In July, the National Bank of Cambodia (NBC) flagged the “historically” high credit-to-gross domestic product (GDP) ratio, which stood at 189 percent in 2022, with credit-to-GDP gap reaching nearly 40 percent.

The central bank in its financial stability report mentioned that although credit growth reduced, the gap warranted close surveillance. (Credit-to-GDP gap is an early warning indicator for distress in the banking system).

Similar observations were made by international bodies on the risks as credit-to-GDP grew rapidly from 37 percent in 2012. For instance, S&P Global’s latest banking industry country risks assessment (BICRA) revealed “extremely high” credit risk in Cambodia’s economy - no change from earlier this year.

The World Bank made a particular mention of the focus of domestic credit in the construction, real estate, and mortgage sectors, which accounted for 35 percent of the total credit disbursed.

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“The rapid credit growth and relatively high private sector debt, with concentration in real estate-related exposures pose key risks to Cambodia’s macro-financial stability,” the World Bank said, asking NBC to intensify supervision as pandemic measures, such as loan restructuring and forbearance are phased out.

It also urged for close monitoring on non-performing loan (NPL) ratios for commercial banks and microfinance institutions, which had marginally risen to four percent and 3.1 percent, respectively, in the second quarter of 2023.

Fastest-ever record

Although credit growth is good as it signals economic recovery, the fast pace amid increasing debt refinancing issues can cause risks and impact asset qualities. These risks have been repeatedly raised by various international organisations in the past six months as the regulatory forbearance ended last year.

“These concerns are real,” Lim Sokchea, associate professor of economics at John Carroll University in Ohio asserted, when asked if the prognosis by the international agencies on Cambodia’s credit risk levels were accurate.

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“Not only was this level of private sector credit too high, but the pace that it has grown especially during and after the pandemic was the fastest ever recorded,” he told Kiripost last month.

Private sector credit has grown about 50 percentage points over “just two years” from 114 percent of GDP in 2019 to 140 percent in 2020 and 166 percent in 2021.

NBC did not respond immediately to questions.

‘Fuelled by speculation’

Slow growth in the construction sector, with several projects in Phnom Penh stalled, as well as slower sales growth in borey and condominiums are evident, as real estate experts point out.

Yet, this slowdown is not so much reflected in the construction and real estate loans, in fact, rising in 2023 despite costly borrowing costs.

The World Bank opined that it might be a result of an “increase in real estate speculation activity”. In February 2023, the combined contribution of construction, real estate, and mortgages to total credit growth rose to 43 percent, up from 37 percent during the same period in 2022, it said.

Between January and June this year, 238.7 trillion riel or $57.8 billion worth of loans were disbursed by banks and financial institutions, up 10.5 percent year-on-year.

Retailers and wholesale traders borrowed 59.5 trillion riel in the period, rising 11.3 percent from last year and accounting for 24.9 percent of the total loan market share, followed by mortgages and owner-occupied loans with 28.6 trillion riel ($6.9 billion).

The latter segment, representing 12 percent of the market share, saw a 15.6 percent expansion, the NBC said in September. First half-year construction sector loans rose 9.2 percent to 18.3 trillion riel, making up 7.7 percent of the loan market share.

“I agree that the ongoing concentration of credit around construction, real estate, and mortgage sectors remains a threat to the health of the financial sector,” Lim commented via email.

Different players in the industry have different risk appetites, where some local banks may be willing to take higher risks. But, NBC is responsible to not only ensure that the financial sector is healthy, but that the sector is not susceptible to any particular banks with concentrated risky assets on the balance sheet.

The current condition of the real estate sector, Lim opined, might somehow be related to the slowdown in the Chinese economy as the Cambodian sector was fuelled by Chinese developers and investors.

“On the other hand, I also think that over the past decade, the sectors have grown unhealthy on their own, driven by speculation rather than real demand,” he said.

‘Not overly concerned’

On Tuesday, the International Monetary Fund (IMF) commended Cambodia’s latest credit growth data, which recorded an 8.1 percent decline year-on-year this August, compared to 23.5 percent in 2021.

Even so, it said, the private credit-to-GDP ratio remained elevated for Cambodia’s level of development at around 160 percent and that NPL rose to 4.6 percent of total loans in August, which reflected a “roll-back in forbearance measures and potentially rising stresses in parts of the economy”.

“Uncertainty around the outlook is high and risks are to the downside, notably weaker-than-projected demand from advanced economies and China, tighter US monetary policy, geoeconomic fragmentation, and high levels of domestic private debt,” IMF said.

It, however, was optimistic of Cambodia’s GDP growth, which is expected to grow by 5.3 percent this year, to six percent in 2024, thanks to tourism recovery and exports of solar panels and electrical components.

Separately, Raymond Sia, chairman of the Association of Banks in Cambodia (ABC), explained that high private sector debt “generally warrants more caution”.

“But, we need to be mindful that Cambodia’s credit growth has been strong in the past decade and this was backed by a growing emerging economy,” he told Kiripost in October.

This, he said, was also in tandem with the global trend where household or private debt are at historical highs.

“However, with the current high interest rate environment, we need to be mindful that debt servicing obligations of customers will be higher and this will also place pressure on asset quality [NPL ratio],” he added.

That said, Sia was “not overly concerned” on the high private debt-to-GDP, believing that the regulators and authorities possess the wisdom to understand the situation “better than any external parties and continues to closely monitor this matter, and will implement necessary counter measures should the situation warrants”.