Rapid credit growth continues to pose a risk to financial stability in Cambodia, requiring more regulation to reduce the impact of a possible economic downturn and more adequate assessments of loan defaults in at-risk sectors, the International Monetary Fund (IMF) said in its latest Article IV consultation report.

The IMF published its recommendations for the Cambodian economy on Friday following a consultation it carried out in October.

Looking at both internal and external risk factors, the report listed US interest rate hikes, uncertainty from Brexit, the Chinese economic slowdown and a high level of dollarisation in Cambodia as some of the main challenges facing the Kingdom’s economy.

Credit lending is developing into another risk given its prolonged and rapid growth, aided by low levels of regulation, the report said. Year-on-year private sector credit growth reached 30 percent this year, leading to a credit-to-GDP ratio of 62 percent, IMF figures showed.

“The duration of the current credit boom, which began at around end-2011, significantly exceeds the average length of past credit booms, leading to the buildup of financial stability risks,” the report said.

“Credit growth is projected to remain high at around 25 percent over 2016–17, moderating only slightly due to tightening global financial conditions and the imposition of tighter liquidity regulations and higher capital requirements.”

In these conditions, the IMF projects the credit-to-GDP ratio will grow to over 80 percent by 2017, with loans offered to the construction and real estate sector considered the biggest threat to economic stability.

“While credit growth has been broad-based, there is growing concentration in the real estate sector, leading to rising credit risk linked to asset prices,” the report said.

“Rapid construction could eventually lead to an oversupply in the real estate market (especially for condominiums), which risks precipitating a large disorderly adjustment in real estate prices, adversely impacting the banking sector and economic activity.”

Oeun Sothearoath, head of business development at the Credit Bureau of Cambodia (CBC), said diversifying the sectors of credit is important to reduce large-scale loan defaults that could destabilise the economy.

“Each sector has their own special characteristics and diversifying loans to various segments [of the economy] should be a good choice rather than focusing on one specific segment,” he said.

The National Bank of Cambodia (NBC) has already taken steps to address the financial vulnerabilities, such as raising minimum capital requirements and creating liquidity coverage ratios, the IMF report noted.

However, more regulation is needed, to address risks from issues such as the high reliance on foreign borrowing to maintain credit growth.