Low-income countries and emerging economies – including Cambodia – are facing heightened sovereign debt distress amid a rise in interest rates in advanced economies, according to International Monetary Fund (IMF) economic counsellor and director of research Pierre-Olivier Gourinchas.
Global economic growth “will bottom out at 2.8 per cent this year before rising modestly to [3.0] per cent next year – 0.1 percentage points below our January projections”, he said in a press release, citing the latest World Economic Outlook (WEO).
“Global inflation will fall, though more slowly than initially anticipated, from 8.7 per cent last year to seven per cent this year and 4.9 per cent in 2024.
“This year’s economic slowdown is concentrated in advanced economies, especially the euro area and the United Kingdom, where growth is expected to fall to 0.8 per cent and minus 0.3 per cent this year before rebounding to 1.4 and one per cent, respectively.
“By contrast, despite a 0.5 percentage point downward revision, many emerging market and developing economies are picking up, with year-end to year-end growth accelerating to 4.5 per cent in 2023 from 2.8 per cent in 2022,” he added.
The WEO pegs Cambodia’s annual real GDP (gross domestic product) growth rate at 5.8 per cent in 2023, 6.2 per cent in 2024 and 6.3 per cent in 2028. The outlook’s statistics put the average for the 2005-2024 period in the range of 6.32-6.42 per cent, or 7.31-7.42 per cent for the pre-Covid-19 segment from 2005-2019.
‘Already borne fruit’
At an April 11 press briefing on the WEO at the IMF headquarters in the US capital of Washington DC, Gourinchas affirmed that the multilateral lender acknowledges the difficult economic situations confronting a number of countries, especially when it comes to sovereign debt, amid limited fiscal space.
“That is something already stated last year when we had the strengthening of the US dollar [which was] also associated with large movements of capital flow and increases in stress,” he said, revealing that the IMF estimates that 60 per cent of low-income developing countries and 25 per cent of emerging market economies are at high risk of or in debt distress.
“[The] situation requires action … [as well as discussions] with creditors about how to address the trajectory going forwards.
“The fund [IMF] is also involved in many discussions and we have various vehicles to try to facilitate and discuss to find the common framework which has been in place since 2020 … it is not yet widely helpful, but it has already borne fruit,” Gourinchas said, adding that “a little bit more time” is needed for more significant progress to be seen.
In the release, Gourinchas recommended that monetary policy “remain focused on bringing inflation down, but stand ready to quickly adjust to financial developments”, claiming that the “banking turmoil will help slow aggregate activity as banks curtail lending”.
This, he said, “should partially mitigate the need for further monetary tightening”. However, he cautioned, “any expectation that central banks will prematurely surrender the inflation fight would have the opposite effect: lowering yields, supporting activity beyond what is warranted, and ultimately complicating the task of monetary authorities”.
‘Wrong, or right?’
Similarly, National Bank of Cambodia (NBC) deputy governor Chea Serey last week provided a statement on the impact of elevated interest rates overseas on local banks’ operations as well as their responses, which have reportedly included rate hikes on existing loans.
“I’ve previously explained why some banks raise interest rates. The increase is due to rising international market interest rates – banks in Cambodia are also being affected by the rise, which has pushed up the price of capital.
“Banks that borrow from abroad have to pay higher interest rates, just as banks that use local capital pay higher interest rates on depositors,” she said, claiming that “almost every bank” has raised deposit rates.
“Depositors want high interest rates, while borrowers want low interest rates. As a result, some banks have decided to raise interest rates on their consumer loans.
“The question is: is this wrong, or right?” she asked rhetorically, arguing that a definitive judgement should hinge on whether the loan agreement stipulates a floating or fixed interest rate. In the case of the latter, the bank has to negotiate with the borrower before any interest rates are adjusted or other contract terms are amended, she stated.
Serey advised the public to read through contracts carefully before signing and to make sure to understand contractual rights and obligations to avoid disputes.
According to regulations, financial institutions are obliged to clarify customers’ concerns and present all contract terms and conditions in an honest and transparent manner, she pointed out.
For reference, in its 2022 annual report, the NBC indicated that Cambodia’s formal “banking” system comprised 59 commercial banks; nine specialised banks; five deposit-taking MFIs (microfinance institutions); 82 non-deposit-taking MFIs; 224 rural credit institutions; 16 financial leasing companies; five third-party processors; 34 payment service providers; one credit information sharing service provider; six foreign bank representative offices; and 2,869 money exchange businesses.
The Kingdom’s five deposit-taking MFIs – or MDIs – were: Amret Plc, AMK Microfinance Institution Plc, PRASAC Microfinance Institution Plc, LOLC (Cambodia) Plc, and Mohanokor Microfinance Institution Plc.