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Biz Talk: NBC manages the challenge well

The IMF’s chief of mission for Cambodia, David Cowen, talks finance to the Post in Washington

Financial shocks which swept the globe were unprecidented.

The global downturn was blamed for a 35.2 percent drop in foreign direct investment (FDI) last year. What is your forecast for 2010?
We expect FDI to pick up in much of Asia in 2010 as the global economy recovers. Cambodia should benefit, with FDI expected to rise [by 45.7 percent] to around US$750 million this year.

By the same token, Cambodia is in a very competitive region, and it needs to keep striving to make improvements in the investment climate to attract high quality investors.

What are your recommendations for Cambodia to attract foreign direct investment?

Maintaining a stable macroeconomic environment; improving physical infrastructure, such as ports, roads and electricity; ensuring a strong and independent judicial system; and developing a healthy and well-educated labour force will go a long way in this direction.

What are you observations of the banking system in Cambodia?
Cambodia has seen a very rapid expansion of the banking sector in recent years. In large part, this trend reflects more confidence in the banking system.

With the recent economic downturn, the central bank has reported some deterioration in the overall quality of banks’ assets. To address this, the NBC has put in place more stringent requirements for reporting and resolving bad loans. It’s now important banks adhere to these rules.

What are the main challenges that banks in Cambodia are facing at the moment?
Following the bank lending and property price boom in Cambodia, the biggest challenge for banks is managing the impact of the recent downturn.
In addition to recognising and provisioning for bad loans, banks should continue working toward strengthening their risk-management controls and credit-oversight policies.

The non-performing loan rate at Cambodia’s commercial banks rose to 6 percent in 2009 from 3.7 percent in 2008. What is the IMF’s forecast for NPL rates this year?

We do not forecast NPL ratio. That being said, Cambodia’s experience is similar to other countries going through a period of rapid credit growth followed by an economic downturn, when NPLs tend to rise. As banks deal with NPLs effectively and the economy recovers, our expectation is that they will decline.

What do you think of the National Bank of Cambodia's (NBC) policy for supervising commercial banks?
It is important to recognise that the economic and financial shocks that swept the globe in 2008 and 2009 were unprecedented for most countries.

In addition to dealing with global shocks, the NBC has had to deal with the local fallout, including on the banking system.

It has been a challenging time, and the NBC has generally managed the circumstances well.

Overall, the lesson to take away from this episode is that strong supervision of banks and enforcement of prudential regulations mean fewer risks and a more stable financial system over the whole cycle.

NBC has asked regulated commercial banks to triple paid-up capital from $13 million to $37.5 million by the end of this year. Can they meet the deadline?
As banks increase in size, it is appropriate that their paid-up capital also increases. In our view, NBC has given all banks sufficient time to secure the necessary resources.

Some local banks say that it is unfair, as banks that are subsidiaries of foreign organisations, which have an “investment grade” rating extended by a reputable agency, can maintain the minimum capital of $13 million. What do you think?

Some experts might see [Cambodian subsidiaries] as having the advantage of getting funds from their parent institutions. However, this exception still requires careful verification by the NBC and foreign regulators to ensure these banks have sufficient capital to expand their businesses responsibly.

Cambodia is set to launch its securities exchange by the end of this year, but the currency that will be used has not yet been decided. In your opinion, which currency is best?
The issue of an appropriate currency for the securities market involves a number of important considerations.

The widespread use of dollars has played a stabilising role in Cambodia. It has also helped reinforce close ties with the US economy, which has had both positive and negative consequences.

We expect Cambodia will become better integrated with the rest of Asia. As it does so, the advantages of using the dollar may become less clear.
It is the government’s policy to increase riel use in Cambodia, so it would make sense that new endeavours start off in this direction.

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