The Kingdom remains stoic as the national budget comes under pressure and foreign debt increases

By December 31, 2020, a total of $2.02 billion had been borrowed for the year to finance public investment projects in priority sectors, such as infrastructure development, which received nearly 64 per cent of the sum.

This would in turn support long-term sustainable economic growth and increase economic productivity or production, the Ministry of Economy and Finance (MEF)’s Public Debt Statistical Bulletin read.

The 2020 government debt, the largest ever, is necessary to facilitate budgetary needs especially under the current pandemic landscape.

In 2015, an International Monetary Fund (IMF) staff discussion note titled When Should Public Debt Be Reduced? cautioned that high public debt could impede risk management, in that the desire to cope with unanticipated or contingent risks, and would weigh on economic growth.

Though it predates the Covid-19 pandemic, the authors, Jonathan Ostry, Atish Ghosh and Raphael Espinoza, wrote that in terms of risk management, the option value of lower debt is particularly high if there are risks of catastrophic events.

They cited a financial crisis in which a public backstop is essential where the government would need to ramp up borrowing.

Furthermore, they found that high public debt “implies the need to distort economic growth” such as labour and capital in order to service the debt.

This could be either through taxation or cuts in productive spending which essentially dampens economic growth.

That being said, analysts closer to home maintain that a debt risk is comparatively low in Cambodia.

The World Bank projected Cambodia’s general government debt to gross domestic product (GDP) for 2020 to be 31.6 per cent, while forecasting an expansion of 32 per cent in 2021 and 32.7 per cent next year.

Its finding on the increase in public debt corresponded with the need to finance the country’s widening overall fiscal deficit in the short-term.

But it added that although the debt sustainability analysis conducted in 2019 showed that Cambodia remained at low risk of external debt distress, the baseline has changed.

“With the fiscal deficit estimated at 5.6 per cent of GDP in 2020 and 6.1 per cent in 2021, financing needs from abroad will increase, while the exchange rate [comes] under pressure,” the World Bank noted in its economic update last November.

The total public debt last year which rose more than half from a year ago was sourced externally from bilateral and multilateral development partners.

Over 80 per cent of the borrowing is annually allocated for infrastructure, and the remaining sum for “other priorities”.

Cambodia Economic Update, November 2020

According to the MEF, the government approves a surplus budget every year, including 2021 despite the pandemic, although it contracted four per cent year-on-year to $7.5 billion.

The budget is usually part-financed by government savings and the rest via official loans.

That being said, the World Bank projected last year that the budget would turn to a deficit in 2020.

“[And] to close the gap between revenue collection and financing requirements, the authorities are dipping into government savings deposited into the banking system,” it said.

Growth of government deposits had eased to 14.5 per cent year-on-year in June last year due to a slowdown in revenue collection including tax revenue.

With the onset of the latest wave, which has claimed 142 lives and brought the total Covid-19 cases up to 21,141 as of May 13, 2021, the government has ramped up aid allocations. Fiscal measures for Covid-19 have seen over $1.1 billion expended under the cash transfer programmes for poor and vulnerable households, unemployed garment and tourism workers, and food aid.

Another $800 million has been reserved for continued support including a $200 million scheme to guarantee small and medium enterprise loans till December next year.

As of January 24, 2021, about $232 million had been allocated to 710,000 vulnerable households in the country.

In addition, the government decided to provide unemployment benefit to some 5,300 workers whose contracts were suspended due to the pandemic.

The fiscal support so far has been rather comparable with regional countries such as Indonesia, Vietnam and the Philippines, the World Bank showed, where government support came up to five per cent of GDP last year.

As of year-end 2020, the accumulated external borrowing amounted to $15.04 billion.

However, as predicted by the World Bank, it might have to dip further into its savings to continue its cash transfer programmes and purchase vaccines.

The strain is obvious on finances as just last week the MEF issued a circular to revise and strengthen the 2021 national budget expenditures, claiming that lockdown measures had impacted the budget framework.

The revision would free up $90 million to combat the spread of Covid-19 and address the negative socio-economic impact.

Debt ratio pushed up

Last year, the Asian Development Bank (ADB), when approving a $250 million loan for Cambodia, noted in its debt sustainability analysis (DSA) that at the end on April 2020, cash deposits at National Bank of Cambodia and commercial banks stood around $5.9 billion, which was equivalent to 22 per cent of 2019 GDP.

It ruled that the government might have drawn down its deposits to finance part of the fiscal deficit during 2020 to 2021 but given the uncertainty about the magnitude of such drawdowns, the DSA considered the loan application where the deficit is fully financed with new borrowing.

And as a result of this, it would push up the debt ratio to 39.9 per cent of GDP in 2020 to 2021 on average, from below 30 per cent in 2019.

“Even if the deficit is fully financed with new borrowing, solid economic growth through to 2024 is expected to more than offset persistently large budget imbalances, stabilising the debt ratio between 39 per cent and 40 per cent of GDP,” it contended.

MEF spokesman Meas Soksensan, when asked, insisted that “unlike other countries”, Cambodia did not make external borrowings to finance the deficit, while referring to the five key strategic principles which include tax collection and the issuance of treasury bonds to raise funds.

“Detailed measures are set in the debt strategy and one of the key measures is developing the government securities market,” he told The Post.

His strong assertion against external borrowing to cover the budget deficit was followed by his remark that loans are only for investment purposes.

“In contrast, we usually enjoy a current budget surplus every year. The loans [are] only for investment,” he retorted.

All loans are concessional

Cambodia’s public debt is generally sustainable, with few vulnerabilities, ADB said, making note of the IMF and World Bank’s rating that Cambodia was at “low risk of debt distress”.

It added that public debt will stay “moderately low” in the medium term, and that liabilities consisted mostly of foreign loans contracted on concessional terms.

“The People’s Republic of China is the country’s largest bilateral creditor, accounting for nearly half of its debt stock. Borrowing costs are low and there is limited exposure to rollover and interest rate risk,” it commented.

Admittedly, China’s loans have steadily streamed in every year totalling $5.3 billion as of December 31, 2020, making it the biggest Non-Paris Club lender to Cambodia.

Interestingly, the cumulative total of Chinese loans was tad lower than the overall debt from multilateral partners at $5.8 billion.

“We also borrow from Paris Club [members] as well as multilateral development banks,” was all Soksensan offered at the time of writing, when asked if Cambodia considered the alleged difficulty in restructuring loans with Non-Paris Club members if it came into trouble servicing loans.

However, he confirmed that the Chinese loans acquired through the Export-Import Bank of China are concessional.

Anthony Galliano, CEO of Cambodian Investment Management Co Ltd, felt that the support for Cambodia would remain strong, especially from China, the development banks and donors.

“I believe the Kingdom has practiced strong fiscal management and with the robust historical growth to the economy, the soundness and capacity of the treasury remains intact,” he said.

Meanwhile, two key economic sectors - garment and tourism that have been heavily impacted by the pandemic risk impacting GDP growth.

Analysts forecast a revision of four per cent economic growth this year if the latest wave digs deeper into the state coffer.

Last year, while the General Department of Taxation (GDT), responsible for individual and corporate taxes, collected 3.7 per cent more revenue at $2.9 billion, the General Department of Customs and Excise registered $2.4 billion revenue, down 25 per cent and nearly 15 per cent shy of its 2020 target.

The drop in total exports, was one contributing factor, a scenario that is anticipated again this year, compounded by the loss of 20 per cent Everything but Arms preferential tariff and exorbitant ocean freight rates.

Against this backdrop, Galliano viewed that the increase in foreign debt is “mildly concerning” at present and can be expected with the serial rounds of government stimulus packages.

Given the persistence of the virus and the prolonged severe impact on the economy, further stimulus will be required, and the government will be further financially burdened.

“The economic devastation is visible on the streets with business closures and the prolific ‘for rent’ and ‘for sale’ signs. The GDT is receiving a continual stream of business suspensions and closures, especially in hospitality, retail, consulting, advertising, entertainment and construction. There is deep concern on how long it takes for these industries to recover,” he said.

He added, “Thankfully, the US economy has strongly recovered under the new administration and the vaccine rollout has been a huge success, positioning the US as the candidate to return the quickest to normality.”

The US consumer’s return with fervour is to be seen as great news for Cambodia which is seeing continual growth in exports there, offsetting adverse consequences of the partial withdrawal of the EU market.

“The value of the US trade relationship with Cambodia should not be underestimated. The US economy will be one of the first out of the gate and back to normal, given the current situation, and some focus should be placed on taking advantage of the strong growth to come,” Galliano remarked.

Living with high debt?

Moving on, the Kingdom, which has an accrued loan arrears of $8.8 billion, with 44.3 per cent of that owed to China, projects total borrowing to hit a debt ceiling of 1.9 billion special drawing rights or $2.8 billion by 2025.

By then, it expects total outstanding debt to be about $15.7 billion.

That being said, it should be noted that as at end-December, 2020, debt service repayment had reached $2.09 billion, largely to China, ADB and the World Bank.

But what is the outlook on Cambodia’s public debt? Authors of the IMF study said those who believed that debt is bad for growth favoured a rapid reduction in indebtedness.

On the other hand, those who stress economist John Maynard Keynes’ or the Keynesian demand management considerations, argue for a measured pace of consolidation, perhaps by a ramping up of public investment while interest rates remain low.

However, drawing from the view of the study relating to what it termed as being “lost in the debate”, is the possibility of “simply living” with relatively high debt and allowing debt ratios to decline organically through output growth.

The study suggested that living with high debt merits consideration in countries where debt sustainability concerns are not pressing.

While debt might be bad for growth, it does not mean that it should be paid down as quickly as possible, which incidentally supports the Keynesian effects on activity and output, where increased government spending spurs output and generates income.

By using the highlights from the study, it perhaps sums up the government’s main objective, in that the economy is stimulated for the benefit of the people even as external debt inches up.