Economic Outlook Stable: Moody’s

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Rating agency Moody renewed Cambodia’s B2 credit rating, a decision based on the kingdom’s stable outlook and expected solid economic growth, but warned investors of a possible downturn in business activity as the general elections in July approach.

The total value of approved construction projects in Cambodia reached $6.42 billion in 2017. KT/Chor Sokunthea

Moody’s conclusions are part of its latest credit analysis titled ‘Government of Cambodia – B2 stable’, released last week.

“The B2 credit profile reflects the country’s robust GDP growth prospects, macroeconomic stability and efforts to strengthen government revenue; factors that bolster continuing high debt affordability,” the report said.

However, the report noted that, “Political developments have the potential to slow impetus for institutional reform and weigh on FDI inflows and donor support in the lead-up to and after the 2018 general election.”

The positive outlook for the country’s economic performance is based on a robust expansion of exports, as well as a strong inflow of foreign investment, solid tourist arrivals, and buoyant domestic demand, with real GDP growth likely to remain at around 7 percent in 2018 and 2019, the report found.

Moody praised the government for its strong revenue collection effort, which gives the kingdom room to raise spending on infrastructure, education and wages. Moreover, its modest debt burden — financed predominantly through concessional loans — continues to support high debt affordability.

The rating agency also commended the Central Bank for its delivery of exchange rate and price stability, but noted that their efforts are balanced out by a weak institutional framework, a narrow economic base, low incomes and a “factious political environment”, which constrain the country’s credit profile.

Finally, Moody explained that Cambodia’s high dollarisation of loans and deposits leaves the country vulnerable to negative shocks, which could follow a sharp appreciation of the US dollar or spikes in US and domestic interest rates.

To further improve the outlook, Moody recommends that action is taken to address institutional weaknesses (particularly when it comes to the rule of law and the spread of corruption), policymaking institutions are strengthened and the economy is diversified.

The Asia Development Bank in mid-April also predicted that Cambodia will grow by 7 percent in 2018 and 2019, following strong growth in the main drivers of economic growth – the construction sector, the garment and footwear industry, tourism and domestic trade.

The World Bank’s ‘Doing Business 2018’ report ranks Cambodia 135 out of 190 countries, far behind many of its neighbours. The country fares particularly poorly in three key areas – starting a business, getting construction permits, and enforcing contracts.

This article was originally published in the Khmer Times.