IMF Staff Completes 2019 Article IV Mission to Cambodia

IMF News, October 11, 2019

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Economic activity has been strong; real GDP growth is expected at around 7 percent this year.
Inflation remains stable at around 2.5 percent.
Deterioration of external conditions is expected to lead to a slowdown in growth to below 7 percent in 2020.
In the medium term, growth is expected to moderate further as the real-estate and credit cycles mature.
Export growth is expected to moderate, leading to a widening of the current account deficit to about 13.5 percent of GDP in 2019.
Large capital inflows, primarily through Foreign Direct Investment (FDI), are expected to support continued growth in foreign reserves.
Downside risks highlighted:
- Ongoing Everything but Arms (EBA) review by the EU could lead to suspension of preferential trade access later next year, with large negative near-term impact.
- Spillovers from a rise in global trade protectionism, hampering exports and denting investor confidence.
- Weaker than expected global growth, including slower growth in China.
- Risks stemming from elevated financial sector vulnerabilities.

Robust revenue performance: tax revenues reached close to 19 percent of GDP in 2018.
2018 fiscal balance (Government Finance Statistics Manual 2014 format) shows a surplus close to 1 percent of GDP.
Fiscal position is projected to remain in surplus in the current year.
Preliminary 2020 budget envisages continued revenue growth and increased government spending to support job creation, human capital development and a scale-up in infrastructure investment; these measures are also a contingency to mitigate near-term negative impact if EBA suspension materializes.
Revenue Mobilization Strategy (2019-23) is expected to help sustain revenue growth through tax policy and revenue administration reforms.
Public debt remains low at 28.6 percent of GDP in 2018 and Cambodia is expected to remain at low risk of debt stress despite increased debt disbursements and Public-Private Partnerships (PPPs) to finance infrastructure.

Private sector credit has accelerated and is increasingly concentrated in the real-estate and construction sectors; credit is expected to grow around 28 percent in 2019.
Lending by real-estate developers remains largely unmonitored and unregulated; official data on real-estate prices are not yet available.
The authorities have implemented macroprudential measures and launched the first Financial Stability Review in April 2019.
Priority policy measures recommended to address elevated financial sector vulnerabilities:
- Implement targeted policies such as higher risk weights and provisioning requirements for real estate lending.
- Introduce a prudent aggregate loan-to-value limit for real-estate lending.
- Consider additional macroprudential measures to moderate credit growth, such as gradually raising reserve requirements on foreign currency liabilities.
- Promptly address shortcomings in the AML/CFT regime to reduce financial risks.
- Further financial market development and increase in local currency use to strengthen resilience over the medium term.

Stable macroeconomic environment, strong growth performance and ongoing structural reforms have contributed to significant progress towards Sustainable Development Goals (SDGs).
To solidify progress towards SDGs by 2030, policies should address spending needs in health, education and infrastructure.
Additional expenditures should be oriented towards priority infrastructure investment, health and education, while ensuring gains in spending efficiency.
Prudent fiscal stance should be supported by restraining non-development current spending.
Accelerated implementation of structural reforms is needed to reduce structural constraints to growth, address governance and corruption weaknesses, promote sustainable development, and improve data quality and transparency.

An IMF team led by Mr. Jarkko Turunen visited Phnom Penh from September 30 to October 11, 2019, for the 2019 Article IV consultation.
The IMF stands ready to support the authorities’ reform efforts through policy advice and capacity development activities.
The IMF team held discussions with the Royal Government of Cambodia, National Bank of Cambodia, other public agencies, and a wide range of stakeholders, and expressed appreciation for the constructive engagement.

Press Release No. 19/370 — October 11, 2019.