowings (In percent): series shown Jan-08 to Jan-17. - International reserves to foreign currency deposits and foreign currency deposits to total deposits: series show high dollarization. ### External Position: Stable but reliant on FDI financing - The current account deficit narrowed in 2016 thanks to lower imports and was financed primarily with FDI inflows. - Net foreign assets (NFA) are in line with peers and composed primarily of FDI liabilities. - The real effective exchange rate continued to appreciate in line with the U.S. dollar, but less than in peer countries. - Cambodia’s export market share continued to improve. - Reserves accumulation continued, and reserve coverage in terms of FX deposits stabilized. - Key projections and levels: - Current account (including official transfers) in percent of GDP: projected steady around -8.6 to -8.0 across 2017–22 (see tables for annual values). - Gross official reserves (in millions of U.S. dollars): 6,731 (2016), 8,097 (2017), and projected increases to 12,714 (2022) in Table 2. - FDI (percent of GDP): 10.7 (2014), 10.9 (2015), 10.9 (2016) and projected around 9.4 (2022). ### Fiscal Performance: Robust revenue, deteriorating spending mix - Fiscal performance is strong owing to robust revenue performance, bolstered by strong one-off collection efforts. - Domestic revenue and tax revenue have increased; revenue reached regional averages. - Public wage bill has been rising, squeezing other expenditures; public wages higher than most other Asian LICs. - Need to maintain government deposits and create fiscal space for development spending. - Selected fiscal numbers (Table 1 and Table 4): - Revenue: 19.8 percent of GDP (2016); projected 19.5 percent (2017) and 19.6 percent (2018) in Table 1. - Domestic revenue: 17.8 percent of GDP (2016); 18.0 percent (2017). - Expenditure: 22.7 percent of GDP (2016); 23.2 percent (2017); 24.1 percent (2018). - Net acquisition of nonfinancial assets: 7.8 percent of GDP (2016); 8.2 percent (2017); 8.5 percent (2018). - Net lending (+)/borrowing(-): -2.8 percent of GDP (2016); -3.7 percent (2017); -4.6 percent (2018). - Government deposits: 10.1 percent of GDP (2016); 9.7 percent (2017); 8.3 percent (2018) (Table 4). ### Structural Challenges to Growth - Cambodia lags peers on business environment dimensions including infrastructure and human capital (Global Competitiveness Index comparisons). - Access to electricity is limited and relatively costly; the price of electricity (US cents per kWh) is higher than several peers. - Costs of exports and imports are higher compared to peers (cost per container series). - Access to finance by SMEs is limited; a high share of firms identify access to finance as a major constraint. - Quality of key health and education services is limited, affecting human capital: - Cambodia lags in secondary education achievement despite progress in primary education. - Indicators such as improved water source, pupil-teacher ratio, and enrollment ratios show gaps relative to CLMV and ASEAN-4 comparators. ### Key Macroeconomic Indicators and Projections (selected extracts) - GDP growth (annual percent change): - 2012: 7.3; 2013: 7.4; 2014: 7.1; 2015: 7.2; 2016: 7.0; 2017 (est.): 6.9; 2018 (proj.): 6.8 (Table 1). - Inflation (end-year): 3.1 percent (2016); 3.3 percent (2017); 3.4 percent (2018). - Gross official reserves (millions of U.S. dollars): 6,731 (2016); 8,097 (2017); 8,955 (2018) (Table 1). - Public external debt (in millions of dollars): 7,267 (2016); 8,216 (2017); 9,100 (2018); (in percent of GDP) 31.9 (2016), 32.8 (2017), 34.0 (2018). - Broad money (annual percent change): 18.0 (2016); 14.4 (2017); 12.9 (2018). - Private sector credit (annual percent change): 22.5 (2016); 12.5 (2017); 10.0 (2018). ### Monetary and Financial Sector Soundness - Monetary survey highlights (Table 5): - Broad money (in billions of riels): 57,617 (2016); 65,928 (2017); 74,437 (2018). - Foreign currency deposits (in millions of U.S. dollars): 11,879 (2016); 13,446 (2017); 15,017 (2018). - Loan-to-deposit ratio (percent): 112.1 (2015), 116.2 (2016), 114.3 (2017), 111.3 (2018). - Core Financial Soundness Indicators (FSIs) (Table 6, selected): - Regulatory capital to risk-weighted assets: 22.6 percent (2017, most recent quarter shown). - Nonperforming loans to total gross loans: 2.2 percent (2017, latest). - Return on equity (annualized): 15.2 percent (2017, latest). - Liquid assets to short-term liabilities: 24.9 percent (2017, latest). - Sectoral distribution of loans to total gross loans: residents ~98.2 percent (2017, latest); nonresidents ~1.8 percent. ### Key FSAP High-Priority Recommendations (Table 7) - General stability and data/supervision: - Improve quality of data for risk assessment and stress tests; collect additional credit-related information. (Short-term) — In process. - Ensure banks retain appropriate liquid assets by enforcing existing regulations. (Short-term) — Improved but still in process. - Upgrade law to formalize delineation of supervisory responsibilities and MOUs for information exchange (NBC, MEF, SECC). (Short-term) — Improved but still in process. - Upgrade staffing and capacity for banking, insurance, securities, and payment system supervision; develop training programs. (Medium-term) — In process. - Develop strategic plan to address conflicts/overlaps in financial sector legal and regulatory framework. (Medium-term) — In process. - Banking supervision and regulation: - Develop supervisory strategy for banks that cannot meet new capital requirement. (Short-term) — Done. - Conduct comprehensive legal framework upgrades; reprioritize staff for forward-looking, risk-based supervision. (Short-term) — In process. - Moratorium on new bank licenses recommended but overruled in practice. - Non-bank financial sector: - Revise capital regulations for insurance market risks. (Short-term) — Done. - Enhance powers for intervention and enforcement. (Short-term) — In process. - Conduct readiness study prior to launch of stock exchange. (Short-term) — Done. - Access to finance and crisis management: - Strengthen supervision of microfinance deposit-taking institutions and consider moratoriums while capacity is inadequate. (Medium-term) — In process. - Revise PCA framework, add triggers for asset quality, liquidity, and earlier intervention; develop crisis management framework. (Medium-term) — In process / In preparation. - Allow banks to use fixed deposits at the NBC and government securities as eligible collateral for interbank and NBC repos. (Short-term) — Done. - Transparency and governance: - Introduce due process for dismissal of NBC Board members and Governor; amend law to reduce government representation on NBC Board and reflect practice of two Deputy Governors. (Short- to medium-term) — In preparation. - Draft/implement banking regulations on internal audit, controls, risk management, and compliance. (Short-term) — Risk management to be done. - AML/CFT: - Introduce measures for AML/CFT risk assessments and risk profiling of financial institutions. (Short-term) — In process. - Note: Cambodia removed from FATF On-Going Global AML/CFT Compliance Process in February 2015, but issues from 2016 APG assessment against 2012 FATF standard need urgent attention. ### Risk Assessment Matrix: Events that could materially alter the baseline - Domestic risks (selected), with horizon, direction, likelihood and impact, and transmission: - Revenue shortfall (Medium-term; down-side; High probability; Medium impact): could widen fiscal deficits and deplete government deposits. Policy recommendation: Steadfast implementation of RMS, rationalize non-developmental current expenditure. - A large correction in real estate prices (Short-term; down-side; Medium probability; High impact): could trigger credit cycle reversal, FX deposit withdrawals, disorderly deleveraging. Policy recommendation: Increase reserve requirements to slow credit growth, implement macroprudential measures, strengthen micro-prudential regulation and supervision for MFIs, ensure adequate emergency liquidity, preemptively strengthen crisis management framework. - Recurrent political uncertainty and/or labor market disruptions (Short-term; down-side; Medium probability; High impact): could lead to large deposit withdrawal, reduced FDI and export growth. Policy recommendation: Ensure continued macroeconomic stability to support confidence. - Extreme weather (Short-term; down-side; Medium probability; Medium impact): weaker agricultural production and tourism; widen inequality. Policy recommendation: Expedite structural reforms, improve infrastructure, increase transfers to rural poor after creating fiscal space. - External risks (selected): - Retreat from cross-border integration (Short-term; down-side; Medium probability; High impact): weaker garments export growth. Policy recommendation: Expedite structural reforms to diversify exports and find new markets. - Structurally weak growth in key advanced economies (Short-term; down-side; High probability; High impact): weaker garments export growth. Policy recommendation: Expedite structural reforms to diversify exports. - Significant China slowdown (Short-term; down-side; Medium probability; Medium/High impact): lower exports, weaker FDI and banking flows. Policy recommendation: Expedite structural reforms and ensure adequate emergency liquidity. - Tighter global financial conditions and strengthening of the US dollar (Short-term; down-side; High probability; High impact): FX deposit outflows, foreign reserves fall, weaker exports/tourism/FDI and bank lending. Policy recommendations: Build up foreign reserve buffers; where appropriate release limited short-term liquidity to troubled banks; expedite crisis management framework; increase reserve requirements on foreign deposits substantially to create a buffer; maintain macroeconomic stability; develop interbank and foreign exchange markets; expedite structural reforms to boost non-price competitiveness. *Source: IMF staff report (Cambodia), selected figures and tables as provided in the source content.* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### Appendix II. Past Fund Advice - Authorities are strengthening public financial management in line with past Fund advice. - Tax administration improvements through implementation of the Revenue Mobilization Strategy (RMS): - Notable progress in strengthening core tax functions, improving human resource management, and increasing automation. - Slower progress in adopting other tax policy and administration reforms. - Public administration and budgeting: - Slower progress in public administration reform and in developing a medium-term budget framework. - Infrastructure and finance: - Government expanding the role of public-private partnerships (PPPs) for infrastructure financing. - Financial stability and prudential measures: - Authorities implementing policies such as the newly introduced liquidity coverage ratio and higher minimum capital requirements to address financial stability risks. - Further prudential measures are in progress, based on past Fund advice. - Education sector: - Authorities undertaking reforms in the education sector to improve the quality of basic education. ### Appendix III. External Sector Assessment - Overall assessment: - The external position of Cambodia in 2016 was moderately weaker than the level consistent with medium-term fundamentals and desirable policy settings. - Policies recommended to improve external balance: consolidate the fiscal position, diversify export markets, and improve productivity and competitiveness. - There is room to build reserves given high dollarization and elevated financial vulnerabilities. - Foreign asset and liability position: - Cambodia’s Net Foreign Asset (NFA) position was -48 percent of GDP in 2016. - NFA is almost entirely composed of FDI liabilities and does not pose a major concern for external sustainability at the moment. - NFA position is projected to increase over the medium term, in line with continuing FDI inflows. - External Sustainability (ES) model: a current account (CA) norm that stabilizes the NFA at its 2016 level implies 7.3 percent REER overvaluation, using EBA-lite elasticities. - Allowing NFA to reach 60 percent over the medium term would imply an overvaluation of 5.3 percent. - Current account: - The CA deficit narrowed from 9.3 percent of GDP in 2015 to 8.8 percent in 2016, led by declining imports. - The 2016 CA is assessed to be moderately weaker than the CA norm of 3.9 percent. - The resulting CA gap is -4.9 percent of GDP, which translates into an REER overvaluation of 9.5 percent. - Model caveat: part of the gap reflects the CA model not fully accounting for Cambodia’s very young population, which implies a fundamentally lower level of savings and a higher CA deficit; using total instead of old-age dependency ratio would likely produce a larger CA norm deficit and a smaller CA gap. - Real effective exchange rate (REER): - The REER on average appreciated by 4 percent between 2015 and 2016. - In 2016 the REER was 16 percent higher than the 10-year average. - EBA-lite REER model suggests an overvaluation of 19 percent, higher than the level implied by fundamentals and desirable policies. - Model sensitivity: the REER model is sensitive to the time sample used and may not fit well for countries undergoing rapid structural change, such as Cambodia. - Despite REER appreciation, Cambodia’s REER appreciated less than in peer countries and Cambodia’s export market share continued to improve. - Recommended policies to improve external balance and adjust the CA deficit: - Consolidate the fiscal position. - Diversify export markets. - Improve productivity and competitiveness, including through moderating minimum wage growth and improving infrastructure and education. - Capital flows: - Cambodia continues to attract sizable capital inflows, with FDI inflows more than financing the CA deficit and contributing to the reserves buildup. - Composition of flows has a favorable risk profile. - Risks: - FDI inflows may be helping fuel rapid real estate growth. - Cambodia may experience smaller inflows as global financial conditions tighten. *Prepared by Katsiaryna Svirydzenka.* ### 6. FX intervention and reserve adequacy. The current exchange rate regime is based on ### 6. FX intervention and reserve adequacy ### Exchange rate regime and rationale - The current exchange rate regime is based on keeping the Riel broadly stable against the U.S. dollar and is appropriate for Cambodia given high dollarization and a concentration in U.S. dollar-invoiced exports. ### Reserve accumulation and traditional adequacy metrics - Over the last seven years, Cambodia has been consistently accumulating international reserves. - As of end 2016: - Reserves were equivalent to about 5 months of prospective imports of goods and services. - Reserves were equivalent to 50 percent of broad money. - Given the long-term nature of Cambodia’s external debt, reserves in percent of short-term debt is not as relevant for Cambodia. ### ARA tool application and comparison - Applying the Assessing Reserve Adequacy (ARA) tool for Credit-Constrained Economies with fixed exchange rate regime to Cambodia suggests an optimal level of reserves of 4 months of current imports of goods and services, which is below the current reserve level. ### Coverage of foreign currency deposits and lender-of-last-resort capacity - Gross official reserves covered only 57 percent of foreign currency deposits, which: - Severely limits the central bank’s lender of last resort capacity. - Is below regional comparators. - Continued financial deepening in the context of near full dollarization suggests that foreign currency deposits are likely to continue to grow. ### Policy implications and recommendations - Further accumulation of reserves beyond the level indicated by traditional reserve adequacy metrics is necessary to enhance resilience against financial sector vulnerabilities and rapid capital flow reversals. - Measures encouraging use of the Riel are necessary to reduce vulnerabilities associated with high dollarization and to bolster the central bank’s lender of last resort capacity. *Source: IMF staff report text (section 6) from the Cambodia 2017 Article IV consultation informational annex.* ### 1. Cambodia is at a low risk of debt distress. The indicative debt distress thresholds remain ### 1. Cambodia is at a low risk of debt distress. The indicative debt distress thresholds remain ### Cambodia’s public debt: stock, composition, and arrears - External public debt including arrears: around US$6.45 billion or about 32 percent of GDP (26 percent of GDP in PV terms) as of end-2016. - Corresponding PV of external debt reported: 25.4 percent of GDP at end-2016. - Composition (end-2016, U.S. dollar, U.S. millions): - Total: 6,457 — Share of total External Debt: 100 — In percent of GDP: 31.9 - Multilateral: 2,088 — Share: 35.9 — In percent of GDP: 10.3 - Bilateral: 4,369 — Share: 64.1 — In percent of GDP: 21.7 - Bilateral debt has been increasing since 2009; China is the largest bilateral creditor, contributing around 70 percent of the total bilateral debt stock (including arrears to the Russian Federation and the United States, as of end-2016). - Cambodia remains in arrears to the Russian Federation and the United States (nearly 10 percent of total debt and about 3 percent of GDP). The DSA assumes no debt restructuring given unclear prospects for resolution. - Public domestic debt: negligible — small bonds of US$3.2 million issued in early 2000s and old claims equal to half percent of GDP (with no interest) carried over from the 1990s. ### Contingent liabilities and PPPs - Authorities adopted an annual ceiling at 4 percent of GDP on guaranteed payments for PPPs. - Authorities established a road map to have a full set of PPP mechanisms, including necessary legal framework, in place by 2020. - Recommendation: To enhance fiscal transparency, authorities should list all contingent liabilities in the annual budget law. - Risk note: PPPs and potential financial sector support in a banking crisis could create substantial contingent liabilities. ### Macroeconomic framework underlying the baseline scenario - CPIA rating: “medium performer.” - Growth and inflation: - GDP growth: expected around 7.0 percent in 2017; projected to slow to around 6.0 percent over the medium term (by 2022). - Inflation (CPI average): rose to 3.9 percent at end-2016; expected to decline over the medium-term. - External sector: - Current account deficit: narrowed to 8.8 percent of GDP in 2016 from 9.3 percent in 2015. - Gross international reserves: reached $7.9 billion in June 2017, about 5.5 months of next year’s imports. - Projection: current account deficit projected to remain broadly stable in 2017 and over the medium-term. - External bilateral debt disbursements: projected to average about US$1.16 billion annually during 2017‒22 (about 6 percent of GDP on average). - External debt-to-GDP: projected to be about 35.5 percent by 2022, after which the debt ratio is projected to decline. - Gross official reserves: projected to rise to close to 6 months of prospective imports by 2022. - Fiscal sector: - Tax revenues: rose to 15.3 percent of GDP in 2016 from 14.6 in 2015 (supported by Revenue Mobilization Strategy (RMS)). - Fiscal deficit: widened to 2.8 percent of GDP in 2016 (but below budget target); projected to widen to about 3.7 percent of GDP in 2017. - Government deposits: rose to 10.1 percent of GDP by end-2016. - Policy guidance: medium-term fiscal policy should be anchored to safeguarding government deposits and long-term fiscal debt sustainability, balancing development needs and rising wage and social spending pressures. - Domestic debt development: - Planned issuance: starting from ¼ ppt of GDP annually in 2022 and gradually increasing to about ½ ppt of GDP in 2035. - Resulting domestic debt stock: about 3.7 percent of GDP by 2035. - Comparative benchmark: average domestic debt in low-income countries (LICs) about 15 percent of GDP. - Authorities’ stated preference: not issuing domestic debt over the medium term; focus on mobilizing domestic revenue and raising government deposits. ### External and public debt sustainability assessments and stress tests - Risk rating: Under the baseline scenario, Cambodia’s risk of debt distress is low. Indicative debt distress thresholds remain unchanged from the 2016 Article IV DSA. - Baseline outcome: PV of key ratios never breach policy-dependent indicative thresholds and are projected to decline over the projection period. Debt service-to-exports and debt service-to-revenue ratios remain well below thresholds due to the concessional nature of most debt. - Export shock (standard stress test): - Effect: PV of debt-to-GDP would reach 43 percent in 2019–20 and 42 percent in 2021–22 (above the indicative threshold of 40 percent), declining to 25 percent in the long-term. - Caveat: This mechanical breach is strongly influenced by a single outlier observation — Cambodian exports grew by 40 percent in 2011. - Note: Excluding the 2011 outlier implies PV of debt-to-GDP remains slightly below the threshold; probability approach confirms the low rating in that case. - Exchange rate shock: - A large one-off depreciation would bring the PV of debt-to-GDP to about 40 percent in 2022 (the level of the indicative threshold) and, following a protracted breach, decline to 32 percent in the long-term. - Mitigants: - High degree of dollarization: more than 90 percent of banking sector assets and most transactions are in dollars. - Government revenues principally in US dollars. - Significant buffers: US dollar denominated government deposits and international reserves. - Authorities’ commitment to a closely managed exchange rate regime and historically stable bilateral exchange rate. - Public debt vulnerabilities: - Under a one-off real depreciation shock: PV of total public debt-to-GDP would reach 37 percent in 2022, declining to 30 percent in the long-term. - If the primary balance remains unchanged at the 2016 level: PV of public debt-to-GDP would increase to about 32 percent by 2025, with modest decline over the long-term. - Conclusion: while present vulnerabilities are limited, continued efforts to mobilize revenues are needed to guarantee long-term debt sustainability. - Contingent liabilities and financial sector risks could materially worsen public debt outcomes if realized. ### Institutional stance and authorities’ views - Authorities broadly agree with DSA findings; the debt management unit at the Ministry of Economy and Finance (MEF) conducts internal DSA and reaches the same low risk conclusion. - The MEF uses DSA results to propose annual ceilings of new net debt disbursements. - MEF assumptions: similar loan disbursement profile and current account deficits to staff, but slightly more optimistic on medium-term real GDP growth. - MEF concern: accumulation of contingent liabilities from PPPs; they have imposed annual ceilings on PPP guarantees. *IMF staff summary from the Cambodia DSA chapter (as provided).* ### 12. Cambodia remains at low risk of debt distress. While the risk of debt distress is currently ### 12. Cambodia remains at low risk of debt distress. While the risk of debt distress is currently ### Assessment of Debt Distress Risk - The risk of debt distress is currently assessed to be low. - Baseline projections and standard stress tests show increasing risks to the external debt outlook. - Downside risks to the baseline scenario include the materialization of contingent liabilities and issues arising from external arrears. - The most extreme stress tests indicate vulnerability to shocks to the exchange rate, economic growth, exports, and the fiscal position. - Policy implication emphasized: preserve macroeconomic stability; diversify the economy and exports; improve spending efficiency; successfully implement the revenue mobilization strategy. ### Stress Tests and Scenarios (selected qualitative outcomes) - The most extreme stress test is the test that yields the highest ratio on or before 2027. - In the figures, the most extreme shocks correspond to: - One-time depreciation shock (figure a and f) - Exports shock (figures c, d, and e) - Stress tests point to elevated ratios for: - PV of debt-to-exports ratio - PV of debt-to-GDP ratio - PV of debt-to-revenue ratio - Debt service-to-revenue ratio - Debt service-to-exports ratio - Memorandum assumption: Grant element assumed on residual financing (i.e., financing required above baseline) is 23 in the presented table (repeated series: 23 23 23 23 23 23 23 23 23 23 23). ### Key Indicators and Projections (selected numeric series as presented) - Public sector debt (series shown): 32.3, 31.2, 32.3, 33.2, 34.3, 34.7, 35.0, 35.4, 36.4, 39.4, 31.9 - Of which: foreign-currency denominated (series shown): 31.8, 30.8, 31.9, 32.8, 34.0, 34.4, 34.8, 35.1, 35.5, 37.5, 27.6 - Change in public sector debt (series shown): 0.2, -1.0, 1.0, 0.9, 1.1, 0.4, 0.3, 0.4, 1.0, 0.6, -1.7 - Identified debt-creating flows (series shown): -1.2, -1.3, -0.3, 0.9, 1.7, 1.5, 1.2, 1.1, 1.1, 1.8, 2.7 - Primary deficit (series shown): 0.8, 1.2, 2.5, 1.8, 1.7, 3.3, 4.2, 4.1, 3.7, 3.7, 3.6, 3.7, 4.5, 4.9, 4.6 - Revenue and grants (series shown): 19.8, 18.8, 19.8, 19.5, 19.6, 19.7, 20.1, 20.2, 20.4, 20.5, 20.8 - Of which: grants (series shown): 3.0, 2.1, 2.0, 1.5, 1.5, 1.4, 1.3, 1.1, 1.1, 0.7, 0.3 - Primary (noninterest) expenditure (series shown): 20.6, 20.0, 22.3, 22.8, 23.7, 23.8, 23.8, 23.9, 24.0, 24.9, 25.7 - Automatic debt dynamics (series shown): -1.9, -2.5, -2.8, -2.3, -2.4, -2.6, -2.5, -2.6, -2.5, -2.7, -2.2 - Contribution from interest rate/growth differential (series shown): -2.7, -2.6, -2.2, -2.3, -2.3, -2.4, -2.4, -2.4, -2.4, -2.7, -1.9 - Contribution from average real interest rate (series shown): -0.6, -0.4, -0.1, -0.2, -0.2, -0.3, -0.3, -0.3, -0.4, -0.5, 0.0 - Contribution from real GDP growth (series shown): -2.1, -2.2, -2.1, -2.1, -2.1, -2.2, -2.1, -2.1, -2.0, -2.2, -1.9 - Residual, including asset changes (series shown): 1.4, 0.3, 1.4, 0.0, -0.6, -1.1, -0.9, -0.8, -0.1, -1.2, -4.4 - PV of public sector debt (series shown): 25.8, 26.7, 27.5, 28.0, 28.4, 28.8, 29.9, 33.1, 27.3 - Of which: foreign-currency denominated (series shown): 25.4, 26.4, 27.2, 27.8, 28.2, 28.6, 29.0, 31.2, 23.0 - Of which: external (series shown): 25.4, 26.4, 27.2, 27.8, 28.2, 28.6, 29.0, 31.2, 23.0 - Gross financing need (series shown): 2.0, 2.5, 4.0, 4.7, 5.2, 5.5, 5.2, 5.1, 5.0, 5.3, 6.7 - PV of public sector debt-to-revenue and grants ratio (in percent, series shown): 129.8, 137.1, 140.7, 142.1, 141.2, 142.7, 146.3, 161.9, 131.2 - PV of public sector debt-to-revenue ratio (in percent, series shown): 144.3, 148.9, 152.0, 152.8, 150.7, 151.3, 154.6, 167.8, 133.0 - Of which: external (series shown): 142.3, 147.1, 150.4, 151.3, 149.4, 150.1, 150.3, 157.8, 112.2 - Debt service-to-revenue and grants ratio (in percent, series shown): 4.3, 5.0, 6.1, 5.6, 4.0, 6.0, 6.2, 6.0, 6.0, 3.7, 8.4 - Debt service-to-revenue ratio (in percent, series shown): 5.1, 5.7, 6.8, 6.1, 4.4, 6.4, 6.6, 6.4, 6.3, 3.8, 8.5 - Primary deficit that stabilizes the debt-to-GDP ratio (series shown): 0.6, 2.2, 1.5, 2.4, 3.1, 3.6, 3.4, 3.3, 2.6, 3.9, 6.6 ### Sensitivity Analysis Highlights (selected entries from Table 2) - Baseline PV of debt-to-exports ratio (selected years): 26, 27, 28, 28, 29, 29, 31, 23 (presented as series) - One-time 30 percent nominal depreciation relative to the baseline in 2018 (B6) raises key ratios substantially in projected years (e.g., PV of debt-to-exports and PV of debt-to-revenue show sizable increases in the tables). - Bound tests (B1–B5) and alternative scenarios (A1–A2) produce higher debt ratios, indicating sensitivity to: - Real GDP growth shocks - Export value growth shocks - US dollar GDP deflator shocks - Net non-debt creating flow shocks - Example scenario outcome (from tables): PV of debt-to-revenue ratio baseline and stress values include entries like 147, 150, 151, 149, 150, 150, 158, 112 (presented as series across years and scenarios). ### Policy Recommendations and Authorities' Response (from statement) - Reinforce macroeconomic stability and diversify the economy and exports to increase resilience to external shocks. - Improve spending efficiency and implement the revenue mobilization strategy successfully. - Authorities’ key recent data and intentions: - Cambodian economy growth: 7 percent growth in 2016; expected to continue around 7 percent in 2017 and 2018. - Headline inflation: authorities expect headline inflation to decline to around 3 percent in 2018. - Credit growth: moderated to around 15 percent in the first half of 2017; projected to slow to 13 percent in 2018 from an average of 30 percent over the past five years. - Current account deficit: expected to narrow to 8.3 percent of GDP in 2017. - Gross official reserves: cover almost 6 months’ worth of imports of goods and services at end-June 2017; authorities see merit in staff’s recommendation to further build up the reserves buffer. - Authorities acknowledge staff’s view on near-term risks and medium-term challenges, broadly agree with staff’s recommendations, and will take them into consideration when formulating future policies. - Authorities remain vigilant to external downside risks including a growth slowdown in advanced economies, appreciation of the US dollar, or rise in protectionism, and are committed to measures and reforms to maintain economic and financial stability while ensuring sustainable growth. *Source: cr17325 - 12. Cambodia remains at low risk of debt distress. While the risk of debt distress is currently* ### 5. The authorities welcome staff’s acknowledgement of sustained financial deepening, which ### 5. The authorities welcome staff’s acknowledgement of sustained financial deepening, which ### Financial sector: soundness, risks, and policy measures - Findings - Sustained financial deepening has been a result of strong credit growth over the past years. - The banking sector has been profitable, with adequate capital buffers and provisions, as reflected by the core financial soundness indicators. - A potential pocket of vulnerability arises from high credit growth and the concentration of loans associated with the real estate and construction sectors. - Institutional response and data work - The Real Estate Data Collection and Coordination Working Group was established in January 2017 to collect and analyze data and monitor potential risks in the real estate sector to formulate well-targeted preemptive measures. - Prudential and macroprudential measures - The National Bank of Cambodia (NBC) introduced measures to enhance financial system resilience and rein in credit growth, including: - Phased implementation of the liquidity coverage ratio. - Bank-specific prudential measures such as higher minimum capital requirements for riskier and more systemically important banks. - These measures have helped bring down credit growth; authorities will continue close monitoring and remain committed to prudent policies to stabilize credit growth and maintain a strong financial system. - Microfinance and supervision - Microfinancial Institutions (MFIs) have played an important role in financial inclusion; some deposit-taking MFIs (MDIs) are becoming more systemically important. - Authorities introduced an interest rate cap on lending by MFIs, MDIs and Rural Credit Operators to improve credit culture and operational efficiency while protecting customers. - The NBC is strengthening regulations, including the liquidity risk management framework, capital buffer and external audit requirements for banks and financial institutions. - Authorities remain committed to a risk-based approach consistent with FSAP recommendations and look forward to continued Fund collaboration to improve data collection and enhance the crisis resolution framework, in particular the establishment of the financial stability committee. ### Monetary policy and Riel development - Exchange rate policy - A stable exchange rate against the US dollar remains appropriate given high dollarization and continues to serve as an important nominal anchor. - High degree of dollarization limits the NBC’s ability to implement monetary policy effectively. - Roadmap and policy development - A National Policy to promote greater use of the Riel has been developed and is being reviewed by the Economic and Financial Policy Committee before submission to the Cabinet for approval. - Market and operational measures - The NBC established in October 2016 the Liquidity-Providing Collateralized Operation (LPCO) to provide Riel liquidity to banks and financial institutions against negotiable certificate of deposits (NCDs). LPCOs have been issued on a regular basis to facilitate banks’ liquidity management and market-based monetary policy operations. - In December 2016, the NBC implemented a measure requiring banks and financial institutions to lend at least 10 percent in Riel. This has resulted in an increase in lending in Riel by banks and financial institutions. - Reserve requirements - Authorities re-imposed the reserve requirement on banks’ foreign borrowing in 2015. - Authorities believe any increase in the reserve requirement on foreign exchange liabilities should be undertaken on a gradual and well-sequenced basis, given other regulations in the pipeline. ### Fiscal policy, revenue mobilization, and debt - Fiscal stance and projections - Tax revenue is projected to continue to perform well as a result of the Revenue Mobilization Strategy (RMS), and exceed the Budget Law for fiscal year 2017. - The fiscal deficit is expected to widen due to higher capital spending and increases in public sector wages, as planned. - Expenditure priorities and frameworks - Authorities are determined to prioritize expenditure and further enhance revenue mobilization. - Development of a medium term fiscal framework (MTFF) is prioritized to improve expenditure allocation efficiency. - Expenditure priorities: education, health and infrastructure while ensuring social protection. - Public sector wage increases will be cautiously implemented and linked with public administration reform progress. - A new public-private partnership (PPP) law is being drafted to develop a well-designed PPP framework; a few PPP projects will be implemented on a pilot basis in line with international best practices. - Revenue-side measures - Authorities note the need to rationalize investment incentives and review other tax policies over the medium term and are committed to strengthening implementation of the RMS. - RMS II (2019 – 2023) is being developed to further enhance revenue mobilization and improve efficiency. - Authorities welcome the Fund’s technical assistance to develop the MTFF and the RMS II to ensure medium term fiscal sustainability. - Debt outlook - From the Debt Sustainability Analysis, Cambodia’s risk of debt distress remains low. - Authorities are committed to maintaining the debt-to-GDP ratio at a sustainable level over the medium term, acknowledging that access to concessional loans will diminish given Cambodia’s lower middle income status. ### Continuing the reform agenda - Structural reform priorities - Promote sustainable and inclusive high economic growth through economic diversification, strengthening competitiveness and promoting productivity via implementation of Industrial Development Policy. - Completion of hydropower projects will result in more affordable electricity and contribute to enhancing Cambodia’s business climate and competitiveness. - Continued focus on infrastructure projects including roads and irrigation to address structural bottlenecks and promote rural development. - Develop human capital through education reform, especially technical and vocational training, to strengthen productivity and promote inclusive growth. ### Conclusion: commitments and cooperation - Authorities’ commitments - Committed to preserving macroeconomic and financial stability, promoting sustainable and inclusive growth, and stand ready to implement any measures deemed appropriate. - Will continue efforts to further improve macroeconomic and financial sector regulatory frameworks in line with the Fund’s policy recommendations. - International cooperation - Authorities express appreciation to the Fund for continuing support through policy advice and technical assistance and look forward to continued support from the Fund. *IMF staff summary as provided in the source content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17325.pdf_