## External Drivers of Credit Cycles in Cambodia

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### Introduction
- Paper completed on November 5, 2025.
- Key context and observations:
  - Private credit growth surged to over 25 percent annually for nearly two decades and sharply fell to a log single-digit growth in 2024.
  - Episodes of Cambodia’s credit cycles align with global events: contraction in 2008-09, sustained boom 2010-2019, COVID-19 slowdown, renewed expansion through 2022, abrupt deceleration in 2023-24.
  - Economy is highly dollarized; trade exceeds 120 percent of GDP.
  - Banks’ loan to deposit ratio reached nearly 130 percent at the peak of 2021.
- Objective: quantify the influence of external factors on Cambodia’s credit cycles and test whether external shocks affect Cambodia directly or via a common global credit channel.

### Data and Methodology
- Data:
  - Monthly credit-to-private-sector data for over 100 countries from 2000 to 2024.
  - External indicators (monthly, transformed to year-over-year changes except monetary policy surprises):
    - US and China PMI (Institute for Supply Management; China’s National Bureau of Statistics)
    - US high-yield corporate credit spreads (FRED)
    - Orthogonalized US monetary policy surprises (Federal Reserve Bank of San Francisco)
- Structural features highlighted:
  - Cambodia’s credit growth substantially exceeds regional and global averages.
  - Drivers include high GDP growth, poverty reduction, high dollarization, real estate and construction boom.
- Econometric approach:
  - State-space dynamic factor model (Miranda-Agrippino and Rey, 2020 framework) to extract global and regional (Asian) common credit factors.
  - Model decomposition: y_{i,t} = Λ_i F_t + ε_{i,t}; F_t = Φ F_{t−1} + η_t.
  - Global factor loads on all countries; regional factor loads only on Asian economies (19 countries listed; Cambodia excluded from factor estimation).
  - Cambodia’s factor loadings calculated by regressing Cambodia’s credit growth on the estimated factors.
  - Two VAR specifications:
    - VAR A: external shock variables and Cambodia’s credit growth.
    - VAR B: same as VAR A plus the extracted global credit factor.
  - Compare impulse responses and Granger causality tests across specifications to identify transmission channels.

### Results
- Factor dynamics:
  - Extracted global and Asian factors show periods of synchronization (e.g., 2009-2010, 2020 downturn/recovery) and divergence (regional factor often more volatile).
  - Regional factor estimated from smaller sample (19 countries), which may amplify volatility.
- Cambodia’s sensitivities and magnitudes:
  - Global factor loading (β) on Cambodia’s credit growth: 12.82.
  - Regional (Asian) factor loading (β) on Cambodia’s credit growth: 7.02.
  - Credit-to-deposit ratio (CDR) loadings: global factor β = 0.31; regional factor β = 0.52.
  - Full-sample regression R² for Cambodia’s credit growth on both factors: 60 percent.
  - Rolling window average R²: 0.57 for sample before 2017; 0.5 for sample since 2017.
- Economic interpretation of the global factor (impulse responses):
  - Strong and persistent positive response to China PMI shocks.
  - Negative response to US monetary policy tightening.
  - Negative response to corporate spread widening (global risk sentiment).
  - Modest positive response to US PMI shocks that fades after 12 months.
- VAR comparison (direct bilateral vs common global channel):
  - When the global factor is included in the VAR, most external variables lose apparent direct influence on Cambodia’s credit growth; the global factor remains highly significant and persistent after 12 months.
  - Cumulative impulse responses decline when the global factor is included.
  - Specific reductions reported: cumulative impulse responses show reductions of 47 percent and 5 percent for corporate spread and China PMI respectively when the global factor is included.
- Granger causality P-values (without Global Factor / with Global Factor):
  - Monetary Policy: 0.35 / 0.84
  - Corporate spread: 0.02** / 0.98
  - US PMI: 0.41 / 0.57
  - China PMI: 0.07* / 0.12
  - Global Factor: NA / 0.00***
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1.
- Interpretation:
  - Common global and regional factors explain over 60 percent of Cambodia’s credit variance.
  - Cambodia exhibits among the highest sensitivities to global credit cycles in the regional sample.
  - Most external influences operate primarily through the common global financial cycle rather than unique bilateral channels.
  - Time variation: the explanatory power of global factors has declined somewhat in recent years, indicating periods when domestic factors (e.g., real estate adjustments, changes in capital inflows) can become more prominent.

### Conclusion
- Main findings:
  - Common global and regional factors explain over 60 percent of Cambodia’s credit growth variance.
  - Cambodia is a high-beta economy with strong sensitivity to global credit cycles (β = 12.82 global; β = 7.02 regional).
  - Transmission of external shocks (US monetary policy, global risk sentiment, China’s growth) operates primarily through a common global credit channel rather than direct bilateral linkages.
  - The global factor’s dominance in VARs renders many direct external predictors statistically insignificant once controlled for.
  - Rolling-window analysis shows significant time variation; external factors historically dominant but domestic factors can matter episodically.
- Policy implication (derived from results):
  - High exposure to the global financial cycle highlights the necessity of macroprudential policies to manage domestic volatility in Cambodia’s highly dollarized economy.

### Policy implications and monitoring (Section 2)
- Macroprudential orientation:
  - Macroprudential policies are likely to be more effective than traditional monetary policy tools for managing credit cycle, as much of the domestic credit growth volatility is in fact outsized responses to common global shocks.
  - In a dollarized economy with limited monetary autonomy, instruments such as loan-to -value ratios, capital requirements, and lending standards can be adjusted to dampen domestic amplification of global shocks without resorting to control over exchange rates or interest rates.
- Enhanced monitoring of global financial conditions:
  - Cambodia's high sensitivity to global cycles implies enhanced monitoring is particularly valuable.
  - Variables such as corporate spreads provide important signals about global credit conditions that ultimately affect Cambodia.
  - Early warning systems should incorporate a suite of global financial market indicators to anticipate potential pressures before they fully transmit to the domestic economy.
- Caveats and avenues for future research:
  - The declining explanatory power of global factors in recent years suggests that the transmission mechanisms may be evolving or that recent credit dynamics reflect a greater role for domestic factors not captured in the current framework.
  - Future research could explore whether structural changes in Cambodia's financial system or shifts in the composition of capital flows could have altered the sensitivity to global cycles.

*Source: External Drivers of Credit Cycles in Cambodia, SIP/2026/002 (IMF Selected Issues Paper), completed November 5, 2025.*

### Section 1

### External Drivers of Credit Cycles in Cambodia

### Introduction
- Paper completed on November 5, 2025.
- Key context and observations:
  - Private credit growth surged to over 25 percent annually for nearly two decades and sharply fell to a log single-digit growth in 2024.
  - Episodes of Cambodia’s credit cycles align with global events: contraction in 2008-09, sustained boom 2010-2019, COVID-19 slowdown, renewed expansion through 2022, abrupt deceleration in 2023-24.
  - Economy is highly dollarized; trade exceeds 120 percent of GDP.
  - Banks’ loan to deposit ratio reached nearly 130 percent at the peak of 2021.
- Objective: quantify the influence of external factors on Cambodia’s credit cycles and test whether external shocks affect Cambodia directly or via a common global credit channel.

### Data and Methodology
- Data:
  - Monthly credit-to-private-sector data for over 100 countries from 2000 to 2024.
  - External indicators (monthly, transformed to year-over-year changes except monetary policy surprises):
    - US and China PMI (Institute for Supply Management; China’s National Bureau of Statistics)
    - US high-yield corporate credit spreads (FRED)
    - Orthogonalized US monetary policy surprises (Federal Reserve Bank of San Francisco)
- Structural features highlighted:
  - Cambodia’s credit growth substantially exceeds regional and global averages.
  - Drivers include high GDP growth, poverty reduction, high dollarization, real estate and construction boom.
- Econometric approach:
  - State-space dynamic factor model (Miranda-Agrippino and Rey, 2020 framework) to extract global and regional (Asian) common credit factors.
  - Model decomposition: y_{i,t} = Λ_i F_t + ε_{i,t}; F_t = Φ F_{t−1} + η_t.
  - Global factor loads on all countries; regional factor loads only on Asian economies (19 countries listed; Cambodia excluded from factor estimation).
  - Cambodia’s factor loadings calculated by regressing Cambodia’s credit growth on the estimated factors.
  - Two VAR specifications:
    - VAR A: external shock variables and Cambodia’s credit growth.
    - VAR B: same as VAR A plus the extracted global credit factor.
  - Compare impulse responses and Granger causality tests across specifications to identify transmission channels.

### Results
- Factor dynamics:
  - Extracted global and Asian factors show periods of synchronization (e.g., 2009-2010, 2020 downturn/recovery) and divergence (regional factor often more volatile).
  - Regional factor estimated from smaller sample (19 countries), which may amplify volatility.
- Cambodia’s sensitivities and magnitudes:
  - Global factor loading (β) on Cambodia’s credit growth: 12.82.
  - Regional (Asian) factor loading (β) on Cambodia’s credit growth: 7.02.
  - Credit-to-deposit ratio (CDR) loadings: global factor β = 0.31; regional factor β = 0.52.
  - Full-sample regression R² for Cambodia’s credit growth on both factors: 60 percent.
  - Rolling window average R²: 0.57 for sample before 2017; 0.5 for sample since 2017.
- Economic interpretation of the global factor (impulse responses):
  - Strong and persistent positive response to China PMI shocks.
  - Negative response to US monetary policy tightening.
  - Negative response to corporate spread widening (global risk sentiment).
  - Modest positive response to US PMI shocks that fades after 12 months.
- VAR comparison (direct bilateral vs common global channel):
  - When the global factor is included in the VAR, most external variables lose apparent direct influence on Cambodia’s credit growth; the global factor remains highly significant and persistent after 12 months.
  - Cumulative impulse responses decline when the global factor is included.
  - Specific reductions reported: cumulative impulse responses show reductions of 47 percent and 5 percent for corporate spread and China PMI respectively when the global factor is included.
- Granger causality P-values (without Global Factor / with Global Factor):
  - Monetary Policy: 0.35 / 0.84
  - Corporate spread: 0.02** / 0.98
  - US PMI: 0.41 / 0.57
  - China PMI: 0.07* / 0.12
  - Global Factor: NA / 0.00***
  - Significance notation: *** p<0.01, ** p<0.05, * p<0.1.
- Interpretation:
  - Common global and regional factors explain over 60 percent of Cambodia’s credit variance.
  - Cambodia exhibits among the highest sensitivities to global credit cycles in the regional sample.
  - Most external influences operate primarily through the common global financial cycle rather than unique bilateral channels.
  - Time variation: the explanatory power of global factors has declined somewhat in recent years, indicating periods when domestic factors (e.g., real estate adjustments, changes in capital inflows) can become more prominent.

### Conclusion
- Main findings:
  - Common global and regional factors explain over 60 percent of Cambodia’s credit growth variance.
  - Cambodia is a high-beta economy with strong sensitivity to global credit cycles (β = 12.82 global; β = 7.02 regional).
  - Transmission of external shocks (US monetary policy, global risk sentiment, China’s growth) operates primarily through a common global credit channel rather than direct bilateral linkages.
  - The global factor’s dominance in VARs renders many direct external predictors statistically insignificant once controlled for.
  - Rolling-window analysis shows significant time variation; external factors historically dominant but domestic factors can matter episodically.
- Policy implication (derived from results):
  - High exposure to the global financial cycle highlights the necessity of macroprudential policies to manage domestic volatility in Cambodia’s highly dollarized economy.

*Source: External Drivers of Credit Cycles in Cambodia, SIP/2026/002 (IMF Selected Issues Paper), completed November 5, 2025.*

### Section 2

### Section 2

### Policy implications
- Macroprudential policies are likely to be more effective than traditional monetary policy tools for managing credit cycle, as much of the domestic credit growth volatility is in fact outsized responses to common global shocks.
- In a dollarized economy with limited monetary autonomy, instruments such as loan-to -value ratios, capital requirements, and lending standards can be adjusted to dampen domestic amplification of global shocks without resorting to control over exchange rates or interest rates.

### Enhanced monitoring of global financial conditions
- Cambodia's high sensitivity to global cycles implies enhanced monitoring is particularly valuable.
- Variables such as corporate spreads provide important signals about global credit conditions that ultimately affect Cambodia.
- Early warning systems should incorporate a suite of global financial market indicators to anticipate potential pressures before they fully transmit to the domestic economy.

### Caveats and avenues for future research
- The declining explanatory power of global factors in recent years suggests that the transmission mechanisms may be evolving or that recent credit dynamics reflect a greater role for domestic factors not captured in the current framework.
- Future research could explore whether structural changes in Cambodia's financial system or shifts in the composition of capital flows could have altered the sensitivity to global cycles.

*Source: sipea2026002 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026002.pdf_