Rebuild Fiscal Buffers, Monitor High Credit Growth - AMRO

In its latest annual consultation report on Cambodia, AMRO has made a few policy recommendations and flagged several risks which could impact long-term growth
National Bank of Cambodia (NBC) in Phnom Penh, December 21, 2022. Kiripost/Siv Channa
National Bank of Cambodia (NBC) in Phnom Penh, December 21, 2022. Kiripost/Siv Channa

Cambodia has been urged to rebuild its fiscal buffers and maintain targeted support, continue normalising the central bank’s liquidity measures and provisioning for restructured loans, and increase structural reforms.

Explaining the objectives of its policy recommendations, ASEAN+3 Macroeconomic Research Office (AMRO) said fiscal support has been vital in protecting lives and supporting the vulnerable groups during the pandemic.

Rebuilding fiscal support and targeted support extension is therefore pertinent, noting that the Covid-19 cash transfer programme be redirected towards shielding the poor from the impact of high inflation.

However, this type of support program should be temporary with a “clear sunset clause” to avoid its people from becoming “entrenched”, thus a further strengthening of the social safety nets is highly encouraged.

While boosting liquidity in banks is necessary, AMRO said raising reserve requirements back to pre-pandemic levels should be done in a calibrated manner in line with the economic recovery.

“With the end of regulatory forbearance on restructured loans, the National Bank of Cambodia should continue monitoring the quality of remaining restructured loans, especially for those still under the assessment period, to ensure that banks allocate adequate provisions,” it added.

Skilled labour

The recommendations were made in line with its annual consultation report, based on its visit to Cambodia between July 20 and August 3 and data up to September 3 this year, which was released today.

AMRO, an international organisation comprising ASEAN states and China, Japan and Korea, was established to ensure macroeconomic and financial stability within the region.

On structural reforms, AMRO said sustained and stronger focus is required to ensure growth momentum of the economy.

Boosting skilled labour supply to enhance productivity, augmenting infrastructure to reduce non-labor costs, and improving the institutional environment, will all be critical in making Cambodia’s business environment more competitive and attract more foreign direct investments (FDIs).

As the economy develops, greater efforts should be exerted to champion domestic suppliers that feed into manufacturing industries and encourage them to diversify and move up the production value chains.

“Fulfilling commitments to achieve carbon neutrality will also support the long-term sustainability of the economy,” AMRO said.

Vigilance needed

Maintaining its gross domestic product growth forecast for 2022 at five percent and 5.4 percent for 2023, and three percent inflation projected next year, the organisation said economic recovery is being met by rising external and domestic risks.

The headwinds are a result of weakening global demand amid the monetary tightening of the US Federal Reserve and other central banks, which could impact Cambodia’s exports of manufacturing products.

“Prolonged strict border controls in China could also adversely affect investments to Cambodia, while dampening prospects for a fuller recovery of its tourism sector,” it added.

Higher oil prices have also exerted strong inflationary pressures, raising the prices of goods and weighing down household consumption.

“Despite the recent easing of inflationary pressures in Cambodia, continued vigilance is needed as there are still significant upside risks to oil prices arising from geopolitical tensions and supply constraints.

“Although inflation has slowed, the overall price level remains elevated compared to a year ago, which could spur calls for higher wages in the future,” AMRO said.

Shadow banking

In terms of a longer-term perspective, the organisation said Cambodia’s large current account deficits are a potential source of external vulnerability.

Although most of the external liabilities are funded from FDI inflows and concessional loans from multilateral and donor agencies, which are relatively stable, capital inflows from external private debt and banks’ non-resident deposits, which are more short-term, have become more substantial in the past five years.

“If a shock were to reverse these short-term flows, the external position could come under pressure,” it warned.

Another source of longer-term risk could come from Cambodia’s high credit growth, seeing that its credit-to-GDP ratio reached 177 percent in the first half of 2022.

AMRO said this has given rise to concerns of financial distress in some segments of the economy, such as real estate-related sectors and shadow banking.

“In particular, risks may have shifted away from banks toward shadow-banking activities with the emergence of property developers that provide their own long-term financing with lax loan screening,” it stated.