Logo of Phnom Penh Post newspaper Phnom Penh Post - IMF sees rapid credit growth as main risk to economy

IMF sees rapid credit growth as main risk to economy

Markus Rodlauer, deputy director of the IMF’s Asia Pacific department, speaks yesterday at a press briefing in Phnom Penh.
Markus Rodlauer, deputy director of the IMF’s Asia Pacific department, speaks yesterday at a press briefing in Phnom Penh. Heng Chivoan

IMF sees rapid credit growth as main risk to economy

Cambodia's economy continues to perform strongly, but rapid credit growth must be contained to reduce the risk of economic and financial instability, and to ensure a “soft landing” of the credit cycle, the International Monetary Fund (IMF) said in a statement issued yesterday at the conclusion of its annual Article IV consultation.

“[Economic] growth is projected to remain robust around 7 per cent for 2016-17, supported by strong garments exports, real estate and construction activity as well as the reduction in oil prices,” an IMF mission concluded following a two-week visit to assess Cambodia’s macroeconomic developments.

The team expects Cambodia’s current account deficit will narrow to 9.7 per cent by the end of the year, from 10.7 per cent in 2015, on the strength of garment exports and less reliance on imported electricity following the completion of major hydro projects. Meanwhile, inflation is expected to edge up to 3.2 per cent on rising food prices.

The IMF projected that economic growth would slow to around 6.25 per cent by 2021 “due to a gradual reduction in FDI [foreign direct investment], challenges in export diversification and a moderation in the credit cycle”.

While the outlook was broadly positive, the mission identified some significant risks.

“The main downside risk to the outlook arises from rapid credit growth, increasingly concentrated in real estate, which threatens to undermine economic and financial stability,” it concluded.

According to Markus Rodlauer, deputy director of the IMF’s Asia Pacific department, private sector credit growth averaged about 30 per cent annually over the past three years, while exceeding 50 per cent annually in the real estate and construction sectors. During this time, the credit-to-GDP ratio doubled to over 60 per cent.

Rodlauer said while a certain level of credit growth was healthy, the continued high pace of expansion was unsustainable and poses a significant threat to Cambodia’s long-term macroeconomic stability.

“We believe that the credit of the real estate sector is on a dangerous trajectory that needs to be slowed down,” he said. “The longer it takes [to do this] the more people that will be hurt when it stops.”

Rodlauer commended Cambodia’s central bank for implementing prudential measures aimed at ensuring capital buffers were in place in the event of a downturn – most recently by raising the minimum capital requirement of financial institutions and implementing a Basel III-compliant liquidity coverage ratio (LCR).

However, he said the IMF team felt more measures were necessary, though they should be imposed gradually to minimise shocks.

“The goal is to achieve a soft landing of the credit cycle,” he stressed.

The IMF mission also identified a number of external risks to Cambodia’s macroeconomic stability. They include a significant slowdown in China’s economy, an appreciating US dollar, weaker growth in Europe following the Brexit referendum result, and a sharper-than-expected tightening in global financial conditions.

The mission’s preliminary findings and recommendations will be presented to the IMF’s executive board for discussion and decision.

MOST VIEWED

  • Hungarian exposes 90 to Covid in Siem Reap

    The Ministry of Health has discovered 90 people who have been exposed directly or indirectly to a Hungarian man infected with Covid-19. They all are required to quarantine at home and the hospital. The ministry is searching for other affected people. Among the 90, one is the

  • PM: West unfair to Cambodia

    Prime Minister Hun Sen released a message celebrating the International Day of Peace on Monday, saying that some major powers and western countries had been systemically cooperating to put political pressure on Cambodia as they did in the 1970s and 1980s. Hun Sen said pressuring

  • ‘Bad news is an investor’s best friend’ – unlocking investment potential in Cambodia

    It is time to shop. Economic woes provide good pickings for investors if they know where to look The poem If, written by English Nobel laureate poet and novelist Rudyard Kipling for his son circa 1895, is widely perceived as fatherly advice for John who would

  • PM requests Russia’s Covid vaccine

    Prime Minister Hun Sen has requested that Russia provide Cambodia with its Covid-19 vaccine after the former announced it planned on mass vaccinating its population next month. The request came on Thursday through the prime minister’s Facebook page as he met with Anatoly Borovik,

  • First ‘mobile kitchen’ in Cambodia enters service

    A catering company recently rolled out Cambodia’s first “mobile kitchen” – a $50,000 container capable of serving up to 200 people at a time. The kitchen is the brainchild of Seng Hok Heng Catering Services. At 4.4m-high, 6.8m-long and 2.4m-wide (expandable to 6.8m), the kitchen is equipped

  • Kingdom, China rebut basis for US sanctions

    The Council for the Development of Cambodia, the Ministry of Foreign Affairs and International Cooperation, and Tianjin Union Investment Development Group Co Ltd (Tianjin) have responded to US sanctions on Union Development Group Co Ltd (UDG), a Chinese-owned company currently developing the sprawling $3.8 billion Dara