The National Bank of Cambodia (NBC) released its review of 2016 and outlook for 2017 this week, highlighting the continued large growth of the banking sector while warning that the Kingdom was still vulnerable to external economic factors.

Cambodia achieved its anticipated 7 percent GDP growth on the continued good performance of its garment, tourism and construction and real estate sectors, the NBC said in the report. Foreign direct investment (FDI) continued to flow into the country, reaching 10.7 percent of GDP, it added.

“Inflation remained low at around 2.9 percent . . . as a result of the rising domestic demand in line with the improvement of living standard,” the report said.

The banking sector experienced strong healthy growth in 2016, though at a cooler pace than in recent years. Bank assets grew by 17.4 percent, reaching $27.8 billion, while deposits grew by 20.7 percent, to $15.4 billion. Meanwhile, credit increased by 18.3 percent to $17.6 billion, with the ratio of non-performing loans finishing the year at 3.5 percent for banks and 1 percent for microfinance institutions.

“In 2016, the National Bank of Cambodia strengthened its regulation on Liquidity Coverage Ratio in line with Basel III principles,” the report noted. “These conditions have urged banks and microfinance institutions to diversify their sources of income beyond interest income in order to ensure the sustainability of their businesses.”

The level of dollarisation in the economy remains high with the NBC reporting that the ratio of foreign currency deposits to riel and other liquid assets was at 83 percent, seriously reducing the effectiveness the of country’s monetary policy.

In response, the NBC said it was taking proactive steps to promote the use of riel, such as public awareness campaigns on the importance of local currency use, reducing transaction costs on riel payments, developing new riel liquidity provisions and gradually requiring financial institutions to provide more loans in riel.

Independent economist Teng Delux, said the dollarisation of Cambodia’s economy could prove increasingly problematic as the US Federal Reserve pushes through its planned interest rate increases.

“Increased interest rates by the US will affect people’s ability to borrow money from banks, especially because in Cambodia 90 percent of transactions are made in dollars,” he said.

Delux added that local consumption using riel needed to be encouraged to counteract the large amounts of dollars brought to Cambodia through FDI.

“It is a problem for the government, which holds a large amount of its debt in US dollars,” he said. “Cambodia’s comparative advantage for exports could also decrease with higher exchange rates because it relies much more on dollars than other similar exporting countries like Vietnam or Sri Lanka, who use and control their own currency.”

The NBC report warned that the Kingdom’s economy was still vulnerable to external downside risks, particularly related to US monetary policy and decreased global trade. On the other hand, the country’s integration into the ASEAN Economic Community and the trade benefits from China’s One Belt, One Road initiative were positive signs for continued GPD growth, alongside existing tax exemptions for exports to the EU and US.

Looking forward, the NBC projects Cambodia will continue on a path of 7 percent GDP growth over the next year, aided by a resurgence in the agricultural and tourism sectors.

“Since Cambodia is a small and open economy, which is highly integrated into the region and the world, its economy will benefit from the recovery of the global economy and robustness of economic growth in the region amid increasing exposure to external risks,” it said.

Inflation was expected to increase to around 3 percent, partly due to projected increase in oil prices. Other factors such as a higher minimum wage and slower growth in the real estate and construction sectors could have a negative impact on the next year’s results, it said.