Cambodia is doing all it can to save the economy but risks taking on a debt burden that could weigh it down in the process

The pandemic has cost Cambodia $2.3 billion in expenses since it began, Prime Minister Hun Sen was quoted as saying last month.

While some portion of that was spent on vaccine procurement, one third of the total expenditure was allocated for cash transfer programmes.

Now in its seventh round, the programme, part of the fiscal stimulus plan, has doled out around $570 million between June 25 last year and September 24 this year.

More aid will be dispensed as the effects of Covid-19 linger, including the emergence of new variant, Omicron, amid the country’s reopening and increasing vaccination rate.

Just a year ago, predictions were that the economy would grow at 3.5 per cent come 2021 after a startling negative growth in 2020.

Cases were relatively low then, hovering around 360 as at end-December with no fatalities, thanks to the government’s efforts in managing the crisis.

However, a spike in community transmission in February caused by an imported case pressured the economy again with spot lockdowns, restrictive travels and factory and business outlet closures.

As of December 9, a total of 120,312 cases were recorded by the Ministry of Health with 2,974 deaths, although the numbers have stabilised to a seven-day rolling average of 22.86 cases earlier this week compared to 930.29 cases at the height of the pandemic in July, ourworldindata.com showed.

Much of the outcome is down to a robust vaccination campaign since March. This was mainly supported by an unending supply of vaccines from China, which led to some 83 per cent of the population fully inoculated.

While the tourism sector has yet to take off, Cambodia’s other economic mainstay – garment, footwear and travel bag manufacturing – has recovered gradually, indicated by exports valued at $8.2 billion between January and September this year, up 11.4 per cent from 2020.

In the same period, non-garment exports rose 51 per cent year-on-year to $3.4 billion.

The agriculture sector pressed on unaffected, with 3.7 million tonnes of milled and unmilled rice worth $1 billion exported from January to November this year, 54 per cent more than last year.

Barring growth figures, pressure on the economy remains strong, as business sectors struggle to get back on their feet, along with the rise in unemployment and poverty level.

It explains the continuation of fiscal stimulus measures including the extension of tax breaks for a “few more months” next year, wage subsidies to garment and tourism workers, financing facilities for small and medium enterprises, and the Covid-19 cash transfer programme.

However, it is not certain whether National Bank of Cambodia (NBC) will prolong its Covid-19 monetary measures in 2022.

These measures, including NBC’s decision to defer the increase in reserve requirements and capital conservation buffers, and interest rate cuts, were aimed at ensuring liquidity in the banking system.

Separately, NBC’s call to banks and microfinance institutions to restructure loans will end this year, pending renewed announcements.

The restructuring exercise saw 22 trillion riel ($5.4 billion) worth of loans belonging to 367,239 borrowers revised in the first six months of the year.

‘One-sided expenditures’

“We are not out of the woods yet,” said Roth Vathana, director for the Centre for Development Economics and Trade at Cambodia Development Resource Institute (CDRI), suggesting that the cash transfers continue, but on a wider scale.

Economists contend that the cash transfer programme has benefitted hundreds of thousands of rural and urban households who lost their jobs and livelihood as a result of the crisis.

The programme, which uses the locally developed poverty identification mechanism (IDPoor) to identify underprivileged groups based on their total household income, debt and assets, has in fact registered an increase in people who have fallen below the poverty line.

Some 700,000 people would be receiving the cash aid from the government between October and December this year.

NBC economist Oudom Cheng, speaking in a personal capacity, commended the government in addressing the social issues and saving people’s lives, but noted that the measures are “one-sided expenditures”.

The large stimulus and government expenditures to support households and private sector amid a contracting economy has led to lower fiscal revenue collection and the widening of fiscal deficits.

“The government has been utilising a combination of its budget, savings [reserves] and external borrowings to finance its stimulus and expenditure programme over the past two years to contain the pandemic and support local businesses,” said Cheng.

He noticed that hope was rising as most businesses and domestic travel have been allowed to to resume with safety guidelines in place.

However, the pace of recovery would be lagging as the way people interact and do business is not the same and that many businesses that had previously shutdown would need more time to re-establish itself.

Cambodia’s economic recovery highly relies on external factors as the drivers, he pointed out, projecting that tourism and international trade would not jump start immediately.

“Therefore, [the] government’s continuous support [stimulus] needs to prolong for some time and possibly needs to be expanded to boost economic recovery,” he added.

‘Many new loans’

These measures, while imperative, have inevitably prompted borrowings from both bilateral and multilateral development partners.

Interestingly, no concessional loans were signed in the first half of 2021, the latest Public Debt Statistical Bulletin, prepared by the Ministry of Economy and Finance (MEF), showed.

The absence of agreements was because new development programmes or projects were being “studied and in preparation phase” and were delayed by the pandemic.

This year, Cambodia’s debt ceiling is set at 1.5 billion special drawing rights (SDR) for loan agreements.

Apart from sporadic news reports on loan agreements with Asian Development Bank (ADB), and China and Japan, there is no clear information on the total debt portfolio this year.

Suffice to say, ADB’s lending pipeline for 2021 to 2024 includes $1.4 billion in concessional loans and $36.8 million in grants to support economic development and recovery.

However, MEF spokesman Meas Soksensan offered that “many new loans will be signed in the second half of 2021”, when asked. “For 2022, we have a ceiling of 1.6 billion SDR [equivalent to $2.3 billion] for loan signing.”

The borrowings, albeit concessional, will also support a burgeoning national budget for 2022, where $8 billion or around 26 per cent of GDP has been approved for pandemic-related work and economic recovery.

Next year, the government forecasts GDP growth of 4.2 per cent from the current expectation of 2.5 per cent this year.

“But you would have recently heard our Prime Minister say that [GDP growth for 2022] might increase to 5.2 per cent,” Soksensan said, sharing that growth would be underpinned by rising industrial and agricultural exports, and improvements in the service sector after reopening.

Even so, trade deficit has widened significantly, caused by increasing imports, especially gold to hedge against price volatility and inflation, the World Bank said in its latest economic update.

In the meantime, current account deficit, partly affected by the collapse of travel and tourism receipts, has deteriorated substantially to an estimated 26.9 per cent of GDP in 2021.

“However, it remains fully financed by foreign direct investment and other investment inflows,” it said, predicting real GDP growth to come in at 4.5 per cent for 2022.

While positivity is felt on the back of Cambodia’s reopening, borrowings will continue, said economist Dr Chheng Kimlong.

“It has become an immediate necessity to cover rising budgetary needs due to growing budget deficits caused by the pandemic over the past two years,” said Kimlong, who is vice president of independent think tank Asian Vision Institute.

However, he assured, government’s external borrowings “appear to be even more prudent than ever” with its tightening over unnecessary current expenditure.

But capital expenditure, such as those on physical infrastructures and logistics networks across the country, have not been affected by the pandemic, meaning that it is going on as normal.

In view of this, external borrowings to support the development needs will continue to expand, Kimlong said.

‘Over 10 per cent deficit’

The annual increment in borrowings, recorded as projections on the bulletin, will hit 1.9 billion SDR by 2025.

By then, outstanding loan is predicted to be around $15.7 billion, 37 per cent more from $11.4 billion expected as of December 31 this year.

As experts opined, the borrowings are necessary to plug a fiscal deficit, caused by additional spending and low tax revenue, that is likely to widen to over 10 per cent this year, Moody’s Investors Service Inc said in August.

Wider deficits will result in an increase in the debt burden to around 42 per cent of GDP this year, and will hover around those levels until 2024, even as the government deploys its savings.

In fact, government deposits have dropped to 17.6 per cent of GDP or 19.7 trillion riel as of September 2021 from 23.7 per cent of GDP or 24.9 trillion riel at the end of 2020, the World Bank said.

Nevertheless, it maintained that government savings remained “solid”.

The thing is, public debt has increased in the last two years, said David Freedman, former ADB country economist for Cambodia, adding that it has remained “relatively low”.

In comparison, Thailand’s public debt in 2021 is projected at 58 per cent of GDP while for Laos and Vietnam, the figure is 69.2 per cent and 45.2 per cent, respectively.

“The government’s fiscal strategy helped mitigate the impacts of the pandemic during 2020-2021. So far, the increase in public debt appears manageable.

“However, we can also see that the overall level of debt in the economy has increased significantly due to increased private borrowing,” Freedman said.

For instance, total debt levels rose to around 174 per cent of GDP in August this year from 136.2 per cent at the end of 2019, which is “high considering Cambodia’s overall level of development”.

Now that the economy is reopening, the key priority is securing a return to inclusive and sustainable growth.

This will help to ensure that both public and private debts can be serviced.

“Fiscal policy has an important role to play and my main concern going into 2022 is that the government may withdraw support too quickly, thus undermining the recovery.

“This is especially relevant for poor and vulnerable households who are currently receiving cash transfers,” he stressed.

Higher debt, higher repayment

Moving forward, Cheng, who shared his personal views, opined that fiscal revenue would not be as good as before while expenditure continue to rise.

In the short-term, the government can continue to draw down fiscal reserves and borrow more.

It is because Cambodia’s current fiscal reserves and public debt levels have yet to reach a “risky level”, he said.

However, in the medium-term, the government should continue to implement fiscal consolidation and be more stringent on external borrowing since “higher debt means higher repayment expenditure”.

Given that slow recovery is anticipated, vulnerable population and local businesses would still need government support, although they should be more targeted and flexible so as to ensure efficient use of funds.

“To balance medium to long-term sustainability, fiscal consolidation is crucial because the government can only have [so] much control on the expenditure side while the revenue side is very much reliant on economic condition.

“So, it is only [when] economic activities grow that the government would need to use less budget to support while also being able to collect more tax once businesses in the country perform better,” Cheng said.

Once the economy recovers, tax base expansion could be more favorable to implement, while the fiscal buffer is restored.

More importantly, to sustain long-term government’s fiscal position, the government needs to ensure that economic structure is resilient against future shock.

“That is, the diversification of Cambodia’s economic structure [which] needs to speed up to reduce the over-reliance on external factors [including tourism and exports of garments and footwear].

“A resilient economy would strengthen the government’s fiscal position over time,” he added.