Cambodia's current Moody’s rating is held back by “very low” institutional strength in the country and limited options for monetary policy, according to the latest report from the international agency.
The findings come despite rapid growth over the past decade, with Moody’s predicting gross domestic product expansion to remain at seven per cent in 2013 and 2014.
Cambodia’s B2 rating remains unchanged from a Moody’s report in March. In its most recent analysis released last week, Moody’s noted that 96 per cent of Cambodia’s total deposits are foreign currency denominated, leaving reserve requirements placed on lenders as the only tool available to influence credit conditions.
This limited monetary policy option, combined with a lack of transparency, weak governance and “endemic” corruption, has led Moody’s to rate Cambodia’s institutional strength as “very low”.
Nguon Sokha, director general of the National Bank of Cambodia, defended the country’s economic management.
“I could not accept something based just on the previous assessment without acknowledging improvement,” she said.
There are many other instruments at hand, according to Sokha, including NBC lending to commercial banks to plug reserve holes in the short term.
Sokha cites effective financial management during the global downturn of 2008 and 2009, as well as the way the sector handled recent election-related consumer jitters, as proof of the strength of Cambodia’s financial system.
“Every year we make improvements in various aspects: monetary policy; institutional framework; capacity building; new institutions created,” she said, noting the launch of the securities exchange.
Moody’s also said that the budget deficit in Cambodia is too high, with government expenditures averaging 20.3 per cent of GDP over the past four years and revenues bringing in 13.2 per cent.
“The budget deficit has consolidated noticeably from the peak seen in 2009, but remains above the peer median,” the report said, adding that a reliance on aid to fund the deficit has “reduced accountability” and hampered efforts to collect tax.
Sokha, however, is comfortable with the current levels of account deficit. She believes there is an appropriate level of spending to support Cambodia’s growth relevant to its current state of development.
“Aid is slowing down and being substituted by our own pocket … tax revenue is growing, but everything takes time,” she said.
Grant Knuckey, chief executive of ANZ Royal Bank, said that growing the tax base to above 20 plus per cent of GDP is a challenge that Cambodia must continue to embrace “because certainly aid and concessionary loans are not an inexhaustible source of deficit coverage”.
Despite the stagnant rating, Moody’s said Cambodia’s risk of shock from economic, financial or political events is low. Moody’s attributes this to a “relatively” stable government, a low interest rate, sufficient reserves to cover external debt and a “relatively sound” banking system.