Cambodia: Joint IMF/World Bank Debt Sustainability Analysis 2010
Author: International Monetary Fund
Publication Date:
07 Feb 2011
eISBN:
9781455216659
Language:
English
Keywords:
ISCR; CR; priority outlay; larger-than-expected capital spending; staff projection; budget proposal; burden indicator; debt dynamics; debt stock; service-to-revenue ratio; debt burden indicator; Depreciation; Public sector; Global
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Prior to the global crisis, Cambodia enjoyed a decade of high growth and relative stability. However, as a result of the global crisis, output collapsed, and longstanding structural vulnerabilities have been exposed. Discussions focused on the dual policy challenge to safeguard macroeconomic stability and policy credibility, and to lay the foundations for broader-based and inclusive growth. It is recommended that the next Article IV Consultation take place on the standard 12-month cycle. IMF staff underscored the need for better and faster data for key economic statistics.

Abstract

Prior to the global crisis, Cambodia enjoyed a decade of high growth and relative stability. However, as a result of the global crisis, output collapsed, and longstanding structural vulnerabilities have been exposed. Discussions focused on the dual policy challenge to safeguard macroeconomic stability and policy credibility, and to lay the foundations for broader-based and inclusive growth. It is recommended that the next Article IV Consultation take place on the standard 12-month cycle. IMF staff underscored the need for better and faster data for key economic statistics.

This document presents the joint IMF-World Bank debt sustainability analysis (DSA) for Cambodia using the Debt Sustainability Framework (DSF) for Low-Income Countries (LICs).2 It shows that Cambodia faces a moderate risk of debt distress. While external debt burden indicators do not breach the relevant policy-dependent indicative thresholds under the baseline scenario, the debt level is sensitive to shocks as indicated in standard bound tests.3 There are also considerable downside risks related to the uncertainty about a sustained global recovery, and possible contingent liabilities from infrastructure projects and the banking system. Moreover, increased borrowing over the next three years, as currently considered by the authorities, would reduce the scope for absorbing additional risks. All this underscores the need for a prudent borrowing strategy, underpinned by continued fiscal consolidation over the medium term, careful selection of investment projects to ensure they are growth-enhancing, and improvements in debt management capacity.

I. Introduction

1. Cambodia’s DSA indicates that the risk of debt distress is moderate. Under the baseline scenario, external debt burden indicators do not breach the relevant indicative thresholds. However, in standard alternative scenarios and stress tests, two debt indicators (debt-to-GDP and debt-to-revenue ratio) breach indicative thresholds for several years (Figure 1).

Figure 1.
Figure 1.

Cambodia: Indicators of External Debt Under Alternative Scenarios, 2010–30 1/

Citation: IMF Staff Country Reports 2011, 045; 10.5089/9781455216659.002.A002

Sources: Cambodian authorities; and staff estimates and projections.1/ The most extreme stress test is the bound test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to an Exports shock; in d. to a One-time depreciation shock; in e. to an Exports shock; and in figure f. to a One-time depreciation shock.

2. Staffs have analyzed an additional country-specific alternative scenario of increased bilateral external borrowing over 2011–13. This scenario is mainly for information purposes as the authorities inquired about the implications for fiscal sustainability of temporarily increasing their legal limit on new borrowing to finance more development projects. The legal limit on the new borrowing of SDR 200 million per year was already once relaxed temporarily in 2009 to weather the impact of global crisis. The government returned to the original borrowing limit in 2010. The terms of borrowing are assumed to be less concessional than those from multilateral donors, similar to China’s terms (20-year maturity, 7-year grace period at 2 percent interest). The analysis indicates that Cambodia’s scope for absorbing additional risks would be significantly reduced.

II. Background and Assumptions

3. At the end of 2009, Cambodia’s external public and publicly-guaranteed (PPG) debt stock was around 28 percent of GDP in nominal terms and 22 percent in net present value (NPV) terms.4 Until 2008, strong economic growth and favorable external conditions contributed to a decline in debt ratios. However, since 2009, the external PPG debt ratios have risen, partly reflecting increased assistance from existing and emerging donors in the face of the global recession. As a result, the PV of debt to revenue was around 189 percent, approaching the 200 percent threshold. For 2010, the debt stock in PV terms as a share of GDP, as a share of exports of goods and nonfactor services, and of government revenues is projected at 23 percent, 42 percent and 178 percent, respectively.

Cambodia: External Public Debt Indicators at End-2009

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Sources: Cambodian authorities; and IMF and World Bank staff estimates.

4. Around half of Cambodia’s external debt is held by multilateral creditors, primarily the Asian Development Bank (28 percent) and the World Bank’s International Development Association (17 percent). China is the largest emerging creditor, accounting for about 58 percent of total bilateral disbursements in 2010.

Cambodia: Stock of Public and Publicly-Guaranteed External Debt at End-2009

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Sources: Cambodian authorities; and IMF and World Bank staffs’ estimates.

5. Government deposits with the domestic banking system exceed the stock of loans from the banks to the government. At the end of 2009, the stock of recorded domestic public debt was equivalent to slightly less than 1 percent of GDP, while government deposits amounted to about 5 percent of GDP.

6. Cambodia remains in arrears to the Russian Federation and the United States. Following a Paris Club agreement in 1995, Cambodia concluded agreements with France, Germany, Italy, and Japan. Negotiations of outstanding debt obligations with the Russian Federation and the United States are ongoing, with their status effectively unchanged since the last DSA. Currently, Cambodia is not servicing its debt with either of these creditors, and efforts to conclude agreements with each under the framework of the Paris Club are required. In September 2010, the Cambodian government announced it would demand cancellation of its debt to the United States. Since prospects for resolution are unclear, the current DSA assumes no restructuring in its baseline, with arrears continuing to build up throughout the projection period. In measuring debt levels, the DSA incorporates the negotiated debt stock for the Russian Federation (US$457 million) and the agreed amount of the total principal owed to the United States (US$162 million).5

7. The main underlying macroeconomic assumptions are presented in Box 1. The baseline scenario assumes a deficit reduction (excluding grants) by about 2½ percent of GDP between 2010 and 2015.

Main Assumptions for the Baseline Scenario (2010–30)

  • After a sharp slowdown in 2009, the Cambodian economy is expected to recover with real GDP growth at 4½–5 percent in 2010, as garments exports, in particular to the U.S., and tourism activity normalize. However, construction is likely to remain sluggish given the ongoing need to repair balance sheets and unwind the excess from the pre-2008 local real estate boom. As a result, the economy will only gradually return to potential growth of about 6–7 percent. Important drivers of future growth will be new export opportunities in agri-business to markets in Asia as well as higher returns from tourism. Cambodia would continue to serve as a useful platform for China’s textile industry. All this will depend on improvements in the investment climate and recovery of FDI. Over the longer term, FDI is expected to be sustained at around 5–6 percent of GDP per year. Improvements in the domestic banking system would also result in increased domestic private investment. Inflation is projected to decline gradually from 4.5 percent in 2010 to around 3 percent over the medium term.

  • The external current account deficit (including official transfers) is projected to widen in 2010 to around 9 percent of GDP, compared to 7 percent in 2009, as the recovery in garment exports and the tourism sector is more than offset by higher imports and increases in commodity prices. The macroeconomic framework incorporates recent projects in the power sector (some of which are already underway), which increases imports and FDI in the near term. However, over the medium and long term, growth in the import of petroleum products would decline, reflecting increases in the domestic power supply from hydropower plants. Over the longer term, the current account deficit is expected to settle in the range of 4–5 percent of GDP a year. Official assistance (grants and loans) would decline gradually as a share of GDP, while FDI and other private inflows would rise. Gross official reserves, which are expected to be around US$2.6 billion (3.6 months of next year’s imports) at end-2010, would stabilize at around three months of imports with more stable import demand over the longer term.

  • Macroeconomic stability is underpinned by a gradual consolidation from a sharp rise in the overall fiscal deficit in 2009. For 2010, the overall deficit is expected to decline to around 5.9 percent (excluding grants) from 8.1 percent in 2009 and lower domestic financing needs. Thereafter, the deficit is projected to decline gradually to around 3.4 percent by 2015. Revenue (excluding grants) would rise to around 15 percent of GDP by 2015 as a consequence of a broadening of the tax base, further administrative improvements, and buoyancy from the projected recovery, with more moderate increases thereafter (see accompanying 2010 Article IV staff report). Expenditures would decline to 18.2 percent of GDP by 2015, down from 18.8 percent in 2010, with some slowing in the growth of recurrent spending and a return of capital spending to the range of 6½–7 percent of GDP under more normal growth conditions.

While an economic recovery is under way, the fragility of the global recovery exposes Cambodia’s exports with their narrow base and heavy reliance on the U.S. and European markets to significant downside risks in the near term. Banking system weaknesses and a limited room for maneuver with regard to fiscal policy further undercut the economy’s ability to absorb additional shocks. Addressing longstanding structural weaknesses, improving the business environment and public sector service delivery may positively affect the balance of risks over the medium term. The development of extractive industries is not factored into the baseline, given uncertainties about the timing and revenue impact of new oil, gas, and mineral production.

8. Contingent liabilities exist in several areas that require close scrutiny because of the potential burden on external and public debt. Cambodia has signed several build-operate-transfer (BOT) projects—mainly related to new projects in the power sector. Contingent liabilities arising from these types of contracts are not incorporated in this DSA because of a lack of information on the total amounts and terms of these agreements. The authorities indicated that they are working to collect necessary details and should be able to provide this information by next year. Other contingent liabilities could arise if the mitigation of risks in the banking sector necessitated government guarantees. Moreover, a shift of aid financing from grants to loans could also add to the debt burden. In light of Cambodia’s need for major infrastructure investment and given its limited scope for servicing larger levels of debt, the authorities should monitor these types of commitments closely and transparently, including by developing and maintaining an inventory of all concessions granted and building and improving capacity to analyze the impact of contingent liabilities on debt sustainability.

III. External Debt Sustainability

9. All external debt indicators remain below the policy-dependent debt burden thresholds under the baseline scenario, but thresholds are breached under the standard bound tests.6 The main results of the external DSA are as follows (Figure 1):

  • Under the baseline scenario, all external debt indicators remain below the threshold in 2010 and decline further over the medium and long term.

  • In one bound test, two indicative thresholds are breached, in the case of the debt-to-revenues ratio for several years (Table 1b). Following a one-time 30 percent nominal depreciation of the Cambodian riel vis-à-vis the U.S. dollar relative to the baseline in 2011, the NPV debt-to-revenue ratio increases to about 235 percent in 2011 and then declines gradually below 200 percent by 2015. The NPV debt-to-GDP ratio also temporarily breaches the threshold and peaks at 31.4 percent in 2011 before falling under 30 percent in 2013.7

  • The debt service-to-exports and debt service-to-revenue ratios stay well below the indicative threshold throughout the entire projection period due to concessionality of earlier debts.

Table 1a.

Cambodia: External Debt Sustainability Framework, Baseline Scenario, 2007–30 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Cambodian authorities; and staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Includes both public and private sector external debt. The years in the table refer to calendar years.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections, also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.

Cambodia: Sensitivity Analysis for Key Indicators of External Debt, 2010–30

(In percent)

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Sources: Cambodian authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP, and nondebt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

10. As an additional country-specific alternative scenario, this DSA considers the impact of increased bilateral borrowing.

  • The authorities have inquired about the fiscal-sustainability implications of doubling their own legal ceiling of loan financing from SDR 200 million to SDR 400 million (about 2 percent of GDP) for the next few years to finance more capital projects. The terms of borrowings are assumed to be similar to those of bilateral loans from China (20-year maturity, 7-year grace period, 2 percent of interest), and the old ceiling would be reinstated in 2014.

  • In the event, the debt level would rise and Cambodia’s scope for absorbing additional risks would be significantly reduced (Figures 3 and 4, Tables 3a, 3b, 4a, 4b). In several bound tests, the indicative thresholds are breached for three years or more.

  • With no information on the type of projects to be financed, it is difficult to project any positive impact of this additional borrowing on GDP growth and other parameters of Cambodia’s overall capacity to absorb debt. Therefore, the calculations in the alternative scenario do not assume any “growth dividend”. However, in order to return debt levels under this scenario by 2020 to those comparable to the baseline scenario, and thus achieve a similar capacity to absorb risks over the medium-to-long term, the growth dividend would need to be significant. On average, annual GDP growth would need to be 1.7 percentage points higher than in the baseline scenario (implying a 25 percent upward shift of potential output growth), while revenue growth would have to be increased even slightly more than that, suggesting additional efforts would be needed to boost the buoyancy of the tax system. Moreover, the still limited administrative capacity of the government in effectively managing capital spending and delays in the public management reform program would make achieving this growth dividend even more difficult.

Figure 2.
Figure 2.

Cambodia: Indicators of Public Debt Under Alternative Scenarios, 2010–30 1/

Citation: IMF Staff Country Reports 2011, 045; 10.5089/9781455216659.002.A002

Sources: Cambodian authorities; and staff estimates and projections.1/ The most extreme stress test is the bound test that yields the highest ratio in 2020. In figures a. and b., they correspond to Temporary shock to growth, and for c. it corresponds to a 10 percent of GDP increase non-debt creating flows in 2011.2/ Revenues are defined inclusive of grants.
Figure 3.
Figure 3.

Alternative Scenario of Increasing Borrowing Limits during 2011–13: Indicators of External Debt, 2010–30 1/

Citation: IMF Staff Country Reports 2011, 045; 10.5089/9781455216659.002.A002

Sources: Cambodian authorities; and staff estimates and projections.1/ The most extreme stress test is the bound test that yields the highest ratio in 2020. In figure b. it corresponds to a One-time depreciation shock; in c. to an Export shock; in d. to a One-time depreciation shock; in e. to an Exports shock; and in figure f. to a One-time depreciation shock.
Figure 4.
Figure 4.

Alternative Scenario of Increasing Borrowing Limits during 2011–13: Indicators of Public Debt, 2010–30 1/

Citation: IMF Staff Country Reports 2011, 045; 10.5089/9781455216659.002.A002

Sources: Cambodian authorities; and staff estimates and projections.1/ The most extreme stress test is the bound test that yields the highest ratio in 2020. In figures a. and b., they correspond to temporary shock to growth, and for c. it corresponds to a 10 percent of GDP increase nondebt creating flows in 2011.2/ Revenues are defined inclusive of grants.
Table 2a.

Cambodia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007–30

(In percent of GDP, unless otherwise indicated)

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Sources: Cambodian authorities; and staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

The public sector debt represents general government gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium- and long-term debt.

Table 2b.

Cambodia: Sensitivity Analysis for Key Indicators of Public Debt, 2010–30

(In percent)

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Sources: Cambodian authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 3a.

Alternative Scenario of Increasing Borrowing Limits during 2011–13, External Debt Sustainability Framework 2007–30 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Cambodian authorities; and staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Includes both public and private sector external debt. The years in the table refer to calendar years.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections, also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).