Cambodia's Financial Environment

The Highlights of the Week 2024/02/05 - 02/09

1.    Cambodia’s economy projected to have grown by 5.3% in 2023: IMF
The IMF's executive board recently concluded its fourth consultation with Cambodia, stating that the country's economy is expected to grow by 5.3% last year, driven by the revival of the tourism industry and strong performance in non-garment exports.
The IMF pointed out that the growth of the United States and China, which account for over 40% of Cambodia's exports, was weaker than expected, posing significant risks. Starting this year, the deficit is expected to narrow, consistent with the authorities' commitment to scaling back temporary support measures, while retaining targeted fiscal support for the poor through social safety net reforms.
The IMF's executive board noted that public debt as a percentage of gross domestic product (GDP) is expected to increase moderately over the next decade, despite vulnerabilities from exports and growth, the risk of debt distress remains low. Geopolitical tensions, trade fragmentation, structural slowdown in China's economic growth, and climate change could pose significant challenges to economic growth in the medium term.
Currently, the IMF has revised its growth expectation for Cambodia in 2023 from 5.6% at the end of last year to 5.3%, with economic growth forecasted at 6.1% in 2024, still significantly above global and regional levels. According to the budget overview for the 2024 fiscal year from the Cambodian Ministry of Economy and Finance, the country's economy is recovering and is expected to grow by about 6.6% this year, despite facing numerous internal and external risks, but economic growth recovery remains promising.

2.    Trade between Cambodia, RCEP members hits $30B
According to data from the Ministry of Commerce, trade between Cambodia and the other 14 countries in the RCEP is expected to reach nearly $30 billion by 2023. The latest report from the Ministry of Commerce shows that Cambodia's exports to member countries reached $8.172 billion in 2023, an increase of over 28% compared to the previous year, while imports from partner countries reached $21.286 billion, a decrease of over 13%. Hong Vanak, Director of the International Economics Department at the Royal Academy of Cambodia, stated that the decline in imports from RCEP member countries in 2023 was due to various factors, such as the impact of the war between Russia and Ukraine causing market price increases and the escalation of global inflation due to conflicts between Israel and Hamas. Hong Vanak added that the increase in production and exports in Cambodia could be attributed to several factors, including improvements in political and geopolitical stability, Cambodia's economic integration into regional and global economies, and reforms in the country's investment laws, leading to continuous export growth.
RCEP, as the world's largest trading bloc, has a GDP of over US$26 trillion, accounting for over 30% of global GDP, 28% of global trade, and over 32% of global investment. Covering 15 major trade agreements among 15 countries in the Asia-Pacific region, including the 10 ASEAN member countries and five trading partners: China, Japan, South Korea, Australia, and New Zealand. Overall, Cambodia's exports to this region grew by as much as 28% this year, with a very favorable export recovery situation; however, imports decreased by 13% year-on-year, possibly due to the less than expected recovery in Cambodia's domestic demand and foreign direct investment.

3.    Deposit-taking MFIs manage bad loans better than pure-play ones
The five deposit-taking MFIs—AMK Plc, Amret Plc, LOLC (Cambodia) Plc, Mohanokor Plc, and Prasac Microfinance Institution Plc (also known as Prasac MFI Plc)—had a non-performing loan (NPL) ratio of 1.38% as of December 31, 2022. On the other hand, according to data from the National Bank of Cambodia (NBC), the NPL ratio for the 82 licensed pure-play microfinance institutions operating at the same time was as high as 9.1%. As of December 31, 2023, the total loans disbursed by the microfinance industry amounted to 38.9 trillion Cambodian riel (US$9.54 billion). Among them, deposit-taking MFIs disbursed 85% of the total loan amount (approximately US$8.15 billion), while pure-play ones disbursed the remaining 15% (approximately US$1.4 billion). The non-performing loans of the five deposit-taking MFIs amounted to 460 billion riel (US$113 million), while those of the pure-play participants reached 520 billion riel (US$128 million).
Additionally, according to NBC's statistics for 2022, the average NPL ratio for all commercial banks was 3.03%, even higher than the average for these five deposit-taking MFIs. Therefore, it can be inferred that the NPL ratio is not necessarily lower for banks than for microfinance institutions, but rather depends on individual financial institutions' supervision and control over credit. Hence, the risk of depositing or investing in smaller financial institutions may not necessarily be higher.