Could the Covid-19 pandemic force Cambodia to reflect on its finances and expenditure?

It is a time when every penny counts. That so-called rainy day is upon governments now. With the global economy sliding into a recession, it is feared that developing nations could be thrust deeper into debt as Covid-19 severely impacts demand and supply.

Unlike its neighbours, Cambodia did not institute a strict lockdown or declare a state of emergency as the infection rate was just 0.1 per cent. But had it done so, the economic consequences would have been dire.

As it is, Cambodia is reeling with slower business activities, rising job suspensions, and weak trade as the risk of a spike in Covid-19 infection looms.

The government’s coffers are likely down after several months of tax collection from tourism and garment sectors were waived due to the blow from the global pandemic.

National savings has also been allocated to fund the fiscal stimulus plan of $800 million to $2 billion, based on its six-month-to-a-year impact.

On the surface, the budget seems conservative, particularly where large ticket payouts have been made to purchase medical equipment, for workers who were temporarily suspended and to provide business loans to shore up cash flows.

It is not going to be enough and the government is well aware of this.

Hence, the welcome acceptance of the financing assistance by the European Union ($67 million grant), a $20 million credit line from the World Bank, and aid from China, Germany, Australia and the US to help the economy and fight Covid-19.

Both the foreign and local Covid-19 fundraising campaign now stands around $63 million.

When asked, Ministry of Economy and Finance (MoEF) spokesman Meas Soksensan said it is evaluating the additional amount but is open to more funds from development partners.

With no disclosure relating to the terms of this funding assistance, questions abound over Cambodia’s debt service capacity.

Just a week into April this year, over 200 civil society organisations around the world called for a debt jubilee – to cancel all external debt payments of global South nations due in 2020, to free up resources to tackle urgent health, social and economic crises flowing from the coronavirus pandemic.

Shortly after, the International Monetary Fund (IMF) decided to erase the debt repayments of 25 poorest developing economies for the next six months totalling $215 million while G20 countries would suspend debt service payments of 73 of the poorest countries from May to the end of the year.

A joint statement on jubileedebt.org.uk urged lender governments, Paris Club members and others such as China, Saudi Arabia and Kuwait, to cancel all principal, interest and charges for the remainder of 2020 for countries in need.

“[This also has to be done] most urgently for Poverty Reduction and Growth Trust and International Development Association (IDA) countries,” the statement read.

For this to happen for Cambodia, which is an IDA nation, an application has to be made first but there is no determination of one yet.

Currently, the present value of the nation’s total public debt remains way below the 55 per cent debt to gross domestic product (GDP) threshold at 21.3 per cent.

Accordingly, international best practices deem that the Kingdom’s public debt remains “sustainable” and with “low risk” of debt distress.

But this analysis found in the Cambodia Public Debt Statistical Bulletin 2019 released in March might not have fully appreciated the current global economic landscape which could induce some stress on its debt service payment as tax revenues dip no thanks to exports and trade that have been badly hit.

Shoring up state funds

In 2019, Cambodia signed concessional loan agreements worth $1.3 billion with development partners, which was 30.1 per cent less than in 2018.

From 2020 to 2024, it plans to increase borrowings to $2.1 billion from $1.8 billion while keeping the net present value (NPV) of public and publicly guaranteed external debt below its threshold.

At the same time though, outstanding debts are projected to expand to $12.9 billion.

The purpose of the borrowings is to finance public investment projects in the priority sectors that support long-term sustainable economic growth and increase economic productivity.

Analysts suggest that some tweaking in the usage of funds going forward might be necessary.

Of the 2019 borrowings, the infrastructure sector absorbed 85.4 per cent of it. It also made debt service payments of $308.8 million to development partners in 2019, according to data.

Nearly all the payment (99.99 per cent or $308.8 million) was used to settle foreign borrowings while its domestic debt payment amounted to only $40,000 (0.01 per cent).

Of the foreign borrowing settlement in 2019, the principal sum came up to $218.3 million whereas interest and other fees totalled $90.5 million.

As of December 31, 2019, Cambodia has total public debt outstanding of $7.6 billion, where 99.96 per cent of that is foreign loans while $2.7 million is domestic debt.

The outstanding debts included rescheduled old debts ($631.7 million as of 2019) which are before 1993, a time when Cambodia was blighted by a protracted civil war and unrest. The government continues to look for clear-cut resolutions with partners over the old debts.

The data in the bulletin showed that the weighted average maturity for its total debt portfolio was 28.51 years while the average time to maturity was 9.98 years.

From 1993 to 2019, Cambodia has spent $1.7 billion in debt service payments to development partners where 98.8 per cent or $1.7 billion featured public external debt ($1.03 billion principal and $636.5 million interest and other fees).

The remaining 1.2 per cent or $20.3 million was public domestic debt ($17.2 million principal and $3.1 million interest).

Among its lenders are Paris Club members, comprising France, Japan, South Korea and Germany as its bilateral partners who loaned $625.5 million, and China which extended $268.8 million.

Multilateral development partners, such as the Asian Development Bank, European Investment Bank, World Bank, International Fund for Agriculture Development, Nordic Development Fund and OPEC Fund for International Development lent $662.8 million.

It should be noted that the loans are highly concessional, so the interest rates are nominal, around two to four per cent.

Besides, the 2019 loans have an average grant element of 51.7 per cent. By simple definition, it means that Cambodia only settles 48.3 per cent of the loans with interest.

Most of the Organisation for Economic Cooperation and Development (OECD) loans use this formula to assist least developed countries to grow, said independent think tank Asian Vision Institute economist Chheng Kimlong.

“It is like giving [the aid] for free, and there is no need to pay back,” he said, adding that financial aid by bilateral and multilateral development partners are small compared to the economic damage caused by Covid-19.

While repayment is an issue, the government as a lender itself has to contend with outstanding dues of $1.4 billion owed by its debtors comprising state-owned enterprises, public institutions, legal entities and financial institutions in 2019. The loans are disbursed to support socio-economic development.

The economy “will be bad”

So what is the problem? For nearly 10 years, Cambodia has enjoyed the sweet spot with a year-on-year average of seven per cent GDP growth, bucking external headwinds.

With a stranglehold on revenue on the reduced exports and tourist arrivals, dark clouds line the horizon.

This year, the economic growth outlook has turned pessimistic. In its latest revision made by the International Monetary Fund (IMF) on Cambodia’s economic growth, GDP is expected to slump to -1.6 per cent. It forecasts growth to rebound to 6.1 in 2021.

MoEF’s Soksensan expressed concern that if the crisis prolongs, the economy “will be bad”.

“It will have a huge impact on external risk. [Assuming] Covid 19 [results] in the extension of lockdown, [we will experience] a decrease in demand and consumption by the external market.

“This will totally affect our economy. We are afraid, and what’s more, we don’t wish it but we [can] only pray that Covid-19 ends soon,” said Soksensan.

The fear is real, especially with the 20 per cent year-on-year slump in export revenue from the garment and footwear sector in the first quarter of 2020.

The sector, which is bleeding as orders from EU and the US fall due to the pandemic, is expected to host the suspension of some 130 garment and footwear plants that allegedly cannot cope with the heavy losses. The effect of the suspension will affect some 100,000 workers.

The tourism sector which is suffering a similar fate as tourist arrivals plunged beginning mid-January has seen the widespread closure of hotels and travel agents, and job losses.

“We are already in trouble”

Cambodia is no longer a heavily-indebted poor country following its graduation to lower-middle-income nation in 2015. But it remains a highly indebted country, Kimlong opined.

Analysts are of two minds on this.For instance, Yuanta Securities (Cambodia) Plc research department head Sim Dara defended the Kingdom’s low gross debt to GDP ratio compared to Vietnam (57 per cent), Thailand (41 per cent) and Laos (64 per cent).

IMF data showed that Cambodia has plenty of room to raise its public debt to finance the necessary public expenditure for its economic data.

“It might take 10 to 20 years to reach the same level of indebtedness as its neighbours,” Dara said.

However, he concurs with Kimlong that Cambodia is “already in trouble” and debt repayment capabilities could be weakened by a large government budget deficit.

“The deficit would be driven by the global economic recession and Covid-19 pandemic crisis, thereby pushing Cambodia’s indebtedness to a higher level,” Kimlong said.

Unless appropriate measures are taken now to battle the crisis and boost the economy, a prolonged downturn could impact on government revenues.

“The government might have to eventually resort to more external funding to cover the fiscal revenue decrease,” Dara said.

There is no doubt the crisis would add more debt to the country with additional financial assistance, but there is no other option.

“The important thing is to get the economy going. As these debts are generally long-term in nature, once the economy grows, the country should be able to pay back,” said Kuala Lumpur-listed RHB Investment Bank Berhad ASEAN chief economist Peck Boon Soon.

The debt burden would fall on the future generation but Peck felt that as long as the debts are put to good use, it is worth doing so in the current economic climate.

Boosting a dwindling budget

With a bleak outlook this year, the government is likely pulling out all stops to ensure it services its debts in time and draw up a reasonable budget.

“We normally maintain our current deficit around five per cent to eight per cent although it is a little early to evaluate what is next because we have to see the impact on the economy this year, and decide the best policy,” said Soksensan.

He cites difficulty in exacting whether higher taxes are the way to go as the situation has to be evaluated to see if there is room to increase.

“An assessment should be done to see who can pay a higher tax. This policy would be looked at after the crisis. For the sake of citizens, we will try to maintain the policies.

“We have issued many policies to help vulnerable groups, such as garment workers and business sectors by reducing tax.

“This is contrary to what was expected where we help the sectors by not collecting taxes.

“For the citizens, we will introduce some policies to help them but for now, we are focused on aiding the vulnerable people who are affected by Covid-19,” Soksensan said.

If raising taxes to push up fiscal revenue is a feasible option versus more foreign debt, the effect of the policies should be none too devastating on taxpayers.

Kimlong said there are two “attractive” methods to expand the tax base for higher tax revenue that can essentially boost the dwindling national budget.

First, promote domestic small- and medium-sized enterprises (SMEs) and entrepreneurship through a more favourable regulatory governance system and a policy intervention that supports SME clusters and innovation.

Second, the government can consider more fiscal incentives for new foreign direct investments and projects relocating from countries with higher wages.

Yuanta Securities’ Dara finds that because the country is developing, the process requires a significant amount of investment in human and physical infrastructure.

“The future generations might be required to pay higher taxes but they will also enjoy the economic benefits brought by the investment made by the older generation.

“This is the path that most developed countries have gone through,” he added.