## 1.    Continued Recovery of the Cambodian Economy

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### Context and recent structural shifts
- Growth record and composition
  - Cambodia averaged around 7 percent real GDP growth annually in the past decade.
  - Real GDP growth: 3.0 percent in 2021 and 5.2 percent in 2022.
  - Despite rebound, real GDP level for 2022 is 14 percent below the pre-pandemic trend; growth rate lower than pre-COVID era.
- External integration and FDI
  - Exports as percent of GDP: 54 percent in 2010 → 78 percent in 2022.
  - Net FDI inflows: less than 3 percent of GDP in early 2000s → over 11 percent in 2022.
- Structural transformation and social outcomes
  - Employment composition since 2010: agriculture declined from 55 to less than 40 percent; industry increased from 16 to 25 percent.
  - Construction share of GDP: 4.9 percent in 2012 → over 10 percent in 2022.
  - Poverty rate declined from 36.7 percent in 2014 to 16.6 percent in 2022 (2023 Global Multidimensional Poverty Index, UNDP and University of Oxford).
- Medium-term challenge
  - Need to upgrade and diversify export portfolio away from lower value-added garments and footwear; potential headwinds from structural slowdown in China.

### Recent developments (selected findings and indicators)
- Output and sectoral performance
  - Manufacturing contributed over 3 percent to real GDP in 2022; agriculture grew 0.7 percent y/y in 2022.
  - Real GDP recovery: 3 percent in 2021 → 5.2 percent in 2022.
- Exports and trade composition
  - Exports declined in Q1 2023, recovered recently led by electronics (notably solar panels).
  - U.S. tariff exemption starting mid-2022 supported solar manufacturing exports.
  - Garment export growth slowed since late 2022.
- Tourism and services
  - International tourist arrivals grew over 10 folds in 2022 vs 2021.
  - As of September 2023, arrivals reached around 80 percent of pre-pandemic levels; most arrivals from ASEAN; arrivals from China resumed but remain a small fraction of pre-pandemic levels.
- Prices and inflation
  - Inflation: 7.8 percent in June 2022 → 0.07 percent in June 2023 → rebounded to 3.9 percent in October 2023.
  - Food and fuel inflation were major drivers of H1 decline and the recent rebound.
  - Property price growth increased since mid-2022 due to higher real estate demand for affordable residential housing.
- Monetary and financial conditions
  - NBC increased bank reserve requirements for foreign currencies to 9 percent; KHR rate unchanged.
  - NCD rates (2022): USD from 0.06 to 1.54 percent; KHR from 1.22 to 1.37 percent; later reduced to 1.2 and 0.86 percent for USD and KHR respectively as of mid-October.
  - Credit growth decelerated to 8.1 percent y/y in August 2023 (from 23.5 percent in 2021); private credit-GDP ratio around 160 percent.
  - NPLs increased from 1.74 percent at end-2021 to 4.6 percent in August 2023.
  - Restructured loans: 12.5 percent of total loans in 2021 → 6.2 percent in 2022; loan restructuring policy withdrawn fully in June 2022.
  - Banks’ liquid asset to total asset ratio declined since the pandemic; FX open position increased.
- Fiscal and external developments
  - Fiscal deficit for 2022 estimated around 1 percent of GDP (down from 7.1 percent in 2021); cyclically adjusted fiscal balance for 2022 around -0.5 percent of GDP.
  - Current account deficit: about 42 percent of GDP in 2021 → about 26 percent in 2022; adjusted 2022 current account deficit to -13.6 percent of GDP after treating gold imports as partially temporary.
  - Gold imports: 22 percent of GDP in 2021 → 16 percent of GDP in 2022; significantly further declined in first nine months of 2023.
  - Financial inflows decreased to 24 percent of GDP in 2022; FDI share of GDP declined slightly in 2022.
  - International reserves decreased by US$2.5 billion to 17.8 US$ billion in 2022 and remain above 7 months of prospective imports.
  - NBC FX interventions: since September, sold US dollars twice per week; total sales about US$140 million as of mid-October.
- Political transition
  - General election in July won by incumbent Cambodian People’s Party; new government took office in September, prioritizing macroeconomic and financial stability and reform efforts.

### Authorities’ views (summary)
- Broad agreement with staff on weak garment export recovery and strong non-garment exports.
- Noted tourism rebound but shorter stays and lower average expenditure than pre-pandemic.
- Consider recent NPL increase temporary, linked to ending of COVID-19 forbearance measures.
- Attributed increase in banks’ net FX open positions partly to de-dollarization measures requiring at least 10 percent of bank loans to be made in riel.

### Outlook, projections, and scenarios
- Growth projections
  - Projected growth for 2023: 5.3 percent.
  - Medium-term growth projected at around 6.3 percent (staff) / authorities target 7 percent annually over the medium term.
  - Output gap projected to close and turn positive by 2025 but toward potential below pre-crisis trend.
- Inflation
  - Expected to average 2.3 percent in 2023 and converge to around 3 percent by 2024 absent further commodity shocks.
- Fiscal projections
  - Fiscal deficit expected to widen to around -3.6 percent of GDP in 2023, then fall to around -2.0 percent in 2024 and reach 2.5 percent over the medium term.
  - 2023 deficit increase driven by 2023 South-East Asia Games, General Election, scheduled public sector wage increase, and completion of incomplete infrastructure projects from 2022.
  - Revenue-to-GDP ratio expected to increase modestly over the medium term with tax and customs reforms.
- Debt outlook
  - Total PPG debt-to-GDP ratio: 35 percent of GDP as of end-2022.
  - Staff DSA baseline: projected to rise by around 4 percentage points of GDP during the next decade due to higher financing costs; risk of debt distress remains low.
- Current account and reserves
  - Current account deficit expected to fall to about 2 percent of GDP at end-2023, mainly due to decline in gold imports and improvement in trade balance excluding gold.
  - From 2024, current account deficit expected to converge to historical average; international reserves expected to remain stable and above 7 months of imports through projections.

### Downside risks (tilted to the downside)
- External demand shocks
  - A 1 percent decline in US economic activity could reduce Cambodia’s output by about 0.5 percent in the short term; US accounts for over 40 percent of Cambodia’s exports.
  - A 1 percent decline in Chinese economic activity could reduce Cambodia’s output by about 0.6 percent after 1 year.
- US monetary tightening
  - A 100-basis point increase in the US monetary policy rate is estimated to reduce Cambodia’s GDP by about 1.1 percent after four quarters.
- Domestic vulnerabilities
  - High private sector debt (private credit-GDP ratio around 160 percent) creates pockets of solvency risk if rates rise and profits decline.
- Geo-economic fragmentation
  - High trade openness and strong ties with US and China make Cambodia susceptible to fragmentation; modeled output loss from a three-bloc fragmentation scenario: output loss 3.3 percent and welfare loss 6.0 percent.
- Other risks
  - Commodity price volatility (sustaining higher inflation), governance weakness, extreme climate events (flood, drought, changing monsoon patterns), and disorderly climate transition causing supply disruption and lower growth.

### Fiscal policy: stance, outlook, and recommendations
- Recent stance and performance
  - Prudent fiscal policy over the past decade kept gross government debt around 30 percent of GDP before the pandemic.
  - Budget for 2023 targeted a deficit around 5 percent of GDP—an increase of about 4 percentage points of GDP compared to 2022 (0.5 percent of GDP additional current, 1.5 percent of GDP additional capital, and about 2 percent of GDP lower projected revenue).
  - Actual 2023 deficit expected to be lower than budgeted due to better-than-expected non-tax revenues and expense savings from efficiency improvements.
- Policy recommendations
  - Allow fiscal position to improve in 2024 as economy and revenue expand; return fiscal stance to neutral in 2024.
  - From 2024, expenditure-to-GDP ratio projected to narrow while retaining targeted fiscal support to the poor through social protection system reform.
  - Strengthen fiscal framework:
    - Implement a fiscal rules framework combining a medium-term anchor on debt-to-GDP and an operational ceiling on overall fiscal deficit.
    - Develop a clear medium-term fiscal strategy based on systemized fiscal space assessment and aggregate expenditure ceilings.
    - Continue IMF-assisted capacity development to complete components of a medium-term fiscal framework (MTFF).
  - Fiscal risk management:
    - Map fiscal risks comprehensively, enhance quantification methods for macroeconomic risks and SOE/PPP risks, redesign sectoral ceilings formulation, establish formal coordination/data sharing for MTFF, and publish a comprehensive MTFF.
  - Public investment management:
    - Strengthen public investment planning and implementation (rolling 3-year PIP, SOPs for domestically funded projects, portfolio monitoring systems, procurement and implementation standards).
  - Government bond market:
    - Establish a government bond market to increase market-based domestically financed government debt.
    - Initial local-currency sovereign bond offering in 2022 raised around US$17.5 million (less than 0.1 percent of GDP); 2023 actual issuance projected around US$60 million versus announced US$200 million plan.

### Monetary and financial sector guidance: normalization, modernization, and stability
- Normalization and prudential steps
  - Monetary policy measures implemented during the pandemic should continue to be fully normalized; monetary stance should normalize to neutral in 2024 as output gap closes and inflation remains moderate.
  - Loan forbearance fully rolled back in June 2022; provisioning requirements reintroduced.
  - NPLs should continue to be promptly recognized and provisioned for.
  - NBC issued regulations to strengthen regulatory capital and intends to lift reserve requirements back to pre-pandemic settings in 2024 (original plan to raise foreign currency RR to 12.5 percent at beginning of 2024 postponed to end-2024).
- Operational modernization to support monetary transmission and de-dollarization
  - Recommended improvements:
    - Establish an effective interest rate corridor (introduce an overnight marginal Deposit Facility, streamline overnight Marginal Lending Facility).
    - Develop accurate liquidity forecasting framework (model-based approaches for currency in circulation and government deposits).
    - Refine instruments: averaging mechanism for banks’ KHR reserve requirement, lengthen RR maintenance period, introduce a 7-day liquidity supply instrument.
    - Expand interbank market transactions and monitoring: NBC collecting interbank transaction data from largest 10 banks since July 2022.
    - Strengthen market determination of exchange rate and operationalize FX intervention procedures (shift to market-based official exchange rate calculation; move FX auctions to NBC platform).
- Banking sector soundness and macroprudential policy
  - Banking sector well capitalized and profitable on indicators, but asset quality deterioration and high private sector debt require close monitoring.
  - Recommendations:
    - Strengthen supervisory framework, transition to risk-based supervision and implement Basel III.
    - Enhance data gathering/analysis capacity.
    - Develop full macroprudential strategy and toolkit including borrower-based tools and enhanced capital requirements.
    - Strengthen legal and operational frameworks for corporate insolvency and bank resolution.
- AML/CFT
  - Cambodia exited FATF Increased Monitoring in February 2023 after implementing Action Plan; continued strengthening of AML/CFT framework encouraged.
  - Ensure effective implementation of reporting requirement for import/export gold with value ≥ USD 10,000 and enable enforcement by GDCE.
- Authorities’ stance
  - Agreed on need to normalize but cautious on pace to avoid impeding credit growth; holding off on raise in foreign currency RR to support bank liquidity and allow NPLs to stabilize.
  - NBC actions: draft prakas on capital requirements, increased tenure of MLF from 5 days to unlimited rolling basis, and modernization of monetary policy framework.
  - Authorities working on a new AML/CFT strategy with national risk assessments to be published in 2024.

### Structural reforms, export diversification, human capital, and climate transition
- Strategy and priorities
  - New “Pentagon Strategy” (announced August 2023) focuses on:
    1) crisis-resilient economic growth,
    2) job creation,
    3) poverty reduction,
    4) improving governance capacity and quality of public institutions,
    5) sustainable socio-economic development.
  - Phase I (starting 2023) includes six policy programs: expanding universal healthcare; vocational training for at-risk youth; formalizing social aid for vulnerable households; transitioning workers from informal to formal economies; coordinating/funding stable fair pricing for key crops; deploying agri-tech officers and forming rural farmers' associations.
- Export diversification and human capital
  - Cambodia leveraged low-cost labor for labor-intensive exports; as incomes rise this advantage will diminish.
  - To sustain growth: expand and upgrade positioning in global value chains (GVCs) via improved infrastructure, institutions, and skilled labor force.
  - Exports are more diversified than predicted by development level, but education and human capital need significant enhancement.
  - Policy priority: improve trade competitiveness, attractiveness to FDI, and geographically diversify export markets.
- Climate transition and investment opportunities
  - Government commitment: invest an additional US$6.5 billion in renewable energy infrastructure from 2026 onwards.
  - Decarbonization trends create opportunities to attract FDI and develop new industry expertise; recent growth in solar panel and electrical parts manufacturing and exports is encouraging.

### Governance, corruption, and data quality
- Corruption and governance assessment
  - Corruption "continues to hamper economic development."
  - Slight improvement in Corruption Perception Index by Transparency International in past 10 years; perception-based caveat noted.
  - Persisting vulnerabilities in rule of law, regulatory quality, anticorruption legal frameworks, and enforcement.
  - Sectors with transparency/accountability challenges: extractives, land and infrastructure development, public procurement, and execution of education-related projects.
- Legal and institutional reform priorities
  - Priority actions:
    - Swift adoption of Law on Witness Protection and Whistleblower Protection Law.
    - Refine asset declaration regime for digital compilation and publication; mandate disclosure of high-level officials' interests and beneficially owned assets; expand to cover close relatives.
    - Enact comprehensive Law on Transparency and Access to Information.
    - Increase transparency in judicial proceedings and ensure disclosure of beneficial owners benefiting from public contracts.
    - Provide additional resources for enforcement agencies.
- Data and statistical quality
  - NIS rebasing National Accounts with 2014 base year underway with IMF Statistics Department support; completion and dissemination of new series should be prioritized.
  - Authorities plan to publish rebased annual GDP for 2023 in March 2024 and start introducing quarterly GDP data in June 2024.
  - CPI re-basing interest expressed; CPI and PPI data deficiencies noted (outdated weights, limited coverage); NBC launched RPPI in June 2022.
  - Balance of Payments and trade data discrepancies need resolution.

### External sector assessment (Annex I) — position and adjustments
- Overall assessment
  - Cambodia’s external position in 2022 remains substantially weaker than implied by medium-term fundamentals after adjusting for temporary factors (mainly high gold imports, tourism receipts below pre-pandemic, and medical imports).
- Current account and gold treatment
  - Reported/current account (CA-Actual): -26.1 percent of GDP in 2022.
  - Gold imports accounted for about 16 percent of GDP in 2022; staff adjusted CA by half of total gold imports (reducing deficit by 8 percentage points of GDP) to obtain Adjusted CA: -13.6 percent of GDP.
  - CA Norm: -6.4 percent of GDP; adjusted CA Gap: -7.2 percent of GDP (equivalent to REER overvaluation about 11.7 percent); REER-model gap range up to -17.7 percent of GDP.
  - Uncertainty: estimated current account gap can range from around 0 to -15 percent of GDP depending on permanence of gold imports.
- Reserves
  - Gross reserves decreased by US$2.5 billion in 2022 to 17.8 US$ billion (62 percent of GDP) and corresponded to over 7 months of prospective imports; reserves remain broadly stable at 18.4 US$ billion in first half of 2023.
  - Recommendation: maintain high level of international reserves given export dependence, managed peg, and high dollarization.

### Nowcasting and assessment of external shocks (Annex IV and related notes)
- Nowcasting Cambodia’s GDP
  - Nowcast models (Bridge, MIDAS, U-MIDAS) using high-frequency indicators (tourist arrivals, exports, credit growth, international reserves, foreign growth) produced real-time estimates:
    - 2023Q1: real GDP y/y expanded by 4.6 percent; Q1 q/q from 0.3 to 1.1 percent.
    - 2023Q2: real GDP y/y 4.9 percent; Q2 q/q 2.9 percent.
  - Key robust drivers of quarterly GDP growth: international arrivals and exports.
  - Caveat: two-step procedure (Chow-Lin interpolation then nowcasting) can impart statistical significance to variables used in interpolation.
- Spillovers from China and US (local projections and sectoral analysis)
  - Aggregate spillovers:
    - 1 percentage point increase in China GDP → about 0.4 percent increase in Cambodia GDP after one quarter and about 0.6 percent after four quarters.
    - US output shocks correlate more immediately but smaller magnitude (about 0.5 percent) and lose significance after about one year.
  - Sectoral heterogeneity:
    - Sectors with high input-dependence on China or output-dependence on the US experience larger differential effects (examples: construction, garments).
- US monetary tightening (Annex VI)
  - A 100-basis point US monetary tightening associated with about 0.9 percent decline in Cambodia GDP after one quarter and about 1.1 percent decline after four quarters.
  - Corporate solvency simulations:
    - Macro-level ICR remained well-above debt-at-risk threshold pre-COVID and in 2022 (ICR ≈ 3.3–3.8 series depending on dataset).
    - Firm- and industry-level heterogeneity: some listed firms and industries (real estate, accommodation and food service, agriculture) have low or negative ICRs; combined profit and interest shocks can push several industries close to or below debt-at-risk threshold (ICR < 1).
    - Policy implication: improve insolvency regimes and debt restructuring procedures; enhance data and macroprudential toolkit.

### Debt sustainability, stress tests, and climate vulnerability
- Coverage and baseline assumptions
  - DSA covers central government debt and debt guaranteed by central government to SOEs; external public debt ~ US$9.97 billion (35 percent of GDP) by end-2022.
  - PPP capital stock estimated at 20.7 percent of GDP (end-2022); contingent liability of PPPs estimated at 7.3 percent of GDP.
  - Private external debt estimated ~43 percent of GDP in 2022 (excluded from DSA).
  - New external borrowing assumed around 3–3.5 percent of GDP over medium term; domestic bond issuance assumed to rise from <0.1 percent of GDP in 2022 to about 2 percent of GDP by 2043.
- Baseline debt dynamics and risk rating
  - Total PPG debt increases from 35 percent of GDP in 2022 to around 40 percent of GDP in 2033 under greater domestic financing mix, then gradually falls; present value of external debt ~21 percent of GDP end-2022.
  - Risk of external debt distress: Low; Overall risk of debt distress: Low.
  - Staff DSA baseline projects PPG debt-to-GDP to rise by around 4 percentage points during the next decade.
- Stress test outcomes
  - Natural disaster scenario calibrated with mitigation cost 10 percent of GDP (≈ US$2.9 billion), interaction coefficients: GDP growth fall 1.5, exports fall 3.5.
  - Exports shocks most severe: PV of external debt-to-GDP rises from around 22 percent in 2023 to around 35 percent under export shock scenario.
  - Under growth shock scenario, PV total debt-to-GDP could rise to 50 percent by 2033 but remain below 55 percent threshold in scenarios presented.
  - Contingent liability (financial market shock of 10 percent of GDP) produces a notable spike in debt service-to-revenue ratio, notably in 2029.
- Policy implications
  - Maintain fiscal discipline and robust public debt management while promoting long-term growth.
  - Preserve macroeconomic stability, diversify economy and exports, improve spending efficiency, implement revenue mobilization strategy, strengthen PPP and public investment management, and close data gaps (external private debt, PPP stock).

*Source: 1khmea2024001 - 1. Continued Recovery of the Cambodian Economy*

### 1.    Continued Recovery of the Cambodian Economy  _____________________________________________24

### 1.    Continued Recovery of the Cambodian Economy

### Context
- Cambodia averaged around 7 percent real GDP growth annually in the past decade, compared to a median of around 5 percent for EMDE Asia.
- Real GDP growth: 3.0 percent in 2021 and 5.2 percent in 2022, compared to Asia EMDE medians of 2 and 3 percent.
- Exports as percent of GDP grew from 54 percent in 2010 to 78 percent in 2022, led by labor-intensive manufacturing (garments and footwear).
- Net FDI inflows increased from less than 3 percent of GDP in early 2000s to over 11 percent in 2022.
- Employment composition shifts since 2010:
  - Agriculture share declined from 55 to less than 40 percent.
  - Industrial sector share increased from 16 to 25 percent.
- Construction share of GDP grew from 4.9 to over 10 percent from 2012 to 2022.
- Poverty rate declined from 36.7 percent in 2014 to 16.6 percent in 2022 (2023 Global Multidimensional Poverty Index, UNDP and University of Oxford).
- Despite rebound, real GDP level for 2022 is 14 percent below the pre-pandemic trend; growth rate lower than pre-COVID era.
- Key medium-term challenge: reignite solid and inclusive growth; need to upgrade and diversify export portfolio away from lower value-added garments and footwear; potential headwinds from structural slowdown in China.

### Recent developments (selected findings)
- Real GDP recovery: growth rose from 3 percent in 2021 to 5.2 percent in 2022; manufacturing contributed over 3 percent to real GDP in 2022; agriculture grew 0.7 percent y/y in 2022.
- Exports:
  - Declined in Q1 2023, recovered recently led by electronics (notably solar panels).
  - U.S. tariff exemption starting mid-2022 supported solar manufacturing exports.
  - Garment export growth slowed since late 2022.
- Tourism:
  - International tourist arrivals grew over 10 folds in 2022 vs 2021.
  - As of September 2023, arrivals reached around 80 percent of pre-pandemic levels; most arrivals from ASEAN; arrivals from China resumed but remain a small fraction of pre-pandemic levels.
- Inflation:
  - Reached 7.8 percent in June 2022, declined to 0.07 percent in June 2023, rebounded to 3.9 percent in October 2023.
  - Food and fuel inflation major drivers of H1 decline and recent rebound.
  - Property price growth increased since mid-2022 due to higher real estate demand for affordable residential housing.
- Monetary policy and financial conditions:
  - NBC increased bank reserve requirements for foreign currencies to 9 percent; KHR rate unchanged.
  - NCD rates increased in 2022: USD from 0.06 to 1.54 percent; KHR from 1.22 to 1.37 percent; later reduced to 1.2 and 0.86 percent for USD and KHR respectively as of mid-October to encourage credit growth.
  - Credit growth decelerated to 8.1 percent y/y in August 2023 (from 23.5 percent in 2021); private credit-GDP ratio around 160 percent.
  - NPLs increased from 1.74 percent at end-2021 to 4.6 percent in August 2023.
  - Restructured loans declined from 12.5 percent of total loans in 2021 to 6.2 percent in 2022; loan restructuring policy withdrawn fully in June 2022.
  - Banks’ liquid asset to total asset ratio declined since the pandemic; FX open position increased.
- Fiscal and external:
  - Fiscal deficit for 2022 estimated at around 1 percent of GDP (down from 7.1 percent in 2021); cyclically adjusted fiscal balance for 2022 around -0.5 percent of GDP.
  - Current account deficit declined from about 42 percent of GDP in 2021 to about 26 percent in 2022; adjusted 2022 current account deficit to -13.6 percent of GDP after treating gold imports as partially temporary.
  - Gold imports: 22 percent of GDP in 2021 to 16 percent of GDP in 2022; significantly further declined in first nine months of 2023.
  - Financial inflows decreased to 24 percent of GDP in 2022; medium-to-long term loans broadly stable; FDI as share of GDP declined slightly in 2022.
  - International reserves decreased by 2.5 US$ billion to 17.8 US$ billion in 2022 and remain above 7 months of prospective imports.
  - NBC FX interventions: since September, sold US dollars twice per week; total sales about US$140 million as of mid-October.
- Political:
  - General election in July won by incumbent Cambodian People’s Party; new government took office in September, prioritizing macroeconomic and financial stability and reform efforts.

### Authorities’ views (summary)
- Authorities broadly agreed with staff assessment: weak recovery in garment exports with high uncertainty; strong non-garment exports.
- Noted tourism rebound but shorter stays and lower average expenditure than pre-pandemic.
- Consider recent NPL increase temporary, linked to ending of COVID-19 forbearance measures.
- Attributed increase in banks’ net FX open positions partly to de-dollarization measures requiring at least 10 percent of bank loans to be made in riel.

### Outlook and risks (projections and key scenarios)
- Growth:
  - Projected growth for 2023: 5.3 percent.
  - Medium-term growth projected at around 6.3 percent, contingent on reform implementation.
  - Output gap projected to close and turn positive by 2025 but toward potential below pre-crisis trend.
- Inflation:
  - Expected to average 2.3 percent in 2023 and converge to around 3 percent by 2024 absent further commodity shocks.
- Fiscal:
  - Fiscal deficit expected to widen to around -3.6 percent of GDP in 2023, then fall to around 2 percent in 2024 and reach 2.5 percent over the medium term.
  - Increase in 2023 deficit driven by 2023 South-East Asia Games, General Election, scheduled public sector wage increase, and completion of incomplete infrastructure projects from 2022.
  - Revenue-to-GDP ratio expected to increase modestly over the medium term with tax and customs reforms.
- Debt:
  - Total PPG debt-to-GDP ratio 35 percent of GDP as of end-2022.
  - Staff DSA baseline: projected to rise by around 4 percentage points of GDP during the next decade due to higher financing costs; risk of debt distress remains low.
  - Cambodia’s external debt remains vulnerable to shocks in exports and growth.
- Current account and reserves:
  - Current account deficit expected to fall to about 2 percent of GDP at end-2023, mainly due to decline in gold imports and improvement in trade balance excluding gold.
  - From 2024, current account deficit expected to converge to historical average; international reserves expected to remain stable and above 7 months of imports through projections.
- Major downside risks (tilted to the downside):
  - Deeper and prolonged slowdown in import demand from advanced economies: a 1 percent decline in US economic activity could reduce Cambodia’s output by about 0.5 percent in the short term (Annex V); US accounts for over 40 percent of Cambodia’s exports.
  - Weaker Chinese prospects: a 1 percent decline in Chinese economic activity could reduce Cambodia’s output by about 0.6 percent after 1 year (Annex V); significant medium-term effects on construction and input-dependent sectors.
  - US monetary tightening: a 100-basis point increase in the US monetary policy rate is estimated to reduce Cambodia’s GDP by about 1.1 percent after four quarters (Annex VI).
  - High private sector debt: large private debt build-up could expose pockets of solvency risk across industries and firms if rates rise and profits decline (Annex VI).
  - Geo-economic fragmentation: high trade openness and strong ties with US and China make Cambodia vulnerable; potential economic costs of fragmentation could be large, above those for other ASEAN economies (Annex VII).
  - Other risks: commodity price volatility (sustaining higher inflation), governance weakness, extreme climate events (flood, drought, changing monsoon patterns), and disorderly climate transition causing supply disruption and lower growth.

*Source: 1khmea2024001 - 1. Continued Recovery of the Cambodian Economy*

### 21.      The authorities shared the staff’s view on risks but are more sanguine about the

### The authorities shared the staff’s view on risks but are more sanguine about the growth outlook

### Authorities’ growth outlook and risk assessment
- Authorities expect 2024 growth to reach 6.5 percent on the back of strong growth in tourism and agriculture, as well as garment sector recovery.
- They noted the recent opening of Siem Reap International Airport may draw new sources of tourists.
- FDIs in the garment sector saw significant increase in 2023 (23 percent y/y), which bodes well for future production growth.
- On the non-tradable sector:
  - High-end real estate has been weak due to a dry-up of foreign investment and demand, negatively impacting the construction sector.
  - Domestic demand for affordable housing remains steady as population and income level continue to grow.
- Over the medium term, the authorities’ goal is to target an annual growth rate of 7 percent, as the country broadens its export markets and diversifies its export portfolios.
- On risks, they generally agreed with the staff’s view.

### Fiscal policy — recent stance, outlook, and recommendations
Findings and recent developments
- Prudent fiscal policy over the past decade kept the debt-to-GDP ratio broadly stable; gross government debt was maintained at around 30 percent of GDP before the pandemic.
- Increased spending needs during the pandemic and simultaneous revenue shortfalls led to a deterioration of the fiscal balance and increased public debt.
- The budget for 2023 targeted a deficit of around 5 percent of GDP—an increase of about 4 percentage points of GDP compared to 2022.
  - Part of the increase is due to additional spending (about 0.5 percent of GDP for current and 1.5 for capital).
  - A significant part is due to lower projected revenue (2 percent of GDP).
- The actual deficit for 2023 is expected to be lower than budgeted, in part due to better-than-expected non-tax revenues and expense savings from efficiency improvement.
Policy outlook and recommendations
- The fiscal position should be allowed to improve in 2024 as the economy and revenue continue to expand.
- Starting from 2024, the expenditure-to-GDP ratio is projected to narrow in line with the authorities’ commitment to scaling back temporary economic support measures (including cash transfers), while retaining targeted fiscal support to the poor through social protection system reform.
- The revenue-to-GDP ratio is expected to increase modestly due to continued improvement in tax and customs administration.
- Key challenge: balance fulfilling development objectives and ensuring fiscal sustainability given Cambodia’s government revenues and expenditures as percent of GDP are both lower than emerging market country averages.
- Strengthening the fiscal framework is recommended:
  - Implement a fiscal rules framework that combines a medium-term anchor on the debt-to-GDP ratio and an operational ceiling on the overall fiscal deficit.
  - Develop a clear medium-term fiscal strategy based on a systemized approach to assessing fiscal space and determining aggregate expenditure ceilings.
  - Continue IMF-assisted capacity development to complete components of a medium-term fiscal framework (MTFF).
- Fiscal risk management:
  - Develop a comprehensive mapping of fiscal risks consolidating data on exposure and mitigation, expanding scope of risks covered.
  - Enhance methods for quantification of fiscal risks, particularly macroeconomic risks and risks associated with state-owned enterprises and public-private partnerships.
  - Redesign the formulation process for indicative medium-term sectoral ceilings by computing sectoral baselines and improving allocation methods.
  - Establish formal coordination and data sharing mechanisms for timely MTFF preparation and publish a comprehensive MTFF to improve transparency and accountability.
- Public investment management:
  - Continue strengthening public investment planning and implementation capacity.
  - Maintain and expand reforms: rolling 3-year public investment plan (PIP), SOPs for domestically funded projects, coordination across government levels, portfolio monitoring systems and supporting IT, and elevate domestic procurement and project implementation standards.
- Government bond market:
  - Establishing a government bond market is important to increase market-based and domestically financed government debt.
  - Current public external debt comprises only of concessional finance.
  - Cambodia issued the initial tranche of its first-ever local-currency sovereign bond offering in 2022 and by end of the year has raised around US$17.5 million, less than 0.1 percent of GDP.
  - For 2023, the government announced plans to raise US$ 200 million via bonds. The actual issuance for the year is projected to be around US$60 million.
Authorities’ views on fiscal policy
- Strong commitment to fiscal sustainability and to rebuild the fiscal buffer with a gradual consolidation path starting in 2024.
- Plan to boost revenues through improvements in administration and efficiency rather than introducing new taxes.
- Implementation of capital gains tax is still under discussion; policies on excise taxes for 2024-2028 are being finalized.
- Emphasized benefits of tax incentives in attracting investments despite low tax revenues / GDP ratio.
- Expenditure priorities will align with the new government’s Pentagon Development Strategy, including expanding healthcare coverage and skill training, institutionalizing social transfer programs, and supporting agriculture.
- Preparing a MTFF for 2025-2027 alongside the 2024 budget, to be submitted to the Council of Ministers for approval by April 2024.
- Agreed on importance of developing the government bond market but stressed the need to find investment projects with sufficient social-economic returns to justify debt service costs, especially given the higher interest rate environment.

### Monetary and financial sector policies — normalization, modernization, and stability
Monetary normalization and prudential steps
- Monetary policy measures implemented during the pandemic should continue to be fully normalized.
- Monetary policy is currently accommodative and should normalize to ensure a neutral stance in 2024 as the output gap closes and inflation remains moderate.
- Loan forbearance was fully rolled back in June 2022, with reintroduction of provisioning requirements.
- NPLs should continue to be promptly recognized and provisioned for.
- NBC has issued regulations requiring financial institutions to strengthen regulatory capital and announced intention to lift reserve requirements back to pre-pandemic settings in 2024.
- Going forward, monetary policy decisions should remain data-dependent and flexible to adjust to output and inflation shocks; any signs of private sector debt distress should be closely watched.
Monetary and FX operations modernization to support monetary transmission and de-dollarization
- Managed peg and widespread dollarization reduce monetary policy responsiveness to external shocks; central bank aims to move from de facto exchange rate targeting to more direct targeting of inflation.
- Main improvement areas identified by Fund TA (some implemented or planned by authorities):
  - Establish an effective interest rate corridor (IRC): improve current partial IRC by introducing an overnight marginal Deposit Facility and streamlining the overnight Marginal Lending Facility (MLF). NBC is reviewing operational issues as a pre-step to introduce overnight deposit facility.
  - Develop an accurate liquidity forecasting framework: NBC is working to establish and refine model-based approaches to forecast short-term changes in currency in circulation and government deposits.
  - Refine operational instruments: introduce an averaging mechanism for banks’ KHR reserve requirement (RR) and lengthen the RR maintenance period; NBC preparing to introduce a 7-day liquidity supply instrument.
  - Expand interbank market transactions and monitoring: NBC has started collecting information on interbank money market transactions from the largest 10 banks since July 2022; NBC platform could be used as a reporting system for interbank market transactions.
  - Strengthen market determination of exchange rate and operationalize FX intervention procedures: shift to a market-based official exchange rate calculation mechanism in August 2022 was welcome and could be finetuned by collecting bank-customer transactions data; work to move FX auctions to the NBC system platform is ongoing.
- Note on reserve requirement plans: The NBC originally planned to raise the requirement on foreign currency to 12.5 percent at the beginning of 2024 while keeping the reserve requirement on riel unchanged. It has postponed the planned raise to the end of 2024.
Banking sector soundness and macroprudential policy
- Banking sector is well capitalized and profitable according to financial soundness indicators, but recent deterioration in asset quality and the high level of private sector debt require close monitoring.
- Recommendations:
  - Continue to strengthen supervisory framework, transition to risk-based supervision and implement Basel III.
  - Enhance data gathering and analysis capacity.
  - Develop a full macroprudential strategy and toolkit including borrower-based tools and enhanced capital requirements.
  - Substantially strengthen legal and operational frameworks for corporate insolvency and bank resolution.
AML/CFT
- Commended implementation of the Action Plan agreed with FATF enabling Cambodia’s exit from the FATF list of Jurisdictions under Increased Monitoring in February 2023.
- Encourage continued strengthening of the AML/CFT framework.
- In view of recent large movements in non-monetary gold imports and exports: ensure effective implementation of the requirement for reporting of import and export gold with a value equal to or exceeding USD 10,000, including enabling effective enforcement by the General Department of Customs and Excise (GDCE).
Authorities’ views on monetary and financial policy
- Agreed with the need to normalize monetary policy but had reservations about the pace; viewed recent credit deceleration as largely supply driven due to increased NPLs and higher provisioning needs.
- Argued raising reserve requirements now may further reduce credit growth and impede economic recovery; thus holding off on the raise to support bank liquidity and allow NPLs to stabilize.
- NBC actions: issued draft prakas on capital requirement to strengthen regulatory capital, increased tenure of MLF from 5 days to unlimited rolling basis, and modernizing monetary policy framework.
- Authorities working on a new AML/CFT strategy supported by national risk assessments, to be published in 2024.

### Structural reforms, export diversification, and climate transition
Structural reform agenda and the Pentagon Strategy
- New government presents an opportunity to re-invigorate structural reform agenda aimed at reaching upper-middle-income status by 2030.
- The “Pentagon Strategy” (announced August 2023) focuses on five strategic objectives:
  1) crisis-resilient economic growth,
  2) job creation,
  3) poverty reduction,
  4) improving governance capacity and quality of public institutions,
  5) sustainable socio-economic development.
- Phase I of the Strategy (immediate implementation starting 2023) includes six key policy programs:
  i) expanding universal healthcare,
  ii) offering vocational training for at-risk youth,
  iii) formalizing social aid for vulnerable households,
  iv) transitioning workers from informal to formal economies,
  v) coordinating and funding stable, fair pricing for key crops,
  vi) deploying agri-tech officers in all farming communities and forming rural farmers' associations.
Export diversification, human capital, and GVC positioning
- Over the past decade, Cambodia leveraged low-cost labor for labor-intensive manufacturing exports, but as income rises the labor cost advantage will diminish.
- Achieving sustained growth requires expanding and upgrading positioning in global value chains (GVCs), which depends on improved infrastructure, institutions, and a skilled labor force.
- Cambodia’s exports are already more diversified than predicted by the country’s development level, but education and human capital need significant enhancement to accommodate rising demand for skills.
- Diversifying trade and investment partners can support resilience: Cambodia occupies an intermediate position in GVCs and is susceptible to supply and demand shocks abroad, including a structural slowdown in China.
  - The US is Cambodia’s largest export destination, while China is the largest import and FDI source.
  - Policy priority: improve trade competitiveness, attractiveness to FDI, and geographically diversify export markets.
Climate transition and investment opportunities
- Climate transition presents development opportunities: investments in new energy sources increase climate preparedness and raise prospects for higher productivity growth and efficiency gains.
- Government commitment to invest an additional US$6.5 billion in renewable energy infrastructure from 2026 onwards is welcome.
- Decarbonization trends create opportunities to attract foreign investment and develop production expertise in new industries and products, contributing to improving the current account.
- Recent growth in solar panel and electrical parts manufacturing and exports is an encouraging step.

*IMF staff summary based on the chapter content provided.*

### 39.       While improvement in perception of corruption have been noted, corruption

### 1khmea2024001 - 39.       While improvement in perception of corruption have been noted, corruption

### Corruption and governance: current assessment
- Corruption "continues to hamper economic development."
- The country has shown "slight improvement in the Corruption Perception Index by Transparency International in the past 10 years."
- Caveat on the indicator: "Use of this indicator should be considered carefully, as it is derived from perceptions-based data. Ranges are for a 90 percent confidence interval."
- Persisting corruption vulnerabilities noted in the 2022 staff report remain unchanged, specifically affecting:
  - rule of law
  - regulatory quality
  - anticorruption legal frameworks
  - effectiveness of anticorruption enforcement
- Sectors and processes with particular transparency and accountability challenges:
  - extractives sector
  - land and infrastructure development
  - public procurement
  - execution of education-related projects

### Legal and institutional reform priorities
- Legal instruments and institutional enhancements described as "limited" and "necessitating government attention."
- Priority legal and institutional actions recommended:
  - Swift adoption of the Law on Witness Protection and the Whistleblower Protection Law to increase likelihood of whistleblowers and witnesses coming forward.
  - Refinement of the asset declaration regime for digital compilation and publication, mandating disclosure of high-level officials' interests and beneficially owned assets.
  - Expansion of the asset declaration regime to cover assets and interests of close relatives, "like children and spouses."
  - Enactment of a comprehensive Law on Transparency and Access to Information to facilitate public oversight and increase accountability.
  - Increased transparency in judicial proceedings.
  - Reforms to ensure disclosure of beneficial owners benefitting from public contracts.
  - Additional resources for enforcement agencies to strengthen training, corruption detection, investigation, and punishment.
  - Measures to ensure reliable dispute resolution and contract enforcement mechanisms.

### Data and statistical quality
- National Accounts rebasing underway: NIS, with IMF Statistics Department support, is "in the process of completing the rebasing of National Accounts data with 2014 as the new base year."
- Expected benefits: improved data sources, coverage, and classification of GDP data.
- Recommended sequencing: "The completion and dissemination of the new series should be prioritized and not delayed any further."
- Specific data quality gaps:
  - Expenditure-side GDP data quality needs improvement to better inform demand drivers.
  - Coverage limitations and data discrepancies in Balance of Payments statistics, including discrepancies between authorities' trade data and mirror data from trade partner countries, need resolution.
- Authorities' data publication plans:
  - Plan to publish the rebased annual GDP for 2023 in March 2024.
  - Plan to start introducing quarterly GDP data in June 2024.
  - Interest expressed in obtaining IMF assistance for the re-basing of CPI.

### Authorities’ views (summarized)
- Authorities agreed on importance of diversification and improving governance and reported progress:
  - Export portfolio and level of value-added in exports are "continuing to increase."
  - Updated Law on Investment and associated sub-decree issued recently to streamline and standardize investment incentives—expected to foster diversification and attractiveness to investors.
  - New Laws on Public Finance System (PFS) and on Public Procurement adopted this year aimed at strengthening public governance.
  - Since 2023, the annual draft budget law has begun to be published in detail to improve transparency in public finance.
  - Government considering incorporating witness protection and whistleblower protection elements in future updates of the criminal code and criminal procedure code.

### Staff appraisal — growth performance and outlook
- Recent growth:
  - "The economy achieved 5.2 percent growth in 2022 and is projected to grow by 5.3 percent in 2023."
- Main drivers of growth:
  - Expansion of non-garment goods exports
  - Rebound in tourism
- Ongoing weakness: garment exports "remains weak."
- Compositional shift in tourist arrivals means "the country is receiving less income per tourist compared to the pre-pandemic era."

### Staff appraisal — risks
- Near-term downside risks highlighted:
  - continued demand weakness from advanced-economy trade partners
  - recovery slowdown in China
  - high level of private debt domestically
  - tighter global financial conditions
- Medium-term risks:
  - geopolitical tension and trade fragmentation
  - structural decline in growth from China
  - climate change

### Fiscal policy guidance
- Assessment: "Fiscal policy in 2023 was appropriately expansionary."
- Recommended stance:
  - Fiscal consolidation should start as recovery progresses.
  - "The fiscal stance should return to neutral in 2024 as pandemic-related spending needs subside and economic recovery continues."
- Medium-term priorities:
  - Strengthen tax base as well as tax and customs administration to safeguard revenues.
  - Address revenue erosion from various tax incentives and the already low revenue-to-GDP ratio.
  - Improve evaluation and execution of public investments to ensure spending supports economic development.

### Monetary and financial sector guidance
- Monetary policy: "needs to continue normalizing towards the pre-pandemic setting."
- Positive measures noted: phasing out pandemic-related forbearance measures and increase of USD reserve requirement.
- Banking sector priorities:
  - NPLs should continue to be adequately provisioned for.
  - Credit growth should be allowed to recalibrate after recent rapid expansion.
  - Continue improvements in supervisory framework, data gathering, and analysis.
  - Strengthen legal and operational frameworks for corporate insolvency and bank resolution.

### Structural and medium-term reform priorities
- To sustain progress in living standards, "substantial reforms are needed."
- Human capital: improve both quality and quantity to meet changing needs as labor-cost comparative advantage diminishes.
- Infrastructure investments needed in:
  - transportation
  - energy
  - logistics
  - telecommunication
- Expected outcomes: support more diversified industries and increase scale of operation.
- Governance and anti-corruption reforms are critical to:
  - attract new FDIs and sustain high growth
  - reduce cost of doing business
  - draw investments from a wider range of source countries
  - improve Cambodia’s attractiveness as a tourist destination
- Specific governance priorities reiterated: strengthen frameworks on asset declarations, whistleblower protection and access to information; allocate adequate resources and authorities to oversight and investigative bodies.

*Source: 1khmea2024001 - 39.       While improvement in perception of corruption have been noted, corruption*

### 49.      It is proposed that the next Article IV consultation with Cambodia be held on the

### 1khmea2024001 - 49. It is proposed that the next Article IV consultation with Cambodia be held on the

### Economic Recovery and Sectoral Developments
- The economy "has rebounded, but with significant scaring compared to its pre-pandemic trend."
- Sectoral recovery is mixed; "manufacturing has been driving the rebound."
- International tourist arrivals: continued uptrend started in H2 2022; charts present quarterly series from Q1-21 through Q3-23 with country composition including China (PRC), Vietnam, Thailand, Lao PDR, Korea (ROK), Others (data sources: Cambodia authorities).
- Tourism has "recovered significantly"; tourism (credit) series shown: 1,015 (2020), 184 (2021), 1,418 (2022), 3,088 (2023), and projections 3,397 (2024), 3,736 (2025), 4,110 (2026), 4,521 (2027), 4,973 (2028) (values appear in Table 3a service/tourism credits).
- Export composition: "Export growth is led by solar products, while garment exports are lagging." Contribution to export growth by product categories (May-21 to Nov-23) shows strong contributions from "Solar and Diode" and weaker from "General garment."
- Construction activity: "showing an uptick from 2022 level." Approved construction projects by area and construction value (USD) show rising series through Q2-23.

### Public Finances: Recent Performance and Medium-Term Outlook
- Fiscal balance: "projected to be lower in 2023 and increase in 2024."
- Revenue: "Revenue growth has been strong" and "tax collection via the customs has improved."
- Expenditure: "increased in 2023 due to one-off spending items and is projected to stabilize over the medium term."
- Demand-support spending: "needs have declined in 2023."
- Revenue improvement and expenditure consolidation: "are expected to support fiscal sustainability over medium term."
- Key fiscal figures (Table 1 / Table 2 / Table 4):
  - Revenue as percent of GDP: 23.9 (2020), 21.6 (2021), 23.9 (2022), 23.0 (2023), projections 23.2 (2024), 23.3 (2025), 23.4 (2026), 23.5 (2027), 23.6 (2028).
  - Domestic revenue as percent of GDP: 22.0 (2020), 20.0 (2021), 22.2 (2022), 21.7 (2023), projections 21.9 (2024) … 22.4 (2028).
  - Tax revenue as percent of GDP: 19.7 (2020), 18.0 (2021), 20.0 (2022), 18.9 (2023), projections 19.1 (2024) … 19.6 (2028).
  - Expenditure as percent of GDP: 27.3 (2020), 28.6 (2021), 24.9 (2022), 26.6 (2023), projections 25.2 (2024) … 26.1 (2028).
  - Net lending (+)/borrowing (-): -3.4 (2020), -7.1 (2021), -1.0 (2022), -3.6 (2023), projections -2.0 (2024), -2.7 (2025), -2.9 (2026), -2.6 (2027), -2.6 (2028).
  - Total public debt (percent of GDP): 34.4 (2020), 35.9 (2021), 34.8 (2022), 35.8 (2023), projections 36.3 (2024), 36.5 (2025), 36.3 (2026), 36.4 (2027), 36.8 (2028).

### External Sector and Balance of Payments
- Current account: "remained larger than the recent years, it shrunk in 2022" largely due to "the decline in gold imports and the recovery in goods exports and tourism."
- Tourism: continued recovery as indicated by international arrivals developments.
- FDI inflows: "recovered a bit in 2022 supported by the inflows to manufacturing industries."
- Short-term capital inflows: "which had skyrocketed in 2021, shrunk in 2022."
- International reserves: "decreased in 2022 mainly due to US$ appreciation and lower international gold price."
- Key external figures (Table 1 / Table 3a / Table 3b):
  - Exports, f.o.b. (millions US$): 18,470 (2020), 19,527 (2021), 23,179 (2022), 23,387 (2023), projections 25,229 (2024), 27,361 (2025), 29,686 (2026), 32,209 (2027), 34,944 (2028).
  - Imports, f.o.b. (millions US$): -20,993 (2020), -30,726 (2021), -32,005 (2022), -27,360 (2023), projections -30,760 (2024), -33,226 (2025), -36,004 (2026), -39,075 (2027), -42,468 (2028).
  - Current account including official transfers (millions US$): -870 (2020), -11,179 (2021), -7,535 (2022), -647 (2023), projections -1,954 (2024), -2,141 (2025), -2,312 (2026), -2,521 (2027), -2,860 (2028).
  - Current account including official transfers (percent of GDP): -3.4 (2020), -42.0 (2021), -26.1 (2022), -2.1 (2023), projections -5.9 (2024), -6.0 (2025), -6.0 (2026), -6.1 (2027), -6.4 (2028).
  - Gross official reserves (millions US$): 21,334 (2020), 21,119 (2021), 17,805 (2022), 20,869 (2023), projections 23,348 (2024), 25,881 (2025), 28,534 (2026), 31,478 (2027), 34,583 (2028).
  - Reserves (months of prospective imports): 7.8 (2020), 7.3 (2021), 7.1 (2022), 7.4 (2023), projections 7.7 (2024), 7.8 (2025), 8.0 (2026), 8.1 (2027), 8.2 (2028).
  - Foreign direct investment (millions US$): 3,485 (2020), 3,392 (2021), 3,580 (2022), 4,145 (2023), projections 4,353 (2024), 4,570 (2025), 4,799 (2026), 5,039 (2027), 5,291 (2028).

### Monetary and Financial Developments
- Private sector debt: "The buildup of private sector debt has been rapid though there’re some signs of slowing in recent months."
- Credit growth moderation: "appears broad-based across all sectors."
- Real estate: "has been a significant contributor to high credit growth."
- Banks: "loan growth has been outpacing deposit growth."
- Interest rates: "lending rates have only increased modestly despite global financial tightening."
- Dollarization: "has declined modestly but continues to be persistently high."
- Financial indicators and trends shown:
  - Banks private sector credit growth (y/y) and banks credit to GDP series illustrated through Mar-17 to Sep-23.
  - Real estate related credit growth series shown (May-20 to Sep-23).
  - Loan-to-deposit ratio and deposit growth (y/y) series shown (May-20 to Sep-23).
  - Lending and deposit rates in KHR and USD series (May-20 to Sep-23).
  - Dollarization measures: international reserves to foreign currency deposits and foreign currency deposits to total deposit, claims on private sector in foreign currency to total claims on private sector (series Jul-08 to Jul-23).
- Monetary aggregates and credit (Table 1 / Table 2):
  - Broad money (annual percent change): 15.3 (2020), 16.4 (2021), 8.2 (2022), 14.9 (2023), projections 11.0 (2024), 12.3 (2025), 11.4 (2026), 12.8 (2027), 8.3 (2028).
  - Private sector credit (annual percent change): 17.2 (2020), 23.6 (2021), 18.5 (2022), 11.0 (2023), projections 13.0 (2024), 13.5 (2025), 13.5 (2026), 13.5 (2027), 13.5 (2028).
- Financial soundness indicators (Table 6, 2018–2022):
  - Regulatory Capital to Risk-Weighted Assets: 22.2 (2018), 21.8 (2019), 22.7 (2020), 22.3 (2021), 21.7 (2022).
  - Tier 1 Capital to Risk-Weighted Assets: 19.9 (2018), 18.8 (2019), 19.6 (2020), 19.3 (2021), 18.8 (2022).
  - Non-performing Loans to Total Gross Loans: 2.0 (2018), 1.6 (2019), 1.8 (2020), 1.7 (2021), 2.7 (2022).
  - Return on Assets: 1.6 (2018), 1.7 (2019), 1.7 (2020), 2.0 (2021), 2.4 (2022).
  - Return on Equity: 6.1 (2018), 6.6 (2019), 6.6 (2020), 7.9 (2021), 9.9 (2022).
  - Interest Margin to Gross Income: 56.3 (2018), 54.9 (2019), 38.6 (2020), 41.8 (2021), 32.3 (2022).
  - Non-interest Expenses to Gross Income: 71.8 (2018), 74.6 (2019), 77.6 (2020), 73.8 (2021), 79.2 (2022).
  - Liquid Assets to Total Assets: 16.6 (2018), 16.0 (2019), 16.7 (2020), 15.3 (2021), 11.7 (2022).

### Key Macroeconomic Projections and Indicators (Selected)
- Output and prices (annual percent change, Table 1 / Table 2):
  - GDP in constant prices: -3.1 (2020), 3.0 (2021), 5.2 (2022), 5.3 (2023), projections 6.0 (2024), 6.4 (2025), 6.5 (2026), 6.2 (2027), 6.3 (2028).
  - Inflation (end-year): 2.9 (2020), 3.7 (2021), 2.9 (2022), 3.7 (2023), projections 3.0 (2024), 3.0 (2025), 3.0 (2026), 3.0 (2027), 3.0 (2028).
- Saving and investment (percent of GDP):
  - Gross national saving: 21.5 (2020), -18.1 (2021), -1.6 (2022), 22.4 (2023), projections 18.6 (2024), 18.5 (2025), 18.5 (2026), 18.4 (2027), 18.1 (2028).
  - Gross fixed investment: 24.9 (2020), 23.9 (2021), 24.5 (2022), 24.5 (2023), projections 24.5 (2024) … 24.5 (2028).
- External debt and reserves:
  - Public external debt (millions US$): 8,810 (2020), 9,505 (2021), 9,971 (2022), 10,926 (2023), projections 11,805 (2024), 12,727 (2025), 13,627 (2026), 14,701 (2027), 15,937 (2028).
  - Public external debt (percent of GDP): 34.4 (2020), 35.9 (2021), 34.8 (2022), 35.6 (2023), projections 35.8 (2024), 35.8 (2025), 35.5 (2026), 35.5 (2027), 35.7 (2028).

*Source: Cambodia: IMF staff report (figures, tables and text as provided in the supplied content).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- Staff assesses that Cambodia’s external position in 2022 remains substantially weaker than the level implied by medium-term fundamentals and desirable policies after adjusting for temporary factors—mainly due to persistently high gold imports, tourism receipts still below pre-pandemic levels, and high Covid-related medical imports.
- International reserves coverage declined in 2022, but it remains broadly adequate.

### Current account: developments and drivers (2021–2022)
- The current account deficit declined from about 42 percent of GDP in 2021 to 26 percent GDP in 2022.
- Key drivers:
  - Gold imports continued to account for more than half of the total current account deficit, but declined by 7 percentage points of GDP in 2022.
  - Exports of major manufacturing goods (e.g., textiles, electronics) saw a solid recovery.
  - Goods imports increased only modestly; trade balance excluding gold improved by about 4 percentage points of GDP.
  - The service deficit declined by 4 percentage points of GDP, due to the recovery in tourism.

### Financial account, capital flows, and net foreign assets
- The financial account balance decreased to 24 percent of GDP in 2022, largely reflecting the decline in other short-term capital inflows.
- Net short-term capital inflow (including errors and omissions) decreased to 5 percent of GDP in 2022 from 20 percent of GDP in 2021.
- Much of the inflows were recorded as other investment and errors and omissions; their source and nature are not clearly identified.
- Medium-to-long term loans remained broadly stable.
- FDI as a share of GDP declined slightly in 2022 despite some increases in construction and solar manufacturing.
- The net foreign asset (NFA) position decreased to -134 percent of GDP by end-2022, reflecting the decline in reserves assets.

### Quantitative assessment of external position (EBA-lite and REER results, 2022)
- Reported/current account (CA-Actual): -26.1
- Cyclical contributions (from model): (-)-1.0
- COVID-19 adjustors: -3.6
  - Additional cyclical adjustment to account for the temporary impact of the tourism (3.1 percent of GDP) and medical goods (0.5 percent of GDP).
- Additional temporary/statistical factors: -7.8
- Natural disasters and conflicts: -0.1
- Adjusted CA: -13.6
- CA Norm (from model): -6.4
- Adjusted CA Norm: -6.4
- CA Gap: -7.2 -17.7
  - o/w Relative policy gap: 2.2
  - Elasticity: -0.6
- REER Gap (in percent): 11.7 28.7
- Methodology notes:
  - 1/ Based on the EBA-lite 3.0 methodology.
  - 3/ Cyclically adjusted, including multilateral consistency adjustments.
  - The adjustment accounts for the large temporary increase in medical goods imports (medical goods exports are assessed to neglible).

### Treatment of gold imports and adjusted gap
- In 2022 the current account deficit reached -26.1 percent of GDP, of which about 16 percent of GDP was driven by gold imports.
- Staff assessment regarding gold:
  - Gold imports are assessed to be partially temporary.
  - The current account deficit is adjusted by half of total gold imports, lowering the deficit by 8 percentage points of GDP.
- After cyclical and other adjustments (weaker terms of trade, larger output gap, COVID-19-related tourism losses and medical imports, and natural disasters), the current account deficit in 2022 is adjusted to -13.6 percent of GDP.
- Comparing to the current norm of -6.4 percent of GDP, the current account gap is -7.2 percent of GDP, equivalent to a real exchange rate overvaluation of about 11.7 percent.
- The real exchange rate model also indicates a similar conclusion, with an estimated current account gap of -17.7 percent of GDP.

### Uncertainties and scenario range
- The external sector assessment faces substantial uncertainties, largely due to volatility in gold trade:
  - Cambodia exported gold in 2020, then switched to importing gold in 2021–22.
  - In early 2023, gold imports declined markedly.
- The estimated current account gap can range from around 0 to -15 percent of GDP depending on whether gold imports are assumed to be entirely temporary or permanent, respectively.

### Real effective exchange rate (REER) and trend
- The REER continued its appreciation trend:
  - The REER had appreciated by 4 percent annually over the decade before the pandemic.
  - The appreciation trend was temporarily disrupted by the (nominal) depreciation against the US dollar in 2020.
  - After appreciation again in 2021, the trend appreciation remained moderate—of about 2 percent annually—until 2023’s third quarter, reflecting capital inflows.

### International reserves: levels and adequacy
- Gross reserves decreased by US$2.5 billion in 2022, mainly due to negative valuation effects.
- Reserves were 62 percent of GDP at the end of 2022.
- This corresponded to over 7 months of prospective imports, which is higher than the optimal level of 4 month of imports as implied by the ARA tool for credit-constrained economies.
- Recent data suggests reserves remain broadly stable at 18.4 US$ billion in the first half of 2023.
- Although the current level of reserves is adequate, maintaining a high level of international reserves is advisable given:
  - Cambodia is a highly export-dependent economy,
  - It operates in a managed peg exchange rate regime,
  - There is a high degree of dollarization.

### Policy implications and recommendations (implicit and explicit)
- Manage temporary factors and monitor gold trade volatility to refine external position assessments.
- Maintain a high level of international reserves given external dependence, managed peg, and dollarization.
- Monitor and identify sources/nature of short-term capital inflows recorded as other investment and errors and omissions.
- Continue policies that support tourism recovery to reduce service deficits.
- Address structural drivers of current account weakness to reduce real exchange rate overvaluation pressures.

*Source: Annex I. External Sector Assessment (Cambodia), IMF staff assessment as presented in the provided content.*

### Annex IV.  Nowcasting Cambodia’s Real GDP

### Annex IV. Nowcasting Cambodia’s Real GDP

### A. Context: Why Nowcasting in Cambodia
- Policymakers often face significant lags in key macroeconomic indicators; real GDP in Cambodia is sometimes produced only at an annual frequency, highlighting the need for high-frequency indicator analysis to inform real-time policy decisions.
- Nowcasting provides estimates of GDP for the current (and sometimes subsequent) quarter and feeds into:
  - Near-term forecasting (NTF): forecasts real GDP from one to four quarters ahead.
  - Medium-term forecasting (MTF): produces forecasts at 2-5 years horizon.
- Nowcasting supports assessment of drivers of economic activity (main sectors, main export products) and monetary conditions (broad money, credit, international reserves).

### B. Nowcasting Approaches
- Multivariate models (e.g., Mixed-Frequency VARs, Dynamic Factor Models, Factor-Augmented Autoregressive Models):
  - Tend to produce minimum mean squared errors (MSE) if correctly specified.
  - Are computationally demanding and prone to misspecification when frequency mismatch is large.
- Univariate regression-based models commonly used for nowcasting:
  - Bridge model:
    - Converts high-frequency indicators to the target low frequency by summing or averaging.
    - May lose some dynamics of high-frequency variables.
  - MIDAS (Mixed Data Sampling):
    - Converts high-frequency variables using “skip” or “split” sampling.
    - Parameters of split/skip-sampled variables follow a specified functional form (e.g., a polynomial) to reduce parameter proliferation.
    - OLS cannot be applied due to nonlinear functional form; functional form assumption may be wrong.
  - U-MIDAS (Unrestricted MIDAS):
    - Adds high-frequency variables directly without parameter shape restrictions; OLS can be applied.
    - Faces parameter proliferation because of many parameters to estimate; large frequency mismatches are problematic.
- Nowcasting exercises often begin with regression-based univariate models and combine nowcasts (Watson and Stock, 2004).

### C. Nowcasting Cambodia’s Quarterly Real GDP: Data and Model Design
- Quarterly GDP availability:
  - Cambodia lacks official quarterly GDP series; NIS has discussed producing quarterly GDP but a new quarterly series with a new base year may take time.
  - The IMF’s ICD and the authorities constructed quarterly real GDP historical data using the Chow-Lin procedure to interpolate quarterly GDP from annual GDP using high-frequency indicators.
- Candidate explanatory variables identified for nowcasting Cambodia’s real GDP:
  - Lagged real GDP
  - Tourist arrivals
  - Exports
  - Credit growth
  - International reserves
  - Growth of the US, the EU, and China
  - A dummy variable, CRISIS, to capture COVID-19 shocks
- Modeling choices:
  - Three nowcasting models estimated: Bridge, MIDAS, and U-MIDAS, using the same baseline specification (Bridge linear equation) with variables at highest available frequency for MIDAS/U-MIDAS.
  - Differences in logarithmic variables are used to ensure stationarity; the dependent variable is quarter-on-quarter growth of seasonally adjusted real GDP.
  - When high-frequency variables are not yet available to the end of the nowcast period, they are projected using automatic ARIMA models or insights from authorities (e.g., credit growth published with one month lag but supervisors may have insights).
- Caveat:
  - The two-step approach (Chow-Lin interpolation then nowcasting) can create statistical significance by construction for variables used in interpolation (e.g., tourism and exports).

### D. Model Evaluation and Nowcasting Results
- Pseudo out-of-sample evaluation:
  - Assuming real GDP unavailable for 2022Q3 and Q4, nowcast models (Bridge, MIDAS, U-MIDAS) and an automatic ARIMA benchmark were used to forecast 2022Q3-Q4.
  - The nowcast models can successfully predict the trend and dynamics of the “actual” real GDP for 2022Q3 and Q4, while the automatic ARIMA benchmark does not capture these dynamics as well.
  - Note: MIDAS results can be sensitive to the evaluation period.
- Nowcast estimates for 2023:
  - Real-time estimates suggest:
    - 2023Q1: real GDP year-on-year expanded by 4.6 percent (y/y), a slight deceleration from 4.8 percent (y/y) in the previous quarter.
    - 2023Q2: real GDP year-on-year picked up to 4.9 percent (y/y).
  - Quarter-on-quarter estimates:
    - Q1: recovery from 0.3 to 1.1 percent (q/q) in Q1.
    - Q2: 2.9 percent (q/q) in Q2.
  - Drivers:
    - Q2 2023 growth was mostly driven by a rebound in tourist arrivals and exports despite a slowdown in China’s growth.
- Key empirical finding:
  - Two high-frequency variables—international arrivals and exports—are robust and strong drivers of quarterly GDP growth in Cambodia.

### E. Conclusion and Policy Implications
- Main conclusions:
  - Recovery in tourism and exports amid global demand recovery helped offset the slowdown in China’s growth in 2023Q2.
  - Positive recovery of tourism and exports following border reopening offset adverse impacts from China’s growth slowdown in Q2 2023.
- Policy and methodological recommendations:
  - Improve data availability and add timely indicators such as measures of PMI, business sentiment index, retail sales, etc.
  - Extend analysis to more efficient multivariate approaches (e.g., principal component analyses, mixed-frequency VAR, Dynamic Factor models) despite higher computational demands.
  - Regularly update nowcasts to inform policymakers for budget preparation and monetary and financial sector policies.
  - Develop official quarterly national accounts: nowcast estimates (especially for 2nd-to-4th quarters) are extremely sensitive to the variable chosen to interpolate past quarterly GDP growth and to the growth estimate for the 4th quarter of the preceding year.

- Important methodological caveat reiterated:
  - The two-step procedure (quarterly GDP interpolation and nowcasting) can make nowcast estimates particularly sensitive to the choice of variables used for interpolation.

*Source: Annex IV. Nowcasting Cambodia’s Real GDP (IMF). *

### 5. The note provides an assessment of the effects of China and US output shocks on

### 5. The note provides an assessment of the effects of China and US output shocks on

### Methodology: Aggregate approach (local projections)
- Data and estimation
  - Uses novel aggregate quarterly GDP for Cambodia (Chow-Lin interpolation of annual NIS data using tourist arrivals, reserves, and credit growth) to estimate dynamic responses.
  - Estimation method: Jorda (2005) local projection method.
  - Estimated equation (for k = 1,...,5):
    - Dependent variable: y_{t+k} = (log of) Cambodia’s GDP.
    - Regressors: contemporaneous China GDP (CH), US GDP (US), vector X including two lags of Cambodia GDP, lags of China and US GDP, and a time trend.
    - Coefficients of interest: β_k^CH and β_k^US capture the percent effect of 1 percent change in China (US) GDP on Cambodia GDP.
  - Impulse responses computed from estimated β_k coefficients; confidence bands from Newey–West standard errors.
- Key estimation sample constraints and data notes
  - Quarterly GDP estimates are used because official quarterly GDP for Cambodia is not yet available.
  - Quarterly GDP estimates sample for US monetary shock analysis: 2005Q1-2018Q4.

### Findings: Aggregate spillovers from China and the US
- Magnitude and timing
  - A 1 percentage point increase in China’s GDP is associated with:
    - about 0.4 percent increase in Cambodia’s GDP after one quarter.
    - about 0.6 percent increase after four quarters.
    - Effect is persistent and declines only marginally over time.
  - US output shocks:
    - Correlation with Cambodian GDP is more immediate but smaller in magnitude (about 0.5 percent).
    - The US effect becomes statistically not significant after about one year.
- Interpretation
  - Results are consistent with Cambodia’s strong dependence on China for production inputs and more diversified final output destinations.

### Methodology: Sector-level approach (difference-in-differences / interactions)
- Data and construction
  - Annual sectoral real GDP growth series for 2007 to 2021 (Cambodia National Institute of Statistics).
  - Input/output shares by sector from ADB Input/Output tables (sectoral shares of input/output from/to USA and China).
  - Annual measures of demand and supply shocks originating from China and the US (methodology in Box 1); demand/supply shocks averaged over four quarters to match annual frequency.
- Empirical model (annual, sectors s, years t)
  - ∆Y_{s,t} is real growth in sector s at year t (2007-2021).
  - Model includes interactions of foreign demand and supply shocks with sectoral output and input shares from China/US (O_{s,07}^C, O_{s,07}^{US}, I_{s,07}^C, I_{s,07}^{US}).
  - Controls: sector-specific time trend φ_{st}, sector fixed effects θ_s, time fixed effects τ_t.
  - Interpretation: coefficients on interactions (e.g., β_1, β_2, γ_1, γ_2) capture differential sectoral growth responses (difference-in-differences interpretation).

### Findings: Sectoral heterogeneity and mechanisms
- Main results
  - Significant heterogeneity across sectors in response to foreign demand and supply shocks.
  - Supply shocks from China and demand shocks from the US have large effects on growth in the most exposed sectors.
- Quantitative examples (differential effects p90 vs p10)
  - A 1 percentage point China supply shock:
    - Differential growth effect for a sector at the 90th percentile of input dependence (e.g., construction) versus a sector at the 10th percentile (e.g., agriculture) is 0.1 percentage point.
  - A 1 percentage point US demand shock:
    - Differential sectoral growth effect for a sector at the 90th percentile of output dependence on the US (e.g., garment) versus a sector at the 10th percentile (e.g., real estate) is 0.06 percentage point.
    - Note: the share of garments and textiles in total GDP is 3 times larger than real estate’s, implying sizable aggregate implications from sectoral differentials.
  - Supply shocks from the US and demand shocks from China: not statistically significant differential growth effects across sectors.

### Box 1: Deconstructing foreign growth shocks (identification of demand vs supply)
- Approach and identification
  - Applies a structural VAR (SVAR) with sign restrictions on quarterly output and inflation (2002 to 2021) following Copestake et al. (2022).
  - Demand shocks: episodes where output and inflation move in the same direction.
  - Supply shocks: episodes where output and inflation move in opposite directions.
  - Methodology extended to the United States for this note.

### Annex VI: The implications of US monetary tightening for the Cambodian economy
- Channels of transmission highlighted
  - Trade channel: weaker US demand reduces exports to the US (likely the most important channel given Cambodia’s high trade exposure to the US).
  - Interest rate channel: higher US rates lead to higher domestic lending rates under Cambodia’s managed peg and extensive dollarization, increasing borrowing costs.
  - Financial/exchange-rate channel: depreciation could increase firms’ foreign liabilities, but this channel is likely minor given the managed peg and extensive dollarization.
- Summary of US rate developments and expectations
  - FED cumulative rate-hike: 425 basis points in 2022 and 75 basis points in the first half of 2023.
  - In Cambodia, USD accounts for about 90% of deposits outstanding amounts.
  - Cambodian interest rates remained broadly stable in 2022 but are expected to increase in 2023; early signs of higher USD lending rates are noticeable.
- Empirical estimates: impact of US monetary policy shocks on Cambodia GDP
  - Method: Jorda (2005) local projection; equation estimated for horizons h = 1,...,8 quarters. β_h captures effect of a 100 basis-point exogenous increase in US rates on Cambodia’s GDP.
  - Data: estimated quarterly Cambodia GDP (Chow-Lin interpolation), exogenous US monetary policy shocks from high-frequency identification (Duval et al. (2021)), proxy-SVAR used to retrieve structural shocks (monthly proxy-SVAR estimated over 1973M1-2019M1 and averaged to quarterly).
  - Estimation sample for this analysis: 2005Q1-2018Q4.
  - Results:
    - A 100-basis points US monetary tightening is associated with:
      - about 0.9 percent decline in Cambodia’s GDP after one quarter.
      - about 1.1 percent decline after four quarters.
    - Effect is persistent and becomes statistically insignificant only after 6 quarters.
- Corporate solvency simulations and risks
  - Focus: interest coverage ratio (ICR) = operating profits / interest payments on outstanding debt; ICR < 1 signals "debt-at-risk".
  - Simulated shocks on ICR using 2022 data:
    - Interest shocks considered: from zero to +150 percent.
    - Profit shocks considered: -10 percent (moderate) and -50 percent (severe).
    - Purpose: identify potential trigger points for corporate insolvency risks and industry heterogeneity in solvency exposure.
  - Data used:
    - Aggregate macro-level corporate dataset (overall solvency assessment).
    - Granular firm-level data for eight major publicly-listed firms.
    - Confidential industry-level corporate data to examine industry heterogeneity.
  - Policy implication highlighted:
    - While aggregate corporate insolvency risks are relatively small even under large lending interest rate shocks, there is marked heterogeneity across industries and firms with pockets of insolvency risk.
    - Recommendation: remain vigilant and have an adequate bankruptcy framework to deal with corporate distress efficiently to prevent spillovers across sectors.

*Source: IMF staff note (content unit: 1khmea2024001 - 5).*

### 10. Macro-level corporate data are estimated using banking sector data and

### 10. Macro-level corporate data are estimated using banking sector data and

### Methodology
- Macro-level corporate interest payments: computed as the ratio of banking sector’s interest revenues to lending to the corporate sector.
- Macro-level operating profits: estimated by adding macro-level interest payment to macro-level profits before tax.
- Macro-level profits before tax: estimated from government’s revenue from business profits tax assuming a profit tax rate of 20 percent.

### Macro-level findings and indicators
- Pre-COVID-19: macro-level profits and interest payments increased by around 20 percent annually.
- Macro-level ICR (Interest Coverage Ratio): relatively stable at around 3.5 prior to COVID-19.
- ICR evolution:
  - Declined to about 3.3 in 2021 due to stagnant profits growth because of COVID-19.
  - Remained at levels well-above the debt-at-risk threshold in 2022.
- Note on debt-at-risk threshold: threshold of debt-at-risk is 1 in ICR. (Footnote: this would be a lower bound as even firms with ICRs slightly above 1 could become problematic.)

### ICR simulation — Listed firms’ sample (2022)
- Sample: eight major non-financial companies listed in the Cambodia Securities Exchange (CSX).
- Contribution of sample to aggregate corporate sector (2022):
  - Outstanding borrowing: accounted for 1.3 percent of whole corporate credit.
  - Profits before tax: accounted for 1.0 percent of whole corporate profits.
  - Borrowing cost: 3.0 percent.
- Average ICR for the eight listed firms: 4.9.
- Distributional heterogeneity among listed firms:
  - Phnom Penh Autonomous Port ICR: 24.2.
  - Phnom Penh Water Supply Authority ICR: 16.7.
  - JS Land PLC and DBD Engineering Plc.: negative ICRs due to operating loss.
- Simulation results (listed firms):
  - Average ICR would remain above 1 for large interest rate shocks of about 150 percent when only interest shocks are applied.
  - If interest rate shocks are compounded by significant declines in profits, the average ICR could become close to 1, with a couple of firms becoming "debt-at-risk".
- Note on simulation panels: Panel (1) omits the 2 firms whose ICRs are much higher than 5.0 and the 2 firms whose ICR are negative due to operation losses.

### ICR simulation — Industry-level corporate data (2022)
- Dataset (confidential) provides industry totals of: total assets, total liabilities, earnings before interest and taxes (EBIT), and interest payments in 2022.
- Average industry ICR: about 3.8.
- Industry heterogeneity in ICR:
  - Wholesale and retail ICR: about 9.8.
  - Real estate, agriculture, forestry and fishing, and accommodation and food service: negative ICRs.
- Leverage measure: calculated by total liabilities divided total capital (reported by industry).
- Simulation results (industry-level):
  - Insolvency risks for industries with positive ICR are unlikely in the case of large interest rate shocks alone.
  - Combination of large shocks — 50 percent profit decrease and 100 percent interest shock — could lower the ICR of several industries to near or below 1, triggering "debt-at-risk".

### Policy implications (section E)
- High level of private sector debt and associated risks of debt distress require close monitoring.
- Recommended policy actions:
  - Improvements of corporate insolvency regimes and debt restructuring procedures to ensure highly-leveraged enterprises do not drag down growth and to support banks’ management of distressed assets.
  - Continue efforts to enhance data gathering and analysis capacity.
  - Develop a full macroprudential strategy and toolkit to include borrower-based tools and enhance capital requirements for banks.

### Annex VII — Geo-Economic Fragmentation: implications for Cambodia (summary of key points)
- Definition: Geo-economic fragmentation refers to policy-driven reversal of integration, often guided by strategic considerations.
- Channels through which fragmentation affects economies: trade, FDI, capital flows, labor flows.
- Trade channel — key findings:
  - Trade policy uncertainty has risen, with spikes in 2018 and again after Russia’s invasion of Ukraine.
  - IMF (2022) estimate: an increase in trade policy uncertainty similar to the 2018 US-China buildup may reduce investment by about 3½ percent after two years, reduce GDP by about ½ percent, and increase the unemployment rate by about 1 percentage point.
  - Empirical estimate (Jakubik and Ruta, 2023): an increase of global trade uncertainty such as associated with US-China tensions may reduce trade between US (China) and Cambodia by about 8 (2) percent.
- Measure of Aggregate Trade Restrictions (MATR):
  - Constructed from AREAER variables; index ranges potentially from 0 to 22 (in practice varies from 2 to 21).
  - Cambodia’s MATR has declined since 2012 and is similar to other EMDEs.
- General equilibrium simulation of fragmentation (three-bloc scenario):
  - Fragmentation simulated by raising trade costs between Western and Eastern blocs to each country’s highest historical MATR.
  - Cambodia assigned to the Neutral bloc in the chosen classification.
  - Results for Cambodia (model-analysis):
    - Average decline in trade flows between Cambodia and other countries: about 3 percent.
    - Trade changes by bloc:
      - Eastern Bloc: -22 percent.
      - Western Bloc: 2.6 percent (increase due to trade diversion).
      - Neutral Bloc: 5.9 percent (increase due to trade diversion).
    - Output loss: 3.3 percent.
    - Welfare loss: 6.0 percent.
  - These effects are larger for Cambodia than for other ASEAN and EMDEs due to stronger trade linkages with China.

*Source: IMF staff calculations and Cambodia authorities, as presented in the content unit.*

### 10. FDI inflows have been stable in recent years, with China accounting for the largest

### 10. FDI inflows have been stable in recent years, with China accounting for the largest share inflows.

### FDI trends and composition
- FDI in Cambodia increased from about 10.1 percent of GDP in 2015 to about 12½ percent of GDP in 2016 and have been relatively stable after that, including during the COVID-19 pandemic.
- Main source-economies of FDI inflows:
  - China: about 42 percent
  - Korea: 11 percent
  - Japan: 9 percent
  - United States: less than 2 percent

### Vulnerability to geo-economic fragmentation
- Cambodia’s FDI vulnerability to geo-economic fragmentation is higher than other EMDEs and Asian economies.
- Key factors determining a country’s FDI vulnerability to geo-economic fragmentation (IMF 2023):
  - (i) geopolitical distance between source and host countries;
  - (ii) market share in trade of a given sector (larger market share → less vulnerable to relocation pressures);
  - (iii) share of inward FDI in strategic sectors for the economy.
- According to IMF (2023) indexes, Cambodia is especially vulnerable on the dimensions of geo-political distance and market power.

### Geopolitical distance and US FDI
- Greater geopolitical distance across countries is associated with less bilateral foreign direct investment; this effect is much stronger for EMDE source and host countries and has increased in recent years as trade tensions between China and the US intensified and trade policy uncertainty increased.
- Back-of-the-envelope calculation: the increase in geopolitical distance between Cambodia and the US (based on UN General Assembly voting data) during the period 2012-2021 could have contributed to reduce the level of FDI from the US to Cambodia by about 15 percent, other things equal.

### Summary policy implications
- The economic costs of geo-economic fragmentation for Cambodia could be large given its high level of trade openness and strong trade and FDI ties with the US and China.
- Policy recommendations and opportunities:
  - Continue to geographically diversify production and export markets.
  - Intensify efforts to promote investment in high-value added manufacturing and human capital.
  - Pursue market and governance reforms aimed at improving the business climate to boost trade competitiveness and attractiveness to trade and FDI.

### Box 1 — Estimating the Costs of Increased Trade Uncertainty (summary)
- Empirical framework (Jakubik and Michele Ruta, 2023) estimates effects of trade uncertainty on bilateral trade flows using:
  - geopolitical distance based on UN General Assembly voting data (Bailey, Strezhnev, and Voeten, 2017);
  - global trade policy (economic) uncertainty measure from Ahir, Bloom, and Furceri (2022).
- Sample: an unbalanced panel of 186 countries during 2002-2019.
- Key empirical finding: a one standard deviation increase in global trade policy uncertainty leads to approximately to a 1.0 percent increase in bilateral trade between countries at the 25th percentile of geopolitical distance (countries that are close, or “friends”) relative to those at the mean (neutral).

### Box 2 — Estimating the Costs of Trade Fragmentation (summary)
- Empirical analysis uses the MATR index (Estefania-Flores, Furceri, Ostry and Rose, 2022), covering up to 157 countries over 70 years and including tariffs, non-tariff barriers, and restrictions on obtaining/using foreign exchange for current transactions.
- Partial-equilibrium structural gravity estimation examines the effect of MATR on bilateral trade flows, including domestic flows (i = j).
- Key empirical result: introducing one additional trade restrictive measure leads, approximately, to a 7% reduction in international trade flows.
- Table 2: MATR Trade Effects – Main Estimates
  - Column (1) MATR: MATR_ijt = -0.0767*** (0.015)
  - Column (2) MATR and TA: MATR_ijt = -0.0695*** (0.015); TA_ijt = 0.262*** (0.062)
  - Column (3) MATR, TA and GATT/WTO: MATR_ijt = -0.0627*** (0.013); TA_ijt = 0.216*** (0.061); GATT/WTO_ijt = 0.365*** (0.112)
  - Observations: 624,444
  - Note: PPML regressions. Fixed effects and constant not reported. Standard errors clustered at exporter and time level. ***p < 0.01, **p < 0.05, *p < 0.1.
- Model analysis: empirical estimates are used to calibrate a canonical general equilibrium trade model where fragmentation is simulated by raising trade costs for flows crossing bloc boundaries. Change in trade costs is computed as:
  - τ̂_ij/θ = exp(β̂1 ΔMATR_ij + ψ̂ ΔZ′_ij) for all i,j, where β̂1 and ψ̂ are estimated parameters and ΔMATR and ΔZ′ are scenario differences relative to baseline.

*Source: IMF staff calculations and analysis as presented in the provided content.*

### References

### References and Information Annex (Cambodia)

### Key bibliographic references
- Ahir, H., Bloom, N. and Furceri, D., 2022. The world uncertainty index, NBER WP 29763.  
- Aiyar, S; J. Chen; C. Ebeke; R. Garcia-Saltos; T.Gudmundsson; A. Ilyina; A. Kangur; T. Kunaratskul; S. Rodriguez; M. Ruta; T. Schulze; G. Soderberg; and J. P. Trevino (2023). “Geoeconomic Fragmentation and the Future of Multilateralism”, IMF Staff Discussion Note, 2023/01.  
- Aiyar, S., A. Habib, D. Malacrino and A. Presbitero. 2023. Investing in Friends: Geopolitical Alignment and Vulnerability to FDI Relocation, IMF working paper, forthcoming.  
- Bailey, M.A., Strezhnev, A. and Voeten, E., 2017. Estimating dynamic state preferences from United Nations voting data. Journal of Conflict Resolution, 61(2), pp. 430-456.  
- Banerjee, Abhijit, V., and Esther Duflo. 2007. "The Economic Lives of the Poor." Journal of Economic Perspectives 21 (1): 141–68.  
- Barattieri, A., Cacciatore, M., and F. Ghironi. 2021. “Protectionism and the Business Cycle.” Journal of International Economics 129: 103417.  
- Branstetter, Lee, Britta Glennon, and J. Bradford Jensen. 2018. “Knowledge Transfer Abroad: The Role of U.S. Inventors within Global R&D Networks.” NBER Working Paper Series No. 24453.  
- Buera, Francisco J., and Ezra Oberfield. 2020. “The Global Diffusion of Ideas.” Econometrica 88: 83–114.  
- Caldara, D. and Iacoviello, M., 2022. Measuring geopolitical risk. American Economic Review, 112(4), pp. 1194-1225.  
- Campos, R.G, J. Estefania-Flores, D. Furceri, J. Timini. 2023. Geopolitical fragmentation and trade. Journal of Comparative Economics, https://doi.org/10.1016/j.jce.2023.06.008  
- Estefania-Flores J., D. Furceri, S.A. Hannan, J.D. Ostry, and A.K. Rose (2023), “A Measurement of Aggregate Trade Restrictions and their Economic Effects”, World Bank Economic Review, forthcoming.  
- Fajgelbaum, Pablo D., and Amit K. Khandelwal. 2016. “Measuring the Unequal Gains from Trade.” Quarterly Journal of Economics 131 (3): 1113–80.  
- Handley, K. and Limão, N., 2022. Trade policy uncertainty. Annual Review of Economics, 14, pp. 363-395.  
- IMF World Economic Outlook, April 2023.  
- IMF Global Financial Stability Report, April 2023.  
- IMF Asia and Pacific Regional Economic Outlook, October 2022.  
- Islamaj, E.s, and M. A. Kose. 2022. “What Types of Capital Flows Help Improve International Risk Sharing?” Journal of International Money and Finance 122: 102544.  
- Jakubik, A. and M. Ruta, 2023. “Trading with Friends in Uncertain Times”, Journal of Policy Modeling, forthcoming.

### Fund relations and IMF financial data (as of specified dates)
- Membership: Joined December 31, 1969; accepted the obligations under Article VIII, Sections 2, 3, and 4 on January 1, 2002.  
- General Resources Account (SDR Million; Percent Quota): Quota 175.00 100.00; Fund holdings of currency (Holdings Rate) 153.13 87.50; Reserve Tranche Position 21.88 12.50.  
- SDR Department (SDR Million; Percent Allocation): Net cumulative allocation 251.65 100.00; Holdings 257.37 102.27.  
- Outstanding Purchases and Loans: None.  
- Latest financial arrangements (Type / Date of Arrangement / Expiration Date / Amount Approved (SDR Million) / Amount Drawn (SDR Million)):  
  - ECF / Oct. 22, 1999 / Feb. 28, 2003 / 58.50 / 58.50  
  - ECF / May 06, 1994 / Aug. 31, 1997 / 84.00 / 42.00  
- Multilateral Debt Relief Initiative: IMF Executive Board approved relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005; forgiven amount SDR 56.8 million (about US$82 million).  
- Safeguards assessment: Voluntary safeguards assessment of the NBC completed in January 2010 (updated March 2004 assessment); identified outstanding recommendations and new risks in external audit.  
- Exchange rate arrangement: Currency is the Cambodian riel. De facto arrangement classified as crawl-like; de jure arrangement is a managed float. Official exchange rate expressed in Riels per U.S. dollar, adjusted to be within 1 percent of the market rate on a daily basis. Cambodia accepted Article VIII obligations on January 1, 2002.  
- Article IV consultation cycle: Standard 12-month cycle. Previous Article IV discussions held during September 7–20, 2022. Executive Board concluded Article IV consultation on November 23, 2022 (IMF Country Report 22/371).  
- FSAP: Joint IMF-World Bank FSAP mission took place in March 2010; assessment completed in October 2010.  
- Resident Representatives: Mr. Yasuhisa Ojima, IMF Resident Representative for Cambodia from September 2019 to August 2023; Mr. Jochen Schmittmann is current regional IMF Resident Representative for Cambodia, based in Vietnam.

### Data sources and main websites
- National Bank of Cambodia (www.nbc.org.kh): Exchange rates; Balance of payments; Monetary and financial statistics.  
- Ministry of Economy and Finance (www.mef.gov.kh): Government budget; Fiscal revenue, expenditure, and financing; Public Debt Bulletin.  
- National Institute of Statistics (www.nis.gov.kh): Consumer Price Index; National accounts; Population census; Labor force survey; Socioeconomic survey; Household survey.  
- National Summary Data Page: https://www.nbc.org.kh/english/economic_research/NSDP.html

### Statistical issues, findings, and recommended actions (September 2023)
- Overall assessment: Data provision has some shortcomings but is broadly adequate for surveillance. Extensive TA from the Fund, UNDP, ADB, World Bank, and bilateral partners has improved capacity. Shortcomings in macroeconomic data hamper timely and comprehensive analysis.  
- National accounts:  
  - Reliability affected by outdated base year (2000).  
  - Informal sector evolution and technology adoption (e.g., transportation) not fully captured.  
  - Sectors lacking adequate volume measures: agriculture and construction.  
  - Absence of relevant price deflators highlights need to upgrade techniques and data sources for GDP by output.  
  - For GDP by expenditure, constraints affect measurement of household final consumption expenditure and gross capital formation.  
  - NIS revised sources and methods and conducted GDP rebasing to base year 2014 with SIDA and UNESCAP assistance; results under review by NIS and the Fund. Official results are expected to be released in 2024.  
  - Availability of turnover and financial statements data, high frequency indicators such as quarterly GDP and a production index would support more agile monitoring.  
- Price statistics:  
  - NBC launched a residential property price index (RPPI) in June 2022.  
  - CPI compilation suffers from outdated weights (2004 Cambodia Socio-Economic Survey) and insufficient geographic coverage and delays in dissemination. NIS plans to update CPI using 2014 household expenditures.  
  - A producer price index (PPI) is under development.  
- Government finance statistics (GFS) and public sector debt statistics (PSDS):  
  - MEF compiles GFS following GFSM 2014 after Fund TA. MEF disseminates monthly GFS for budgetary central government (BCG) and quarterly GFS covering BCG and local governments (LGs).  
  - MEF reported 2019-2021 GFS for consolidated general government including National Social Security Fund and extrabudgetary units to the Fund. GDICDM agreed to start reporting PSDS covering BCG debt securities and loans to the joint World Bank/IMF Database on a quarterly basis.  
  - MEF bridged BCG program classification with COFOG and reported BCG Environmental Protection Expenditure for 2018-2020 to the Fund’s Climate Indicators Dashboard. COFOG for LGs is work-in-progress.  
  - Source data for net acquisition of government nonfinancial assets remain limited. A prototype financial balance sheet covering BCG has been compiled for 2015-2021. BLG balance sheet statistics accessible from 2019 based on Trial balance reports from GDNT.  
  - Need to continue reconciling coverage of government deposits and other statistics across MEF, NBC, and NIS. Promoting use of GFS would improve budget planning and data transparency; streamlining budget table with GFSM2014 framework recommended. Fund TA encouraged MEF fiscal team to use GFSM 2014 data for fiscal projections. Fund TA assisted MEF GFS team in developing Technical Compilation and Dissemination Guidelines for GFS and PSDS.  
  - Cambodia issued debt securities for first time in 2022; included in Public Debt Bulletin and should be included in PSDS. Authorities encouraged to review source data for SOEs and consider compiling public sector GFS.  
- Monetary and financial statistics (MFS):  
  - NBC reports monthly monetary data using STA SRFs for central bank, other depository corporations (ODCs), and other financial corporations (OFCs).  
  - Need to improve counterpart sector information for OFCs, especially loans, and expand institutional coverage to leasing companies. Current SRF 4SR covers non-deposit taking microfinance institutions, specialized banks and insurance companies (ICs). Insurance Association of Cambodia assists in collecting data from ICs.  
  - Lack of information on shadow banking sector (real estate developers, pawn shops, payment service providers).  
  - MCM diagnostic review proposed a roadmap to support NBC’s automation of regulatory reporting. Future work on streamlining data collections should account for MFS and FSI compilation requirements. Upcoming MFS mission will review and improve mapping of data for NDTMFIs and insurance corporations to 4SR and advise on mapping newly created accounts for 2SR related to debt securities, financial derivatives, and other instruments from banks’ chart of accounts.  
- Financial sector surveillance and access:  
  - NBC reports to the Fund 15 core and 8 additional FSIs for deposit takers, 2 FSIs for OFCs, 1 FSI for households, and 2 FSIs for real estate markets quarterly with one-quarter timeliness. NBC uses new FSIs templates based on the 2019 FSIs Compilation Guide starting with 2021Q1 data. Migration poses recalculation and mapping challenges; upcoming joint MFS-FSI mission will assist.  
  - Several FAS indicators (including commercial bank branches per 100,000 adults and ATMs per 100,000 adults used to monitor SDG Target 8.10.1) are disseminated.  
- External sector statistics:  
  - Quarterly balance of payments and IIP compiled by NBC according to BPM6. Gaps exist in trade data coverage and short-term financial inflows; some BoP components compiled using estimation methods.  
  - Trade data discrepancies between national sources and mirror data from partners persist.  
  - Scope exists to improve data on inward direct investment (DI); current estimation relies heavily on DI approvals and ITRS. NBC is in process of requesting data from tax authorities for non-bank FDI via MOU. NBC revised remittance model after 2020 TA and updated trade credit and other debt liabilities data.

### Data standards and dissemination
- Cambodia participates in the IMF’s General Data Dissemination System (e-GDDS). National Summary Data Page launched on May 30, 2018: https://www.nbc.org.kh/english/economic_research/NSDP.html.  
- No data ROSC available.

### Table of Common Indicators Required for Surveillance (As of November 15, 2023) — selected entries (Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Frequency of Publication)
- Exchange Rates: 11/14/2023 / 11/15/2023 / D / D / D  
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Reserve/Base Money: 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Broad Money: 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Central Bank Balance Sheet: 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Consolidated Balance Sheet of the Banking System: 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Interest Rates (Loan and Deposit rates): 9/2023 / 11/2023 / M / M, 2 month lag / M  
- Consumer Price Index: 9/2023 / 11/2023 / M / M, 1-2 month lag / M  
- Revenue, Expenditure, Balance and Composition of Financing—General: 9/2023 / 11/2023 / M / M, 1-2 month lag / M  
- Stocks of Central Government and Central Government-Guaranteed Debt: 6/2022 / 9/2022 / S / S, 3 month lag / S  
- External Current Account Balance: Q2/2023 / 10/2023 / Q / Q, 3 month lag / Q  
- Exports and Imports of Goods and Services: Q2/2023 / 10/2023 / Q / Q, 3 month lag / Q  
- GDP/GNP: 2022 / 7/2023 / A / A, 6 month lag / A  
- Gross External Debt: Q2/2023 / 10/2023 / Q / Q, 3 month lag / Q  
- International Investment Position: Q2/2023 / 10/2023 / Q / Q, 3 month lag / Q  
- Residential Property Price Index: Q2/2023 / 8/2023 / Q / Q, 3 month lag / Q

Notes associated with the table:
- Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Semi-annual (S), Annually (A), Irregular (I), Not Available (N/A).  
- International reserve assets include reserve assets pledged or otherwise encumbered as well as net derivative positions.  
- Interest rates refer to deposit and loan rates.  
- General government consists of central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.  
- Debt stocks include currency and maturity composition.

### Debt sustainability assessment: Summary findings (Joint Bank-Fund DSA)
- Risk of external debt distress: Low.  
- Overall risk of debt distress: Low.  
- Granularity in risk rating: Not applicable.  
- Application of judgment: No.  
- Baseline assumptions: Steady economic recovery largely driven by rebound in tourism sector and manufacturing goods exports.  
- Projection: Total public and publicly guaranteed (PPG) debt-to-GDP ratio projected to rise by around 4 percentage points of GDP during the next decade, but its level is set to remain stable.  
- Debt burden indicators: Projected to remain well below their thresholds under the baseline and shock scenarios.  
- Vulnerabilities: Stress tests show debt sustainability remains vulnerable to shocks in exports and growth.  
- Debt-carrying capacity: Current capacity consistent with a medium classification. Cambodia’s Composite Indicator (CI) index, based on the October 2023 WEO update and the World Bank’s 2022 CPIA, is 3.06; this is the first “signal” indicating the country’s debt-carrying capacity changes from a medium to strong classification (two consecutive signals needed to change classification).

*Prepared by Staff of the International Monetary Fund and the International Development Association, December 12, 2023.*

### 1.      The DSA covers central government debt and debt guaranteed by the central

### 1khmea2024001 - 1.      The DSA covers central government debt and debt guaranteed by the central

### Coverage and methodology
- The DSA covers central government debt and debt guaranteed by the central government to state-owned enterprises (SOEs).
- By law, state and local governments and the central bank do not engage in borrowing, and SOEs do not contract non-guaranteed loans.
- Currently, there are no extra-budgetary funds, and the National Social Security Fund is funded by deposits and does not constitute a liability for the general government.
- External debt is defined on a currency basis.

### Contingent liabilities and stress tests
- Contingent liability stress tests included:
  - PPPs.
  - A financial market shock.
- SOE shock scenario:
  - Set to 0 percent of GDP because SOEs do not engage in non-guaranteed external borrowing and guarantees to SOEs are included in public debt.
- PPP contingent liability:
  - Capital stock of PPPs estimated at 20.7 percent of GDP as end of 2022, corresponding to a contingent liability of 7.3 percent of GDP.
- Financial market shock:
  - Assumes contingent liabilities from financial markets to be 10 percent of GDP, twice the default value of 5 percent of GDP.
  - Rationale: to account for risks from private sector debt that reached 160 percent of GDP.

### External public debt and composition (key statistics)
- External public debt amounted to around US$ 9.  97 billion (35 percent of GDP) by end-2022.
- External debt-to-GDP ratio decreased by 1.1 percentage points in 2022.
- Bilateral debt accounts for around 70 percent of total external debt, with more than half owed to China.
- Present value of external debt: around 21 percent of GDP at end-2022.
- Legacy arrears to the Russian Federation and the United States amount to about 2.2 percent of GDP (principal amounts, excluding accumulated interest).
- Multilateral debt breakdown (per Cambodia Public Debt Statistical Bulletin):
  - Asian Development Bank: US$ 2,051 million.
  - World Bank: US$ 934 million.
  - Cambodia does not have loan liabilities to the IMF.

### Public domestic debt and government bond issuance
- Public domestic debt remains negligible.
- Authorities started issuing local-currency government bonds in September 2022.
- Total issuance in 2022: US$ 17.5 million, less than 0.1 percent of GDP (planned US$ 300 million).
- All 2022 bonds issued at a 2.2 percent yield with a 1-year maturity.
- Policy changes to improve appetite for bonds in 2023:
  - Increased 1-year yield to 3.5 percent.
  - Widened maturities to 2-, 3-, and 5-years.
  - Plan to deduct 50 percent of withholding tax on interest earned and set tax exemption on capital gains from purchasing and trading the bonds for three years.
- 2023 issuance plan: US$ 200 million total; only US$ 27 million issued in the first half of the year; a new auction expected by end of the year.
- Cambodia Securities Exchange planning to establish a new platform by the end of 2023 to develop issuance.

### PPPs and private external debt
- PPPs are expected to continue as important financing as concessional financing access diminishes and domestic debt markets develop slowly.
- PPP stock more-than-doubled between 2010 and 2015 and is estimated at around 20.7 percent of GDP by end-2022.
- Authorities have taken steps to strengthen the PPP framework, including a central PPP unit and a new law on PPP enacted in November 2021.
- Private external debt is excluded from the DSA; staff estimate private external debt at about 43 percent of GDP in 2022.
- Private debt risks:
  - Excessive private external borrowing could increase insolvency risk and possibility of government interventions.
  - Insolvency would increase financial vulnerabilities and is modeled as a financial shock of 10 percent of GDP.

### Macroeconomic background and near-term outlook
- Real GDP growth increased from 3.0 percent in 2021 to 5.2 percent in 2022.
- Manufacturing contributed over 3 percent to real GDP in 2022; services (tourism) strongly rebounded.
- Exports declined in Q1 2023 but started to recover led by electronics.
- Credit growth decelerated to 8.1 percent y/y in August 2023, down from 23.5 percent in 2021.
- Private credit-GDP ratio remains around 160 percent.
- Fiscal stance in 2022:
  - Primary deficit estimated at 0.6 percent of GDP in 2022 (down from 6.7 percent in 2021).
  - Revenue outperformance about 0.6 percent of GDP; social spending decreased around 6 percent y/y.
- Current account:
  - Deficit declined from about 42 percent of GDP in 2021 to about 26 percent in 2022, largely driven by a decline in gold imports.

### Baseline projections (2023- medium term) and assumptions
- Growth:
  - Projected 5.3 percent in 2023.
  - Medium-term growth projected at around 6.5 percent.
- Inflation:
  - Expected to average 2 percent in 2023 and converge to around 3 percent absent further commodity shocks.
- Current account:
  - Projected to decline to 2.1 percent of GDP at the end of 2023.
  - Expected to converge to its historical average starting in 2024.
  - International reserves expected to remain stable and above 7 months of imports throughout the projection period.
- Fiscal:
  - Primary deficit expected to widen to 3.6 percent of GDP in 2023, fall to around 2.0 percent in 2024, and reach 2.5 percent over the medium term.
  - Increase in 2023 due to 2023 South-East Asia Games, the General Election, scheduled public sector wage increase, and completion of infrastructure projects.
  - Employee compensation as percent of GDP expected to stay at current level from 2024; social benefit expenditures projected to scale back somewhat but remain higher than pre-pandemic.
  - Revenue-to-GDP ratio expected to increase modestly over the medium term.
- Baseline realism:
  - Projected growth path is in line with standard fiscal multipliers.
  - Contribution of public capital to GDP growth is broadly in line with historical values.
  - Primary deficit-to-GDP ratio adjustment over next three years is not in the top quartile of the distribution for LICs.
- Drivers and caveats:
  - Large current account deficits in 2021-22 driven by surge in gold imports and financed mostly by unidentified other short-term inflows; baseline assumes surge was temporary and residuals will return to pre-2020 outflows.

### Main risks (tilted to the downside)
- Deeper and more prolonged slowdown in import demand from advanced economies:
  - US accounts for over 40 percent of Cambodia’s exports.
  - Staff estimate: 1 percent decline in US economic activity could reduce Cambodia’s output by about 0.5 percent in the short term.
- Weaker prospects for the Chinese economy:
  - Staff estimate: 1 percent decline in Chinese economic activity could reduce Cambodia's output by about 0.6 percent after 1 year.
- US monetary tightening:
  - A 100-basis point increase in the US monetary policy rate is estimated to reduce Cambodia GDP by about 1.1 percent after four quarters.
- High levels of private debt: pockets of solvency risks across industries and firms amid rising lending rates and falling profits.
- Geo-economic fragmentation: Cambodia’s high openness and strong US and China ties make it susceptible to trade fragmentation risks with potentially large economic costs.
- Other risks: commodity price volatility, extreme climate events (flood, drought, changing monsoon patterns), and a disorderly climate transition.

### Financing and debt dynamics assumptions
- External borrowing:
  - Set at around 3-3.5 percent of GDP over the medium term, declining to 2.6 percent of GDP by 2030 as fiscal deficit narrows and domestic financing increases.
  - New external debt expected to remain largely concessional, with an average maturity of 27 years and a nominal interest rate of less than or equal to 2 percent.
- Domestic bonds issuance:
  - Annual domestic bond issuance assumed to increase gradually from less than 0.1 percent of GDP in 2022 to about 2 percent of GDP in 2043.
  - Outstanding domestic PPG debt estimated to reach around 10 percent of GDP by 2043, accounting for about 25 percent of total outstanding PPG debt.
  - If demand for domestic issuance is less than expected, the government could draw down domestic deposits held at the central bank.

### Debt-carrying capacity and classification
- Cambodia’s debt-carrying capacity classified as "medium", same as previous DSA.
- Composite Indicator (CI) index: 3.06 (based on October 2023 WEO update and World Bank’s 2022 CPIA).

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1khmea2024001.pdf*

### 16.      Stress analysis include tailored stress test. Cambodia is highly vulnerable to climate

### 1khmea2024001 - 16.      Stress analysis include tailored stress test. Cambodia is highly vulnerable to climate

### Stress tests and tailored natural disaster scenario
- Cambodia is highly vulnerable to climate change, likely to experience an increase in temperatures, and longer and more intense droughts and flooding.
- In addition to six standardized stress tests, analysis includes a natural disaster scenario calibrated with:
  - a significant mitigation cost of 10 percent of GDP (around US$ 2.9   billion)
  - a fall in GDP growth using an interaction coefficient of 1.5
  - a fall in exports using an interaction coefficient of 3.5
- The contingent liability stress test quantifies potential risks from:
  - PPPs amounting to 7.3 percent of GDP
  - financial markets amounting to 10 percent of GDP

### External debt sustainability and projections
- External debt risk assessment:
  - External debt projected to remain at 35.5 percent of GDP until 2026 (from 34.8 percent of GDP in 2022)
  - Gradually falls to 32.4 percent of GDP by 2033 and 29 percent of GDP by 2043
  - Present value of external debt-to-GDP ratio falls from 21.9 percent of GDP to 19.4 percent of GDP over the same timeframe
- Debt service metrics:
  - Large share of concessional loans keeps debt service-to-exports and debt service-to-revenue ratios far below indicative benchmarks throughout the forecast horizon
- Stress-test sensitivity:
  - Exports shocks have the most severe impact: present value of external debt-to-GDP rises from around 22 percent of GDP in 2023 to around 35 percent of GDP, below the 40 percent threshold, and then gradually falls to about 33 percent over the medium term

### Public debt dynamics and stress outcomes
- Baseline public debt path:
  - Total PPG debt increases from 35 percent of GDP in 2022 to around 40 percent of GDP in 2033 with an increased domestic financing mix
  - Present value of total debt-to-GDP estimated to increase gradually to 30 percent (throughout the timeframe) but remains below the 55 percent benchmark
- Debt service and vulnerability:
  - Debt service-to-revenue ratio is estimated to pick up over the long term alongside a rising share of domestic debt
  - Under the growth shock scenario, present value of total debt-to-GDP rises to 50 percent by 2033 but does not breach the 55 percent threshold
  - Contingent liability stress test produces the most extreme spike in the debt service-to-revenue ratio, notably in 2029, driven by the 10 percent of GDP financial market shock that results in temporary borrowing needs and higher debt servicing

### Risk rating, vulnerabilities, and policy implications
- Risk assessment:
  - Cambodia remains at low risk of both external and overall debt distress
  - Public debt projected to rise by around 4 percentage points of GDP during the next decade before stabilizing
  - Debt burden indicators projected to remain well below thresholds under baseline and all shock scenarios
  - Debt sustainability remains vulnerable to shocks in exports and growth
- Policy recommendations and priorities:
  - Maintain fiscal discipline and robust public debt management while promoting long-term growth
  - Implement targeted and managed fiscal measures to safeguard near-term recovery amid heightened global risks
  - Preserve macroeconomic stability, diversify the economy and exports to increase resilience to external shocks
  - Improve spending efficiency and successfully implement the revenue mobilization strategy
  - Strengthen public investment management and PPP frameworks and enhance analysis of PPP risks
  - Close data gaps, particularly regarding external private debt and the PPP stock

### Authorities’ views
- Authorities expressed strong commitment to debt sustainability and closely monitor external and overall debt-related indicators.
- Ongoing and planned actions by authorities:
  - Continued focus on managing PPP risks and building a comprehensive PPP database, to include PPP stock and estimated contingent liabilities
  - Continued development of domestic financial markets and support for developing the government bond market

*Source: IMF staff analytical text provided in content unit 1khmea2024001.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1khmea2024001.pdf_