## 1. Credit-to-GDP Gap Estimates ## Source details **Canonical URL:** [1. Credit-to-GDP Gap Estimates](https://www.imf.org/-/media/files/publications/cr/2025/english/1khmea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1khmea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1khmea2025001-print-pdf.pdf.json) --- ### Context and structural shifts - Cambodia at a crossroads after decades of strong growth and poverty reduction. - GDP growth averaged 8.3 percent annually from 2000 to 2019; poverty rates declined from 30.1 percent in 2007 to 17.8 percent in 2019. - Credit-to-GDP ratio rose from 24.2 percent in 2010 to 134.5 percent in 2023; credit boom accelerated from 2018 and peaked close to 140 percent of GDP in late 2022. - Economy highly dependent on external demand and exposed to geoeconomic fragmentation and changing policies by major trading partners. - Impending graduation from LDC status in 2027-2030 will result in loss of preferential export treatment. ### Recent developments — growth, inflation, external sector, and financial conditions - Growth and sectoral dynamics: - Real GDP growth estimated around 5 percent in 2023 (rebased GDP). - Staff nowcast: around 5¾ percent in 2024H1. - Manufacturing drove growth in 2023; tourism arrivals at 2019 levels by mid-2024 but receipts remain below pre-COVID levels. - Construction and real estate undergoing correction with declining credit quality and FDI. - Inflation: - Headline CPI: 5.3 percent in 2022 → 2.1 percent in 2023. - Inflation averaged 0.3 percent (y/y) in 2024H1; core inflation declined from 2 percent (2023 average) to 0.6 percent in 2024H1. - External sector and reserves: - Current account: deficit of 19 percent of GDP in 2022 → surplus of 1.3 percent of GDP in 2023 (driven by gold trade volatility, import compression, tourism recovery). - Gold imports contracted from 11 to 0.5 percent of GDP in 2023. - International reserves increased in 2023 and remained adequate, with around 7 months of prospective import coverage; GIR at end-2023: 46 percent of GDP or 7 months of prospective imports; reserves in 2024H1: USD 20 billion. - Fiscal and credit outcomes: - Fiscal deficit: 0.3 percent of GDP in 2022 → around 2.8 percent in 2023. - Tax revenues declined by about 4 percent (y/y) in 2023. - Total expenditure rose by around 10 percent (y/y) in 2023; capital expenditure execution lower than planned by about 20 percent. - Credit growth reached a decade low in 2023; loan-to-deposit ratio declined by 15 percentage points but remained above pre-pandemic levels. - Financial sector soundness: - NPL ratios: 2.9 percent in 2022 → above 6.5 percent in 2024Q2. - Banks’ profitability declined sharply with higher provisioning and reduced interest margins. - NBC lowered the USD reserve requirement rate (RRR) on deposits and non-resident borrowing for banks to 7 percent in 2023Q4. - NCD rates averaged 0.7 percent (USD) and 0.9 percent (KHR) in 2024H1. ### Outlook and key projections - Growth: around 5½ percent for 2024 and 5¾ percent for 2025 (staff); medium-term potential growth around 6 percent. - Output gap expected to close by end-2025. - Inflation: projected to reach around 1.5 percent by end-2024 and converge towards 3 percent thereafter. - Fiscal trajectory: - Fiscal deficit projected at around 3 percent in 2024 and to decline gradually to around 2 percent over the medium term. - Tax-revenue-to-GDP ratio projected at around 12 percent for 2024 — nearly 4 pts lower than before the pandemic, 3 pts lower than EMDE average of 15 percent, and much below Cambodia’s potential tax-to-GDP ratio of 21 percent. - 2024 deficit driven by tax revenue shortfall projected to be 10-15 percent lower than the budget forecast. - Public debt and contingent liabilities: - Total PPG debt-to-GDP around 26 percent as of end-2023; projected to increase by around 4 pts of GDP during the next decade. - Capital stock of PPPs estimated at around 40 percent of GDP at end-2023, corresponding to a contingent liability of 14 percent of GDP. - External sector: current account expected to return to a deficit of around 1¾ percent of GDP in 2024; international reserves projected to remain stable at about 7 months of prospective imports. ### Risks and vulnerabilities - Downside risks dominate: slower global growth, geoeconomic fragmentation, policy shifts by trading partners. - Domestic financial risks: - Continued weakness in construction and real estate → corporate defaults, domestic financial instability, protracted private-sector debt overhang. - Elevated NPLs, falling profitability, and renewed forbearance risk masking loan quality deterioration and creating credit misallocation. - Climate change and natural disasters pose long-term threats to agriculture and infrastructure; climate change could lower GDP by some 3-9 percent by 2050 (World Bank model). ### Policy issues and key recommendations — fiscal - Near-term macro stance: broadly neutral while vigilant to downside risks. - Fiscal policy: - Accommodate a durable and inclusive near-term recovery while rebuilding buffers drawn down during the pandemic. - Reinforce fiscal sustainability as access to concessional financing declines with LDC graduation. - Improve fiscal rules: staff recommends adopting an improved set with a medium-term debt anchor of 40 percent of GDP; an overall deficit ceiling of 3.5 percent of GDP; and a fiscal buffer rule requiring contributions of 2-4 percent of previous year revenue to the Financial Reserve Fund. - Implement Revenue Mobilization Strategy (RMS-III) to modestly raise revenues over the medium term. - Mobilize revenue while safeguarding priority spending: health, education, social protection. - Revenue and tax policy measures: - VAT reforms to broaden base; Cambodia’s VAT C-efficiency ratio: 72 percent. - Implement personal income tax starting in 2026 (authorities’ plan). - Replace generous income tax holidays with targeted incentives; limit interest deductibility and strengthen transfer-pricing rules. - Strengthen tax administration, digitalization, Non-tax Revenue Management Information System (NRMIS), E-Payment systems; adopt full VAT liability regime for digital platforms; review low-value import thresholds. - Assess foregone revenues from recent tax exemptions and conduct tax expenditure reporting and cost-benefit analyses. ### Policy issues and key recommendations — monetary, macroprudential, and financial stability - Monetary policy and liquidity: - Ensure adequate liquidity to support recovery despite weak transmission. - Operationalize emergency liquidity assistance (ELA) to be effective and credible. - Resume policy normalization at a pace calibrated to recovery and banking sector liquidity; renormalizing by raising USD RRR to pre-pandemic levels would rebuild policy space but must avoid liquidity risks. - Promote an active KHR interbank market; make the interest rate corridor fully symmetric; publish the reference rate; enhance liquidity forecasting; gradually increase role of KHR to improve resilience. - Macroprudential and financial stability: - Prioritize financial stability; phase out forbearance measures to avoid misallocation and delayed loss recognition. - While forbearance remains: properly report restructured loans, ensure adequate provisioning, preserve liquidity and capital buffers, restrict dividends for weak banks, encourage capital raising. - Strengthen supervision: reinforce NBC’s Financial Stability Committee, continue risk-based supervision, implement Basel III (including new capital adequacy and solvency framework), review Prompt Corrective Action framework. - Expand macroprudential toolkit and introduce borrower-based measures (BBMs) when conditions permit: LTV and DSTI for households; sectoral risk weights or SyRB for corporates; consider activating a positive neutral CCyB (e.g., 1 percent initially) when conditions normalize. - Recommended sequencing: time activation of CCyB and BBMs and announce ahead to reduce leakages and regulatory arbitrage; coordinate with NBFSA to cover non-bank lenders. - Crisis preparedness: - Establish crisis resolution framework, sound insolvency regime, and deposit insurance scheme. - Intensify inter-agency coordination and data-sharing to monitor nonfinancial corporates with large exposure to construction and real estate. ### Credit-to-GDP gap and forbearance (Boxes) - Credit gap use: deviation of credit-to-GDP from trend is a useful leading indicator of systemic risk and for calibrating Countercyclical Capital Buffers. - Methodology: BCBS core reference uses one-sided Hodrick-Prescott (HP) filter on quarterly data; alternatives include Hamilton (Ham), Christiano-Fitzgerald (CF), and moving average (MA) filters. - Historical pattern: - Credit gaps contained until 2017; rapid credit acceleration from 2018 signaled increasing risks. - Gaps widest in late 2022 when credit-to-GDP peaked close to 140 percent of GDP. - With credit deceleration, gap measures have fallen, though CF filter continues to show a sizable positive gap. - Forbearance (Box 2): - Pre-pandemic NPLs ~2 percent of gross loans. - Forbearance allowed restructuring without reclassification and NBC waived provisioning; restructured loans peaked mid-2021 at about 10½ percent of loan portfolio. - Forbearance masked deterioration in asset quality; phase-out since 2022 revealed gradual NPL deterioration. - New forbearance risks delaying addressing loan quality; recommendation: clearly flag restructured loans for monitoring by credit bureau and NBC. ### Debt sustainability, contingent liabilities, and stress tests - DSA key figures: - Total PPG debt-to-GDP: around 26 percent end-2023; projected to increase by around 4 pts over next decade. - Present value of total PPG debt-to-GDP: 55 percent (Text Table 1 entry for PV total PPG debt-to-GDP). - Present value of PPG external debt-to-GDP: 40 percent; PV PPG external debt-to-exports: 180 percent; PPG external debt service-to-exports: 15 percent; PPG external debt service-to-revenue: 18 percent. - Contingent liabilities modeled: - PPP capital stock ~40.2 percent of GDP end-2023; contingent liability from PPPs estimated 14.1 percent of GDP (assumed shock size 35 percent of PPP stock). - Financial market shock assumed at 10.0 percent of GDP. - Aggregate contingent liabilities used in analysis: 24.1 percent of GDP. - Stress-test findings: - Contingent liability shock produces largest impact: PV external debt-to-GDP rises from <15 percent in 2024 to around 30 percent, then falls towards 28 percent. - PPG debt under baseline: 26 percent of GDP in 2023 → 30 percent in 2034; contingent liability shock pushes PV total debt-to-GDP to over 30 percent by 2034 but below 55 percent benchmark. - Natural disaster tailored scenario: mitigation cost assumed at 10 percent of GDP (around US$ 4.5 billion); fall in GDP growth interaction coefficient: 1.5; fall in exports interaction coefficient: 3.5. - Public and external debt composition: - External public debt: around US$ 11.2 billion (26 percent of GDP) end-2023. - Bilateral debt ~64 percent of external debt; China ~US$ 4,114 (9.8 percent of GDP, 36.8 percent of external debt). - Private external debt estimated at about 27 percent of GDP in 2023. - Domestic public debt stock low: US$ 52.4 million (0.14 percent of GDP) in 2023; domestic issuance expanding (2023 maturities: 2, 3 and 5 years). - Financing assumptions in DSA: - External borrowing: around 3-3.5 percent of GDP per annum medium term, declining to 2.6 percent by 2030. - New external debt largely concessional, average maturity 27 years, nominal interest rate <2 percent on average. - Annual net domestic bond issuance rising gradually from <0.1 percent of GDP in 2022 to about 2 percent of GDP in 2044. - Risk assessment: current risk of external and overall debt distress rated Low under LIC-DSF; vulnerabilities concentrated in contingent liabilities and private external borrowing. ### External sector assessment (Annex II) - 2023 CA: surplus 1.3 percent of GDP (from deficit of 19 percent in 2022); goods trade balance improved by 15 pts of GDP relative to 2022. - Capital/financial account: balance declined to 1.5 percent of GDP in 2023; large short-term capital outflows amounted to 3 percent of GDP in 2023. - Banks increased net foreign assets by 13 pts of GDP relative to 2022. - Errors and omissions: over 3 percent of GDP in 2023. - EBA-lite model (selected entries, percent of GDP): - CA-Actual: 1.3 - Adjusted CA: -3.8 (after adjustments) - CA Norm: -5.4 - CA Gap: 1.6 -13.7 (table shows CA Gap entries "1.6 -13.7" and related REER gaps) - REER Gap (in percent): -3.6 30.6 - REER: stabilized in 2023 after prior secular appreciation; model outputs show considerable uncertainty (EBA-CA implies REER undervaluation -2.3 percent applying elasticity -0.4; REER model implies overvaluation 30.6 percent based on CA gap -13.7 percent of GDP). - Policy priorities: address data limitations in external statistics; reduce errors and omissions; pursue balanced macroeconomic policies; promote inclusive domestic-demand-led growth and structural reforms. ### Monetary policy transmission and bank-level findings - NBC uses RRRs on domestic and foreign currency liabilities as a key instrument; transmission to lending weak. - High dollarization: about 90 percent of loans and deposits in USD; foreign currency deposits to M2 over 80 percent; FCD to total banking deposits around 90 percent. - Bank-level sample: 65 banks, 2019Q1–2024Q2 panel (highly unbalanced). - Key findings: - No clear association between RRR changes and credit growth; RRR cuts often led banks to hold additional excess reserves rather than increase lending. - Banks’ profits declined despite RRR cuts; profitability heterogeneous with many banks marking losses since 2022. - Lending and deposit rates sticky; USD rates particularly sticky; KHR rates more volatile. - Limitations: quarterly data, limited time coverage; monthly, longer series recommended. - Policy directions: - Modernize monetary operations: establish policy rate corridor, strengthen central bank communication. - Deepen KHR interbank market and promote de-dollarization gradually. - Develop macroprudential tools and crisis management frameworks (deposit insurance). ### Macroprudential toolkit and calibration guidance (Annex VI) - Credit-to-GDP reached 133 percent end-2023 (almost 189 percent in 2022 before rebasing). - Existing tools and gaps: - CCoB set at 1.25 percent till December 2025 (scheduled increase to 2.5 percent postponed). - CCyB at zero with no enabling regulation. - Capital surcharge 1 percent for D-SIBs; minimum CAR in Cambodia: 15 percent. - RRRs at historically low 7 percent. - Recommended measures: - Activate and carefully calibrate CCyB and build releasable buffers; consider initial positive neutral CCyB 1 percent when normalized. - Introduce BBMs: LTV and DSTI for households; appropriate corporate measures (risk weights, credit caps, SyRB). - Address FX and liquidity risks given high dollarization. - Improve data to calibrate measures: collect nonfinancial corporations’ balance-sheet indicators and household loan coverage beyond mortgages. - Mitigate leakages and regulatory arbitrage by coordinating with NBFSA and bringing non-bank lenders under macroprudential perimeter. ### Structural reforms, governance, and data - Structural priorities: diversify growth drivers, boost higher-value-added industries, logistics, renewable energy, agro-processing, and human capital. - Skills Development Fund and plan to provide vocational training to 1.5 million youths from poor households welcomed. - Business environment constraints: high electricity costs (rates "nearly double" Vietnam), uncertainty in law enforcement, governance concerns—recommend comprehensive energy strategy and governance/legal reforms (Whistleblower Protection, Transparency and Access to Information, asset declaration digitalization, specialized commercial courts). - Climate policy: authorities reviewing NDC 2.0 and Climate Change Strategic Plan 2024-33; FAD TA recommended carbon pricing to "around $25 per ton of CO2-equivalent by 2030". - Data gaps and statistical capacity: - GDP rebased to 2014 base year; gaps remain in real estate, nonfinancial corporate debt, and non-bank financial institutions. - Errors and omissions in BOP large (3.3 percent of GDP in 2023); need for quarterly national accounts, improved fiscal outturn timeliness (GFS), and better inter-agency data sharing. - Fund CD spending FY2024: around US$3.6 million with focus on PFM, financial supervision, central bank operations, and monetary/macroprudential policy. ### Authorities’ views (summary) - Authorities broadly agree with staff on uneven recovery; project growth of 6 percent in 2024 and 6.3 percent in 2025. - Emphasize maintaining low USD RRR to support credit supply and stabilize NPLs; view capital and liquidity buffers as ample. - Plans: finalize RMS-III, implement personal income tax in 2026, reform excise taxes, conduct tax expenditure study, develop domestic government bond market, and implement Public Debt Management Strategy 2024-2028. - Commit to modernizing liquidity operations, de-dollarization steps, and improvements in market infrastructure for government securities. *Source: IMF staff report text from 1khmea2025001-print-pdf* ### 1. Credit-to-GDP Gap Estimates __________________________________________________________________ 23 ### 1. Credit-to-GDP Gap Estimates ### Context and structural shifts - Cambodia's economy is at a crossroads after decades of strong growth and poverty reduction. - GDP growth averaged 8.3 percent annually from 2000 to 2019, and poverty rates declined from 30.1 percent in 2007 to 17.8 percent in 2019. - The extended credit boom lifted the credit-to-GDP ratio from 24.2 percent in 2010 to 134.5 percent in 2023. - The economy remains highly dependent on external demand and is exposed to geoeconomic fragmentation and changing policies by major trading partners. - Impending graduation from Least Developed Country (LDC) status in 2027-2030 will result in a loss of preferential treatment for exports. ### Recent developments — growth, inflation, external sector, and external balances - Real GDP growth: - Estimated around 5 percent in 2023 (based on the rebased GDP). - Staff nowcast estimated growth to be around 5¾ percent in 2024H1. - Sectoral dynamics: - Manufacturing drove growth in 2023. - Tourism activity picked up but tourism receipts lagged. - Construction and real estate are undergoing a correction with declining credit quality and FDI. - Inflation and prices: - Headline CPI inflation decelerated from 5.3 percent in 2022 to 2.1 percent in 2023. - Inflation averaged 0.3 percent (y/y) in 2024H1. - Core inflation declined from 2 percent on average in 2023 to 0.6 percent 2024H1. - Current account and reserves: - CA shifted from a deficit of 19 percent of GDP in 2022 to a surplus of 1.3 percent of GDP in 2023, reflecting mainly gold trade volatility, import compression, and tourism recovery. - Gold imports contracted from 11 to 0.5 percent of GDP in 2023 and did not recover subsequently. - International reserves increased in 2023 and remained adequate, with around 7 months of prospective import coverage. - Exports, tourism, and FDI: - Strong rebound in garment and agricultural exports since late-2023. - Solar-related exports fell sharply since 2023Q4 following anti-dumping duties rulings. - FDI inflows in 2024H1 declined as manufacturing inflows were offset by declines in financial and real estate sectors. - Tourist arrivals were at 2019 levels in mid-2024 but high-spending tourism receipts remained far below pre-COVID levels due to compositional shifts. - Fiscal outcomes: - Fiscal deficit increased from 0.3 percent of GDP in 2022 to around 2.8 percent in 2023. - Tax revenues declined by about 4 percent (y/y) in 2023. - Total expenditure rose by around 10 percent (y/y) in 2023; capital expenditure execution was lower than planned by about 20 percent. - Monetary and credit developments: - Credit growth reached a decade low in 2023 after rapid expansion; overall credit growth remained low in 2024 prompting extension of forbearance measures. - Loan-to-deposit ratio declined by 15 percentage points, though remained above pre-pandemic levels. - NBC lowered the USD reserve requirement rate (RRR) on deposits and non-resident borrowing for banks in 2023Q4 to 7 percent. - Rates on negotiable certificate deposits (NCDs) were lowered in early 2023 from 3.4 and 1.3 percent for USD and KHR, respectively, and averaged 0.7 and 0.9 percent, respectively, in 2024H1. - Financial sector soundness: - NPL ratios climbed to above 6.5 percent in 2024Q2 from 2.9 percent in 2022, rising especially for retail and wholesale trade, construction, real estate, and agriculture sectors. - Banks’ profitability declined sharply with increased provisioning costs and reduced interest margins. ### Outlook and key projections - Growth projections: - Around 5½ percent for 2024 and 5¾ percent for 2025 (compared to 6 and 6.1 percent respectively in the April 2024 WEO). - Output gap expected to close by end-2025. - Medium-term potential growth around 6 percent per staff’s forecast model. - Inflation forecast: - Projected to reach around 1.5 percent by end-2024 and converge towards the long-term trend of 3 percent thereafter. - Fiscal trajectory: - Fiscal deficit projected at around 3 percent in 2024 and to decline gradually over the medium term to around 2 percent. - Tax-revenue-to-GDP ratio projected at around 12 percent for 2024 — nearly 4 pts lower than before the pandemic, 3 pts lower than the EMDE average of 15 percent, and much below Cambodia’s potential tax-to-GDP ratio of 21 percent. - The 2024 deficit is driven by a tax revenue shortfall projected to be 10-15 percent lower than the budget forecast. - Public debt and contingent liabilities: - Total public and publicly guaranteed (PPG) debt-to-GDP ratio was around 26 percent as of end-2023 and is projected to increase by around 4 pts of GDP during the next decade. - Capital stock of PPPs is estimated at around 40 percent of GDP at end-2023, corresponding to a contingent liability of 14 percent of GDP. - External sector: - Current account expected to return to a deficit of around 1¾ percent of GDP in 2024. - International reserves projected to remain stable at about 7 months of prospective imports. ### Risks and vulnerabilities - Downside risks dominate: - Exposure to slower-than-expected global growth, geoeconomic fragmentation, and policy shifts by trading partners. - Continued weakness in construction and real estate could lead to corporate defaults, domestic financial instability, and a protracted private-sector debt overhang. - Climate change and natural disasters pose long-term threats to agricultural output and infrastructure. - Financial sector stress points: - Elevated NPLs and falling profitability increase systemic vulnerability. - Forbearance measures risk masking loan quality deterioration and creating credit misallocation. - External shocks to contingent liabilities could make external debt vulnerable (DSA concerns). ### Authorities’ views - Authorities agreed broadly with staff’s assessment: - Projected growth of 6 percent in 2024 and 6.3 percent in 2025. - Recognize uneven recovery across sectors, stronger garment exports, and moderate tourism earnings recovery. - Note recently announced tax exemptions and forbearance measures intended to support the recovery. - Highlight risks from slower global growth, geoeconomic fragmentation, climate change, and prolonged tight global monetary conditions. ### Policy issues and recommendations - Near-term macro stance: - Broadly neutral macroeconomic-policy stance is appropriate under the baseline scenario while remaining vigilant to downside risks. - Fiscal policy: - Accommodate a durable and inclusive near-term recovery while rebuilding buffers drawn down during the pandemic. - Reinforce fiscal sustainability over the medium term as access to concessional financing declines with LDC graduation. - Improve fiscal rules using conservative and easily measurable metrics to ensure transparency and accountability. - Implement Revenue Mobilization Strategy (RMS-III) to modestly raise revenues over the medium term. - Monetary and macroprudential policy: - Ensure adequate liquidity in the system to support recovery despite weak transmission. - Operationalize emergency liquidity assistance (ELA) to be effective and credible for adverse shocks. - Restore policy settings to pre-COVID conditions at an appropriate pace. - Financial stability and crisis management: - Prioritize financial stability given risks from renewed forbearance measures and NPL increases. - Establish a crisis resolution framework with a sound insolvency regime and a deposit insurance scheme to mitigate disorderly adjustments and contain debt overhang risks. *CAMBODIA — INTERNATIONAL MONETARY FUND* ### 18. Under adverse shocks, fiscal policy should be the first line of defense, given limited ### Under adverse shocks, fiscal policy should be the first line of defense, given limited ### Fiscal framework and consolidation - The Medium Term Fiscal Framework (MTFF 2025-27) outlines a multi-year fiscal consolidation plan to rebuild buffers to pre-pandemic levels. - The 2025 national budget, pending parliamentary approval by end-2024, is broadly aligned with MTFF goals and staff projections and aims to maintain expenditure control while addressing infrastructure and human capital. - Staff recommends adopting an improved set of fiscal rules: - medium-term debt anchor of 40 percent of GDP; - an overall deficit ceiling of 3.5 percent of GDP; - a fiscal buffer rule requiring contributions of 2-4 percent of previous year revenue to the Financial Reserve Fund. - Rationale: the proposed rules are more conservative and easily measurable than current rules and designed to reinforce fiscal sustainability during economic transition. ### Key fiscal indicators (Text Table 1) - Present Value of Total Public and Publicly Guaranteed (PPG) Debt to GDP: 55% - Present Value of PPG External Debt to GDP: 40% - Present Value of PPG External Debt to Exports: 180% - PPG External Debt Service to Exports: 15% - PPG External Debt Service to Revenue: 18% - Total budget deficit ceiling to GDP: -5% ### Quality of fiscal consolidation and spending priorities - Recent revenue collection underperformed, with outturns falling short of budget projections for both 2023 and 2024 (through July); fiscal adjustments have disproportionately relied on expenditure rationalization, primarily deferment of capital expenditure. - Staff recommends a more balanced approach: mobilize revenue while safeguarding priority spending to support sustainable and inclusive development. - Priority spending areas to be protected and strengthened: - health, education, and social protection to support human capital and inclusive growth; - minimize gaps in education outcomes and access to quality healthcare between urban and rural areas; - address low teacher-student ratios in rural areas and improve health infrastructure and financing for vulnerable households. - Public-private partnerships (PPPs) can help address infrastructure financing gaps but contingent liabilities must be well managed and monitored. - Public investment management should be strengthened, including explicit accounting of maintenance costs in the budget. ### Revenue mobilization and tax policy measures - Revenue mobilization should be multi-pronged: tax policy reforms and improved revenue administration. - VAT reforms: - further strengthen the VAT system with broadening of its base; - Cambodia’s VAT system has a C-efficiency ratio of 72 percent. - Personal income tax reforms to enhance progressivity and redistribution; authorities plan to implement a personal income tax starting in 2026. - Corporate sector reforms: - replace generous income tax holidays with better-targeted, cost-based investment incentives (e.g., accelerated depreciation); - limit interest deductibility and strengthen transfer-pricing rules. - Administration and digitalization: - enhance data integration and information sharing through digital platforms; - strengthen tax collection in real estate and e-commerce with digital transaction tracking; - adopt a full VAT liability regime for digital platforms and review low-value import thresholds; - continue streamlining customs procedures and expand the National Single Window System; - strengthen non-tax revenue collection via the Non-tax Revenue Management Information System (NRMIS) and E-Payment systems and improved monitoring of royalties and leases. - Tax exemptions: - recent measures (stamp-duty and registration-tax exemptions, capital-gains-tax postponement for real estate, exemptions of VAT and income tax for tourism in Siem Reap, suspension of prepayment of tax on income for garment sector) aim to support recovery but exacerbate limited tax revenue and add complexity to tax administration. - Foregone revenues should be carefully assessed against objectives; staff welcomes the authorities’ Tax Expenditure Working Group and development of reporting on tax incentives and cost-benefit analyses. ### Developing domestic financing and managing contingent liabilities - Priority to further develop the domestic government bond market as concessional external loans decline with LDC graduation. - Past progress: bond maturities expanded from 1 year in 2022 to 2, 3 and 5 years in 2023, contributing to yield curve construction. - Recommendations: - increase bond issuance at a measured pace to allow market price discovery and stable investor demand; - improve liquidity as banks trade bonds and use them as collateral in operations with the NBC; - carefully assess financing options’ impact on contingent liabilities and public sector financial performance, including SOEs. - The government unveiled a ten-year master plan in early 2024 for transit and logistics with a projected total financial cost of US$ 37 billion. - Authorities should monitor SOE financial performance and contingent liabilities from PPPs; implement a robust framework for evaluating and managing fiscal risks in PPPs, with transparent disclosure and appropriate risk-sharing. ### Authorities’ views on fiscal policy - Authorities reaffirm commitment to fiscal sustainability and gradual consolidation. - They view some tax exemptions as potentially more effective than targeted spending for recovery but acknowledge challenges for revenue projections. - Plans include finalizing RMS-III, implementing personal income tax in 2026, reforming excise taxes, conducting a rigorous tax expenditure study, and developing the domestic government bond market with regulatory collaboration between the Ministry of Economy and Finance, NBC, and the Securities and Exchange Regulator. ### Monetary policy, liquidity, and de-dollarization - Monetary policy normalization should resume at a pace calibrated to recovery and banking sector liquidity conditions. - Renormalizing by raising the USD RRR to pre-pandemic levels would rebuild policy space, but timing and pace must avoid liquidity risks. - Transmission of RRR changes remains weak (Annex V); staff recommends: - promote an active KHR interbank market; - improve operational efficiency of monetary policy, recalibrate instrument use, and make the interest rate corridor fully symmetric; - enhance liquidity forecasting, strengthen market determination of exchange rates, and publish the reference rate; - gradually increase the role of the KHR to increase resilience given high share of foreign currency liabilities. - Authorities have taken steps to modernize liquidity operations to support de-dollarization and have received IMF TA on ELA and de-dollarization strategy. ### Financial sector forbearance, supervision, and crisis preparedness - Forbearance measures should be phased out to avoid capital misallocation, delayed recognition of loan losses, resolution delays, credit overhang, and potential misallocation. - While forbearance remains, ensure: - proper reporting of loans under forbearance; - adequate provisioning; - preservation of banks’ liquidity and capital buffers; - weak banks should not distribute dividends and should be encouraged to raise capital, including from existing shareholders. - Intensify supervision and coordinate monitoring; develop policy tools to fortify the financial sector: - strengthen NBC’s Financial Stability Committee (FSC) oversight and coordination with the National FCS; - continue risk-based supervision and implement Basel III, including completing the new capital adequacy and solvency framework and reviewing the Prompt Corrective Action framework; - expand the macroprudential toolkit and introduce borrower-based measures when conditions permit (Annex VI). - Recent measures (Text Table 2 excerpts): - Delay the introduction of Basel III related capital reforms until 2025. - Delay the accumulation of capital conservation buffers (CCBs) to 2.5 percent until end-2025. 1/ - Faster upgrade on loan classification for borrowers that restart making payments. - Allow banks to restructure loans twice without any change in classification until end-2025, with restructuring flagged in the Credit Bureau. 2/ - Note: The CCB was reintroduced in 2023, initially requiring banks to accumulate CCB to 1.25 percent by June 2023 and to 2.5 percent by December 2023. The minimum CAR in Cambodia is 15 percent. ### Monitoring corporate sector, crisis frameworks, and AML/CFT - Staff urges implementation of past advice to strengthen corporate sector monitoring (Annex VII). - Near-term priorities: - develop action plans for crisis resolution frameworks and deposit insurance schemes; - improve data collection and sharing across agencies to better monitor nonfinancial corporates with large exposure to construction and real estate; - strengthen inter-agency coordination on supervision and financial stability risk assessment; - ensure stringent prudential requirements and close monitoring of credit provision by real estate developers to homebuyers; - further strengthen the AML/CFT framework, including enforcing reporting requirements for gold imports and exports. ### Authorities’ views on monetary and financial policies - Authorities emphasize calibrating monetary normalization to recovery given low inflation and a negative output gap, favoring maintaining low USD RRR to strengthen credit supply and stabilize NPL ratios until credit conditions improve. - They note ongoing efforts to narrow the interest rate corridor, deepen the interbank market, and modernize liquidity operations. - Authorities see increased financial sector risks and the need to address data gaps and coordination but have a more sanguine view on forbearance measures, citing ample capital and liquidity buffers and stricter provisioning based on delinquency. ### Structural reforms for diversification and human capital - Comprehensive structural reforms are needed to diversify growth drivers, improve productivity, and upgrade export capabilities. - Key reforms include: - promote investment in higher-value-added industries, production networks, logistics, and low-cost renewable energy; - integrate productivity gains in agriculture and promote agro-processing industries; - strengthen human capital via improved education outcomes and equitable access to quality and affordable healthcare; - active labor market policies to enhance digital literacy and vocational skills. - Staff welcomes the Skills Development Fund and the planned provision of vocational training to 1.5 million youths from poor households. *Source: IMF staff report text from 1khmea2025001-print-pdf* ### 33. To attract more diversified foreign investment sources, Cambodia should prioritize ### 33. To attract more diversified foreign investment sources, Cambodia should prioritize addressing key obstacles of doing business. ### Business environment and foreign direct investment (FDI) - High cost of electricity is cited as one of the most significant obstacles for foreign investors; Cambodia's rates are "nearly double" those of neighboring Vietnam. - Uncertainty regarding enforcement and interpretation of laws and governance-related issues are frequently reported by foreign businesses. - Recommendation: develop a comprehensive energy strategy to reduce costs and improve reliability to boost competitiveness. ### Energy, climate change, and digital inclusion - Climate change impact: "Climate change could lower GDP by some 3-9 percent by 2050." - Policy priorities: - Promote renewable energy adoption to reduce dependence on imported fossil fuels. - Invest in adaptation measures to reduce asset-loss risks from floods, lower labor productivity losses, and mitigate lower crop yields. - Promote digitization to improve access to banking and digital payment services, particularly for SMEs and marginalized groups. - Institutional action: authorities are reviewing implementation of the Nationally Determined Strategy (NDC 2.0) and updating the national framework with the Climate Change Strategic Plan 2024-33. - Technical advice referenced: October 2023 FAD TA recommended introducing carbon pricing, starting at a low level and gradually increasing to "around $25 per ton of CO2-equivalent by 2030" in coordination with ASEAN peers. ### Governance, anti-corruption, and rule of law - Corruption vulnerabilities identified in the 2022 staff report largely remain (rule of law, regulatory quality, anticorruption legal frameworks, effectiveness of anticorruption enforcement). - Recommended legal and institutional actions: - Expedite approval of essential norms, including Whistleblower Protection and a law on Transparency and Access to Information. - Reform and improve the asset declaration regime; fully operationalize a digital platform for managing asset declarations and ensuring public access to high-level officials' declarations. - Clearly define roles of agencies involved in enacting laws for better accountability. - Strengthen independence and resources of the National Audit Authority and enhance its ability to audit high-risk agencies. - Strengthen judiciary capabilities by allocating adequate resources and taking steps to create specialized commercial courts. - Reinforce inter-agency cooperation, particularly for detecting and enforcing offenses arising from public procurement. - Expected outcome: targeted reforms would enhance governance frameworks, improve transparency, and bolster investor confidence. ### Data limitations and statistical capacity - Recent improvement: rebasing of National Accounts data completed with "2014 as the new base year." - Remaining gaps: real estate activities, non-financial corporate debt, non-bank financial institutions. - Recommended improvements: - Strengthen institutional capacity to address data gaps and enhance the timeliness and frequency of critical macroeconomic releases (e.g., quarterly national accounts and fiscal outturns based on Government Financial Statistics (GFS)). - Address Balance of Payments discrepancies, including mismatches between domestic trade data and reciprocal counterparty data from trade partners. - Enhance timely data sharing across agencies with a secure data transmission system, as recommended by recent TA in statistics. - Empower the capacity of the National Institute of Statistics (NIS). - Integration: integrate capacity development (CD) efforts with surveillance to support evidence-based policymaking. ### Authorities’ views and reform efforts - Authorities acknowledge structural impediments: high costs of doing business, limitations in trade facilitation and the business climate, and gaps in education, health, and labor force skills. - Noted reforms and initiatives: - "Single Portal" online registration system and streamlined customs processes. - Digital Economy and Society Policy Framework 2021-2035 to support digital transformation. - Progress toward the National Financial Inclusion Strategy 2019-2025, including promoting Bakong digital payments. - Challenges: digital divide persists with low financial literacy and gaps in internet access. - Legal reform commitments: - Draft norms on Whistleblower Protection being prepared and possibly included in Criminal Code reforms. - A draft law on Transparency and Access to Information under consideration by the Ministry of Posts and Telecommunications. - Working groups to establish labor and commercial courts to reduce caseloads at the Supreme Court. - Note: authorities indicate it typically takes time to enact laws. ### Staff appraisal — outlook, risks, and key policy recommendations - Growth outlook: - "Growth projected at 5½ percent" in 2024, up from "5 percent in 2023." - Near-term drivers: strong rebounds in garment exports, growth in agricultural exports, and recovery in tourism. - Non-tradable sectors expected to remain sluggish amid subdued domestic demand and a rapid slowdown in credit growth. - Construction and real estate sectors are undergoing a correction with declining FDI inflows and increasing NPLs. - Risks: - Risks to the outlook are skewed to the downside. - Slower global growth among major trading partners could dampen export growth, increase strain on corporate sectors with elevated leverage, and raise financial sector stress. - Continued weakness in construction and real estate could create private-sector debt overhang and slower growth. - Geoeconomic fragmentation could disrupt trade and FDI flows. - Climate change is a growing long-term threat to economic stability. - Fiscal policy: - Call for high-quality fiscal consolidation underpinned by sound medium-term fiscal frameworks to maintain debt sustainability and strengthen resilience. - Recommended measures: rationalize tax exemptions based on cost-benefit analysis, tax policy reforms to mobilize revenues, improve expenditure efficiency equitably, adopt more conservative and transparent fiscal rules. - Foster development of the domestic government bond market to reduce reliance on concessional foreign financing as Cambodia graduates from LDC status. - Manage fiscal risks from SOEs and PPPs. - Monetary policy: - "Monetary policy normalization should continue at a measured pace." - Restore policy to pre-pandemic settings while maintaining adequate liquidity. - Phase out pandemic-era monetary measures and modernize the monetary policy framework to support transmission and de-dollarization efforts. - Financial sector: - Policies should facilitate timely exit from forbearance measures and develop a comprehensive action plan to safeguard financial stability. - Immediate attention needed for rising NPLs and vulnerabilities in high-leverage sectors, with stronger inter-agency coordination. - Key reforms: implement Basel III, strengthen risk-based supervision, develop crisis resolution frameworks, improve macroprudential policy, and apply stringent prudential requirements for financial intermediation by real estate developers to prevent regulatory arbitrage. - Structural reforms: - Focus on strengthening governance and institutions, promoting economic diversification, improving competitiveness, enhancing human capital and skills, reducing energy cost, upgrading infrastructure, and addressing data limitations. - Strengthen anti-corruption measures and public sector transparency to attract diversified FDI. - Support evidence-based policy with strengthened NIS capacity and timely data sharing; leverage CD efforts with the international community. - Procedural note: It is proposed that the next Article IV consultation with Cambodia be held on the standard "12-month cycle." ### Box: Credit-to-GDP gap estimates — key points - Purpose: credit gap measures (deviation of credit-to-GDP from trend) are useful leading indicators of systemic risk and for calibrating Countercyclical Capital Buffers. - Methodology: the Basel Committee (BCBS) uses a one-sided Hodrick-Prescott (HP) filter on quarterly data as a core reference—but the HP filter has shortcomings (end-of-sample sensitivity, choice of smoothing parameter, need for long quarterly series). - Alternative filters: Hamilton (Ham) filter, Christiano-Fitzgerald (CF) filter, and moving average (MA). - Historical pattern for Cambodia: - Credit gaps were contained until 2017 as credit growth decelerated from a 2011 peak. - Rapid acceleration of credit growth starting in 2018 led gap measures to signal increasing risks. - Gaps across measures were widest in late 2022 when the credit-to-GDP ratio "peaked at close to 140 percent of GDP." - With recent credit deceleration, credit gap measures have fallen; however, the CF filter "continues to show a sizable positive gap." *Source: IMF staff report excerpt on Cambodia (content unit: 1khmea2025001-print-pdf).* ### Box 2. Forbearance Measures - Masking the Deterioration in Loan Quality ### Box 2. Forbearance Measures - Masking the Deterioration in Loan Quality ### Pandemic impact on loan performance - Banks’ non-performing loans (NPLs) remained about 2 percent of gross loans before the pandemic. - The pandemic created an unprecedented adverse shock that prompted the NBC to embark on regulatory forbearance which allowed banks to restructure while maintaining the same loan classification without additional provisioning. - The NBC also waived provisioning. ### Heterogeneity across banks and sectors - The impacts of the pandemic and subsequent forbearance have been heterogenous across banks. - Banks with high exposure to hotels, real estate, and construction experienced larger impacts than banks concentrated in more resilient sectors such as manufacturing. - The heterogeneity among smaller banks is even larger, with steeper increases in NPL ratio for some, while others have shown declines in NPLs. ### Forbearance effects on asset quality transparency - Restructured loans peaked in mid-2021, amounting to about 10½ percent of the loan portfolio. - Forbearance masked the deterioration in asset quality by: - Delaying the build-up of provisions. - Masking the overall increase in NPLs. - Hiding large heterogeneity across banks. - The phase-out of measures as the economic recovery gained speed allowed a more transparent portrait of credit conditions, with NPLs showing a clear and gradual deterioration since 2022. ### Risks of new forbearance and recommended monitoring - New forbearance could delay addressing deteriorated asset quality. - The rationale for new measures is unclear given the economy growing at a stronger pace, unless lagging sectors face longer-term challenges rather than a cyclical downturn. - Policy recommendation: - Clearly flag restructured loans for strong monitoring by the credit bureau and NBC to ameliorate risks. *Prepared by Enrique Flores Curiel.* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### 2023 external position and current account - The current account recorded a surplus of 1.3 percent of GDP in 2023, swinging from a deficit of 19 percent in 2022. - Drivers of the 2023 surplus: - Contraction in imports (garment materials, machinery, vehicles) amid global demand downturn and inventory drawdowns in 2023H1. - Rebound in exports in 2023H2 with garment recovery. - Agricultural exports gains of 2 percentage points (pts) of GDP. - Solar-related export growth accelerated in 2022 but significantly reversed in 2023Q4 after the US imposition of anti-dumping and countervailing duties on Cambodian photovoltaic exports. - Gold imports declined to near zero in 2023 following an import ban from 2022Q4 to 2023Q1. - Combined effects boosted the goods trade balance by 15 pts of GDP relative to 2022. - Services balance improved by 4 pts of GDP relative to 2022 due to the tourism recovery. - The primary income deficit improved as income payments to foreign investors declined. ### Capital and financial account and net foreign assets - The capital and financial account balance declined to 1.5 percent of GDP in 2023. - Large short-term capital outflows amounted to 3 percent of GDP in 2023. - Banks increased net foreign assets (NFA) by 13 pts of GDP relative to 2022 as they built asset positions abroad while repaying liabilities. - FDI and medium-to-long-term debt inflows remained broadly stable. - Errors and omissions climbed to over 3 percent of GDP (in absolute terms). - Aggregate NFA position improved in 2023, reflecting a decline in other investments and a marginal increase in reserve assets. ### International reserves - Gross international reserves (GIR) increased by 12 percent ( USD 2.2 billion) in 2023. - FX intervention by the National Bank of Cambodia (NBC) was limited, amounting to sales of USD 140 million in 2023Q3 after a one-year hiatus. - GIR at end-2023: 46 percent of GDP or 7 months of prospective imports. - Reserves in 2024H1 remain broadly stable at USD 20 billion. - GIR in 2023 exceeds the optimal level of 4 month of imports as implied by the ARA metric for credit-constrained economies. - A high level of international reserves is advisable given Cambodia’s highly export-dependent economy, managed float exchange rate regime, and high degree of dollarization. - The de facto exchange rate arrangement is crawl-like. ### Assessment, model adjustments, and key numerical results - Cambodia’s external position in 2023 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies. - The current account gap is estimated at 0.5 percent of GDP based on the current account model after cyclical and multilateral adjustments and after accounting for temporary and statistical factors. - Temporary/statistical adjustments applied to the current account: - Gold net exports: adjusted by 1.5 percent of GDP to reflect the temporary gap relative to pre-pandemic levels. - Solar-related exports: adjusted by 2.8 percent of GDP as the gap between observed 2023 solar-related exports and the counterfactual pre-investigation/post-ruling trend. - Agricultural exports: an adjustor of 0.9 pts of GDP (half of the estimated 1.8 pts of GDP cyclical/statistical component) is added to the current account. - Selected EBA-lite model figures (in percent of GDP) as reported: - CA-Actual 1.3 - Cyclical contributions (from model) (-) 0.2 - Additional temporary/statistical factors (-) 5.0 - Natural disasters and conflicts (-) -0.1 - Adjusted CA -3.8 - CA Norm (from model) -5.4 - Adjustments to the norm (+) 0.0 - Adjusted CA Norm -5.4 - CA Gap 1.6 -13.7 - o/w Relative policy gap 2.6 - Elasticity -0.4 - REER Gap (in percent) -3.6 30.6 - Note: 1/ Based on the EBA-lite 3.0 methodology; 2/ Additional adjustment to account for the temporary impact of gold trade (1.5 percent of GDP) and solar-related exports (2.8 percent of GDP), as well as agricultural exports (0.9 percent of GDP); 3/ Cyclically adjusted, including multilateral consistency adjustments. ### Real effective exchange rate (REER) assessment - REER stabilized in 2023 after a decade of secular appreciation pre-pandemic. - Pre-pandemic decade: real exchange rate appreciated by 4 percent annually. - Since 2021: appreciation moderate at about 2 percent annually. - Tighter global interest rates from mid-2022 and a stronger US dollar induced REER volatility: initial depreciation through mid-2023 followed by appreciation in 2023H2. - REER volatility mirrored Khmer riel movements vis-à-vis the US dollar within its 2 percent stabilized exchange-rate band. - REER valuation outcomes show considerable uncertainty: - EBA-CA model implies a REER undervaluation of -2.3 percent (applying an elasticity of -0.4). - REER model implies an overvaluation of 30.6 percent based on an estimated CA gap of -13.7 percent of GDP. ### Policy implications and recommended priorities - Significant uncertainty in the CA gap and REER assessment due to: - Large volatility in gold trade since 2020, with Cambodia historically a net importer of gold but experiencing net importing and net exporting periods post-pandemic. - Data gaps in Balance of Payments statistics, including sizable errors and omissions in 2023. - Structural factors not captured by the model, notably informality. - Policy priorities: - Address data limitations in external sector statistics and reduce sizable errors and omissions. - Pursue more balanced macroeconomic policies to manage external vulnerabilities. - Promote inclusive and broad-based economic growth supported by domestic demand. - Implement structural reforms to strengthen social safety nets, promote consumption, and enhance productivity with investment to diversify growth drivers. *Source: Annex II. External Sector Assessment, 1khmea2025001-print-pdf.* ### 8. High investments in human capital distinguishes the “outliers” among Cambodia’s ### 8. High investments in human capital distinguishes the “outliers” among Cambodia’s peers ### Outlier economies and drivers of sustained high growth - Examples of outliers among Cambodia’s most similar peer country-periods: Japan (1956-1967), South Korea (1971-1986), and China (1996-2002). - Common drivers identified in the growth literature: - Export-oriented industrialization policies and strategic integration into global value chains (Rodrik, 2018; Wade, 1990; Stiglitz, 1996). - High investments in human capital through education and health infrastructure that allow continuous stepping into higher tiers of global value chains (World Bank, 1993; Birdsall et al., 1995). - Institutional reforms that improved governance, protected property rights, and fostered an enabling environment for private sector development (Acemoglu and Robinson, 2012; Hausmann et al., 2005). - Data comparison: Cambodia is lagging in terms of human capital accumulation and labor productivity relative to these outlier economies during their base periods. ### DTW-based growth projections and baseline - DTW modeling projects Cambodia's baseline growth at around 6 percent by 2030. - Baseline forecast using median and average aggregations across the top 2 percent most similar country-periods points to potential growth for Cambodia in the range of 5.8 to 6.3 percent by 2030. - Higher growth possibilities appear in the 75th to 80th percentile forecasts, but historical evidence indicates sustained outperformance at those levels is statistically less likely due to mean reversion in countries' growth rankings over time. - Preferred baseline: the median and average forecasts of 5.8 to 6.3 percent, sourced from the majority of realized growth outcomes in Cambodia's most similar peer group. - Policy strategies that could increase the likelihood of Cambodia becoming a sustained high-growth outlier: - Boost exports and integrate into global value chains. - Invest in human capital (education and health). - Implement institutional reforms that improve governance and protect property rights. ### DTW methodology (implementation and aggregation) - Target period definition used: k = 5 years and t = 2019, i.e., target period is 2015-2019. - Steps summarized: - Use DTW algorithm to calculate DTW distance between Cambodia’s target period and other countries’ historical periods. - Identify country-periods with the shortest DTW distances and select the top x percent as projection candidates (baseline uses x = 2). - For each selected candidate, identify its growth trajectory for the subsequent y years (e.g., y = 10). - Aggregate subsequent growth rates across candidates year-by-year using average, median, weighted average (weights proportional to inverse of DTW distances), and percentile calculations. - DTW distance calculation details: - Time series sequences X = {x1, x2, ..., xn} and Y = {y1, y2, ..., ym}; in application n = m = 5 (multivariate annual data). - Initialize cost matrix D of size n × m; set D[0][0] = 0 and first row and column to infinity. - Pair-wise distance used: Euclidean distance for multivariate series: - D[i][j] = sqrt( sum_{i=1}^{q} (x_{ii} - y_{ji})^2 ), where q is number of features. - Construct cumulative cost matrix C with recursive update: - C[1][1] = D[1][1] - C[i][1] = C[i-1][1] + D[i][1], for i = 2, ... , n - C[1][j] = C[1][j-1] + D[1][j], for j = 2, ... , m - C[i][j] = D[i][j] + min( C[i-1][j], C[i][j-1], C[i-1][j-1] ) - DTW distance = C[n][m], the final cell value representing minimum cumulative distance. ### Risk Assessment Matrix (high-level entries) - Global risks: - Intensification of regional conflicts — Likelihood: High; Impact: Reduced tourism; disrupted supply chains; higher shipping costs; slower economic growth; reduced FDI and financial flows. - Policies: Diversify export markets and tourism source countries; strengthen regional economic ties; promote domestic investment to produce critical goods. - Global growth slowdown — Likelihood: Medium; Impact: Reduced exports; lower FDI; slower economic growth; increased unemployment. - Policies: Implement countercyclical fiscal policy; provide targeted support to the vulnerable; prioritize active labor market policies and skills training. - Commodity price volatility — Likelihood: High; Impact: Increased food and energy costs; pressure on household budgets; potential social instability risks. - Policies: Implement targeted transfers to the vulnerable; develop strategic fuel and food reserves; promote renewable energy; support agriculture. - Deepening geo-economic fragmentation — Likelihood: High; Impact: Disrupted trade and FDI; higher inflation and lower growth. - Policies: Promote export market and product diversification; strengthen multilateral economic ties; safeguard financial stability. - Climate change — Likelihood: Medium; Impact: Agricultural losses; infrastructure damage; threats to water security; increased natural disasters; impact on tourism. - Policies: National climate adaptation strategy; invest in climate-resilient infrastructure; sustainable agriculture; strengthen disaster preparedness. - Domestic risk: - Systemic financial instability — Likelihood: Medium; Impact: Insolvencies and market dislocations given domestic banking sector vulnerabilities. - Policies: Enhance central bank liquidity provision framework; strengthen bank supervision; develop macroprudential toolkit; establish deposit insurance and crisis management framework with effective communication. ### Monetary policy transmission in Cambodia’s banking sector (key findings) - The National Bank of Cambodia (NBC) uses the required reserve ratio (RRR) on domestic and foreign currency liabilities to control credit growth and manage banking sector liquidity; RRRs serve as a key monetary policy instrument absent a full-fledged interest rate corridor. - Bank-level analysis shows weak policy transmission from RRR changes to bank lending; no clear evidence of a significant effect on credit growth and lending terms around recent RRR changes. - Implication: Need for modern monetary policy operations and macroprudential policies to help translate liquidity into credit growth. - Background and specific facts: - NBC maintains RRRs for local currency (KHR) and foreign currency (USD). - References to foreign currency are denoted as “USD” due to high degree of dollarization. - RRRs are currently remunerated at zero. - Historical note: Prior to August 2018, NBC offered interest on 4.5% of the RR in foreign currency, leaving the remaining 8% unremunerated. - RRRs apply to customer deposits, non-resident bank deposit, and non-resident borrowing. - Two main channels by which RRR changes operate: - Cost channel: RRRs act as a tax on banks if remunerated below market rates (Fama, 1980); weak transmission may appear as changes in bank profitability without corresponding changes in lending. - Liquidity channel: RRRs influence bank lending by freeing or restricting available liquidity (Alper et al. 2014); empirical cross-country evidence shows short-term impacts on deposit and lending rates and credit (Lim et al. 2011; Reinhart and Reinhart 1999). - Constraints on transmission: - High degree of dollarization: about 90 percent of loans and deposits in USD. - Monetary policy framework centered on price stability with exchange rate as a quasi-nominal anchor, limiting room for independent cyclical policies. - NBC has liquidity providing and absorbing instruments and a recently established reference/policy rate, but a full corridor system and central bank communication on interest rate policy remain at an early stage. - Short-term liquidity imbalances and structural features: - Regulation requires banks to make at least 10 percent of loans in local currency. - All domestic funds in USD can only be invested in Cambodia, contributing to structural USD liquidity surplus and KHR deficit at longer maturities. - Vast excess KHR liquidity at short-term maturities is held as excess reserves in KHR at zero interest in current accounts; therefore, higher KHR RRR likely shifts liquidity from current accounts to required reserves (both earning zero interest) without addressing structural long-maturity KHR deficit. - Changes in USD RRR could affect banks through both cost and liquidity channels, potentially binding for banks with limited USD liquidity. - Bank-level dataset and sample: - Dataset includes bank balance sheets, lending and borrowing rates, and credit. - Sample covers 65 banks over the period 2019Q1 to 2024Q2, implying 18 time periods for the analysis of credit growth (y/y) with only one quarter preceding the first RRR change and two quarters succeeding the latest RRR change. - The bank-quarter panel is highly unbalanced. - Recommended policy directions: - Modernize monetary policy operations (establish policy rate corridor and strengthen central bank communication). - Develop and deploy macroprudential tools and operational frameworks. - Strengthen bank supervision and consider a deposit insurance scheme and crisis management framework to enhance transmission and financial stability. *Source: 1khmea2025001-print-pdf - 8. High investments in human capital distinguishes the “outliers” among Cambodia’s peers.* ### 6. Bank profitability has been steadily deteriorating, unimpeded by RRR changes. A ### 6. Bank profitability has been steadily deteriorating, unimpeded by RRR changes. A ### Bank profitability and drivers - Banks saw profits gradually declining at the aggregate level despite the cuts in RRRs in 2020Q1 and 2023Q4. - Profitability varied widely across banks; since 2022 many banks have marked increasing losses on their balance sheets, with increasing dispersion around the median. - The trend decline in profitability likely reflects broader credit-cycle developments: - rising costs of provisioning for NPLs after the 2022 expiry of forbearance measures; - narrowing of the net interest margin with U.S. monetary policy tightening; - limited profitable opportunities due to sluggish growth in non-tradable sectors. ### RRR changes, liquidity, and excess reserves - A tightening or easing of RRRs does not systematically relate to changes in banks’ short-term liquidity. - Following the first cut in RRRs in 2020Q1: - excess reserves held at the NBC and overall cash balances in both KHR and USD increased for three consecutive quarters. - The increase in the USD RRR in 2023Q1 briefly brought down excess reserves in the same quarter before they started rising again. - Evidence for the latest RRR cut in 2023Q4 is mixed. - Banks’ decisions on excess reserve holdings became more unified during 2023Q1-2023Q4, as seen by a lower dispersion. - Even the most liquid banks significantly reduced their excess liquidity in their current account, possibly reflecting rapid broad-based growth in NPLs and associated risk aversion after forbearance measures were removed in 2022. ### Credit growth and RRRs - There is no clear association between RRR changes and credit growth: - Quarter-on-quarter growth rates show credit growth picked up in the quarter following the cut in USD RRR (but not in the same quarter). - Year-on-year growth rates that account for seasonal factors show a decline in credit growth amid the RRR cut. - The increase in USD RRR in 2023Q1 was both preceded and succeeded by a trend decline in credit growth. - Dispersion of credit growth rates across banks narrowed following the RRR increase in 2023Q1, suggesting an asymmetric effect of tightening on banks’ portfolio rebalancing. - Even banks with higher liquidity are more sensitive to RRR increases than to cuts. ### Liquidity-constrained banks and lending response - A liquidity injection does not systematically induce liquidity-constrained banks to extend additional credit: - No clear evidence of higher RRR-sensitivity of more liquidity-constrained banks. - Correlation between changes in excess liquidity and credit growth in the same month or the following month is very limited. - While average credit growth trends are similar across more and less liquid banks, variability in credit growth rates is much larger for more liquid banks; variability narrowed intermittently after the RRR increase in 2023Q1. ### Profitability and lending capacity - RRR cuts do not systematically boost lending capacity of less profitable banks: - After the first cut in RRRs in 2020Q1, less profitable banks appeared to boost credit more strongly than profitable banks. - Less profitable banks saw a steeper decline in credit growth in the quarter following the RRR increase in 2023Q1. - Despite the cost channel, credit growth of less profitable banks declined below credit growth of more profitable banks despite the final RRR cut. - Bank profitability in a given quarter does not relate to the level of excess liquidity available in the same quarter or the previous quarter (low correlation). ### Interest rates and price-channel transmission - Lending and deposit rates tend to be sticky, with mixed movements in lending rates around RRR changes: - Short- and longer-term deposit rates reprice infrequently and followed the US monetary policy tightening cycle since 2022. - Deposit rates tended to decline after the RRR increase in 2023Q1 among banks with larger market share, as suggested by a widening gap between the weighted mean and median lending rate. - Lending rates in both USD and KHR broadly followed external trends. - Banks appear to increase interest rates on USD loans amid RRR cuts but lower them amid RRR increases, led by banks with greater relative market share. - Interest rates on KHR-denominated debt tend to be more volatile than equivalent USD rates at both shorter and longer maturities. - Greater heterogeneity exists across banks in rates charged on debt than rates offered on savings. ### Limitations and need for further work - Quarterly bank-level data, limited time coverage, and small sample size complicate isolating RRR effects from confounding factors (anticipation, concurrent policies, macro shocks). - Studying RRR transmission at monthly frequency over a longer time period could help better quantify impacts on lending decisions and real outcomes. ### Conclusion on RRR effectiveness - There is no clear evidence of effective monetary policy transmission through RRRs in Cambodia: - Banks tend to hold additional dollars on their current account when RRRs are relaxed instead of lending them out. - Lending and deposit rates, especially in USD, remain sticky around RRR changes except for larger repricing of KHR loan rates. - Effectiveness of RRRs as a monetary policy tool is limited, though data limitations may mask effects. --- ### Annex VI — Expanding the Macroprudential Toolkit in Cambodia: motivation and recommended measures - Rationale: - Macroprudential policy can limit systemic risks and preserve financial stability in Cambodia where monetary policy is constrained by a managed exchange rate and a high degree of dollarization. - Financial dollarization: foreign currency deposits (FCD) to broad money (M2) is over 80 percent; FCD to total banking system deposits has stayed around 90 percent. - Credit and debt context: - Credit-to-GDP ratio reached 133 percent at end-2023, well above regional peers. - The credit-to-GDP ratio reached almost 189 percent in 2022, sharply receding to 133 percent in 2023 amid a rebasing of GDP and decline in credit growth. - Years of robust credit growth averaged over 22 percent from 2010 to 2021. - Existing macroprudential toolkit and gaps: - Capital conservation buffer (CCoB) is set at 1.25 percent till December 2025 after the scheduled increase to 2.5 percent had been postponed twice (initially in 2023 and then 2024). - Counter-cyclical capital buffer (CCyB) is set at zero, with no enabling regulation. - Capital surcharge is set at 1 percent for systemically important domestic financial institutions (D-SIB). - Minimum liquidity coverage ratio (LCR) and minimum reserve requirements (RR) in domestic and foreign currency (in USD) are in place. - RR ratios (RRRs) are currently set at 7 percent, which is already at historically lows. - Recommendations to activate and expand tools: - Activate existing measures at an appropriate time and develop borrower-based measures (BBMs) targeting households and corporates. - For households: introduce loan-to-value (LTV) and debt service-to-income (DSTI) measures. - For corporates: consider appropriate risk weights, credit caps, and/or a systemic risk buffer (SyRB). - Given high dollarization, add measures that address FX and liquidity risks. - Use CCoB as a usable buffer, but recognize banks may be reluctant to draw it down; ensure releasable buffers. - Consider building a positive neutral CCyB (e.g., at 1 percent initially) once macroeconomic conditions normalize and release more flexibly. - Sectoral and borrower details: - Lending by commercial banks accounts for over 90 percent of total credit by the banking system; corporates are the largest recipients of bank credit (over three quarters of the total) in 2023. - Retail and wholesale sector accounted for over 27 percent of bank lending in 2023; real estate and construction accounted for 20 percent. - Outstanding loans for households amount to around 38 percent of GDP. - Total household loans stood at USD 16.7 billion in 2023, 70 percent of which has been provided by banks. - Mortgage loans are 60 percent of the household total bank loans; remaining 40 percent is personal and credit card loans (NBC, 2024). - Non-bank lending by real estate developers and pawn shops exists but data are limited. - Rationale for borrower-based measures: - Banks’ mortgage loans to households accounted for almost 15 percent in December 2023 of banks’ overall loan portfolio and are the second largest component behind retail trade. - BBMs can safeguard financial stability and promote consumer protection; absence of DSTI and LTV measures risks borrowers taking excessive loans and facing hardship under interest rate, currency, or income shocks. - Policy instrument preferences: - Sectoral risk weights or higher capital charges, and building SyRB, can limit exposure to risky sectors. - Credit caps can be applied but may be distortive; price-based measures (risk weights or provisioning requirements) may be more desirable. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1khmea2025001-print-pdf.pdf* ### 10. The timing to activate the measures must be well-calibrated to the prevailing ### 10. The timing to activate the measures must be well-calibrated to the prevailing ### Calibration and activation of macroprudential measures - The economy continues to recover, albeit at a moderate pace than previously envisaged, while the banking sector faces a challenging time with a spike in NPLs, a sharp deceleration in credit growth, and low profitability among banks. - The heightened risk environment led to the introduction of various forbearance measures by the NBC in August 2024. - Guidance on timing: - The NBC should suitably time the activation of existing macroprudential measures (CCyB) and the introduction of new possible measures (e.g., DSTI ratio and LTV limits) when the financial conditions warrant—and announce them ahead to provide enough time for preparations. - Example sequencing: once conditions return to normal, consider a positive neutral CCyB, followed by a regular CCyB in line with the build-up of systemic risks. - Buffers can be released when the economy faces shocks unrelated to the financial cycle or when banks hesitate to draw down on CCoB to avoid market stigma. ### Key challenges (D) - Minimize leakages and regulatory arbitrage when borrower-based measures (BBMs) are introduced: - Introduction of DSTI ratio and LTV limits might push some household lending to non-bank financial institutions (e.g., real estate developers) who are not subject to stringent monitoring at present. - This would necessitate closer cooperation with non-banking financial services authority (NBFSA) to ensure that all types of lenders should be subject to the same macroprudential regulations. ### Data limitations and data-sharing needs - Designing suitable macroprudential measures for the corporate sector (e.g., appropriate risk weight or systemic risk buffers (SyRB)) requires examining financial health, scale of indebtedness, and debt servicing capacity of each sector; such data is unavailable or of poor quality even when it exists. - Critical data gaps to be filled related to banks’ corporate sector exposures. - Recommended data collection and coordination: - The NBC needs to coordinate with relevant agencies to start collecting financial soundness indicators for ‘Non-Financial Corporations’ as recommended by the IMF, including: total debt to equity, external debt to equity, foreign currency debt to equity, total debt to GDP, return on equity, earnings to interest and principal expenses, and earnings to interest expenses, among other indicators. - For households, expand data coverage beyond banks’ mortgage loans to at least cover personal loans from banks and household loans from MDIs and MFIs. - Improve data quality to calibrate appropriate thresholds for both income- and collateral-based measures. *Source: 1khmea2025001-print-pdf* ### Annex VIII. Data Issues ### Annex VIII. Data Issues ### Data Adequacy Assessment — Overall - Median Rating: CBCCBBC (heatmap summary presented in source). - Overall staff assessment: "Overall, there are some shortcomings in the data that somewhat hamper surveillance." - Specific summary finding: "The data provided to the Fund have some shortcomings that somewhat hamper surveillance." ### National Accounts, Prices, and Frequency/Timeliness - Change since last Article IV consultation: "Rebased GDP series using 2014 as the new base year was published in Q2 2024." - Use of estimates: "Estimates from a nowcasting model developed by ICD technical assistance are used to guide the quarterly assessment of economy activity." - Key shortcomings: - Frequency and timeliness "significantly hamper surveillance, with higher frequency indicators available only for a few sectors--mainly goods exports." - "Activities in the large informal economy are not adequately tracked." - Limited information on the corporate sector, including "financing provided for real-estate related activities by non-financial corporates." - Ongoing corrective work related to national accounts: - "Work in progress to update the CPI weights." - "Develop high frequency indicators of economic activity." - "Update the input-output and supply-use tables for national accounts." ### Government Finance Statistics (GFS) and Public Debt - Assessment highlights: - "The government accounts have coverage and granularity limitations, and significant lags for debt." - "The conversion from TOFE to GFS presentation has been slow and classification of data is questionable in items such as acquisition of non-fiancnail assets, grants, and subsidies." - Corrective actions and capacity development priorities: - Ongoing TA to improve GFS and Public Sector Debt Statistics (PSDS). - Specific TA examples listed across 2022–2024 missions addressing "Government Finance Statistics (GFS) and Public Sector Debt Statistics (PSDS)" and "Treasury Management on accrual accounting." ### External Sector Statistics - Key shortcomings: - "Errors and omissions are large (3.3 percent of GDP in 2023)." - "Direct investment, the international investment position (IIP), and travel services data have some shortcomings in terms of quality and granularity." - Corrective actions: - "Ongoing technical assistance to enhance the compilation and validation of external sector statistics, including the goods component of the BOP, the IIP, direct investment, external debt statistics, and travel services." - Upcoming IMF Statistics Department missions "will review the institutional development plan to strengthen the capacity of the National Institute of Statistics and conduct the Report on the Observance of Standards and Codes." ### Monetary and Financial Statistics; Financial Soundness Indicators - Assessment notes: - Granularity concerns for monetary and financial statistics and for Financial Soundness indicators. - Corrective TA and mission activity include "Monetary Operations," "Monetary and Foreign Exchange (FX) Operations," and work on FSI classification (e.g., "classification of instruments to align with 2019 FSI guide"). ### Data Standards and Dissemination - Participation: "Cambodia participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes the data on its National Summary Data Page since May 2018." - Table and timetable references in source: multiple entries with dates such as "As of November 7, 2024" and "Date Received" entries spanning 6/2024–11/2024 for various indicators and expected timeliness designations (examples include "M. 2 month lag", "M. 1 month lag", "Q, 3 month lag", "A, 6 month lag"). ### Fund Relations — Key Data and Resourcing - 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 and 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: - "Net cumulative allocation 251.65 100.00" - "Holdings 258.26 102.63" - Overdue obligations and projected payments: forthcoming totals for 2024–2028 reported as "0.00" for Principal and Charges/Interest in the table shown. - Multilateral Debt Relief Initiative (MDRI): "relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005" — "forgiving of all of Cambodia’s outstanding debt to the IMF, a total of SDR 56.8 million (about US$82 million)." ### Technical Assistance and Capacity Development - FY2024 CD spending: "the Fund has allocated around US$3.6 million to deliver CD, led by Fiscal Affairs Department (FAD), followed by Monetary and Capital Markets Department (MCM), Statistics Department (STA), and Institute for Capacity Development (ICD)." - Distribution highlights: - Nearly one half of spending allocated for technical assistance by long-term experts (LTXs) and resident experts in Phnom Penh. - Headquarters-based IMF staff provided TA accounting for about one third of the total. - TA concentrated on "public financial management (PFM), financial supervision and regulation, central bank operations, and monetary and macroprudential policy, accounting for nearly three quarters of the total expense." - Selected TA missions (2022–2024) addressing priority topics: - "Government Finance Statistics," "External Sector Statistics," "CPI Prices Statistics," "GDP Rebasing," "Treasury Management on accrual accounting," "Monetary Operations," "Review of the Cambodian Statistical System and the preparation of a Report on the Observance of Standards and Codes (Data ROSC)," among many others listed with mission dates throughout 2022–2024. ### Debt Sustainability — Key Points - Risk ratings: "Risk of external debt distress Low" and "Overall risk of debt distress Low" under the LIC-DSF. - Debt-carrying capacity: "Cambodia’s Composite Indicator (CI) index ... is 3.02, indicating a medium debt-carrying capacity." - Baseline projection summary: - "The baseline scenario assumes a continued economic recovery, largely driven by a rebound in manufacturing goods and agricultural exports and tourism." - "The total public and publicly guaranteed ( PPG) debt-to-GDP ratio is projected to rise by around 4 percentage points of GDP during the next decade, but its level is expected to remain stable." - "The stress tests shows that debt sustainability is most vulnerable to shocks in contingent liabilities." - Public debt coverage: "The debt sustainability analysis (DSA) covers central government debt and debt guaranteed by the central government to state-owned enterprises (SOEs)." Additional legal coverage notes include: "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." *Source: Annex VIII. Data Issues; Table titles and excerpts as provided in the IMF staff report materials for Cambodia (dates and figures as presented in source).* ### 2. The DSA includes contingent liability stress tests for public-private partnerships (PPPs) ### 2. The DSA includes contingent liability stress tests for public-private partnerships (PPPs) ### Contingent liability stress test design and key parameters - SOE debt shock: - Shock size set to 0 percent of GDP because, by law, SOEs do not engage in non-guaranteed external borrowing, and guarantees to SOEs are included in public debt. - PPPs: - Capital stock of PPPs estimated at around 40.2 percent of GDP as of end 2023. - Contingent liability from PPPs: 14.1 percent of GDP (assuming a shock size of 35 percent of the total PPP stock). - Authorities’ assessment: total PPP stock stood at US$16.8 billion (around 40 percent of GDP) as of end 2023. - Financial market shock: - Standard financial market shock intensified: contingent liabilities from financial markets assumed to be 10 percent of GDP, twice the default value of 5 percent of GDP. - Rationale: account for risks emerging from private sector debt growth, rising NPL ratio, and absence of comprehensive bank resolution framework and deposit insurance regime. - Aggregate contingent liabilities used in analysis (text table totals): - Other elements of the general government not captured: 0.0 (in percent of GDP) - SoE's debt (guaranteed and not guaranteed by the government): 0.0 (in percent of GDP) — note: SOEs are not allowed to contract external debt. - PPP (35 percent of PPP stock): 14.1 (percent of GDP) - Financial market (default value 5 percent of GDP is the minimum value): 10.0 (percent of GDP) - Total (2+3+4+5) (in percent of GDP): 24.1 - Banking sector deposit reference: around 107 percent of GDP as of end 2023. - Sub-sectors covered (as indicated in design table): - Central government: X - Guarantees (to other entities in the public and private sector, including to SOEs): X - Central bank (borrowed on behalf of the government): X - Non-guaranteed SOE debt: X ### Background on public and external debt relevant to stress tests - External public debt: - External public debt amounted to around US$ 11.2 billion (26 percent of GDP) by end-2023, using the newly rebased GDP. - External debt-to-GDP ratio increased by 0.7 percentage points in 2023 as growth in debt (12 percent) outpaced nominal GDP. - Bilateral debt accounts for around 64 percent of total external debt, with more than half owed to China (share has declined somewhat). - External debt accrued on concessional terms, with a present value of around 15 percent of GDP at end-2023. - Text Table 3 (selected figures): Multilateral US$ 3,997 (9.6 percent of GDP, 35.7 percent of external debt); Bilateral US$ 7,188 (17.2 percent of GDP, 64.3 percent of external debt); of which China US$ 4,114 (9.8 percent of GDP, 36.8 percent of external debt); Total US$ 11,186 (26.7 percent of GDP, 100.0 percent of external debt). - Public domestic debt: - Total domestic debt stock as of 2023: US$ 52.4 million (0.14 percent of GDP). - 2023 total issuance: US$ 58.3 million (planned issuance US$ 200 million). - Domestic bond maturities expanded from 1 year in 2022 to 2, 3 and 5 years in 2023. - To facilitate domestic bond demand, authorities lowered withholding tax on interest by 50 percent and exempted tax on capital gains from purchasing/trading the bonds for three years. - For 2024, authorities plan to issue around US$ 100 million of local-currency government bonds, of which US$ 62 million have been already issued in the first six months, with one to three year maturities. - Private external debt and relevance: - Staff estimates private external debt at about 27 percent of GDP in 2023. - Excessive private external borrowing could raise insolvency risk and possibility of government intervention; this is modeled as a financial sector related shock of 10 percent of GDP in the stress test. ### Macroeconomic outlook and fiscal context relevant to debt sustainability - Growth and inflation projections: - Medium-term growth projected at around 6 percent. - Growth projected at around 5½ percent for 2024 and 5¾ percent for 2025, up from 5 percent in 2023. - Output gap expected to close by 2025/26. - Inflation expected to remain low in 2024 and converge towards long-term trend of 3 percent in following years. - External sector: - Current account balance: shifted to a surplus of 1.3 percent of GDP in 2023 from a deficit of 11 percent in 2022. - CA balance projected to swing back to a deficit of around 1¾ percent of GDP in 2024. - FX reserves: adequate with 7¼ months of prospective import coverage. - Fiscal sector: - Fiscal deficit in 2023 widened to 2.8 percent of GDP. - Tax revenues declined by about 4 percent (y/y) in 2023. - Total expenditure rose by around 10 percent (y/y) in 2023; capital expenditure lower by about 20 percent than planned. - Fiscal deficit projected at around 3 percent of GDP in 2024 and to decline modestly over the medium term. - Authorities preparing a Revenue Mobilization Strategy (2025-2028). - Financing assumptions: - External borrowing set at around 3-3.5 percent of GDP per annum over the medium term, declining to 2.6 percent of GDP by 2030. - New external debt expected to remain largely concessional, with an average maturity of 27 years and a nominal interest rate of less than 2 percent on average. - Annual net domestic bonds issuance assumed to increase gradually from less than 0.1 percent of GDP in 2022 to about 2 percent of GDP in 2044. - Outstanding domestic PPG debt estimated to reach around 8 percent of GDP by 2044, accounting for about 30 percent of the total outstanding PPG debt. ### Risk assessment and policy implications highlighted in the DSA - Main risks to the outlook (tilted to the downside): - Sharper-than-expected slowdown in major economies (United States, China, Eurozone) affecting exports. - Increased uncertainty of trade policy and potential loss of preferential treatment from the US and EU. - Geopolitical tensions (Ukraine, Middle East, Red Sea) raising shipping costs and commodity prices. - Higher for longer global interest rates increasing risks of debt overhang, especially in a highly dollarized economy. - Disorderly deleveraging from the last credit boom risking domestic financial stability in absence of effective liquidity provisioning and bank resolution frameworks. - Vulnerability to climate change increasing frequency/severity of natural disasters, affecting agriculture and manufacturing and raising poverty and inequality. - Upside considerations: - Implementation of structural reforms (improved business environment, economic diversification) and additional trade agreements (e.g., RCEP) could boost growth potential, exports, and FDI. - Policy-relevant notes from stress test design: - PPP contingent liabilities and an intensified financial market shock (10 percent of GDP) materially raise total contingent liabilities used in the analysis to 24.1 percent of GDP, underscoring the significance of monitoring PPP stock, private external borrowing, and strengthening bank resolution and deposit insurance frameworks. *Source: 1khmea2025001-print-pdf - 2. The DSA includes contingent liability stress tests for public-private partnerships (PPPs)* ### 17. Stress analysis include tailored stress test. Cambodia is highly vulnerable to climate ### 1khmea2025001-print-pdf - 17. Stress analysis include tailored stress test. Cambodia is highly vulnerable to climate ### Stress testing framework and tailored scenario - Six standardized stress tests were applied, plus a natural disaster scenario tailored to Cambodia’s climate vulnerability. - Natural disaster scenario calibration: - Mitigation cost assumed at 10 percent of GDP (around US$ 4.5 billion). - Fall in GDP growth interaction coefficient: 1.5. - Fall in exports interaction coefficient: 3.5. - Contingent liability stress test quantification: - Potential risks from PPPs: 14.1 percent of GDP. - Potential risks from financial markets: 10 percent of GDP. ### External debt outlook and vulnerabilities - Baseline external debt projections: - External debt projected to reach 27 percent of GDP by 2025, moderating to 24 percent by 2044 (table 1). - Present value (PV) external debt-to-GDP ratio projected to hover around 15 percent. - 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 findings for external debt: - Contingent liability shock has the largest impact among tested shocks. - Under the contingent liability shock, the PV external debt-to-GDP ratio increases from less than 15 percent of GDP in 2024 to around 30 percent of GDP, then gradually falls to about 28 percent over the medium term (figure 1). ### Total public debt (PPG) and debt dynamics - Baseline PPG debt projections: - PPG debt increases from 26 percent of GDP in 2023 to 30 percent of GDP in 2034, with an increased domestic financing mix (Table 2). - PV of total debt-to-GDP ratio estimated to increase gradually to 2 4 percent throughout the projection horizon but remains well below the 55 percent benchmark. - Debt service and stress-test implications: - Debt service-to-revenue ratio projected to pick up over the long term with a rising share of domestic debt. - Contingent liability shock is the most severe for PPG debt: PV total debt-to-GDP rises to over 30 percent by 2034 but does not breach the 55 percent threshold. - Contingent liability shock also produces the most extreme spike in the debt service-to-revenue ratio, with a noticeable spike in 2027, as stress from PPP and financial sector contingent liabilities (24 percent of GDP combined) creates temporary borrowing needs and increases debt servicing. - Recent drivers of external debt creation: - Current account was the largest external debt-creating factor in the recent past, largely due to an adverse shock to the trade balance during the pandemic (increase in health-expenditure-related import needs and reduction in tourism receipts). - Current account contribution is expected to normalize to previous historical trend going forward. - Future debt creation will be primarily driven by government deficit to support the growing economy and various development needs. ### Domestic debt market and projections - Domestic issuance and stock: - Domestic public debt issuance only began 2 years ago; market development is expected to take time. - Domestic debt-to-GDP ratio is expected to stay well below 10 percent through 2034. - This is significantly lower than the median for low-income countries (LICs). - Domestic debt service: - Domestic debt service as a percentage of revenues remains below 5 percent for much of the forecast period. - Uncertainty: - Projections are subject to high uncertainty due to the emergent nature of domestic borrowing and market development. ### 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 and then stabilize. - Debt burden indicators projected to remain well below thresholds under the baseline and all shock scenarios. - Debt sustainability is vulnerable to shocks in contingent liabilities and growth. - Policy recommendations and priorities: - Maintain fiscal discipline and public debt management. - Promote long-term growth and diversify the economy and exports to increase resilience to external shocks. - Strengthen PPP risk evaluation and macroprudential regulations. - Implement a revenue mobilization strategy to improve the revenue-to-GDP ratio. - Implement sound public investment management and PPP frameworks and strengthen analysis of PPP risks. - Close data gaps, especially by developing data on external private debt and monitoring PPP stock and potential risks. ### Climate change impact on debt sustainability - World Bank climate impact model projection: - Climate change could lower Cambodia's GDP by 3.0 to 9.4 percent, - This would imply an increase in the debt-to-GDP ratio from 30 percent to 33 percent in 2024. - The projection does not take into account potential benefits of climate adaptation and mitigation policies in boosting growth. *Source: IMF chapter text.* ### 25. The authorities expressed their strong commitment to debt sustainability. They ### The authorities expressed their strong commitment to debt sustainability. ### Public debt management and commitment to sustainability - Authorities highlighted the Public Debt Management Strategy 2024-2028 focused on: - prioritizing concessional financing; - implementing a centralized debt management principle; - strengthening the monitoring of debt-related risks. - Aim to keep public debt sustainable while supporting growth. ### Domestic government bond market development - Policy Framework on the Development of Government Securities 2023-2028 is being implemented to diversify financing sources. - Key measures: - expand the investor base, including allowing non-bank financial institutions to participate in primary and secondary markets; - collaboration among the Ministry of Economy and Finance, the National Bank of Cambodia, and the Securities and Exchange Regulator to enhance regulatory frameworks and market infrastructure; - aim to establish a yield curve by 2026 with technical advice from development partners. - Exploring innovative financing: blended finance, impact investment schemes, and green financing to complement traditional sources. ### Contingent liabilities and public-private partnerships (PPPs) - Authorities consider contingent liability risks from PPPs to be low. - Most PPP projects after the 2021 PPP Law do not allow government guarantees. - Projects are carefully evaluated to ensure financial viability before approval. - Commitment to diversify PPP partners and implement robust project assessment procedures to mitigate potential risks. ### Key debt sustainability indicators and stress testing (selected highlights) - All additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. - Terms of marginal debt: external PPG MLT debt 100%. - USD discount rate used in stress testing: 5.0%. - Avg. nominal interest rate on new borrowing in USD: 1.2%. - Shares of marginal debt in some scenarios: External PPG MLT debt 100%. - Stress-test target: establish most extreme stress test (the test that yields the highest ratio in or before 2034). - Selected projected indicators (from DSAs and Tables): - External debt (nominal) for 2024: 26.6 (percent of GDP). - PV of PPG external debt-to-GDP ratio (selected projection years): 14.3, 14.8, 15.3, 15.4, 15.4, 15.5, 15.6, 15.6, 16.1. - PV of PPG external debt-to-exports ratio (selected values): 22.3, 21.9, 22.5, 22.8, 23.0, 23.2, 23.2, 22.6, 21.3. - PPG debt service-to-exports ratio (selected values): 2.0, 1.7, 1.6, 1.3, 1.3, 1.2, 1.2, 1.2, 1.1, 1.3, 1.2. - PPG debt service-to-revenue ratio (selected values): 7.4, 6.5, 7.1, 6.5, 6.4, 6.0, 5.8, 5.5, 5.3, 5.9, 6.0. - Gross external financing need (Million of U.S. dollars) (selected entries): 7,800.4, 4,482.5, -4,004.4, -2,310.3, -2,233.3, -2,090.8, -2,309.2, -2,590.5, -2,988.5, -3,313.4, -9,193.2. - Public sector debt (baseline scenario): - Public sector debt (percent of GDP) 2024: 26.8; 2025: 27.8; projection examples up to 2044 show values such as 27.7, 30.7, 31.3, 32.0, 32.6, 33.1, 33.4, 33.4, 33.2, 32.9, 32.2, 31.3, 28.2 in later projection years. - PV of public debt-to-GDP ratio (selected projection values): 14.3, 15.0, 15.7, 15.9, 16.0, 16.1, 16.3, 19.8, 20.7, 21.5, 22.4, 23.2, 23.8, 24.3, 24.5, 24.5, 24.4, 24.0. - Debt service-to-revenue and grants ratio examples: 6.8, 5.9, 6.5, 6.0, 6.1, 7.0, 7.2, 7.2, 6.9, 10.1, 11.7, 13.2, 14.6, 16.1, 17.2, 18.6, 20.1, 20.9, 21.2. - Sensitivity analysis highlights: - Tailored test C1 (Combined contingent liabilities) shows elevated PV of debt-to-GDP and other ratios (example series: 15, 30, 29, 31, 30, 30, 29, 28, 29, 28 for some years). ### Fiscal policy stance and medium-term framework - Authorities introduced a Medium Term Fiscal Framework (MTFF) aiming for gradual consolidation. - Growth projections: 6.0% in 2024 and 6.3% in 2025. - Fiscal deficits expected to persist in 2024 to support growth, with an aim to reduce the deficit to a capped level of 3.5%. - Public debt expected to remain below 40% of GDP. - Tax policy and revenue measures: - Rationalizing tax exemptions; most tax incentives scheduled to conclude by June 2025, except those retained for Siem Reap province. - Plan to accelerate tax reforms starting in 2026 to improve tax compliance among businesses and individuals. - Public spending efficiency: - Focus on safeguarding priority sectors: health, education, and social protection. - Revising the Budget Law to better align public spending with medium-term growth targets. - Reducing reliance on concessional foreign financing through domestic bond market development. ### Monetary and financial sector policies - The National Bank of Cambodia (NBC) has started normalizing monetary policy. - Authorities emphasize maintaining a low USD reserve requirement ratio (RRR) to: - support credit supply; - stabilize non-performing loan (NPL) ratios; - bolster market confidence. - Commitments to: - modernize monetary operations, narrow the interest rate corridor, and deepen the interbank market; - promote exchange rate stability as a nominal anchor; - promote the use of the Khmer Riel as part of a de-dollarization strategy; - advance liquidity operations and modernize exchange rate management. - Financial stability vigilance: - Concern about rising NPLs and sectoral vulnerabilities. - Authorities note banks have strong capital and liquidity buffers and that provisioning requirements for restructured loans are more stringent than regional peers. ### Structural reforms, governance, and data improvements - Structural reform priorities: - economic diversification and competitiveness; - addressing high electricity costs, trade facilitation constraints, and skill gaps; - fostering digital transformation via the Digital Economy and Society Policy Framework 2021-2035. - Business environment improvements: - "Single Portal" online registration system; - streamlined customs processes. - Governance and anti-corruption: - focus on judicial reforms and strengthening the rule of law; - draft laws on Whistleblower Protection and Transparency and Access to Information in development; - plans to establish commercial and labor courts. - Data initiatives: - address gaps in real estate, corporate debt, and non-bank financial institution data; - improve timeliness and frequency of macroeconomic data releases, including fiscal and national accounts data; - resolve trade data discrepancies and enhance inter-agency data sharing; - build capacity of the National Institute of Statistics (NIS). ### Additional macroeconomic and external context (selected figures) - International reserves cover almost seven months’ worth of imports of goods and services by the end of 2023. - Nominal dollar GDP growth selected series: 5.4, 8.3, 8.7, 7.5, 7.8, 9.1, 8.8, 8.7, 8.7, 7.9, 7.5, 8.2, 8.2 (values appearing in the DSA projections table). - Real GDP growth (selected projection series): 3.1, 5.1, 5.0, 5.5, 5.8, 6.2, 6.0, 6.0, 6.0, 5.9, 5.2, 5.8, 5.9 (values appearing in the DSA projections table). - Aid flows (in Million of US dollars) selected entries: 422.1, 676.6, 540.3, 1,580.1, 1,675.6, 1,508.9, 1,485.7, 1,615.3, 1,590.7, 1,325.5, 1,129.3. - Grant-equivalent financing (in percent of GDP) examples: 2.7, 2.7, 2.4, 2.2, 2.2, 2.0, 1.3, 0.8, 2.0 (selected years shown in table). *Source: IMF staff and country authorities (from the provided PDF content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1khmea2025001-print-pdf.pdf_