Moody’s Investors Service Inc maintained a stable outlook while affirming Cambodia’s B2 long-term issuer rating on the back of robust gross domestic product (GDP) growth prospects, modest and highly affordable government debt, and low external vulnerabilities.
In a statement on Friday, Moody’s said the positive effects that serve as a buffer offset risks stemming from a sustained, high rate of credit growth which raises contingent liability risks for the government, if it needs to support Cambodia’s relatively large financial system through a boom-bust credit cycle.
“Low institutional strength and a high degree of dollarisation act as continued constraints on the government’s ability to manage shocks,” stated the global ratings agency.
On Cambodia’s stable outlook which reflected balanced risks, Moody’s said growth could moderate by more than its estimates following the expected reduction of tariff benefits enjoyed by exports to the European Union.
A reduction in tariff benefits accorded under the Everything-but-arms (EBA) special preference would negatively affect textile, garment and footwear exports to the EU. This is in addition to the imposition of duties on Cambodian rice effective January 2019. Together, these developments will weigh on Cambodia’s trade balance.
The stable outlook balances vulnerability to shocks against mitigating factors, it explained, adding that these risks arise from a sharper slowdown in growth that Moody’s currently assesses driven by a collapse in asset prices, a material reduction in funding from China, or a sharper slowdown in export growth, assuming EBA benefits are withdrawn.
Stabilising factors include modest fiscal deficits, owing in part to the effective implementation of tax policies, sustaining high affordability and low levels of government debt. In particular, the concessional and long-term nature of Cambodia’s debt reduces the risk of near-term liquidity pressures for the government and the country as a whole.
In the meantime, Moody’s said slowing growth in China could also present spillover risks for Cambodia, due to its deep economic and financial linkages with the country.
“A slowdown in growth in China or weaker outward foreign investment from China would act as a significant drag on Cambodia, and present potential risks particularly for the construction and real estate sectors. However, relatively low levels of government debt and increasing tax revenues provide space for fiscal policy to offset a shock to growth,” Moody’s said.
Based on expectations of weaker growth in the Chinese economy and the assumption of a full withdrawal of EBA benefits, Moody’s expects Cambodia’s real GDP growth to moderate to 7 percent year-on-year in 2019 and 5.5 percent in 2020 from 7.5 percent in 2018.
But the agency said even at these projected slower rates, Cambodia is still among the fastest growing sovereigns at the B2-rating level.
It said strong revenues have supported a healthy fiscal position, with deficits remaining well-contained at less than 2 percent of GDP between 2013 and 2018 but Moody’s expects it to widen over the next two years, as the government undertakes stimulus measures directed at supporting the economy in the face of headwinds to export growth.
Despite an expansionary fiscal stance, Moody’s expects the government’s debt burden to remain modest, hovering around or below 30 percent of GDP over the next two to three years, below that of many similarly rated sovereigns.
Debt affordability metrics are also likely to remain favourable, since all debt is concessional, characterised by long maturity periods and very low interest costs.
Pointing out that Cambodia has a healthy balance of payments position, Moody’s sees strong FDI flows and stable multilateral and bilateral support would result in foreign reserves at stable levels of nearly $15 billion over 2019 and 2020. This, despite Moody’s projection of a widening account deficit.
“Cambodia’s access to entirely concessional debt implies that external debt servicing requirements are low. Taking these into consideration, Moody’s external vulnerability indicator for the Kingdom, or the ratio of foreign reserves to maturing debt obligations over the next year, is projected at just 18.3 percent in 2020, signalling very low external risks,” it said.
Moody’s said it would consider upgrading the rating if reforms were likely to address the country’s institutional weaknesses and enhance policy effectiveness, such as control of corruption and rule of law.
Revising the ratings could also depend on the implementation of structural reforms pointed to higher competitiveness and reduced hurdles to doing business, contributing to a material increase in economic diversification and incomes. Such an outcome would bolster the economy’s resilience to shocks.
“Either of these scenarios would potentially become more likely over the medium to longer term,” it added.
Conversely, a downgrade downgrading is possible if a shock to asset prices resulted in significant liquidity and solvency pressures in the domestic banking system.
A sharp slowdown in growth beyond Moody’s baseline expectations, either owing to pronounced repercussions from the withdrawal of EBA benefits or an unwinding of credit growth, would also present downward pressures on the rating.
The agency would also consider downgrading the rating if foreign direct investment inflows fell sharply and seemingly on a sustained basis due to either domestic, economic or political, or external shocks.
“It would raise pressure on financing of the current account deficit and external vulnerability risks,” it warned.
