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‘On the offensive’: Cambodia to load up on loans to stimulate economy

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The rice sector is at risk of tariff pressure from the West. Yousos apdoulraShim

‘On the offensive’: Cambodia to load up on loans to stimulate economy

As the dust settles on the economy, Cambodia comes to grips with what needs to be done to turn the economy around, starting with a big shopping list for credit

‘We are going on the offensive,” Vongsey Vissoth, Ministry of Economy and Finance permanent secretary of state asserted at a briefing on the Covid-19 stimulus package. “Expect more borrowings because we need to spend a lot [to boost the economy],” he said.

The government is switching gears to boost competitiveness by developing skills, making trade efficient and improving infrastructure.

To do this, it first needs to bump up borrowings to $1.16 billion for credit relief ($600 million) and cash aid for suspended workers and the poor ($564 million) by raising funds.

Observers acknowledge that this is necessary. But with the global economic slowdown and Cambodia coming to a head, particularly with plunging garment exports and tourist arrivals, and rice tariff pressure from the West, the decision to borrow could have a daunting outcome.

The $8.2 billion approved budget for 2020, which included expenditure for the anticipated partial withdrawal of the Everything but Arms scheme by the EU, was among its largest in many years, but it was not built to handle Covid-19.

“We have been preparing for the EBA withdrawal since 2013 based on the strong economic growth for six to seven years. We had the resources to see it through, but after February, when we noticed that Covid-19 was not only in China, we had to rethink the budget,” Vongsey said.

Initial moves saw the rationalisation of expenditure such as overseas trips and large infrastructure projects release some $900 million. But civil servants salary of $2.1 billion and investments that created jobs continued.

Government data showed that national revenue was likely to drop 20-30 per cent year-on-year from $6.9 billion on the back of reduced taxes and falling exports.

Along with that, savings is also expected to decline between $800 and $900 million this year, a far cry from the $3 billion savings of 2019.

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Now, the insufficient funds for the Covid-19 stimulus package and lesser capital inflow has already seen the government seeking credit, the latest being $250 million from the Asian Development Bank.

Under the budget for 2020, Cambodia has a debt ceiling of $1.4 billion in special drawing rights (SDR) or equivalent to $1.9 billion (based on exchange rates) from development partners to augment its funding, including some from the revenue in 2019.

Comparatively, the 2019 public debt statistical bulletin showed that Cambodia borrowed only $927 million SDR ($1.3 billion), which accounted for 66.2 per cent of the debt ceiling.

In the current economic landscape with growth forecast to fall to -1.9 per cent this year, a double down on loans could impact the economy in the future, but Vongsey assured that the Kingdom can afford it.

Seemingly, there are no plans to seek a moratorium on debt repayments or restructure with its development partners. “No. We don’t want to anger our creditors,” he told The Post.

What about the cancellation of accumulated old debts of $631.68 million to the US and Russia as of December 31, 2019?

Again, he was vehement with his response, “No, we are able to pay back the old debts. We are not appealing . . . we don’t want [to do] that.”

However, anecdotal evidence has revealed that the ministry is working hard to cancel those debts, a process that is being reviewed by the creditors. Some $11.6 million has been rescheduled.

Ministry spokesman Meas Soksensan pointed out that according to the International Monetary Fund (IMF), Cambodia is considered a low-risk indebted country and can borrow up to 40 per cent of GDP without risk.

That might have been the case before Covid-19. But now?

Diminishing grants

In May, the World Bank expressed concern that a widening fiscal deficit to nearly nine per cent could result in the public debt ratio expanding to 35 per cent of gross domestic product (GDP) by 2022, from 30 per cent in 2019.

And more so now, as Cambodia starts the process of migrating from a least developed country (LDC) next year to become an upper middle income nation by 2030.

Of course, the process is extensive and full graduation is not likely to occur for six years or more, but once it is complete, official development assistance (ODA) or grants would eventually dry up.

“As Cambodia develops, its successes will come at a price. In this case, the loss of concessions and preferences, and the decline in aid and other ODA flows.

“This will happen gradually, therefore Cambodia has time to prepare. But it must start doing so immediately,” said Jayant Menon, a visiting senior fellow of the Institute of Southeast Asian Studies (ISEAS-Yusof Ishak Institute).

The pandemic will further reduce ODAs for some time as developed nations deal with their own slump in growth and other domestic problems such as rising unemployment, he said.

The Development Cooperation and Partnership Strategy 2019-2023 outlined that overall trends in aid in the form of external cooperation indicate a gradual decline from the peak of $1.5 billion in 2012, which is consistent with the experience of countries transitioning to middle-income country status.

The decline in ODA grant has been mitigated by loan provisions from major bilateral and multilateral partners such as China, which is Cambodia’s largest single bilateral creditor and owes $3.6 billion or 47.5 per cent of total outstanding loans as of December 31, 2019.

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It is followed by multilateral creditors the Asian Development Bank (ADB) ($1.4 billion) and World Bank ($586 million), and Japan ($411.3 million) and South Korea ($385.04 million) in the corresponding period.

“This is the trend now, I tell you, with newly emerging [creditors] like China. They want to lend you a lot of money, so do Japan and Korea. They have increased [lending],” said Vongsey.

It should be noted though that the interest rates for concessional loans are often nominal, more so with multilateral development partners such as the ADB and the World Bank.

As for China, rates per annum are between zero and 1.25 per cent (yuan credit) and 2.5 per cent (US dollar debts).

Asked if the fall of ODAs due to the loss of LDC status puts Cambodia in a difficult spot with higher debt-to-GDP ratio, Vongsey disagreed.

“As we migrate, we will use that period to borrow more. No problem [because] as we grow, we [will] borrow for investment, not consumption. So why worry?”

This falls in line with Menon’s advice for Cambodia to continue preparing for the inevitable diminishing of ODAs and private capital flows in the short to medium term although it faces a sharp decline in growth due to the global slowdown.

‘Devastating and unprecedented’

For now, the $1.16 billion budgeted for debt relief, workers allowance, loan intervention, skills training, and health aid will be spent this year.

Of that, $300 million has been allocated for 560,000 poor households, representing over 2.4 million citizens for June and July, and suspended workers. Some $100 million was also set aside for skills training.

Another $100 million was identified for the purchase of medical items including personal protective equipment, and health trainings and Covid-19 response.

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Vongsey said the government initially adopted a defensive approach because the economy was badly hit by the pandemic.

The government had to support people and businesses which included low-interest credit for small and medium enterprises, and payouts for suspended workers.

“We have never experienced this . . . these are unprecedented measures. It is a devastating year. We had to adjust the budget. Lots of funds were reallocated for social aid and fiscal measures to ensure that the economy does not fall drastically.

“Being an open economy, we cannot avoid the severe impact compared to a closed one. It has been only six months since Covid-19, but both our formal and informal sectors have been badly affected. For now, we are on survival mode,” Vongsey said.

Seeing that the exit strategy, otherwise known as the economic recovery plan, is still being drawn up, the government sees some hope in the agriculture sector which was only slightly affected by the pandemic.

The farming sector makes up 40 per cent of the population. With the loss of jobs in the formal sector, first generation farmers can return to their provinces and work on the land.

“Agriculture is not only self-sustaining but also addresses issues of national food security. So, we know that Cambodians won’t die of starvation,” Vongsey said.

In terms of investments, the government has shelved projects such as real estate investments that give rise to speculation.

“We have to distinguish real estate development and purchase of land. Some investments are not made to develop the land but to speculate. This is unproductive,” he stressed.

Not perfect but better

The road ahead is tough, which is why the government will put in place a strategy called the “financial economic architecture”, which involves the construction of a new foundation based on strategic and selective interventions.

“We will identify new trends in the world that dictate the new normal. We believe it will be different as there could be lower trade and higher protectionism,” he said, adding that this meant a shift towards the East.

It will push forth its free trade agreement with China, and focus more on the regional supply chain while identifying its strengths vis-à-vis threats and potential growth.

“For all this to happen, we need resources. We need to spend more. Fortunately, we have the room to do that [but] we must borrow in the right manner.

“We cannot rely on garment and tourism alone. We have to think long-term and short-term as the virus persists. We might not have a perfect option but it is a better option,” he said.

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