Construction Sector Faces “Credit Crunch”

Cambodia faces a “credit crunch” this year triggered by a shortage of buyers in the real estate and construction sector, a senior economic official has warned
Vongsey Vissoth speaks at a public forum in Phnom Penh, January 25, 2023. Kiripost/Siv Channa
Vongsey Vissoth speaks at a public forum in Phnom Penh, January 25, 2023. Kiripost/Siv Channa

A senior economic official warned on Wednesday that there may be a “credit crunch” this year due to a shortage of buyers in the real estate and construction sector, and urged a joint efforts solution.

Vongsey Vissoth, Permanent Secretary of State at the Ministry of Economy and Finance and Minister attached to the Prime Minister, said at a public forum that this is one of the risks that Cambodia faces and urged caution.

“We have another risk that we must be careful of because in doing economic policies, we must look at risks, look at the strong points and challenging issues that are our risks,” Vissoth said at the forum held at Sofitel hotel and broadcast live on social media.

“Our problem is real estate and construction, there may be credit crunch, a shortage of buyers. As a choice, we can’t let this sector collapse because it is a big economic pillar,” Vissoth added.

He said that construction contributes about 10 percent to GDP, which is similar to the garment industry, tourism and agricultural sectors - the main economic pillar of the country.

“These are areas that we must look at and solve from now because only 20 percent of construction and developing companies have the power to live on their own. The rest depends on the banking system and they get cash flow from buyers,” Vissoth said.

“I would like to speak frankly. We must solve this all together, this can’t be done alone.”

Other risks are narrow based and even see diversifications in some sectors. Vissoth said that the level of value-added benefits remains low as new types of investments coming in are not focused on skills but on labor.

“We can’t be the same, we must move up to the medium skill-based industry,” he said.

Competitiveness in the country is still limited if compared to other countries in the region, he said, adding that productions have moved to bigger ASEAN countries, such as Indonesia, Thailand, Vietnam, Singapore and Malaysia. As a result, these countries have hugely benefited from this trend, while Cambodia has only received a small chunk.

“We have attracted many but they are investors that are not based much on skills,” he noted.

Logistics, labor skills and the business environment are not yet good enough, and this needs to be addressed, he added.

Vissoth said that national economic policies have aimed at ensuring growth to support recovery in the short-term. In the long-term, a government policy must support equitable growth that benefits all and strong growth against future impact.

This includes social protection schemes and cash handouts for the vulnerable, including those impacted by high inflation. The health sector budget and salaries for civil servants have also increased, he said.

This will also need the strengthening of public administrations to be good, strong and clean. In addition, building human capital is key, he added.

Vissoth said this is the “perfect storm” and if Cambodia can get out of it, the country will become strong.

$1.2b Pumped into Construction Sector in Six months

Construction Sector Totaled $5.3b in 2021

Real estate developer and economist Ngeth Chou said that if sales decline, ongoing projects may face crisis, construction may be stalled and, in return, developers may not be able to pay back finances to banks.

Financial institutions will not be able to receive back payments, including from home buyers, and this may lead to defaults, he said.

This would also lead to banks being unable to issue new loans and this situation would put pressure on financial institutions, Chou said.

He added that he will wait and see the percentage of Non Performing Loans (NPL) in the real estate sector and believes the government will find ways to intervene so the situation will not be too bad.

“Cash flow from buyers is a big risk exposure, it is vulnerable,” Chou told Kiripost.

Government intervention in the sector will need big budgets, unlike in the agriculture sector that has received past help, Chou said.

“This is a big challenge for the sector,” he said. “The size of capital in the construction and real estate sector is very big and affordability by the government to intervene will be limited, so the whole sector in conclusion is very vulnerable.”