Cambodia: Staff Report for the 2018 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
17 Dec 2018
eISBN:
9781484391273
Language:
English
Keywords:
ISCR; CR; authority; preliminary budget; spending; debt-to-GDP ratio; service-to-revenue ratio; PV of debt-to-GDP ratio; dynamics equation; nominal interest rate; Contingent liabilities; Public and publicly-guaranteed external debt; Stress testing; debt stock; debt dynamics equation
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2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Cambodia

Abstract

2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Cambodia

PUBLIC DEBT COVERAGE

1. The DSA covers the central government debt as well as the debt guaranteed by the central government to state-owned enterprises (SOEs). By law, state and local governments and the central bank do not engage in external borrowing, and SOEs do not contract non-guaranteed external loans. There are no extra budgetary funds and the National Social Security Fund is funded by deposits and does not constitute a liability for the general government.

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The following contingent liabilities are included in the contingent liability stress test: PPP (6.3 percent of GDP) and financial market (5 percent of GDP). 2

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

BACKGROUND ON DEBT

2. Cambodia’s external public debt, including arrears, amounted to US$6.7 billion (30.3 percent of GDP) at end-2017. The external debt-to-GDP ratio has remained relatively flat during the last decade, increasing by 0.2 percentage points on average per year. The composition of the debt stock is 70 percent bilateral debt—more than half of it owed to China—with the remaining 30 percent multilateral debt. External debt has been accrued on concessional terms, and the PV of debt-to-GDP ratio is calculated at 23.6 percent for end-2017. The debt stock includes legacy arrears to the Russian Federation and the United States of about 3 percent of GDP.3 The status of negotiations of these arrears remains unchanged compared to the last DSA and this analysis continues to assume no debt restructuring.

Cambodia: External Public Debt, 2017

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Sources: Cambodia authorities; and IMF estimates.

3. Public domestic debt is currently negligible. The stock as of end-2017 was US$2.8 million. To support financial market development, the government is preparing to issue, for the first time, local-currency government bonds over the next few years.

4. The PPP framework continues to be strengthened while the stock of PPP has increased. With expected diminished access to concessional financing and slow progress in developing domestic debt markets, PPPs have been identified as a way to finance necessary investment projects. The PPP stock grew more than twofold between 2010 and 2015, when it was estimated at 17 percent of GDP. There is no recent estimation of the Cambodian PPP stock. The authorities have established a roadmap to have a full set of PPP mechanisms by 2020, including the legal framework and system for risk assessment. Technical assistance provided by the IMF, the World Bank and ADB has focused on developing the Ministry of Economy and Finance’s capacity to analyze fiscal risks from PPPs, integrating PPP risks in the assessment of fiscal sustainability and strengthening the legal, regulatory and institutional framework of PPP management. A central PPP unit has been established under the Ministry and the authorities adopted an annual ceiling at 4 percent of GDP. A new PPP law is being drafted with the support of the ADB.

5. Private external debt. The stock of private external debt in Cambodia is not published by the authorities.4 Risks emerging from excessive external borrowing by the private sector could increase the government’s exposure to contingent liabilities. For this analysis, the default magnitude of the contingent liability stress test is used, amounting to 11.3 percent of GDP.

BACKGROUND ON MACRO FORECASTS

6. Growth and inflation. Economic activity is expected to remain strong, driven by construction, tourism and exports. GDP growth is projected at 7½ percent in 2018 and expected to decline towards its potential of 6 percent over the medium term. Inflation was stable at 2.9 percent in 2017 and is expected to decrease slightly to 2.5 percent in 2018, in part owing to measures to contain fuel and food price increases.

7. External sector. The current account deficit was 8 percent of GDP in 2017. On the back of strong FDI inflows and robust remittances, foreign reserves reached US$8.8 billion (5.1 months of imports). The current account deficit is expected to widen in 2018 due increased imports of construction material and to narrow over the medium as economic activity becomes driven more by exports and tourism. In line with authorities’ projections, external debt disbursements are expected to average 3.9 percent of GDP annually over 2018–23. External borrowing is projected to remain largely concessional over the next decade and external debt is projected to reach 34.1 percent of GDP by 2023 and to stabilize at 38 percent of GDP in 2028.

8. Fiscal. The fiscal deficit narrowed to 1.1 percent of GDP in 2017, well below the budget deficit target of 3.9 percent, due to significant tax revenue overperformance. Consequently, the level of government deposits rose to 12.6 percent of GDP by end-2017. The fiscal deficit is projected to increase to about 2.2 percent of GDP in 2018 due a rising public sector wage bill, higher capital and social spending. The fiscal deficit is projected to widen further over the medium-term, to 3.7 percent of GDP by 2023, as revenue growth moderates—absent of tax policy reforms–while capital and social expenditures are kept at a higher level guided by the government’s National Social Protection Policy Framework (2016–2025).

9. Domestic debt. As Cambodia’s financial sector continues to develop and access to concessional financing becomes more limited, it is expected that the government will start issuing domestic government bonds that will provide additional fiscal financing. Hence, this analysis assumes that the government will issue long-term domestic bonds starting in 2021 under technical assistance support by the World Bank. The annual issuance of domestic bonds is projected to increase gradually, from 0.4 percent of GDP in 2021 to 1 percent in 2038. Domestic PPG debt is expected to increase from 0 to 4.1 percent of GDP by 2038.

10. Realism of the baseline (Figure 4). Cross-country experience suggests that the baseline fiscal adjustment is feasible. The maximum adjustment over the next 3-year period is a 1.6 percentage point increase in the primary deficit-to-GDP ratio. Given the forecasted fiscal adjustment, the projected growth path is in line with a fiscal multiplier of 0.2. Finally, the contribution of public capital to GDP growth in the baseline scenario is in line with historical values.

COUNTRY CLASSIFICATION AND DETERMINATION OF SCENARIO STRESS TESTS

11. Country classification. The revised LIC_DSF determines the debt sustainability thresholds by calculating a composite indicator (CI). In the previous DSF, debt-carrying capacity was wholly determined by the World Bank CPIA score. The CI captures the impact of the different factors through a weighted average of the country’s real GDP growth, remittances, international reserves, world growth and the CPIA score.5 The calculation of the CI is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projections. For Cambodia, the CI score based on the 2018 October WEO data, corresponds to a medium rating. Therefore, while the previous rating was strong (using the 2018 April WEO data), the final classification is kept at medium. 6 The corresponding thresholds are noted in the table below. PV of debt-to-exports threshold was increased compared to the previous DSF, from 150 to 180 percent. Debt service-to-exports and to-revenue thresholds were lowered respectively from 20 to 15 percent and from 20 to 18 percent.

Cambodia: Debt Carrying Capac ity and Thresholds

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EXTERNAL AND PUBLIC SUSTAINABILITY

12. The external DSA shows that Cambodia’s risk of debt distress is low. Under the baseline scenario, the PV of debt ratios never breach their respective thresholds and are projected to remain flat over the projection period. Moreover, the debt service-to-exports and debt service-to-revenue ratios remain well below the thresholds throughout the projection period, partly due to the concessional nature of most debt (Figure 1).

13. Stress tests show that Cambodia’s external debt sustainability is most vulnerable to export shocks. For all four indicators, the export shock is identified as the most extreme one, leading to a rise of the ratios larger than for shocks to real growth, fiscal primary balance, exchange rate depreciation and external flows. Under the export scenario, the PV of debt-to-GDP ratio would increase quickly from 23.3 percent in 2018 to 36 percent in 2020, but would remain under the 40 percent threshold.

14. The overall risk of public debt distress is low. Under the baseline, total PPG debt is projected to rise from 30.3 percent of GDP in 2017 to 41.4 percent in 2038 (Table 2). The PV of total debt-to-GDP ratio is expected to increase to 30.2 percent in 2028, as the share of concessional external debt to total debt decreases, but to remain well below the 55 percent benchmark (Figure 2). Debt-to-revenue and debt service-to-revenue ratios are also expected to increase over the next decade.

15. PPG debt is vulnerable to growth and contingent liabilities shocks. A growth shock (calibrated at 1 standard deviation of historical performance) in 2019-20 would lead to a rise of the PV of total debt-to-GDP ratio to 45 percent in 2028. The realization of contingent liabilities related to PPPs and financial stress could increase the debt service-to-revenue ratio from 5 percent in 2018 to 15 in 2021.

CONCLUSION

16. Cambodia remains at low risk of external and overall debt distress. However, the total PPG debt-to-GDP ratio is expected to rise by more than 10 percentage points during the next decade due to projected increasing fiscal deficits between 2018 and 2023. To preserve public debt sustainability in the medium-term, the government should establish a fiscal anchor by introducing a debt ceiling at 40 percent of GDP and develop a medium-term budgetary framework. The baseline projections and the standard stress tests show increasing risks to the external and public debt outlooks. Stress tests indicate that Cambodia’s debt sustainability remains vulnerable to shocks to exports, economic growth and contingent liabilities. This reinforces the importance of preserving macroeconomic stability and diversifying the economy and exports to increase resilience to external shocks, improving spending efficiency and the successful implementation of the revenue mobilization strategy. Further efforts to implement sound PIM and PPP frameworks and strengthen analysis of PPP risks are needed. Finally, the authorities should focus on closing data gaps, in particular regarding external private debt and the PPP stock.

Table 1.

Cambodia: Debt Sustainability Framework, Baseline Scenario, 2015–2038

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes public sector external debt.

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.

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).

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

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 2.

Cambodia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government, government-guaranteed debt. Definition of external debt is Currency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term 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 and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Figure 1.
Figure 1.

Cambodia: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2018–2028 1/

Citation: IMF Staff Country Reports 2018, 369; 10.5089/9781484391273.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Cambodia: Indicators of Public Debt Under Alternative Scenarios, 2018–2028 1/

Citation: IMF Staff Country Reports 2018, 369; 10.5089/9781484391273.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Cambodia Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–2028

(In Percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Cambodia Sensitivity Analysis for Key Indicators of Public Debt, 2018–2028

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.