Abstract
Private debt recorded double-digit growth rates for many consecutive years, exceeding by far the growth rate of output. Credit growth continued to be sustained even during the 2020 recession. Private sector debt is now expected to exceed 180 percent of GDP by the end of 2022. This ratio is significantly above levels registered among regional peers, even those with higher per capita GDP. While Cambodian households are increasingly leveraged, the largest share of private debt pertains to the corporate sector. Corporate debt is not concentrated in real estate, but rather is broadly distributed, with a large and increasing share pertaining to companies active in trade (retail and wholesale). 10 percent of the overall stock of private debt (17 percent of GDP) has been restructured at least once between 2020 and 2021, indicating the potential for sizeable stress to lenders if these loans required to be written off entirely.
Risks Related to Private Sector Debt1
Private debt recorded double-digit growth rates for many consecutive years, exceeding by far the growth rate of output. Credit growth continued to be sustained even during the 2020 recession. Private sector debt is now expected to exceed 180 percent of GDP by the end of 2022. This ratio is significantly above levels registered among regional peers, even those with higher per capita GDP. While Cambodian households are increasingly leveraged, the largest share of private debt pertains to the corporate sector. Corporate debt is not concentrated in real estate, but rather is broadly distributed, with a large and increasing share pertaining to companies active in trade (retail and wholesale). 10 percent of the overall stock of private debt (17 percent of GDP) has been restructured at least once between 2020 and 2021, indicating the potential for sizeable stress to lenders if these loans required to be written off entirely.
A. Rising Private Sector Debt and its Composition
1. Private sector credit has been growing at a faster pace than nominal output and deposits for several consecutive years. Double-digit growth rates continued even in 2020, despite the recession. Before the pandemic, credit was growing above 25 percent a year, almost three times the rate of nominal output growth; even during the 2020 recession and the slow-paced recovery in 2021, credit growth to the private sector has been in the double digits. By the end of 2021, 87 percent of private debt was denominated in foreign currency (predominantly USD). Given the high rate of dollarization, most deposits are also USD-denominated (83 percent); but the FX loan-to-deposit ratio has been steadily increasing since 2018.
Cambodia: Private Sector Credit Growth and NGDP Growth (y-o-y)
(In percent)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Sources: IMF staff calculations based on NBC and NIS’ data.Cambodia: FX Loan-to-Deposit Ratio
(In percent)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Sources: IMF staff calculations based on NBC data2. The stock of private debt in Cambodia is very high by international standards. Debt kept rising also in 2020 and 2021, despite the recession and the relatively slow pace of the recovery. Private debt levels in Cambodia were 170 percent of GDP by the end of 2021, exceeding by a wide margin the ratios registered in other low and middle-income countries in the region. By the end of 2022, outstanding credit to the private non-financial sector is expected to surpass 180 percent of GDP, continuing a steep trend of private debt accumulation observed over the past few years.
Cambodia: Private Sector Credit to GDP Compared
(In percent, 2021)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC data and Systemic Risk Tracker.Cambodia: Private Sector Credit
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Sources: IMF staff calculations based on NBC data3. Most debt is concentrated in the corporate sector and sits in commercial banks, rather than in microfinance institutions. Between 2018 and 2021, the ratio of total credit to output grew by 72 percentage points—in absolute terms, most of the increase can be explained by the rise in corporate credit, which increased by 42 percentage points, reaching 107 percent of GDP in 2021. By comparison, the 26 percentage points increase in household liabilities (including mortgages, personal loans, credit cards, and all MFI borrowing) is more modest, even if outstanding levels are still relevant. In terms of lending institutions, commercial banks are by far the largest players, holding 83 percent of the US$ 45 billion outstanding at the of end 2021. Not much information is available on the composition of credit held by microfinance institutions (MFIs). However, from the point of view of systemic risk, the role of MFIs is comparatively limited, as these institutions hold less than 17 percent of all outstanding credit, or US$ 7.8billion.
Cambodia: Private Sector Credit Contributions
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC monetary statistics.Cambodia: Private Sector Credit by Institution (2021)
(In percent of Total)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC monetary statistics.4. Real estate and construction accounts for a quarter of corporate debt, but the largest share is accounted for by retail and wholesale trade. As of 2021, liabilities of the real estate and construction sector stood at 27 percent of Cambodia’s GDP, less than a third of total outstanding corporate debt. However, trade (retail and wholesale) has historically been the largest recipient of credit across all business sectors; ratios of credit to GDP in retail have also experience the fastest growth during the pandemic. Currently, trade is estimate to account for 8 percent of GDP, but liabilities in this sector stand at 38 percent of GDP. As retail and wholesale sector tend to be import-intensive activities (and construction also heavily depends on imports), it is possible that these credit developments contributed to the widening of the current account deficit..
Cambodia: Composition of Corporate Sector Credit
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC monetary statistics.Cambodia: Corporate Sector Credit
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC monetary statistics.B. Assessing Risks from Private Sector Debt
5. Based on the limited information available, credit performance appears to be deteriorating. The overall volume of loans restructured one or more times reached US$ 3.8 billion, or 7 percent of total outstanding credit and 13 percent of GDP, by June2022.2 The ratio of restructured loans to total outstanding remained overall stable between 2020 and 2021 and decreased in 2022; however, these ratios need to be read in light of sustained annualized credit growth, which keeps these ratios low.. As a share of GDP, the ratio of restructured loans in 2022 remains significant. Furthermore, official figures indicate that the volume of loans classified as non-performing corresponds to about 2.8 percent of outstanding loan volume as of June 2022, up from about 2 percent at the end of 2021. NPLs in June 2022 currently stand at 4.4 percent of projected 2022 GDP. These figures are based on self-reporting data from banks and exclude MFIs and MDIs— as well as extensive lending conducted by the shadow banking sector, such as real estate developers.
Cambodia: Stock of Restructured Loans
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Source: IMF staff calculations based on NBC data.Cambodia: Non-Performing Loans
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 372; 10.5089/9798400228643.002.A001
Sources: IMF staff calculations based on NBC data.6. Many indicators point to a significant buildup of risk in the domestic financial sector. Credit developments in Cambodia are of some concern. Large outstanding amounts are accompanied by rapid and sustained credit growth, somewhat detached from economic fundamentals. While household leverage is also a concerning trend, most debt pertains to the corporate sector. Corporate debt is not heavily concentrated in real estate and construction, and household debt does not depend only on residential mortgages. Instead, most productive sectors in the economy appear to be heavily indebted, suggesting that a wave of insolvencies could materialize from a variety of different external and domestic shocks. Outstanding quantities raise concerns about debt overhang should a downturn materialize, especially given that insolvency regimes and banking resolution mechanisms are currently limited in scope.
7. Policy options in the event of adverse financial events are likely to be limited. Monetary policy is constrained by dollarization and by the peg—and a large amount of macroprudential stimulus, deployed during the pandemic, is yet to be rolled back. Choosing the appropriate timing for stimulus withdrawal is crucial, as untimely tightening may exacerbate liquidity problems in the banking sector. A wave of insolvencies could pose significant financial stability risks and translate into large contingent liabilities for the government.
8. The recent recovery is an opportunity to update and test legislation on bank resolution mechanisms and insolvency regimes. It would also be appropriate to improve the collection of statistics on borrowers’ income and collateral, both for new originations and for outstanding loans. This information would enable the financial regulator to introduce prudential policy measures-such as DTI or LTV caps, aimed at curbing excessive credit growth going forward.
References
National Bank of Cambodia (2021), Financial Stability Review
