Press Release No. 19/370

IMF Staff Completes 2019 Article IV Mission to Cambodia

October 11, 2019

• Cambodia’s economic activity has been strong, and growth is expected to remain around 7 percent this year.
• Further measures are needed to contain high credit growth and address elevated financial sector vulnerabilities, including through targeted measures in the real estate sector.
• Uncertainties, including from trade tensions and potential suspension of preferential market access, highlight the importance of maintaining macroeconomic stability, while meeting still large development needs, and accelerating implementation of structural reforms to strengthen competitiveness and governance.

An International Monetary Fund (IMF) team led by Mr. Jarkko Turunen, visited Phnom Penh from September 30 to October 11, 2019, to conduct discussions on the 2019 Article IV consultation. [1] At the end of the visit, Mr. Turunen issued the following statement:

“Stable macroeconomic environment, strong growth performance and ongoing structural reforms have contributed to significant progress towards Sustainable Development Goals (SDGs). At the same time, Cambodia faces uncertainties including from trade tensions and potential suspension of preferential market access under the EBA scheme.

“Economic activity remains strong with real GDP growth expected at around 7 percent this year, owing to continued export growth and strong construction activity, while 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 also expected to moderate, leading to a widening of the current account deficit to about 13.5 percent of GDP in 2019. Thanks to large capital inflows, primarily through Foreign Direct Investment (FDI), the foreign reserves are nevertheless expected to continue to grow.

“Cambodia’s economic outlook is positive, although there are significant downside risks. The on-going Everything but Arms (EBA) review by the EU—Cambodia’s primary export partner—could lead to a suspension of preferential trade access later next year, which could have a large negative impact on near-term economic activity. Other downside risks include: (i) spillovers from rise in global trade protectionism, which could hamper exports and dent investor’s confidence; (ii) weaker than expected global growth, including slower growth in China; and (iii) risks stemming from elevated financial sector vulnerabilities.

“Robust revenue performance continues, and, thanks to strong administrative efforts, tax revenues reached close to 19 percent of GDP in 2018. As a result, the 2018 fiscal balance (following the Government Finance Statistics Manual 2014 format) shows a surplus close to 1 percent of GDP. The fiscal position is projected to remain in surplus also this year.

“The authorities are proactively addressing risks through a structural reform plan aimed at improving competitiveness and diversification. The preliminary 2020 budget envisages continued revenue growth and, to mitigate near-term negative impact on growth from potential EBA suspension, an increase in government spending to support job creation, human capital development and a scale-up in infrastructure investment. As a contingency, should EBA suspension materialize, authorities’ plans for additional fiscal spending together with accelerated implementation of structural reforms go in the right direction and can help dampen near-term negative impact.

“Looking ahead, strong implementation of the authorities’ new Revenue Mobilization Strategy (2019-23) should help sustain revenue growth through tax policy and revenue administration reforms. Additional expenditures should continue to be oriented towards priority infrastructure investment, as well as health and education spending, while ensuring gains in spending efficiency. Prudent fiscal stance needs to be supported by restraining non-development current spending.

“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 an increase in both debt disbursements and Public-Private Partnerships (PPPs) to finance needed infrastructure investment.

“The authorities continue to implement macroprudential measures and are taking welcome steps to promote the effectiveness and transparency of macroprudential policy decisions. The first Financial Stability Review was launched in April 2019. At the same time, private sector credit, increasingly concentrated in the real-estate and construction sectors, has accelerated and is expected to grow around 28 percent in 2019. Lending by real-estate developers remains largely unmonitored and unregulated and official data on real-estate prices are not yet available.

“Further policy efforts are needed to address elevated financial sector vulnerabilities. Priority measures include implementation of targeted policies, such as higher risk weights and provisioning requirements for real estate lending as well as introducing a prudent aggregate loan-to-value limit, to address risks associated with the real-estate sector. To moderate credit growth, consideration should be given to additional macroprudential measures such as gradually raising reserve requirements on foreign currency liabilities. Promptly addressing shortcomings in the AML/CFT regime would reduce financial risks, while further financial market development and increase in local currency use would help strengthen resilience over the medium term.

“To solidify the already substantial progress towards SDGs, policies should be geared towards addressing spending needs to reach SDG targets in health, education and infrastructure by 2030. Accelerated implementation of structural reforms is needed to reduce structural constraints to growth, address governance and corruption weaknesses and promote sustainable development. While significant progress has been made, additional efforts are needed to address data gaps, and improve data quality and transparency.

“The IMF stands ready to support the authorities’ reform efforts through policy advice and capacity development activities.”

The IMF team held constructive and candid discussions with senior officials of the Royal Government of Cambodia, National Bank of Cambodia, and other public agencies, as well as a wide range of stakeholders, including representatives of the business and banking sectors, and development partners. The team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions as well as their warm hospitality.

1/ Under the Article IV consultation, IMF staff undertakes annual surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation discussion with Cambodia took place in December 2018.