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

  • Kingdom accepts Chinese vaccine, PM first to get jab

    Prime Minister Hun Sen said China would offer Cambodia an immediate donation of one million doses of the Covid-19 vaccine produced by the Sinopharm company. In an audio message addressing the public on the night of January 15, he said Cambodia has accepted the offer and

  • Reeling in Cambodia’s real estate sector

    A new norm sets the scene but risks continue to play out in the background A cold wind sweeps through the streets of Boeung Trabek on an early January morning as buyers and traders engage in commerce under bright blue skies. From a distance, the

  • Hun Sen: Lakes filled in for national developments

    Prime Minister Hun Sen has announced continued operations to fill some lakes in Phnom Penh to create land for developments, though he is against the unrelated practice of damming rivers or blocking waterways. Speaking at the inauguration of the Ministry of Public Works and Transport

  • Koh Preus upgrades 70% complete

    Initial construction of a nearly $30 million tourism infrastructure project on Preah Sihanouk province’s Koh Preus Island is “about 70 per cent complete”, according to an official with the developer. Heng Thou, construction site manager of Angela Real Estate Co Ltd (ARE), told The Post that

  • Local media loses a giant, and The Post a great friend

    Cheang Sokha, a gifted and streetwise reporter who rose to the highest ranks of Cambodian media and was beloved for his sharp intelligence, world-class humour and endless generosity, died on Friday in his hometown of Phnom Penh. He was 42. His wife, Sok Sophorn, said he

  • Cambodia, India agree to start direct flights, tourism exchanges

    Cambodia and India have agreed to start direct flight connections and promote closer tourism exchanges and cooperation in all areas after the Covid-19 saga comes to a close. The agreement was reached during a meeting between Cambodian Minister of Tourism Thong Khon and newly-minted Indian