Inflation to Peak this Year Before Showing Signs of Decline

The International Monetary fund has predicted inflation in Cambodia will peak this year due to global pressures, weakened export orders, and a slowing real estate market, before falling from 2023 onwards
A vendor accepts Riel notes at a market in Phnom Penh. Kiripost/Siv Channa
A vendor accepts Riel notes at a market in Phnom Penh. Kiripost/Siv Channa

Inflation is expected to peak this year before falling in 2023 and continuing to decline, assuming it remains mostly confined to imported goods, the International Monetary Fund (IMF) said.

Inflation hit 7.8 percent year-on-year in June 2022, following significant increases in fuel and fertilizer costs, although it receded to 4.9 percent in August, the IMF said in a statement on Tuesday.

Export orders for the second half of the year have weakened and the real estate market is slowing, the IMF added.

“The authorities have largely continued with crisis policy responses, such as loans and guarantees, tax breaks, wage subsidies and retraining, and cash transfers (while withdrawing some Covid-19-related spending as the health situation improves),” the IMF said.

Despite the new pressures, recovery is projected to continue with real GDP growth forecast to reach 5 percent in 2022 following strong export performance earlier in the year.

In 2023, it is expected to hit 5.5 percent, supported by continued tourism recovery and ongoing policy support. However, the IMF said this will be dampened by external pressures and the impact of rising prices on real disposable income.

“Uncertainty around the outlook is particularly high, and risks are tilted to the downside. The most pressing risks are from rising private debt, conditions in key large economies, and inflation,” the IMF said.

It added that the level of private debt is very high, raising concerns about the drag on the economy if borrowers struggle to meet repayments.

Credit growth has outstripped growth in nominal GDP for several consecutive years. Consequently, outstanding private sector credit reached 170 percent of GDP by the end of 2021, a ratio notably above those of other countries in the region.

“Moreover, these numbers do not account for credit issued by unsupervised lenders (such as real estate developers and pawn shops), which could be sizable.”

Restructured loans in June 2022 are estimated to be about 13 percent of GDP, and non-performing loans have already risen to nearly 4.5 percent of GDP.

According to the IMF, the National Bank of Cambodia (NBC) needs to continue to normalize prudential conditions to pre-pandemic settings, so the financial system is able to withstand future shocks.

In May 2020, NBC introduced a policy to facilitate the restructuring of loans. Since December 2021, it has taken the welcome step of reintroducing provisioning requirements.

The IMF said it should continue with heightened supervision, including rigorous onsite inspections. NBC should also be prepared to raise provisioning requirements and instruct lenders facing solvency problems to proactively increase capital.

The Asian Development Bank (ADB) said on Wednesday it has revised Cambodia’s 2022 inflation forecast to 5 percent, from the 4.7 percent forecast in April, due to the strong pass-through effects of fuel price increases caused by the Russian invasion of Ukraine.

The inflation forecast for 2023 was kept at 2.2 percent.

The ADB maintained its economic growth forecast for Cambodia at 5.3 percent in 2022 but lowered the 2023 forecast to 6.2 percent from 6.5 percent due to weaker global growth.

Cambodia’s garments, travel goods, and footwear outputs remained robust, registering 39.8 percent year-on-year growth in the first half of 2022, despite the economic slowdown in the United States and Europe, the ADB said.

The non-garment manufacturing sector continued its strong growth momentum. Construction gradually recovered, with imports of construction materials rising 22.8 percent.