After years of strong growth, Cambodia comes face-to-face with falling income, dwindling savings and a gaping deficit that will test its mettle

For now, some things are looking up for Cambodia. Economic trends from June have shown an uptick on the back of a trade surplus and marginal rise in tourist arrivals.

Even domestic economic activities and normalisation or reopening of businesses are bolstering the trends, observed economist Dr Chheng Kimlong.

At the local bourse, the index closed stronger in the second quarter for a market capitalisation of $2.5 billion as opposed to a slower first quarter.

Of course, this was boosted by the largest listing on the exchange by Acleda Bank Plc which saw net profit climb 9.6 per cent to $63.7 million and net interest income gain 10.2 per cent at $177.1 million in the cumulative six months period ended June 30, 2020 from a year ago.

Newest counter, Pestech (Cambodia) Plc posted a four-fold growth in net profit at 29.4 billion riel ($7.2 million) for the financial year ended June 30, 2020 from $1.8 million in 2019 following the completion of two major projects.

State-owned utility firm Phnom Penh Water Supply Authority’s net profit for the first half ended June 30, 2020, rose over 140 per cent to $10.3 million compared to $4.3 million last year.

Similarly, Phnom Penh Autonomous Port, which has so far revealed its revenue only for its third quarter ended September 30, 2020, noted a 12.2 per cent expansion at $22.3 million from $19.8 million in 2019.

It should be mentioned that these counters are chiefly service oriented, meaning that their facility is crucial to daily operations.

In the midst, international reserves grew to $19.5 billion as of June 30, 2020, up 3.7 per cent from $18.8 billion from December 31, 2019, sufficient to finance 10 months of imports.

But while these indicators bear small truths of positive changes, the pandemic’s lingering effects threaten to keep the economy under stress.

Like everywhere else, the economy will stay contracted this year.

Officially, gross domestic product (GDP) growth is predicted to decelerate to -1.9 per cent. The Asian Development Bank (ADB), despite revising its figure upwards expects a -4 per cent drop, making it one of the most austere outlooks.

Notwithstanding the buoyant public tax collection so far, total revenue is forecast to take a 20 to 30 per cent hit this year due to the setback on three major revenue generating sectors.

Compare this to 2019, when total revenue, comprising direct and indirect taxes, amounted to nearly $7 billion, its record highest.

Judging from the lower revenue expectation, fiscal deficit could widen between eight and nine per cent versus five to six per cent last year.

It currently stands at a surplus of 1.5 per cent, which is pleasing to the government, spokesman Meas Soksensan of the Ministry of Economy and Finance (MEF) said.

Unfortunately, it is not going to last.

Even as we speak, current income from government levies and interests this year is some 20 per cent behind target.

“[So far] 81.4 per cent of non-tax revenue has been collected compared to the initial plan, as a result of the drop in sector and sub-sectors hit by the virus,” he said.

This is compounded by the impact on the garment and footwear industry where some $1.1 billion loss is expected from the partial withdrawal of the Everything but Arms scheme which took off on August 12.

Put together, the government might only be able to save $800 to $900 million this year compared to $3 billion in 2019.

The anticipated fall in revenue is reflected by a halved fiscal budget at $4 billion for 2021 versus $8.2 billion this year.

Impact on debt affordability

According to Moody’s Investors Service Inc, government revenue in emerging economies (EMs) will dip by an average 2.1 percentage points of GDP in 2020, which is more than twice the one percentage point in advanced economies.

In an analysis between oil importing and oil exporting nations, the global ratings agency, which rated Cambodia as B2 stable, said oil-importing EMs generally benefit from a relatively stable revenue base.

This time, however, the revenue shortfall will be much larger than that experienced after the global financial crisis.

“Cambodia, the Maldives, Barbados, Belize, Thailand and South Africa in particular will register sizeable [year-on-year] falls in revenue as a proportion of GDP, given that all barring South Africa will be heavily affected by the sharp decline in international tourism,” Moody’s said.

This squarely reflects the estimated $5 billion revenue loss in the tourism sector this year as international travels plunged in the months after February.

Seemingly, the crisis has underlined the importance of revenue generation for EMs because the fall in revenue is particularly important for creditworthiness.

This is so because of the spending needs of the government such as social, infrastructure and debt-financing which Moody’s said is often more urgent than for advanced economies.

Additionally, their narrow revenue bases mean any fall in revenue has a large impact on debt affordability.

In the October 12 note, Moody’s said almost all EMs are set to record deficits this year and face constraints in cutting spending amid the pandemic, which amplifies the pertinence of revenue generation.

No easing on spending pressure

As the crisis deepens with nearly 50,000 garment workers affected by the temporary closure of 100 to 150 factories, in addition to the pressure on key economic sectors and medical needs, the urge to draw down savings might be overwhelming.

Up to September, the government had disbursed $40 each to jobless workers in the garment and tourism sectors under 30 cash outlay programmes, which is part of its $800 million to $2 billion fiscal stimulus package.

Of that, some $564 million was set aside for unemployed workers, IDPoor households, cash for work programme and Covid-19 healthcare expenditure.

Tax breaks were also extended till the end of the year for businesses that were impacted by the coronavirus pandemic while some $3.6 billion worth of loans was restructured as of August 31, 2020.

The stimulus, equivalent to seven percent of GDP, was pooled together by reallocating $900 million via rationalisation of activities such as cutbacks on foreign trips and the postponement of large public infrastructure projects.

But as funds run assumedly low, the government decided early this month to hold the planned civil servant pay rise next year.

Together with an increase in stimulus and healthcare spending, Moody’s expects the drop in revenue to trigger a sizeable fiscal deterioration across EM sovereigns.

On top of that, spending pressures is not likely to ease in the short-term, particularly as the crisis has emphasised the social role governments perform in areas such as healthcare and labour markets.

These spending pressures are often worsened by factors including higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment.

“As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side,” it said.

Tax base expansion

Owing to that, focus on raising revenue could shift to widening the tax base which admittedly is challenging.

As it stands, the capital gains tax, largely seen as a prelude to private income tax, was initially planned for implementation on January 1, 2021, which raised the ire of industry players and consumers. It has been deferred to January 1, 2022.

In addition, there is the call by the government to register small businesses including nail salons and schools through the acquisition of permits from the One Window Service Office (OWSO).

Although the authorities claim that the permits aid smooth inspections, some quarters perceive it as a subtle expansion the taxpayer base.

However, Kimlong, director of independent think tank Asian Vision Institute’s Centre for Governance Innovation and Democracy, does not think so.

“[The registration] is to improve the business climate and formalise businesses for improved governance,” he asserted.

Still, the need to grow national income in the current economic landscape seems apparent.

For instance, new laws that sat on the backburner for years have finally come to be passed such as the Law on E-Commerce and soon-to-be implemented Law on the Management of Integrated Resorts and Commercial Gambling, and Law on Investment.

These laws including the capital gains tax will augment the tax revenue in a few short years, as prescribed under Cambodia’s revenue mobilisation strategy (RMS).

To date, the General Department of Tax has collected nearly two thirds of its $2.9 billion tax revenue target but a lot of this is based on a profitable fiscal year for taxpayers last year.

The agony of lower taxation will kick in next year, which is probably why Moody’s opined that most vulnerable countries may receive more grants to help deal with the post-pandemic era.

Although, it added, the revenue receipts are not within a government’s control and tend to only cover a small portion of the government’s total spending needs.

That is why it expects EM governments to redouble their efforts to increase tax collection, and perhaps with development finance institutions such as ADB.

“Admittedly, it will be a challenging task, even for sovereigns with the strongest institutional capacity,” Moody’s said.

But looking back at 10 years of revenue collection prior to this crisis, it found that Cambodia along with Rwanda and Armenia managed to grow their revenue `much faster than GDP growth’ on a sustained basis.

These countries have improved payment processes, reinforced administrative capacities and simplified tax systems and policies.

“In Cambodia, the RMS looked at improving overall tax compliance and governance, including the use of e-tax services and auditing.

“These measures have enabled the authorities to increase government revenue to 24 per cent of GDP in 2019, up from less than 19 per cent in 2013,” it said.

Open to all funds

By the first half of 2020, up to $480 million of concessional loans have been signed with bilateral and multilateral development partners.

It is 25 per cent of the debt ceiling of 1.4 billion in special drawing rights or approximately $1.9 billion for this year.

Going by projections in the ministry’s public debt statistical bulletin for the first half of 2020, borrowings could rise to $2.6 billion by the end of this year.

At the same time, outstanding loans would cumulatively amount to $8.7 billion.

In recent months, ADB approved a loan of $250 million to help Cambodia’s health systems, expand social protection and support economic recovery.

This is separate from other Covid-19 aid and loans from the EU, Japan and China, and credit line which the Kingdom has accepted in the past few months.

Soksensan said it is open to all sources of funds, including the current government budget and savings, loans and grants to augment expenditure.

Yet, Cambodia is far from lacking funds although it is viewing the issue `seriously and carefully’, he stressed.

Going forward, the path is rough as questions remain if the government can hold out as both industries and citizens remain stressed.

It is also not certain how much the government has drawn down from the stimulus package as it is still processing the data.

However, Soksensan assured that reforms will persist as well as facilitation to affected sectors including tax exemptions.

“Barriers will be reduced and stimulus package to small and medium enterprises and the agriculture sector will carry on [regardless],” he said.