## 1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved ## Source details **Canonical URL:** [1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15307.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15307.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15307.pdf.json) --- ### Short-term outlook and macro projections - Growth: projected 7 percent in 2015 and 7.2 percent in 2016. - Inflation: projected to rise gradually to about 2 percent by end-2015 (annual average in 2014 was 3.9 percent). - Current account deficit (CAD): projected to narrow to around 11 percent in 2015. - Fiscal deficit: projected to rise modestly to 2 percent in 2015 (below the budget target deficit of 4.2 percent) as a result of strong measures to improve revenue administration. - Credit growth: projected to be around 30-34 percent in 2015–16. - Credit-to-GDP gap: expected to exceed 10 percent by early 2017. ### Recent developments and key indicators - Private sector credit: grew nearly 30 percent (y/y) on average in the past three years; about 33 percent by 2015 Q2. - Credit-to-GDP ratio: doubled over this period to over 50 percent. - Loan-to-deposit (LTD) ratio: reached over 100 percent in early 2015; some banks much higher; MFIs average LTD 193 percent in 2014. - Real estate lending and prices: - Real estate-related lending grew by 53 percent (y/y) on average in 2015 Q2. - Real estate prices rose on average 10–20 percent (y/y) in 2014. - Monetary and fiscal aggregates (selected): - Broad money growth: 29.9 percent in 2014; projected 23.9 percent in 2015 and 23.1 percent in 2016. - Private sector credit: 31.3 percent in 2014; projected 30.2 percent in 2015 and 34.0 percent in 2016. - Revenue: 19.8 percent of GDP in 2014; projected 19.4 percent of GDP in 2015 and 2016. - Expenditure: 21.2 percent of GDP in 2014; projected 21.4 percent of GDP in 2015 and 22.0 percent of GDP in 2016. - Net lending (+)/borrowing(-): -1.3 percent of GDP in 2014; projected -2.0 percent of GDP in 2015 and -2.6 percent of GDP in 2016. - Current account (including official transfers, millions of dollars): -2,027 in 2014; projected -1,971 in 2015 and -2,031 in 2016. - Current account (percent of GDP): -12.2 percent in 2014; projected -11.1 percent in 2015 and -10.6 percent in 2016. - Gross official reserves (millions of dollars): 4,391 in 2014; projected 4,979 in 2015 and 5,494 in 2016. Reserves (months of prospective imports): 3.8 in 2014; projected 4.0 in 2015 and 4.0 in 2016. - Public external debt (millions of dollars): 5,483 in 2014; projected 5,949 in 2015 and 6,400 in 2016. In percent of GDP: 33.4 in 2014; projected 33.9 in 2015 and 33.6 in 2016. ### Financial sector vulnerabilities — findings - Rapid credit growth, increasingly financed by bank flows from abroad and concentrated in real estate and construction, poses significant macro-financial risks. - Financial deepening: Cambodia’s credit growth much more rapid than peer Asian economies during their take-off. - Rapid credit growth not accompanied by increase in private investment. - LTD ratios significantly higher in deposit-taking MFIs that rely heavily on external financing. ### Financial sector — recommended measures - Raise reserve requirements. - Note: National Bank of Cambodia raised reserve requirements in September 2012 by 0.5 percentage points to 12.5 percent and expanded reserve requirements to banks’ foreign borrowings in March 2015; Directors recommended further increases. - Put in place well-designed macroprudential measures to moderate credit growth and guard against excessive risk taking. - Upgrade prudential regulations on large deposit-taking MFIs and align them with those of banks. - Better monitor developments in the real estate and construction sectors. - Consider a moratorium on offering new bank licenses until supervisory capacity improves. - Further strengthen crisis management framework and supervisory capacity of the National Bank of Cambodia (NBC). - Develop an interbank market and continue progress on negotiable certificates of deposit (NCDs) to support monetary framework, promote de-dollarization, and support a more flexible exchange rate policy over time. ### Macroprudential and liquidity measures (design and sequencing) - Introduce macroprudential tools tailored to supervisory capacity and data limits. - Manage high LTDs by phased introduction/tightening of LTD limits. - Current LTD ratio in Cambodia far exceeds levels commonly observed in LICs and EMs (80 percent, IMF 2014). - Among 35 commercial banks, 21 banks have LTD ratio above 100 and 12 banks have LTD ratio above 200 percent. - Impose countercyclical capital requirements (CCB) to build buffers. - Minimum capital requirement: 15 percent; most banks hold around 20 percent. - Address real estate exposure with higher capital requirements, risk weights linked to real estate, and consider sectoral concentration limits. - Past measure: lending cap on property sector to 15 percent of banks' total loan portfolios in 2008. - Improve data collection on real estate sales, prices, and construction activity to enable LTV and DTI limits when feasible. - Encourage banks to rely more on internal funding; consider stable funding requirements. - Include microfinance sector in macroprudential measures; enhance MFI data collection and oversight. ### Dollarization, exchange rate, and monetary framework - Policies to reduce dollarization include: - macro stability (prudent fiscal, monetary, structural policies); - strengthen NBC forecasting and short-term liquidity management; - introduce deposit insurance for local currency deposits; - maintain adequate international reserves; - market-based measures to promote the riel (e.g., lower-cost services for riel, larger spread between foreign currency and riel RR). - Stable exchange rate to the U.S. dollar continues as important nominal anchor given limited monetary control. - Develop money and FX markets to promote de-dollarization and allow for effective monetary framework and exchange rate flexibility. - Cambodia’s de facto exchange rate regime reclassified as “stabilized” from “other managed,” effective January 2014. ### Fiscal stance, revenue mobilization, and public wage policy — findings - Fiscal deficit narrowed in 2014 to 1.3 percent of GDP (from 2.1 percent in 2013, GFS 2001), supported by stronger revenues and higher-than-planned grants. - Tax revenues rose by around 2.2 percentage points of GDP to 13.9 percent in 2014. - Current spending increased by 1.3 percent of GDP (driven by higher wage bill); capital spending fell by 0.6 percent of GDP. - Government deposits replenished to 7.1 percent of GDP. - Spending mix deteriorating due to higher wage bill while capital spending declined. - Revenue increased following adoption of the Revenue Mobilization Strategy; government revenue rose to 18.4 percent of GDP in 2013 and 19.8 percent in 2014. ### Fiscal recommendations - Continue steadfast implementation of the Revenue Mobilization Strategy (RMS) to safeguard fiscal space and finance development. - Mobilize higher revenues to create fiscal space for social spending and capital expenditure. - Make future public wage increases contingent on fiscal performance and accompany with civil service reforms. - Continue public financial management reforms to ensure spending effectiveness, enhance budget transparency, and improve monitoring of contingent liabilities. - Maintain adequate government deposits given spending pressures and expected fall in official assistance. - Save higher-than-expected revenues in 2015 and contain nonwage current expenditure. - Recommended government deposits target: 5½ percent of GDP; minimum threshold to withstand shocks estimated at 2¾ percent of GDP (deposits of 5½ percent provide an additional fiscal space of 2¾ percent of GDP). - Authorities aim for a compression ratio of about three and to limit the wage bill to less than 50 percent of current spending. - Debt management committee revised debt policy: ceiling on government guarantees at 4 percent of GDP; contingency fund account for contingent liabilities related to enterprises in the power sector. ### Fiscal risk scenarios (selected) - If revenue-to-GDP ratio remains flat rather than targeted 0.5 percent of GDP increase: - Fiscal deficit (excluding grants) will rise to 5.8 percent of GDP in 2018; government deposits decline by 2 percentage points of GDP. - An external demand shock reducing GDP growth by around 0.5 percent would: - Tax revenues drop by around 1 ppt to 12.2 percent of GDP; - Fiscal deficits increase to around 7 percent of GDP by 2018. ### Structural policies: competitiveness, diversification, and inclusion - Opportunities: expand/diversify export base and integrate into global supply chains supported by regional trade shifts and strategic location. - Directors encouraged efforts to improve competitiveness by: - Upgrading infrastructure and boosting rural access. - Strengthening human capital. - Improving investment climate by reducing overall cost of doing business. - Continue efforts to promote economic diversification and inclusive growth. - Structural constraints: governance, access to finance, institutional efficiency, education and skills, inadequate infrastructure. - Competitiveness pressures: average real wages growing faster than productivity; garments sector productivity lags wages. ### External stability — current account, reserves, and REER - CAD: estimated around 12 percent of GDP in 2014, largely financed by FDI and official loans. - Drivers: moderating garment exports and tourism growth offset by lower power-projects-related imports. - CAD projections: - Narrow to around 11 percent in 2015 (mainly due to fall in oil prices). - Forecast to decline to 6.3 percent of GDP by 2020 as major power projects completed and exports diversify. - Gross official reserves: increased to US$4.7 billion by end-August 2015, nearly 4 months of prospective imports. - REER: appreciated by 8 percent (as of August 2015 compared to a year ago) and estimated broadly aligned with fundamentals. - Fund External Balance Assessment (EBA-lite): indicates 6 percent overvaluation; equilibrium REER approach indicates 2 percent overvaluation; overall REER assessed broadly in line with fundamentals with caution given weak data and high dollarization. - Reserve adequacy: - Traditional metrics: 4 months of imports at end-2014 could be considered adequate. - Customized analysis suggests optimal reserves 27 to 30 percent of GDP, equivalent to additional reserves of US$200 to US$500 million. - Foreign currency deposits are more than 1½ times gross official reserves, limiting lender-of-last-resort capacity. ### External sector assessment — summary findings - External position: relatively strong with CAD predominantly financed by stable FDI and official inflows. - REER: broadly in line with fundamentals. - Reserve recommendation: room to build additional reserves to increase resilience given high dollarization and financial fragilities. ### Debt sustainability (DSA) — baseline and risks - Risk of debt distress: assessed as low under baseline. - Baseline: PV of debt-to-GDP, debt-to-exports, and debt-to-revenue ratios never breach policy-dependent indicative thresholds; projected to decline. - Stress tests: - Change in export value growth is the most important risk. - A shock to export value growth would bring PV of debt-to-GDP to 36 percent (4 percent under indicative threshold). - A large one-off depreciation would bring PV of debt-to-GDP to about 35 percent. - PV of external debt declines over projection period even after shocks. - Public external debt (end-2014): around US$5.5 billion or 33 percent of GDP (23.3 percent in NPV terms). - Creditor composition: - Share of bilateral debt increased to 69 percent in 2014. - China largest bilateral creditor: 62 percent of total bilateral debt stock and about 90 percent of bilateral disbursements during past three years. - Cambodia remains in arrears to the Russian Federation and the U.S. (nearly 15 percent of total debt or 5 percent of GDP). - Contingent liabilities: PPPs and potential banking sector support could pose large fiscal costs; staff estimate bank recapitalization and backstopping demand deposits could amount to around 15 percent of GDP. - Policy implications: preserve macro stability, diversify economy/exports, implement RMS, monitor debt dynamics and contingent liabilities. ### Selected macro-fiscal and external projections (selected table entries) - GDP growth (constant prices): 7.1 (2011); 7.3 (2012); 7.4 (2013); 7.0 (2014); 7.0 (2015 Est.); 7.2 (2016 Proj.). - Inflation (end-year): 4.9 (2011); 2.5 (2012); 4.7 (2013); 1.0 (2014); 1.9 (2015 Est.); 2.8 (2016 Proj.). - Current account (including official transfers, millions of dollars): -1,303 (2011); -1,547 (2012); -1,880 (2013); -2,027 (2014); -1,971 (2015 Est.); -2,031 (2016 Proj.). - Current account (percent of GDP): -10.2 (2011); -11.0 (2012); -12.2 (2013); -12.2 (2014); -11.1 (2015 Est.); -10.6 (2016 Proj.). - Gross official reserves (millions of dollars): 3,032 (2011); 3,463 (2012); 3,642 (2013); 4,391 (2014); 4,979 (2015 Est.); 5,494 (2016 Proj.). - Public external debt (millions of dollars / percent of GDP): 3,811 / 29.7 (2011); 4,433 / 31.5 (2012); 4,997 / 32.5 (2013); 5,534 / 33.4 (2014); 6,058 / 34.2 (2015 Est.); 6,527 / 34.0 (2016 Proj.). ### Risks to the outlook (domestic and external) - Domestic risks: - Rising financial sector vulnerabilities from rapid credit growth. - Fiscal pressures and erosion of competitiveness from wage increases. - Uncertainty related to wage policy and labor disputes. - External risks: - Stronger U.S. dollar. - Growth slowdown in Europe constraining garments exports. - Weaker-than-expected growth in China with spillovers through FDI, banking, and tourism. - Financial market stress in the Euro area could raise funding costs for banks and MFIs that rely on external funding, leading to liquidity pressures and a credit crunch. ### Policy recommendations — summary (Policy recommendations section and RAM) - Financial stability: - Tighten monetary policy; raise reserve requirements substantially to moderate credit growth and curb aggregate demand. - Upgrade/tighten prudential regulations for large MFIs; expand RR to include foreign funding of deposit-taking MFIs. - Bring real estate developers under strict regulatory and supervisory control. - Enhance prompt corrective action framework; broaden crisis management framework with inter-agency coordination and improved resolution powers; build on MoU. - Macroprudential tools: - Phase in LTD limits; impose countercyclical capital buffers; increase capital/risk weights for real estate exposure; consider sectoral concentration, LTV, and DTI limits as data permit. - Liquidity and market development: - NBC to offer shorter-term liquidity absorption facilities; increase usage and attractiveness of NCDs; manage interbank market development and upgrade liquidity ratio to usable liquid assets only. - De-dollarization: - Promote riel via market-based measures, deposit insurance for local currency deposits, adequate reserves, and development of money and FX markets to support monetary policy and reduce dollarization. - Fiscal: - Steadfast implementation of RMS to raise domestic revenues by on average ½ percent of GDP annually. - Make wage increases contingent on fiscal performance and accompany with civil-service reforms. - Safeguard social spending and capital expenditure; monitor contingent liabilities; adopt ceiling on PPP guarantees and list contingent liabilities in annual budget law. - Structural reforms: - Lower cost of doing business (transportation, energy, logistics); improve legal/regulatory environment; upgrade public services. - Lower electricity price and boost rural access; develop secondary roads; improve education quality and vocational training; strengthen anti-corruption measures. - Crisis preparedness: - Preemptively strengthen crisis management framework; ensure adequate emergency liquidity; utilize liquidity buffers for limited instability; comprehensive approach for severe stress. ### RAM (Risk Assessment Matrix) — selected risks and staff advice - Materialization of domestic financial vulnerabilities: Relative Likelihood M; Impact H. Staff advice: Increase reserve requirements; develop macro/micro-prudential measures and crisis management framework; ensure emergency liquidity; strengthen supervision/regulation including for MFIs. - Recurrent political uncertainty and/or labor market disruptions: Relative Likelihood L; Impact H. Staff advice: Ensure continued macro stability. - Revenue shortfall: Relative Likelihood L; Impact M. Staff advice: Steadfast RMS implementation; make wage increases contingent on fiscal performance. - Extreme weather: Relative Likelihood M; Impact M. Staff advice: Expedite structural reforms to accelerate diversification, improve infrastructure, and increase transfers to rural poor. - Structurally weak growth in Euro area: Relative Likelihood H; Impact H. Staff advice: Expedite structural reforms to accelerate diversification. - Persistent US dollar strength: Relative Likelihood H; Impact M. Staff advice: Maintain macro stability; develop interbank and FX markets; expedite structural reforms. - Euro area bond market contagion: Relative Likelihood M; Impact M. Staff advice: Ensure continued macro stability. - Sharp China slowdown in 2015-16: Relative Likelihood L; Impact H. Staff advice: Expedite structural reforms; ensure emergency liquidity; strengthen supervision including MFIs. ### Poverty, social indicators, and inclusion - Poverty rate: declined from 50 percent in 2004 to 18 percent in 2012. - Millennium Development Goal: halved poverty in 2009. - Financial inclusion (Global Findex): - Account ownership: 3.7 percent in 2011 to 22.2 percent in 2014. - Bottom 40 percent account ownership: 0.8 percent in 2011 to 17.9 percent in 2014. - Policy priorities: lower cost of doing business, lower electricity price, boost rural access, develop secondary roads, improve education quality and vocational training, streamline procedures, strengthen anti-corruption, and improve public service delivery. *International Monetary Fund. Staff Report for the 2015 Article IV Consultation (October 1, 2015).* ### 1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved ### _cr15307 - 1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved ### Short-term outlook and macro projections - Growth is projected to remain robust at 7 percent in 2015 and rise modestly to 7.2 percent in 2016. - Inflation is projected to rise gradually to about 2 percent by end-2015 (annual average in 2014 was 3.9 percent). - The current account deficit (CAD) is projected to narrow to around 11 percent in 2015. - The fiscal deficit is projected to rise modestly to 2 percent in 2015 (below the budget target deficit of 4.2 percent) as a result of strong measures to improve revenue administration. - Credit growth is projected to be around 30-34 percent in 2015–16. - The credit-to-GDP gap is expected to exceed 10 percent by early 2017. ### Recent developments and key indicators - Private sector credit grew by nearly 30 percent (year-on-year) on average in the past three years, and rose to about 33 percent by the second quarter of 2015. - The credit-to-GDP ratio doubled over this period to over 50 percent. - The loan-to-deposit (LTD) ratio reached over 100 percent in early 2015; some banks have LTDs much higher than 100 percent, and microfinance institutions had an average LTD of 193 percent in 2014. - Real estate-related lending grew by 53 percent (y/y) on average in 2015 Q2; real estate prices rose on average 10–20 percent (y/y) in 2014. - Broad money growth: 29.9 percent in 2014; projected 23.9 percent in 2015 and 23.1 percent in 2016. - Private sector credit: 31.3 percent in 2014; projected 30.2 percent in 2015 and 34.0 percent in 2016. - Revenue: 19.8 percent of GDP in 2014; projected 19.4 percent of GDP in 2015 and 2016. - Expenditure: 21.2 percent of GDP in 2014; projected 21.4 percent of GDP in 2015 and 22.0 percent of GDP in 2016. - Net lending (+)/borrowing(-): -1.3 percent of GDP in 2014; projected -2.0 percent of GDP in 2015 and -2.6 percent of GDP in 2016. - Current account (including official transfers) in millions of dollars: -2,027 in 2014; projected -1,971 in 2015 and -2,031 in 2016. - Current account (in percent of GDP): -12.2 percent in 2014; projected -11.1 percent in 2015 and -10.6 percent in 2016. - Gross official reserves: 4,391 (millions of dollars) in 2014; projected 4,979 in 2015 and 5,494 in 2016 (in months of prospective imports: 3.8 in 2014; projected 4.0 in 2015 and 4.0 in 2016). - Public external debt: 5,483 (millions of dollars) in 2014; projected 5,949 in 2015 and 6,400 in 2016 (In percent of GDP: 33.4 in 2014; projected 33.9 in 2015 and 33.6 in 2016). ### Financial sector vulnerabilities and recommended measures Findings - Rapid credit growth, increasingly financed by bank flows from abroad and concentrated in real estate and construction, poses significant macro-financial risks. - Financial deepening has been striking: Cambodia’s credit growth is much more rapid than peer Asian economies during their take-off. - Speed of credit growth has not been accompanied by an increase in private investment. - Loan-to-deposit ratios are significantly higher in microfinance institutions that collect deposits but rely heavily on external financing. Recommended policy actions - Raise reserve requirements (National Bank of Cambodia raised reserve requirements in September 2012 by 0.5 percentage points to 12.5 percent and expanded reserve requirements to banks’ foreign borrowings in March 2015; Directors recommended further increases). - Put in place well-designed macroprudential measures to moderate the pace of credit growth and guard against excessive risk taking. - Upgrade prudential regulations on large deposit-taking micro-finance institutions and align them with those of banks. - Better monitor developments in the real estate and construction sectors. - Consider a moratorium on offering new bank licenses until supervisory capacity improves. - Further strengthen the crisis management framework and the supervisory capacity of the National Bank of Cambodia. - Develop an interbank market and continue progress on negotiable certificates of deposit to support a more effective monetary framework, promote de-dollarization, and support a more flexible exchange rate policy over time. ### Fiscal stance, revenue mobilization, and public wage policy Findings - Deficits have been reduced on strong revenue performance and replenishment of government deposits. - Spending mix is deteriorating due to a higher wage bill while capital spending declined. - Revenue increased following adoption of the Revenue Mobilization Strategy and improved tax and customs enforcement; government revenue rose to 18.4 percent of GDP in 2013 and 19.8 percent in 2014. Recommendations - Continue steadfast implementation of the Revenue Mobilization Strategy to safeguard fiscal space and provide resources for development. - Continued efforts to mobilize higher revenues will be needed to create fiscal space for social spending and capital expenditure. - Future increases in public wages should be contingent on fiscal performance and be accompanied by civil service reforms. - Continue to reform public financial management to ensure spending effectiveness, enhance budget transparency, and improve monitoring of risks from contingent liabilities. - Maintain adequate government deposits in view of spending pressures and an expected fall in official assistance. ### Structural policies: competitiveness, diversification, and inclusion - Opportunities to expand and diversify the export base and further integrate into global supply chains are supported by the transformation of regional trade patterns and Cambodia’s strategic location. - Directors encouraged efforts to improve competitiveness by: - Upgrading infrastructure and boosting rural access. - Strengthening human capital. - Improving the investment climate by reducing the overall cost of doing business. - Continued efforts are recommended to promote economic diversification and inclusive growth. ### Risks to the outlook - Domestic risks: - Rising financial sector vulnerabilities from rapid credit growth. - Fiscal pressures and erosion of competitiveness from wage increases. - Uncertainty related to wage policy and labor disputes. - External risks: - Stronger U.S. dollar. - Growth slowdown in Europe constraining garments exports. - Weaker-than-expected growth in China with negative spillovers through foreign direct investment, banking, and tourism channels. *International Monetary Fund. Staff Report for the 2015 Article IV Consultation (October 1, 2015).* ### 6. External stability. The current account deficit (CAD) is estimated at around 12 percent of ### 6. External stability. The current account deficit (CAD) is estimated at around 12 percent of ### Current account and financing - The current account deficit (CAD) is estimated at around 12 percent of GDP in 2014, and largely financed by FDI and official loans. - Moderating garment exports and tourism growth were offset by lower power projects-related imports. - The CAD is projected to narrow to around 11 percent in 2015, primarily due to the fall in oil prices. - The CAD is forecast to decline to 6.3 percent of GDP by 2020, as major power projects are completed and exports grow with some product diversification amid AEC integration. - Gross official reserves increased to US$4.7 billion by end-August 2015, nearly 4 months of prospective imports. ### Real effective exchange rate (REER) and competitiveness - As of August 2015, the REER appreciated by 8 percent compared to a year ago and is estimated to be broadly aligned with fundamentals. - Exchange rate targeting has supported price stability by providing a credible nominal anchor. - Further strengthening of the U.S. dollar, as well as higher wage pressures, may weigh on Cambodia’s competitiveness. ### Box 1 — Cambodia: External Sector Assessment — summary findings - External position: relatively strong with the current account deficit predominantly financed by stable FDI and official inflows. - REER: estimated to be broadly in line with fundamentals. - Reserve recommendation: in view of high dollarization and financial fragilities, staff assesses there is room to build additional reserves to increase resilience. BOP developments - The overall balance of payments (BOP) has averaged an annual surplus of 2.5 percent of GDP from 2004 to 2014. - A widening current account deficit since 2011 corresponds to large FDI inflows to finance the construction of large power generation projects. - Direct investment increased from an average of 6½ percent of GDP for 2008–10 to 11¼ percent for 2011–13. Exchange rate assessment - The Fund’s pilot External Balance Assessment (EBA-lite) exercise indicates a 6 percent overvaluation in the REER (implying a 6 percent depreciation would be necessary). - The equilibrium REER approach indicates an overvaluation of 2 percent, following a 10 percent appreciation during 2010–14. - Taken together, the REER is assessed to be broadly in line with fundamentals; results should be interpreted with caution given weak data, rapid structural change, and a high degree of dollarization. - Policy implication: efforts to improve the business climate should be accelerated to boost competitiveness. Reserve adequacy - Reserve coverage, in terms of FX deposits, has been declining. - Measured against traditional metrics (import reserve coverage, reserves as a percentage of broad money), gross international reserves at 4 months of imports at end-2014 could be considered adequate. - Reserves are 10 percent higher than the 150 percent threshold of the IMF’s EM ARA metric. - Customized analysis (Jeanne and Ranciere 2006 model adapted for high dollarization and financial fragilities) suggests current reserve coverage might not be adequate. - According to this model, the optimal level of reserves ranges from 27 to 30 percent of GDP, which is equivalent to additional reserves of US$200 to US$500 million. - Foreign currency deposits are more than 1½ times gross official reserves, seriously limiting the central bank’s lender of last resort capacity and lower than regional comparators. - Conclusion: a higher level of reserves than that suggested by traditional metrics may be warranted. ### Risks, spillovers, and policy response - Outlook: broadly positive but subject to substantial downside risks. Domestic risks - Main risk: rising financial sector vulnerabilities from rapid credit growth. - Other risks: fiscal pressures and erosion of competitiveness from wage increases potentially outstripping revenues and productivity improvements. - Uncertainty related to wage policy and labor disputes could disrupt garment production and weigh on investor sentiment. External risks - Stronger U.S. dollar and/or a protracted growth slowdown in Europe could constrain garment exports, amid stiff competition from other low-cost producers and wage pressures. - Weaker-than-expected growth in China would have spillovers through the FDI, banking and tourism channels. - Financial market stress in the Euro area (e.g., Greece crisis) would affect Cambodia through FDI, trade, tourism, and banking channels via impacts on Asian neighbors. - Specifically, funding costs for Cambodian banks and microfinance institutions (MFIs), which rely increasingly on external funding, would increase leading to liquidity pressures and a credit crunch. Policy response - Policy room to support growth in the face of large external shocks is limited given high dollarization and lack of monetary control, as well as insufficient fiscal space over the medium term. - Recommendation: step up efforts to build policy buffers and resilience preemptively. - If downside risks materialize and are prolonged (e.g., prolonged slowdown in the EU), efforts to diversify the economy should be expedited. - Given wage indexation to the U.S. dollar and dollarized balance sheets, exchange rate flexibility may not provide a boost to the CA balance in the near term. - In case of limited financial instability: utilize liquidity buffers. - In case of severe financial stress: a more comprehensive approach will be required, underscoring the importance of preemptively strengthening the crisis management framework. ### Authorities’ views - Broad agreement between staff and the authorities on the macroeconomic outlook and risks. - Authorities agreed with staff on the impact of recent oil price developments on the current account and project a slowdown in exports for this year. - Authorities expressed concerns regarding spillovers from Greece and EU growth on garment exports and noted risks related to the expected US interest rate hike. - On the external sector assessment, authorities were more optimistic about the prospects for FDI this year while agreeing with staff on the medium-term assessment. *Source: _cr15307 - 6. External stability. The current account deficit (CAD) is estimated at around 12 percent of (IMF staff summary content provided).* ### 13. Policy recommendations. The following policy measures would mitigate financial ### _cr15307 - 13. Policy recommendations. The following policy measures would mitigate financial ### Financial stability: monetary, prudential, and supervisory measures - Monetary policy needs to be tightened in view of the positive output gap and rising financial stability concerns. - Specifically, RR should be raised substantially to moderate the pace of credit growth and to curb aggregate demand. - Prudential regulations should be upgraded/tightened for large MFIs to match those of banks to prevent regulatory arbitrage. - Specifically, RR should also be expanded to include foreign funding of deposit-taking MFIs. - Currently, MFIs have lower RR requirement on deposits (8.5 percent) and can borrow externally without being subjected to RR. - Real estate developers, often providing supplier’s credit and increasingly funded by foreign flows, should be brought under strict regulatory and supervisory control. - Enhance prompt corrective action framework and institute a broader crisis management framework. - The crisis management framework should provide a sound institutional arrangement with explicit inter-agency coordination mechanisms, including the exchange of information, and improve inadequate resolution powers. - Build on the MoU to improve coordination and resolution powers. ### Macroprudential tools (Box 3): design and sequencing - Introduce well-designed macroprudential tools to contain systemic risk; tailor measures to stretched supervisory capacity and limited data availability. - Manage fragility from high LTDs by phased introduction (and tightening) of LTD limits. - Current LTD ratio in Cambodia far exceeds levels commonly observed in LICs and EMs (80 percent, IMF 2014). - Among 35 commercial banks, 21 banks have LTD ratio above 100 and 12 banks have LTD ratio above 200 percent. - Impose countercyclical capital requirements (CCB) to enhance resilience and build buffers. - Minimum capital requirement in Cambodia is 15 percent but most banks hold around 20 percent. - Current practice that supervisors can advise banks to hold additional capital could help transition to the CCB. - Address growing exposure to real estate with higher capital requirements and risk weights linked to real estate, and consider sectoral concentration limits. - Cambodia had imposed a lending cap on the property sector to 15 percent of banks' total loan portfolios in 2008. - Other regional experiences: China put caps on overall credit growth for major banks; Hong Kong introduced ceiling on mortgage lending growth set at 15 percent per annum in 1994 and banks’ exposure to property limited to 40 percent; Malaysia introduced a limit on property lending equal to 20 percent of a bank’s portfolio in 1997; Singapore introduced caps on banks’ loan exposures to the property sector at 35 percent of total non-bank exposure in 2009. - Improve monitoring of real estate developments by enhancing data collection on real estate sales and prices as well as construction activity. - Limits on loan-to-value ratios could be imposed once sufficient progress is made on improving data availability. - Encourage banks to rely more on internal funding; stable funding requirements such as LTD ratio limits can act as a brake on excessive credit growth. - Consider sectoral loan-to-value (LTV) limits and debt to income ratio (DTI) as complementary measures when a real estate boom accompanies a broader credit boom. - Note: Although recommendations focus on the banking system, the microfinance sector needs to be included in macroprudential measures; data collection on and basic oversight of MFIs is an important first step. ### Liquidity management and interbank market development - NBC could offer shorter-term liquidity absorption facilities and increase usage of NCDs by improving attractiveness through better pricing (as outlined in recent Fund TA). - Progress of interbank market development needs to be properly managed and monitored since it may further increase risk of contagion, especially for banks that rely on short-term borrowing. - Continue progress on upgrading the liquidity ratio to cover only truly usable liquid assets. ### Dollarization and exchange rate issues - Policies to reduce high dollarization include: - ensuring macroeconomic stability through prudent fiscal, monetary, and structural policies; - further developing the NBC’s ability to forecast and target short-term liquidity; - introducing deposit insurance for local currency deposits; - maintaining adequate international reserves; - market-based measures to promote the riel (e.g., lower-cost and convenient services for riel use, larger spread between foreign currency and riel RR). - The stable exchange rate against the U.S. dollar continues to serve as an important nominal anchor, given limited monetary control. - Going forward, development of money and foreign exchange markets is needed to promote de-dollarization and allow for implementation of an effective monetary framework, including exchange rate flexibility to respond to external shocks. - Cambodia’s de facto exchange rate regime was reclassified as “stabilized” from “other managed,” effective January 2014. ### Authorities’ views on financial stability measures - Authorities broadly agreed with staff’s recommendations but were concerned about growth implications and implementation capacity. - They would consider introducing macroprudential measures but were concerned about potential impact on growth and viewed implementation capacity as a constraint. - Keen on identifying risks, improving data collection and creating a comprehensive risk assessment report. - On supervision and licensing: - In light of stretched supervisory capacity and emerging risks, the 2010 FSAP recommendation to impose a moratorium on offering new bank licenses remains valid. - Implementation of other FSAP recommendations should be expedited. ### Fiscal position: recent developments and risks - Fiscal deficit narrowed in 2014 to 1.3 percent of GDP (from 2.1 percent in 2013, GFS 2001), supported by stronger revenues and higher-than-planned grants. - Tax revenues rose by around 2.2 percentage points of GDP to 13.9 percent in 2014. - Current spending increased by 1.3 percent of GDP, mostly driven by a higher wage bill. - Capital spending fell by 0.6 percent of GDP. - Government deposits replenished to 7.1 percent of GDP. - 2015 Budget: overall deficit projected to widen to around 2 percent of GDP in 2015 (GFS 2001). - Increase in the wage bill (0.7 percent of GDP) expected to fully offset higher revenues. - A smaller-than-budgeted (4.2 percent of GDP) deficit would be more consistent with the economy’s cyclical position and would boost government deposits further. - Recommendation: higher-than-expected revenues in 2015 should be saved, and nonwage current expenditure contained. ### Emerging fiscal pressures and the wage bill - Near-term strong revenue efforts have eased fiscal pressures, but pressures expected to reemerge in the medium term as the wage bill is projected to continue rising due to electoral promises and an expected fall in official assistance with the attainment of LMIC status. - In late 2014, the government pledged to raise the civil servants’ minimum monthly wage to US$250 by 2018 from about US$100 in 2013/14. - Deposits serve as the only financing buffer in the absence of government bond markets. - Government deposits target: 5½ percent of GDP. - Minimum threshold to withstand financing shocks based on historical data is estimated at 2¾ percent of GDP; deposits of 5½ percent of GDP provide an additional fiscal space of 2¾ percent of GDP. - Cambodia’s public wage bill has risen from 4.4 percent of GDP in 2011 to 5.8 percent in 2014. - Public wage bill is around 45 percent of total current government spending and 35 percent of domestic revenue after the recent increase. - 2015 budget reflected a 21 percent increase in public sector wage bill (after an estimated 27 percent increase in 2014). - Government planned to raise the minimum wage to 100 million Riel by 2018. - Fiscal risk scenarios: - If revenue-to-GDP ratio remains flat rather than the targeted 0.5 percent of GDP increase, the fiscal deficit (excluding grants) will rise to 5.8 percent of GDP in 2018 while government deposits will decline by 2 percentage points of GDP. - An external demand shock reducing GDP growth by around 0.5 percent would result in tax revenues dropping by around 1 ppt to 12.2 percent of GDP and fiscal deficits increasing to around 7 percent of GDP by 2018. ### Fiscal policy recommendations - Sustain and systematically implement the Revenue Mobilization Strategy (RMS) to achieve government target of raising domestic revenues by on average ½ percent of GDP annually. - Also advance RMS elements: review excises and VAT thresholds, rationalize tax incentives, and enhance institutional framework. - Future wage increases should be contingent on projected fiscal performance (including meeting revenue targets and maintaining an adequate fiscal buffer) and accompanied by deeper, efficiency-enhancing civil-service reforms. - Wage increases should be based on key indicators (availability of resources, cost of living, productivity, fiscal performance, and priority objectives). - Wage increases should be part of broader civil service reform to improve productivity, strengthen capacity and accountability by rationalizing allocation and size. - Safeguard social spending and capital expenditure, particularly on infrastructure, to support diversification, boost competitiveness, and increase inclusiveness. - Continue progress in monitoring contingent liabilities via the PPP unit in the MEF. - Mitigate fiscal risks by adopting a ceiling on PPP guarantees and listing all contingent liabilities in the annual budget law to enhance fiscal transparency. - Authorities aim for a compression ratio of about three and to limit the wage bill to less than 50 percent of current spending. - The debt management committee revised the debt policy framework to include a ceiling on government guarantees at 4 percent of GDP and designates a contingency fund account for contingent liabilities related to enterprises in the power sector. ### Competitiveness, diversification, and inclusion - Cambodia’s growth has been impressive but relies on a narrow base and remains volatile. - Growth volatility around 5.5 percent, higher than the average of Asian LICs (4.5 percent). - Emerging signs of diversification across sectors and export destinations exist, but economy remains largely undiversified. - Evidence of FDI into nontextile manufacturing firms (electronics, automobile parts) from China, Korea, and Japan. - Structural bottlenecks to diversification and competitiveness: governance, access to finance, institutional efficiency, education and skills, and inadequate infrastructure. - Cambodia dropped its rank from 134 to 135 out of 189 countries in overall Doing Business Index and ranks 95 out of 144 countries in the Global Competitiveness Index (2014–15). - Cambodia ranks poorly at 107, 123, and 119 out of 144 countries with regard to infrastructure, education and training, and institutions, respectively. - Competitiveness pressures: - Average real wages growing faster than in other countries and outpacing productivity; garments sector shows productivity lagging behind wages. - REER has appreciated, though not as much as competitor countries (Vietnam, Bangladesh, Lao PDR). - Policy focus: maintain competitiveness by improving the business climate and ensuring wages do not outstrip productivity. *Source: _cr15307 - IMF staff report excerpt.* ### 23. Poverty and social indicators. Progress on poverty alleviation and improving social ### 23. Poverty and social indicators. Progress on poverty alleviation and improving social ### Progress on poverty and social indicators - Poverty rate declined from 50 percent in 2004 to 18 percent in 2012. - Cambodia achieved the Millennium Development Goal (MDG) of halving poverty in 2009. - Consumption of the bottom income quintile has increased sharply and ameliorated income inequality. - Improvements achieved in maternal health, early childcare and primary education programs in rural areas. - Further efforts to improve health and education remain important development priorities. ### Financial inclusion - Access to bank accounts rose rapidly but remained below peers. - According to the World Bank’s Global Findex database: - Percentage of people having accounts increased from 3.7 percent in 2011 to 22.2 percent in 2014. - Among the lower income segment (bottom 40 percent) the percentage of people having accounts increased from 0.8 percent to 17.9 percent over the same time period. ### Policy recommendations - Priority: lower the overall cost of doing business by reducing transportation, energy, and logistics costs, improving the legal and regulatory environment, and upgrading public services. - Specific recommendations: - With higher electricity supply expected to materialize in future, priority is to lower its price, improve supply, and boost rural access. - Following major improvements in highways, develop secondary roads for better market access and integration with regional supply chains. - Improve the quality of education, building on gains in access to elementary education; vocational and industry-led training programs can address immediate skill gaps. - Streamline government procedures and improve governance in doing business. - More transparent and predictable customs procedures to expedite cross-border flows of goods and integration with regional supply chain networks. - Strengthen the anti-corruption framework to address governance concerns and ease constraints on doing business. - Further gains in ameliorating inequality require improved public service delivery (especially in health and education), reducing skill gaps, and fostering a dynamic agricultural sector. ### Authorities’ views - Authorities emphasized efforts to improve the business environment and expressed concern about recent deterioration in external competitiveness. - Authorities prepared an Industrial Development Policy 2015–25 to provide a roadmap to boost investment and broaden the country’s economic base. - The IDP has three goals: - i) to increase the share of the industrial sector in GDP by 10 percentage points to 30 percent by 2025; - ii) increase exports of non-garment exports (especially agricultural products) to 15 percent of GDP by 2025; - iii) encourage formal registration of 80 percent of SMEs. - Authorities’ focus aligns with staff recommendations (e.g., reducing electricity costs, simplified registration and accounting standards for SMEs). ### Staff appraisal — Economic setting - Growth remains strong and is projected to remain steady in 2015 and to rise modestly over the medium term. - Inflation is projected to rise gradually over 2015, reflecting the recovery in food prices and stabilization of global energy prices. - Rapid credit growth accelerated, reflecting both supply and demand factors. - The external position is stable and the real effective exchange rate is assessed to be broadly in line with fundamentals. ### Staff appraisal — Risks - Outlook subject to substantial downside risks: - External risks: stronger U.S. dollar and/or a protracted growth slowdown in Europe constraining garments export and tourism growth. - Weaker-than-expected growth in China would have spillovers through the FDI, banking and tourism channels. - Domestic risks: materialization of financial sector vulnerabilities from rapid credit growth, fiscal pressures and erosion of competitiveness from wage increases. ### Staff appraisal — Monetary policy and prudential regulations - Monetary policy and prudential regulations need to be tightened further to contain financial sector vulnerabilities. - Rapid credit growth, increasing bank flows from abroad, and greater exposure to the real estate and construction sectors pose macro-financial risks. - Policy measures recommended: - Raise reserve requirements to moderate the pace of credit growth. - Upgrade/tighten prudential regulations on large deposit-taking micro-finance institutions (MFIs) to match those of banks to prevent regulatory arbitrage. - Expand reserve requirements to include foreign funding of MFIs. ### Staff appraisal — Macrofinancial policies - Introduce well-designed macroprudential tools given increased financial sector risks. - Manage fragility from high loan-to-deposit (LTD) ratios via phased introduction (and tightening) of LTD limits. - Impose countercyclical capital requirements to enhance resilience and build buffers. - Given growing exposure to real estate, consider higher capital requirements and risk weights linked to real estate, and sectoral concentration limits. - Better monitoring of developments in the real estate sector is warranted, including enhancing data collection. ### Staff appraisal — Supervision and market development - Supervisory capacity is stretched; impose a moratorium on new bank licenses. - Strengthen and expedite the crisis management framework to manage systemic risk. - Expedite implementation of FSAP recommendations to contain rising financial stability risks. - Develop money and foreign exchange markets to promote de-dollarization and to implement an effective monetary framework, including exchange rate flexibility to help absorb external shocks. ### Staff appraisal — Fiscal policy - Strong revenue growth has temporarily eased fiscal pressures, but fiscal consolidation is necessary to maintain adequate government deposits given spending pressures from a higher wage bill. - Steadfast implementation of the RMS is needed to sustain revenues. - Wage increases should be formulated contingent on projected fiscal performance and accompanied by deeper, efficiency enhancing civil-service reforms. - Better managing contingent liabilities is critical to safeguard fiscal space. - Continue to reform public financial management to ensure spending effectiveness. ### Staff appraisal — Diversification and inclusiveness - Greater investment in education and reduction in the overall cost of doing business will enhance competitiveness, economic diversification, and promote inclusiveness. - Upgrading infrastructure, particularly ensuring cheaper and more reliable electricity supply, remains a key priority. - Enhance the business climate by removing regulatory impediments to expedite integration with regional supply chains. *CAMBODIA — INTERNATIONAL MONETARY FUND* ### 33. It is recommended that the next Article IV consultation takes place on the standard ### _cr15307 - 33. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. ### Article IV timing - It is recommended that the next Article IV consultation takes place on the standard 12-month cycle. - Cambodia is on the standard 12-month Article IV consultation cycle. The last Article IV consultation discussions were held in Phnom Penh during November 4–15, 2013. The Executive Board approved the staff report (IMF Country Report 14/33) on January 27, 2014. ### Risk Assessment Matrix (RAM): key risks, impacts, and staff policy advice - Materialization of domestic financial vulnerabilities - Relative Likelihood: M - Impact if Realized: H - Potential Impact: Deterioration of asset quality including in the real estate sector, abrupt decline in credit growth, large deposits withdrawal, accentuating liquidity risks and declining investor confidence - Staff Advice: Increase reserve requirements to slow down credit growth; develop macro and micro-prudential measures and crisis management framework; ensure adequate emergency liquidity; strengthen supervision and regulation including for MFIs; preemptively strengthen the crisis management framework. - Recurrent political uncertainty and/or labor market disruptions - Relative Likelihood: L - Impact if Realized: H - Potential Impact: Large deposits withdrawal, drag in FDI and export growth, weaker investor confidence - Staff Advice: Ensure continued macroeconomic stability to support confidence in the economy. - Revenue shortfall - Relative Likelihood: L - Impact if Realized: M - Potential Impact: Fiscal position deteriorates - fiscal deficits widen and government deposits deplete sharply - Staff Advice: Steadfast implementation of the RMS. Formulate wage increases contingent on projected fiscal performance. - Extreme weather - Relative Likelihood: M - Impact if Realized: M - Potential Impact: Weaker agricultural production and exports, weaker tourism, and wider income inequality - Staff Advice: Expedite structural reforms to accelerate diversification, improve infrastructure, and increase transfers to the rural poor. - Structurally weak growth in Euro area - Relative Likelihood: H - Impact if Realized: H - Potential Impact: Weaker garment export growth - Staff Advice: Expedite structural reforms to accelerate diversification. - Persistent US dollar strength - Relative Likelihood: H - Impact if Realized: M - Potential Impact: Weaker exports, tourism receipts, FDI, and bank lending from other partner countries - Staff Advice: Maintain macroeconomic stability; develop interbank and foreign exchange markets to enhance monetary policy effectiveness and reduce dollarization; expedite structural reforms to boost non-price competitiveness. - Euro area bond market contagion - Relative Likelihood: M - Impact if Realized: M - Potential Impact: Weaker exports, tourism receipts, FDI, and bank lending from other partner countries - Staff Advice: Ensure continued macroeconomic stability through prudent fiscal, monetary, and structural policies to support confidence and FDI. - Sharp China slowdown in 2015-16 - Relative Likelihood: L - Impact if Realized: H - Potential Impact: Weaker tourism receipts and FDI, reduced foreign borrowing by banks resulting in liquidity risks and declining investor confidence - Staff Advice: Expedite structural reforms to accelerate diversification; ensure adequate emergency liquidity; strengthen supervision and regulation including to MFIs. (Note on RAM probabilities: “low (L)” indicates probability below 10 percent, “medium (M)” between 10 and 30 percent, and “high (H)” between 30 and 50 percent.) ### Growth drivers and external position - Growth drivers and recent trends - Economic growth remains strong supported by garment exports, tourism, and real estate. - Garments exports to the EU have been an important driver owing to preferential treatment. - Tourism remains strong, mainly due to increased tourist arrivals from China. - Export growth is moderating with external demand slowdown but remains in double digits. - Inflation remains muted due to decline in food and global fuel prices. - Rapid credit growth, particularly in construction and real estate, is increasing macro-financial stability risks. - External position and financing - The current account deficit is largely funded by FDI, grants, and loans, and is projected to narrow over the medium term partly due to expected completion of infrastructure projects and moderating overall imports. - Cambodia’s share in the EU garment market continues to increase. - FDI flows have been strong compared to other countries in the region. - The real effective exchange rate has been on an appreciation trend. - Official reserves continue to grow, though they cover a declining share of foreign currency deposits. ### Fiscal performance and medium-term outlook - Fiscal performance - Fiscal performance is strong on higher revenues and prudent expenditure. - Revenues have increased on enhanced tax collection efforts. - Nonwage spending has been contained, offsetting impact from large wage increases. - Tax collection remains low compared to regional levels, implying room for further growth. - Wage bill is higher than that of other Asian LICs (except Lao P.D.R). - Implementing the RMS to sustain revenue increase and improve public expenditure efficiency is critical to secure fiscal buffers over the medium term. - Selected fiscal figures (Table 1 / Table 2 / Table 4) - Revenue: 15.6 percent of GDP (2011); 19.4 percent of GDP (2015); projected 19.4 percent of GDP (2016). - Domestic revenue: 12.4 percent of GDP (2011); 17.5 percent of GDP (2015); projected 17.6 percent of GDP (2016). - Expenditure: 19.7 percent of GDP (2011); 22.0 percent of GDP (2015); projected 22.0 percent of GDP (2016). - Net lending (+)/borrowing (-): -4.1 percent of GDP (2011); -2.0 percent of GDP (2015); projected -2.6 percent of GDP (2016). - Net lending (+)/borrowing (-) excluding grants: -7.3 percent of GDP (2011); -3.8 percent of GDP (2015); projected -4.4 percent of GDP (2016). - Government deposits: 4.6 percent of GDP (2011); 8.1 percent of GDP (2016, memorandum). ### Credit, monetary, and financial sector risks - Credit and banking system developments - Credit growth has been persistently high; real estate-related sector contributed rapidly. - Reliance on external funding has been increasing. - Loan-to-deposit ratio continued to increase and is now more than 100 percent. - Banking system maintains a high level of excess reserves. - Credit-to-GDP gap has widened, surpassing the 2008 boom. - Degree of financial dollarization remains persistently high. - Monetary and monetary aggregates (selected figures) - Private sector credit growth: 31.2 percent (2011); 34.0 percent (2016 projection in Table 1); private sector credit growth annual rates indicated throughout monetary survey. - Broad money growth: 21.4 percent (2011); 23.1 percent (2016 projection in Table 2). - Foreign currency deposits (in millions of U.S. dollars): 4,736 (Dec-2011); 15,924 (Dec-2016 projection, Table 6). - Loan-to-deposit ratio (in percent): 86.7 (Mar-2011 reference) rising to above 100 percent in later series (Table 6 dynamics). - Financial sector policy advice and FSAP follow-up - Staff advice includes strengthening supervision and regulation including for MFIs, ensuring adequate emergency liquidity, developing interbank and foreign exchange markets to enhance monetary policy effectiveness and reduce dollarization, and preemptively strengthening crisis management frameworks. - Key 2010 FSAP recommendations of High Priority (status highlights): - Improve quality of data and stress testing: Short term — In process. - Ensure banks retain appropriate liquid assets: Short term — In process. - Establish procedures for information exchange among supervisors (NBC, MEF, SECC): Short term — In process. - Upgrade supervisory capacity and staff: Medium term — In process. - Develop supervisory strategy for banks not meeting new capital requirements: Short term — Done. - Impose moratorium on new bank licenses while supervisory capacity inadequate: Short term — In process. - Revise capital regulations for insurance market: Short term — Done. - Conduct readiness study prior to launch of stock exchange: Short term — Done. - Upgrade regulations of microfinance deposit-taking institutions: Short term — Under NBC's consideration. - Enhance powers for intervention, corrective measures, and enforcement: Medium term — Under NBC's consideration. - Introduce regulation allowing banks to use fixed deposits at the NBC and government securities as collateral for interbank and NBC repos: Short term — Done. - Develop crisis management framework and revise PCA triggers: Short term — In process / Under NBC's consideration. - Amend law to reduce government representation on NBC Board and specify Deputy Governors: Short/Medium term — In preparation. - AML/CFT: New measures for overall risk assessments and risk profiling — Short term — In preparation. ### Structural diversification, competitiveness, and reform priorities - Structural weaknesses and policy priorities - Cambodia’s growth has been historically very volatile compared to peers. - Export diversification index indicates a low level of diversification and has remained relatively flat. - Room to upgrade export quality to boost potential growth. - Wages are lower than in emerging economies but face competition from neighboring lower income countries. - Low expenditure on education drives serious skill mismatches. - High logistics costs relative to peers remain a key challenge. - Joint IMF–World Bank shared priorities - Sustaining growth: continue fiscal consolidation; prudent management of banking sector risks; improve business climate; reduce infrastructure, energy, and skills bottlenecks; promote private sector development and diversification; improve governance and delivery of public services; support rural development. - Managing public finances and debt: improve revenue collection; prioritize spending; better monitor contingent liabilities; strengthen budgetary and public debt management and transparency. - Safeguarding financial stability and improving monetary policy effectiveness: implement 2010 FSAP recommendations (moratorium on new bank licenses, coordinated supervision, develop foreign exchange market, improve supervisory capacity); manage real estate-related financial stability risks through strengthened supervision and improved data collection; develop interbank market. - Improving governance to enhance service delivery and private sector development. ### Selected macroeconomic and external projections (from tables) - Output and prices (annual percent change, Table 2 projections) - GDP in constant prices: 7.1 (2011), 7.3 (2012), 7.4 (2013), 7.0 (2014), 7.0 (2015 Est.), 7.2 (2016 Proj.). - GDP deflator: 3.4 (2011), 1.4 (2012), 1.6 (2013), 0.9 (2014), 1.8 (2015 Est.), 2.6 (2016 Proj.). - Inflation (end-year): 4.9 (2011), 2.5 (2012), 4.7 (2013), 1.0 (2014), 1.9 (2015 Est.), 2.8 (2016 Proj.). - Saving and investment (percent of GDP) - Gross national saving: 11.8 (2011), 12.5 (2012), 11.3 (2013), 11.0 (2014), 11.4 (2015 Est.), 12.1 (2016 Proj.). - Gross fixed investment: 22.0 (2011), 23.5 (2012), 23.5 (2013), 23.2 (2014), 22.5 (2015 Est.), 22.7 (2016 Proj.). - Balance of payments and reserves - Exports, f.o.b. (millions of dollars): 5,035 (2011), 5,633 (2012), 6,530 (2013), 7,408 (2014), 8,212 (2015 Est.), 9,116 (2016 Proj.). - Imports, f.o.b. (millions of dollars): -7,730 (2011), -8,600 (2012), -9,744 (2013), -10,991 (2014), -11,869 (2015 Est.), -12,796 (2016 Proj.). - Current account (including official transfers, millions of dollars): -1,303 (2011), -1,547 (2012), -1,880 (2013), -2,027 (2014), -1,971 (2015 Est.), -2,031 (2016 Proj.). - Current account (in percent of GDP): -10.2 (2011), -11.0 (2012), -12.2 (2013), -12.2 (2014), -11.1 (2015 Est.), -10.6 (2016 Proj.). - Gross official reserves (millions of dollars): 3,032 (2011), 3,463 (2012), 3,642 (2013), 4,391 (2014), 4,979 (2015 Est.), 5,494 (2016 Proj.). - Reserves (in months of prospective imports): 3.6 (2011), 3.6 (2012), 3.4 (2013), 3.8 (2014), 4.0 (2015 Est.), 4.0 (2016 Proj.). - Public external debt (millions of dollars / percent of GDP) - Public external debt: 3,811 (2011), 4,433 (2012), 4,997 (2013), 5,534 (2014), 6,058 (2015 Est.), 6,527 (2016 Proj.). - Public external debt (percent of GDP): 29.7 (2011), 31.5 (2012), 32.5 (2013), 33.4 (2014), 34.2 (2015 Est.), 34.0 (2016 Proj.). ### IMF engagement, technical assistance, and cooperation - Fund relations and arrangements - Membership: Joined December 31, 1969; accepted obligations under Article VIII, Sections 2, 3, and 4 on January 1, 2002. - Quota: 87.50 SDR Million (100.0 percent of quota). - Net cumulative SDR allocation: 83.92; Holdings: 68.34 (81.44 percent). - Latest Financial Arrangements: ECF arrangements dated Oct. 22, 1999 (expired Feb. 28, 2003) and May 06, 1994 (expired Aug. 31, 1997) listed in staff report; Outstanding Purchases and Loans: None. - Multilateral Debt Relief Initiative: IMF Executive Board approved relief on 100 percent of debt incurred before January 1, 2005, forgiving SDR 56.8 million. - Technical assistance focus areas - Bank supervision, monetary operations, public financial management, tax and customs administration, macro-fiscal and revenue forecasting, financial sector supervision, macro-financial statistics. - Delivery through a resident advisor at the NBC, peripatetic experts, and short-term visits from headquarters. - Resident Representative - IMF Resident Representative in Phnom Penh: Ms. Yong Sarah Zhou (appointed July 2015). *Source: Staff Report for the 2015 Article IV Consultation — Informational Annex (Cambodia), Asia and Pacific Department, International Monetary Fund, October 1, 2015.* ### 2020. After successfully rebuilding the basic foundation of the banking industry under the First and ### _cr15307 - 2020. After successfully rebuilding the basic foundation of the banking industry under the First and ### Financial sector programs, AsDB support, and PPPs - TFSP supports sector expansion to cover nonbanking services and capital markets, and to boost investor’s and beneficiaries’ confidence through: - stronger legal and regulatory framework, - necessary infrastructure, - better quality of services, including consumer protection. - AsDB will support improved access to formal sources of finance, especially in rural areas, through: - AsDB initiatives to support growth of commercial farms and rural enterprises, - private sector operations focusing on finance sector development, including private equity, transport, agribusiness, water supply and sanitation, and trade and supply chain finance for SMEs. - AsDB provided policy and advisory technical assistance for public private partnerships (PPPs) in Cambodia: - assisted government to review existing policies, laws, regulations, and institutional arrangements; - developed a strategic framework for PPPs; - proposed changes to the law on concessions to make the PPP process effective; - implemented a capacity development technical assistance project for PPPs to build institutional capacity of government agencies involved in PPPs. ### Asian Development Bank: Loans/Grants Commitment and Disbursements to Cambodia 1992–2014 (In millions of U.S. dollars, as of December 31, 2014) - Yearly Loan/Grant Approvals Contract Awards/Commitment Disbursements (presented as in source): - 1992 67.70.00.0 - 1993 0.04.45.4 - 1994 28.235.912.2 - 1995 45.128.135.9 - 1996 105.015.332.1 - 1997 0.041.510.7 - 1998 40.029.129.3 - 1999 88.017.026.2 - 2000 109.6114.450.8 - 2001 75.240.748.3 - 2002 116.564.478.9 - 2003 98.361.973.3 - 2004 65.062.476.7 - 2005 1 52.096.484.5 - 2006 2 69.844.767.2 - 2007 3 64.182.562.1 - 2008 4 84.1140.7137.7 - 2009 5 144.559.882.7 - 2010 6 160.864.371.4 - 2011 7 70.0128.6122.3 - 2012 8 312.679.560.5 - 2013 9 98.2149.6163.6 - 2014 10 247.3104.198.7 - TOTAL: 2,142.01,465.31,430.5 - Footnotes (as presented): - 1 US$10 million loans and US$42 million grants. - 2 US$62 million loans and US$7.8 million grants. - 3 US$27.1 million loans and US$37 million grants. - 4 US$53.8 million loans and US$30.3 million grants. - 5 US$71.7 million loans and US$72.8 million grants. - 6 US$95.0 million loans and US$65.8 million grants. - 7 US$67.0 million loans and US$11.9 million grants. - 8 US$275.46 million loans and $37.16 grants. - 9 US$70.0 million loans and US$28.21 million grants. - 10 US$226.0 million loans and US$21.25 million grants. - Source: Asian Development Bank. ### Assessment of data adequacy for surveillance and statistical issues (September 2015) - General: - Data provision is broadly adequate for surveillance. - Extensive TA provided by IMF, UNDP, AsDB, World Bank, and bilateral partners has led to substantial capacity improvements. - Cambodia is participating in STA's project on Implementation of the System of National Accounts and International Comparison Program, funded by the government of Japan. - Shortcomings in macroeconomic data hinder timely and comprehensive analysis. - National accounts: - Quality and timeliness weaknesses remain due to lack of comprehensive and reliable source data on production and expenditure bases, resource constraints, and weak data collection techniques. - TA missions: November 2011 (methodologies and quarterly national accounts), February 2014 (assistance processing EC2011 results for GDP estimates). - EC2011 not particularly focused on national accounts; further improvements needed to convert EC2011 data into SNA-consistent national accounts data. - Progress stalled partly due to resource constraints. - Statistics Sweden assisting NIS on national accounts compilation. - Price statistics: - CPI compilation suffers from insufficient coverage. - Updated CPI series introduced starting in April 2012; geographic coverage expanded to Phnom Penh plus five provinces. - STA TA mission in April 2012 assisted CPI updating/improvement. - Authorities indicated need for PPI development assistance, but no funds allocated for ongoing PPI compilation. - Government finance statistics (GFS): - MOFE began reforms to government accounting system and budgetary nomenclature in 2007 based on GFSM 2001 with IMF assistance. - Participated in GFS project funded by Japan; TA missions in 2012, 2013, and October 2014. - Latest TA objectives: (i) finalize Charts of Accounts mapping into GFS for FMIS integration and GFS table production; (ii) address compilation questions related to below-the-line data based on GFSM 2001 and GFSM 2014 update. - New CoA implemented starting January 2015. - Further actions needed: integrate coverage of GFS to broader public sectors and local governments; develop and implement functional classification of expenditure; reconcile with monetary and external statistics. - Monetary and financial statistics: - NBC compiles balance sheet and survey for central bank and other depository institutions per IMF Monetary and Financial Statistics Manual. - Since August 2005, NBC reported monthly MFS to STA using Standardized Report Forms. - NBC received TA during FSAP on compilation of financial soundness indicators (FSIs); now compiles monthly core FSIs and shares them irregularly. - Data inconsistencies challenge FSI interpretation. - STA TA mission on FSI methodology scheduled in September 2015. - External sector statistics: - Cambodia part of Asian module of Project on the Improvement of External Sector Statistics funded by Japan (launched October 2012) with short-term TA missions over three years. - Third TA mission in September 2014 reviewed action plan implementation and focused on direct investment statistics and interagency cooperation for BOP purposes. - NBC accomplishments: (i) training sessions with commercial banks on ITRS; (ii) initiated work to establish business register; (iii) prepared draft direct investment survey questionnaire. - Further actions needed: improve inter-institutional cooperation; improve coverage and address methodological inconsistencies. - Foreign direct investment believed to be large, relies excessively on approvals; gaps exist for large build-operate-transfer projects in energy sector. - NBC launching survey on foreign direct investment. - NBC receives monthly data from GDCE broken down into main commodities used to generate quarterly BOP figures; quarterly trade figures need to be provided timelier and more systematically to NBC. - Gaps exist in public external debt and official transfers; no data available for private external debts. - Data Standards and Quality: - Cambodia participates in IMF’s General Data Dissemination System. - No data ROSC available. ### Table of Common Indicators Required for Surveillance (As of September 2015) — selected entries (as presented) - Exchange Rates: Date of latest Observation 9/21/ 2015; Date Received 9/21/ 2015; Frequency of Data D; Frequency of Reporting D; Frequency of Publication W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation 8/2015; Date Received 9/2015; Frequency of Data Biweekly; Frequency of Reporting Biweekly, 4 week lag; Frequency of Publication N/A - Reserve/Base Money: 7/2015; 9/2015; M; M, 4–6 week delay; M - Broad Money: 7/2015; 9/2015; M; M, 4–6 week delay; M - Central Bank Balance Sheet: 7/2015; 9/2015; M; M, 4–6 week delay; M - Consolidated Balance Sheet of the Banking System: 7/2015; 9/2015; M; M, 4–6 week delay; M - Interest Rates: 7/2015; 9/2015; M; M, 3 month lag; M - Consumer Price Index: 7/2015; 9/2015; M; M, 2–4 week lag; M - Revenue, Expenditure, Balance and Composition of Financing—General: 5/2015; 8/2015; M; M, 4–6 week lag; M - Stocks of Central Government and Central Government-Guaranteed Debt: 5/2015; 8/2015; M; M, 3 month lag; A - External Current Account Balance: 3/2015; 8/2015; Q; Q, 3-5 month lag; Q - Exports and Imports of Goods and Services: 7/2015; 9/2015; M; M, 4 week lag; M - GDP/GNP: 2014; 6/2015; A; A, 6 month lag; A - Gross External Debt: 6/2015; 8/2015; M; M, 4 week lag; A - International Investment Position: 3/2015; 8/2015; Q; Q, 3-5 month lag; Q ### Main websites of data (as listed) - National Bank of Cambodia (www.nbc.org.kh): Exchange rates; Balance of payments - Ministry of Economic and Finance (www.mef.gov.kh): Government budget; Fiscal revenue, expenditure, and financing - National Institute of Statistics (www.nis.gov.kh): Consumer Price Index; National accounts; Population census; Labor force survey; Socioeconomic survey; Household survey ### Debt Sustainability Analysis — main findings and projections - Risk rating: - This DSA assesses the risk of debt distress as low. - Indicative debt distress thresholds unchanged from the 2013 Article IV DSA. - Baseline scenario: - External and public debt distress indicators never breach policy-dependent indicative thresholds. - PV of external debt follows a downward trend in the medium term. - Downside risks include external arrears and materialization of contingent liabilities. - Macroeconomic assumptions broadly similar to last year’s DSA; Cambodia assumed to issue domestic debt over the long term. - Debt-to-GDP ratio at end-2014 slightly higher than previous estimate due to larger disbursement of bilateral debts, especially from China. - Footnote: Eighty percent of outstanding debt is owed to China. - Public debt stock (end-2014): - External public debt, including arrears, around US$5.5 billion or 33 percent of GDP (23.3 percent in NPV terms). - Debt-to-GDP ratio has increased since 2008 (27 percent of GDP in 2008). - NPV of external debt 23.3 percent of GDP at end 2014, up from 19.0 percent of GDP at end-2012 due to amortization schedule assumptions. - Creditor composition and arrears: - Share of bilateral debt, including arrears, increased from 50 percent in 2009 to 69 percent in 2014. - China is largest bilateral creditor: 62 percent of total bilateral debt stock and about 90 percent of bilateral debt disbursement during past three years. - Cambodia remains in arrears to the Russian Federation and the U.S. (nearly 15 percent of total debt or 5 percent of GDP); not servicing these debts. - DSA assumes no debt restructuring; arrears assumed to build up over projection period. - Domestic debt: - Negligible domestic public debt; small bonds US$4 million issued in early 2000s and some old claims equal to 0.5 percent of GDP with no interest. - Contingent liabilities and debt management: - Progress in monitoring contingent liabilities and debt management; development of debt management strategy and PPP unit in MEF welcome. - Technical assistance from World Bank on measuring assumed contingent liabilities. - Recommendations: strengthen MEF capacity on PPP legal issues; adopt annual ceiling on PPP guarantees; list all contingent liabilities in annual budget law to enhance fiscal transparency. - Closer monitoring of fiscal risks from contingent liabilities and strengthen capacity to analyze these risks recommended. ### Macroeconomic framework underlying baseline scenario - Growth and inflation: - GDP growth expected at 7.0 percent in 2015 and projected to gradually increase to 7.3 percent by 2018. - Over the long term, growth projected to moderate to 7 percent. - Inflation dropped to 1.1 percent in 2014. - In the medium term, inflation expected to average 3 percent. - External stability: - Current account deficit, including official transfers, around 12 percent of GDP in 2014; expected to stay flat in 2014 and remain fully financed by FDI and official loans. - Medium-term current account deficit projected to decline to 7 percent of GDP. - Gross official reserves projected to remain at around 4 months of prospective imports through 2020. - External debt disbursement projected to average about US$550 million annually during 2015‒20 (about 2½ percent of GDP on average). - Debt-to-GDP ratio projected to gradually decline to 30 percent by 2020. - Fiscal sustainability: - 2014 fiscal deficit narrowed to 1.3 percent of GDP (GFS 2001), compared to 3.1 percent implied by the budget. - Government deposits expected to increase temporarily to 7.1 percent of GDP, before declining to around 4 percent of GDP in the medium term. - Revenue Mobilization Strategy (RMS) measures expected to raise domestic revenue by ½ percent of GDP on average over the medium term. - Domestically funded capital spending projected to increase from 1.8 percent GDP in 2014 to 3.4 percent in 2020. - Overall capital spending maintained at around 8 percent of GDP. - Fiscal deficit, excluding grants, projected to decline from about 6 percent of GDP in 2013 to 4.6 percent in 2020. - Compared to 2013 DSA, loans from non-Paris Club official bilateral donors assumed to be on less concessional terms; difference increases external debt by 3 percent of GDP by 2033. - Domestic debt issuance assumptions: - Government assumed to begin issuing domestic government bonds starting from ¼ ppt of GDP annually in 2021 and gradually increasing to about ½ ppt of GDP in 2035. - Total stock of domestic debt would reach about 3.7 percent of GDP by 2035. - Compare: average domestic debt in LICs about 15 percent of GDP. *Source: IMF staff report for the 2015 Article IV Consultation (as presented in the supplied content).* ### 7. Under the baseline scenario, the external DSA shows that Cambodia’s risk of debt ### _cr15307 - 7. Under the baseline scenario, the external DSA shows that Cambodia’s risk of debt ### Baseline debt-sustainability assessment - Under the baseline scenario, the external DSA shows that Cambodia’s risk of debt distress is low. - The PV of debt-to-GDP, debt-to-exports, and debt-to-revenue ratios never breach their respective policy-dependent indicative thresholds and are projected to decline over the projection period. - Debt service-to-exports and debt service-to-revenue ratios remain well below the thresholds throughout the projection period, partly due to the concessional nature of the debt. ### Stress tests and key risks - Standard debt stress tests do not indicate any major vulnerability, but large exchange rate or export shocks could have a major impact on debt dynamics. - Change in export value growth is identified as the most important risk to sustainability. - A shock to export value growth would bring the PV of debt-to-GDP to 36 percent, just 4 percent under the indicative threshold. - A large one-off depreciation would bring the PV of debt-to-GDP to about 35 percent. - Despite these shocks, the PV of external debt declines over the projection period and does not currently indicate any major vulnerability. ### Public sector DSA and domestic debt projections - Given the minor role of domestic debt, the public sector DSA closely tracks external debt sustainability. - The PV of public debt-to-GDP and public debt service-to-revenue ratios would decline gradually over time. - The debt service-to-revenue ratio would remain low in most scenarios for the entire projection period. - It is assumed that, with the development of the domestic bond market, domestic financing sources will increase after 2020 and domestic debt will reach about 3.7 percent of GDP over the long run. ### Vulnerabilities to policy and shocks - Public debt is vulnerable to a large exchange rate depreciation shock and to a loose fiscal policy. - Under a one-off real depreciation shock, the PV of public debt-to-GDP would reach 35 percent in the short-run, and then would decline over time. - If the primary balance remains unchanged at the 2014 level, the PV of public debt-to-GDP would increase to about 27 percent in the medium term. - Public debt is projected to decline over the projection period under all scenarios and does not present any major vulnerability. ### Contingent liabilities - Potential contingent liabilities might threaten debt sustainability if they materialize. - Investment in power generation and distribution projects under PPPs is large; if problems arose leading to a total loss of investment costs, substantial liabilities could be added to the debt stock. - The World Bank has provided technical assistance to determine the size of contingent liabilities. - Other potential contingent liabilities include the fiscal cost to support the financial sector during a banking crisis. - Staff calculations suggest that support in the form of bank recapitalization and backstopping demand deposits would amount to around 15 percent of GDP. ### Authorities' views and debt management practices - The authorities broadly agreed with the overall results of the DSA. - The debt management unit at the Ministry of Economy and Finance conducts annual DSA analysis as part of their budget process and uses results to propose annual ceilings of new net disbursements (to date only external disbursements). - The authorities use the same terms for new loans, current account deficits, projected loans disbursement as staff, but are more conservative than staff on the medium-term real GDP growth assumption. - The MEF expressed concern about accumulation of contingent liabilities from PPPs and have imposed annual ceilings on PPP guarantees. ### Policy implications and recommendations - Preserve macroeconomic stability to reduce vulnerability to shocks. - Diversify the economy and exports to increase resilience to external shocks. - Successfully implement the revenue mobilization strategy to strengthen fiscal position and debt sustainability. - Continuously monitor debt dynamics, especially export and exchange rate risks, and the accumulation of contingent liabilities. ### Conclusion - Cambodia remains at low risk of debt distress under the baseline scenario. - Baseline projections and standard stress tests show limited risk to external debt since none of the indicators breach their thresholds. - Downside risks include the materialization of contingent liabilities and issues arising from external arrears. - The most extreme stress tests indicate vulnerability to shocks to the exchange rate, growth, exports, and fiscal position, underscoring the policy priorities above. *Source: IMF staff assessment as presented in the external DSA chapter.* ### 11.5 percent of GDP (Laeven and Valencia (2010), IMF Working Paper 10/146). ### _cr15307 - 11.5 percent of GDP (Laeven and Valencia (2010), IMF Working Paper 10/146) ### Debt sustainability indicators (baseline, projections, and key ratios) - External debt (nominal): 31.5; 32.5; 33.4; 34.2; 34.0; 33.4; 32.6; 31.7; 30.5; 24.8; 18.8 (annual series shown). - Of which: public and publicly guaranteed (PPG) external debt: 31.5; 32.5; 33.4; 34.2; 34.0; 33.4; 32.6; 31.7; 30.5; 24.8; 18.8. - Change in external debt: 1.8; 1.0; 0.9; 0.7; -0.2; -0.6; -0.8; -0.9; -1.2; -1.0; -0.4. - Identified net debt-creating flows: -3.7; -2.3; -0.2; -0.4; -0.4; -1.1; -2.3; -3.1; -4.7; -4.1; -0.7. - PV of external debt (selected years): 23.3; 24.2; 24.4; 24.1; 23.6; 23.0; 22.2; 18.3; 14.2. - PV of debt-to-exports ratio (selected years): 34.3; 34.9; 34.6; 33.7; 32.8; 31.6; 30.0; 23.5; 16.0. - PV of PPG external debt (selected years): 23.3; 24.2; 24.4; 24.1; 23.6; 23.0; 22.2; 18.3; 14.2. - PV of PPG external debt in percent of government revenues (selected years): 133.9; 136.4; 136.3; 133.5; 130.0; 126.2; 120.6; 94.3; 65.8. - Debt service-to-exports ratio (in percent): 1.0; 1.1; 1.3; 1.4; 1.5; 1.7; 1.8; 1.9; 2.1; 1.7; 1.1. - PPG debt service-to-revenue ratio (in percent): 4.0; 4.9; 4.9; 5.3; 5.9; 6.8; 7.3; 7.5; 8.4; 6.8; 4.5. - Total gross financing need (Billions of U.S. dollars): -0.1; 0.1; 0.4; 0.4; 0.5; 0.4; 0.2; 0.0; -0.4; -0.6; 1.0. - Non-interest current account deficit that stabilizes debt ratio: 8.9; 10.9; 11.0; 10.6; 11.4; 11.1; 9.9; 9.3; 7.9; 7.7; 10.3. ### Stress tests and sensitivity analysis (selected scenarios and outcomes) - Definition: "The most extreme stress test is the test that yields the highest ratio on or before 2025." - Scenario outcomes for PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio (selected entries): - Baseline PV of debt-to-GDP ratio (selected years): 24; 24; 24; 24; 23; 22; 18; 14. - A2 (New public sector loans on less favorable terms): 24; 25; 25; 26; 26; 25; 23; 21. - B2 (Export value growth at historical average minus one standard deviation): PV of debt-to-exports ratio reaches 45; 63; 61; 58; 55; 43; 23 in projection years. - B6 (One-time 30 percent nominal depreciation relative to the baseline in 2016): PV of debt-to-GDP ratio examples: 24; 35; 34; 33; 33; 31; 26; 20. - Sensitivity tables show large swings under export shock and depreciation scenarios (e.g., PV-to-exports and PV-to-revenue ratios spike under adverse export growth shocks). ### Public sector debt dynamics and fiscal indicators - Public sector debt (percent of GDP): 32.1; 33.0; 33.9; 34.6; 34.4; 33.7; 32.9; 31.9; 30.7; 27.4; 23.2. - Of which: foreign-currency denominated public debt: 31.5; 32.5; 33.4; 34.2; 34.0; 33.4; 32.6; 31.7; 30.5; 24.8; 18.8. - Change in public sector debt: 1.8; 1.0; 0.9; 0.7; -0.2; -0.7; -0.8; -0.9; -1.2; -0.1; -0.3. - Identified debt-creating flows (public): 0.8; -0.2; -0.7; -0.2; -0.2; -0.1; 0.1; 0.1; 0.0; 0.6; 1.2. - Primary deficit (percent of GDP): 3.3; 2.2; 0.8; 1.7; 1.7; 1.4; 2.0; 2.2; 2.5; 2.4; 2.2; 2.1; 2.4; 2.6; 2.5 (series shown). - Revenue and grants (percent of GDP): 17.9; 18.9; 20.4; 19.6; 19.7; 19.9; 20.0; 20.1; 20.2; 20.5; 22.1. - Of which: grants (percent of GDP): 2.8; 3.9; 3.0; 1.9; 1.8; 1.8; 1.8; 1.8; 1.8; 1.1; 0.5. - Primary (noninterest) expenditure (percent of GDP): 21.2; 21.0; 21.2; 21.1; 21.6; 22.1; 22.5; 22.5; 22.4; 22.9; 24.7. - Automatic debt dynamics (contribution, percent): -2.5; -2.4; -1.5; -1.6; -2.2; -2.3; -2.4; -2.3; -2.2; -1.8; -1.5. - Residual, including asset changes: 1.0; 1.1; 1.5; 0.9; 0.0; -0.6; -0.9; -1.0; -1.2; -0.7; -1.5. ### Key macroeconomic assumptions and projections (selected) - Real GDP growth (in percent): 7.3; 7.4; 7.0; 7.6; 3.5; 7.0; 7.2; 7.2; 7.3; 7.3; 7.3; 7.2; 7.0; 6.9; 6.9. - GDP deflator in U.S. dollar terms (change in percent): 2.2; 1.7; 0.7; 4.2; 3.7; -0.4; 0.5; 1.2; 1.7; 1.7; 1.7; 1.0; 1.7; 1.9; 1.8. - Effective interest rate (percent): 1.0; 1.1; 1.2; 0.9; 0.2; 1.1; 1.2; 1.3; 1.4; 1.4; 1.6; 1.3; 1.8; 2.4; 2.0. - Growth of exports of G&S (U.S. dollar terms, in percent): 13.7; 13.6; 12.1; 13.5; 13.7; 8.8; 9.5; 9.8; 9.9; 10.6; 10.8; 9.9; 10.1; 10.6; 10.2. - Growth of imports of G&S (U.S. dollar terms, in percent): 12.0; 13.5; 13.1; 13.6; 11.2; 7.4; 8.5; 8.7; 8.9; 9.8; 8.6; 8.6; 10.0; 10.7; 10.3. - Grant element of new public sector borrowing (in percent, selected years): 30.9; 32.4; 33.3; 33.7; 33.8; 32.6; 32.8; 30.3; 26.4; 28.9. - Government revenues (excluding grants, in percent of GDP): 15.2; 15.0; 17.4; 17.8; 17.9; 18.0; 18.2; 18.3; 18.4; 19.4; 21.6; 20.0. - Aid flows (in Billions of US dollars): 1.1; 1.2; 1.0; 0.5; 0.6; 0.6; 0.7; 0.7; 0.7; 0.7; 0.7. - Of which: Grants (Billions USD): 0.4; 0.6; 0.5; 0.3; 0.3; 0.4; 0.4; 0.4; 0.5; 0.4; 0.5. - Of which: Concessional loans (Billions USD): 0.7; 0.6; 0.5; 0.2; 0.2; 0.3; 0.3; 0.3; 0.3; 0.2; 0.2. - Grant-equivalent financing (in percent of GDP, selected years): 2.9; 2.8; 2.8; 2.8; 2.7; 2.6; 1.7; 0.9; 1.5. - Grant-equivalent financing (in percent of external financing, selected years): 56.4; 57.9; 59.7; 59.4; 60.3; 60.7; 55.4; 43.3; 51.7. - Nominal GDP (Billions of US dollars, selected series): 14.1; 15.4; 16.6; 17.6; 19.0; 20.6; 22.5; 24.5; 26.7; 40.8; 95.1. - PV of PPG external debt (in Billions of US dollars, selected): 3.8; 4.2; 4.6; 4.9; 5.3; 5.6; 5.9; 7.4; 13.5. - Gross workers' remittances (Billions of US dollars): 0.1; 0.1; 0.3; 0.4; 0.2; 0.2; 0.3; 0.4; 0.4; 0.8; 1.9. ### Authorities' statement, recent developments, and policy focus - Authorities’ acknowledgements and priorities: - Expressed gratitude to IMF mission team; broad agreement with staff’s assessment. - Will consider staff’s policy recommendations in future policies. - Emphasized need for reinforcing fiscal buffers, strengthening monetary policy instruments and transmission mechanism, and enhancing supervisory practices. - Recent economic performance and outlook: - Average annual growth rate over last two decades: 7.7 percent. - Cambodia ranked as "sixth fastest growing economy in the world" in the 2014 World Bank Economic Update (as cited). - Poverty decline: from around 53 percent in 2004 to 18 percent of population in 2013. - Authorities' development goals: transform from low income to low-middle income by 2016 and to middle income by 2030. - Short-term growth outlook: expected 7 percent in 2015 and 7.3 percent in 2016, underpinned by exports, tourism, real estate, construction, and sustained FDI. - Headline inflation noted as low and decelerating (series begins before cut-off in provided text). *Sources: Cambodian authorities; and IMF staff estimates and projections; _cr15307 - 11.5 percent of GDP (Laeven and Valencia (2010), IMF Working Paper 10/146).* ### 3.9 percent to 2.6 percent in 2015, due mainly to the sharp decline of global oil prices and ### _cr15307 - 3.9 percent to 2.6 percent in 2015, due mainly to the sharp decline of global oil prices and ### Macroeconomic outlook and external sector - Headline inflation fell from 3.9 percent to 2.6 percent in 2015, due mainly to the sharp decline of global oil prices and appreciation of the real effective exchange rate (REER). - Over the medium-term, headline inflation is projected to average around 3 percent. - Current account deficit expected to narrow to 10 percent of GDP in 2015 from 12 percent of GDP in 2014, mainly due to the decline in oil prices. - REER has remained relatively stable despite the US dollar appreciation and is assessed by staff to be in line with fundamentals. - Gross official reserves stood at US$4.7 billion at end-August 2015, covering four months of prospective imports. - Authorities view the reserve level as sufficient but agree on merits of building a larger reserves buffer. - Authorities expect sustained FDI flows over the medium-term and are committed to: - Prioritizing public investment, - Diversifying the economy through structural reform, - Enhancing the business environment and competitiveness, - Fostering more inclusive growth. - Downside risks highlighted: - Slow recovery in Europe, - US dollar appreciation, - Weaker-than-expected growth in China affecting FDI, banking, and tourism, - Moderate growth in tourism and stronger competition in garment exports. - Implication: further reforms needed to ensure economic diversification and macro-financial stability. ### Monetary policy - Stable exchange rate against the US dollar serves as an important nominal anchor, keeping inflation low and stable. - Authorities committed to developing interbank and money markets and foreign exchange markets to promote use of Khmer Riel (KHR) and enable a more effective and flexible monetary framework. - Policies and action plans in place to manage dollarization and promote greater use of the local currency over the long term. - Measures implemented: - Reserve requirements increased by 50 basis points to 12.5 percent in 2012. - Issuance of negotiable certificates of deposit (NCDs) in US dollar and Khmer Riel (KHR) in 2013 to develop the interbank market and facilitate liquidity management. - Expansion of reserve requirements to cover banks’ foreign borrowing in March 2015, in line with Fund recommendations. ### Financial stability - Cambodia experienced increased financial deepening with credit growing more rapidly than peer Asian economies during take-off periods. - Credit growth considered in line with Cambodia’s development needs and diversification requirements. - Core financial soundness indicators are healthy and credit quality remains sound. - Credit largely directed to productive sectors, supporting development and growth. - Potential vulnerabilities: - Rapid credit growth, - Growing exposure to real estate and construction sectors identified as a potential pocket of vulnerability. - Authorities’ responses: - Measures to rein in credit growth, including increasing reserve requirements. - Commitment to closely monitor developments and implement prudent policies to stabilize credit growth while mindful of growth impacts. - Supervision and data: - Strengthened supervision framework and improved data collection with Fund technical assistance. - Recognition that Micro-finance institutions (MFIs) are becoming more systemic; authorities stepped up efforts to enhance MFI supervision and stand ready to implement prudential measures if necessary. - NBC committed to a risk-based approach consistent with FSAP recommendations. - Recent revision of liquidity ratio requirements aligned with Fund technical assistance and previous Article IV recommendations. - Memorandum of Understanding (MoU) on information sharing signed between the Ministry of Finance, the NBC and Securities Exchange Commission of Cambodia (SECC) in 2014. - NBC provides internal and external training to enhance bank supervision capacity; welcomes further Fund technical assistance due to limited capacity. - Overall stance: NBC will monitor for emerging risks from rapid credit growth and is prepared to strengthen prudential and supervisory measures across banks, MFIs and other credit intermediaries; committed to improving data collection and crisis resolution frameworks with Fund collaboration. ### Fiscal policy - Fiscal deficit reduced to 1.3 percent of GDP in 2014 from 2.1 percent in 2013, supported by stronger revenues and lower capital spending. - Tax revenues increased by 2.2 percentage points of GDP to 13.9 percent in 2014, due mainly to adoption and enforcement of the Revenue Mobilization Strategy (RMS) and improved tax and customs administration. - Authorities determined to prioritize expenditure and strengthen revenue mobilization and governance to build fiscal buffers. - Near-term budget outlook: - Budget deficit projected to moderate further, consistent with the economy’s cyclical position. - Authorities committed to a wage bill increase equivalent to 0.7 percent of GDP by 2016, to be supported by higher-than-expected revenue collection and expenditure prioritization. - Aim to limit the wage bill to less than 50 percent of current expenditure to allow more capital expenditure for infrastructure. - Plans to expedite civil service reforms to increase efficiency and productivity. - Contingent liabilities and debt policy: - Improved monitoring of contingent liabilities. - Debt management committee revised debt policy framework to include a ceiling on government guarantees at 4 percent of GDP. - Designated a contingency fund account for contingent liabilities related to enterprises in the power sector. - Authorities remain committed to RMS implementation and to rationalizing investment incentives and reviewing other tax policies over the medium term. - Debt sustainability: - Debt Sustainability Analysis indicates Cambodia’s risk of debt distress is low. - Public debt continues to decline. - Authorities committed to reducing the fiscal deficit and maintaining the debt-to-GDP ratio below 30 percent over the medium term to ensure debt sustainability and stronger fiscal buffers over the longer term. ### Continuing the reform agenda - Strong growth has significantly improved income distribution; consumption-spending by the bottom income quartile continues to increase. - Authorities committed to addressing structural bottlenecks through public investments in roads, railways, bridges and irrigation to promote rural and inclusive growth and to crowd in private investment. - Noted infrastructure development: - Completion of the 1,300 megawatt hydropower projects expected to provide affordable electricity and enhance business climate and competitiveness. - Social priorities: - Continued prioritization of education and healthcare development, especially in rural areas, encouraged by improvements in maternal health, early childcare and primary education. ### Closing remarks and policy commitment - Over the medium term, robust growth supported by exports, tourism and construction favors Cambodia’s economic prospects. - Lingering global uncertainty and planned slowdown in China’s growth present downside risks to the growth outlook. - Authorities committed to preserving macroeconomic and financial stability and stand ready to implement available measures as appropriate. - Authorities express appreciation for the Fund’s continuing technical assistance and commit to further improving the macroeconomic framework in line with the Fund’s policy recommendations and to continue seeking Fund support. *Source: Cambodian authorities’ staff report excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15307.pdf_