Cambodia Economic Update Improving Macroeconomic and Financial Resilience Improving Macroeconomic and Financial Resilience Cambodia Economic Update April 2016 @ All rights reserved This Cambodia Economic Update is a product of the World Bank. The findings, interpretations, and conclusions expressed in this update are those of World Bank staff, and do not necessarily reflect the views of its management, Executive Board, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Preface and Acknowledgements The Cambodia Economic Update (CEU) is a product of the staff of the World Bank. It was prepared by Sodeth Ly and incorporates contributions by Miguel Eduardo Sánchez Martín, both at the Macroeconomics and Fiscal Management Global Practice (MFM GP). Linna Ky served as research assistant. The team worked under the guidance of Mathew A. Verghis, Practice Manager, MFM GP. Ratchada Anantavrasilpa and Colleen Mascenik, Finance and Markets (FAM) GP contributed the selected issue on Recent Developments of the Financial Sector: Opportunities and Risks, which was reviewed by James Seward, Practice Manager, FAM GP. The team is grateful for the comments, advice and guidance provided by Ulrich Zachau, Country Director, and Shabih Ali Mohib, Program Leader. The CEU is produced bi-annually to provide up-to-date information on macroeconomic developments in Cambodia. It is published and distributed widely to the Cambodian authorities, the development partner community, the private sector, think tanks, civil society organizations, and academia. The update is timed to coincide with the six-monthly publication of the East Asia and Pacific Economic Update by the East Asia MFM GP of the World Bank. We received valuable inputs, comments and suggestions from Ahmad Ahsan, East Asia and Pacific Chief Economist Unit, Sergiy Zorya, Agriculture GP, Carolina Mejia-Mantilla, Poverty GP, and Jose De Luna Martinez, Finance and Markets GP. The report also benefited from the advice, comments, and views of various stakeholders in the Royal Government of Cambodia (RGC), the private sector, development partner institutions and academia. The team is very grateful for their time and inputs. We are very grateful to the Cambodian authorities, in particular the Ministry of Economy and Finance, and the National Bank of Cambodia for their cooperation and support in the preparation of this CEU. The World Bank Cambodia Office Communications Team, comprising Saroeun Bou and Sophinith Sam Oeun prepared the media release, web display, and dissemination. For information about the World Bank and its activities in Cambodia, please visit our website at www.worldbank.org/cambodia. To be included in the email distribution list of the CEU and related publications, please contact Linna Ky (lky@worldbank.org). For questions on the content of this publication, please contact Saroeun Bou (sbou@worldbank.org). Table of Contents A. Executive Summary ................................................................................................................. 1 B. Recent Economic Developments .............................................................................................. 5 An overview .................................................................................................................................... 5 The real sector ................................................................................................................................. 5 a) Garments .................................................................................................................................. 5 b) Footwear and agricultural commodities .................................................................................... 7 c) Construction and real estate ...................................................................................................... 8 d) Tourism .................................................................................................................................... 9 e) Agriculture ............................................................................................................................. 10 Employment, income and consumption .......................................................................................... 11 Poverty .......................................................................................................................................... 12 The external sector ......................................................................................................................... 13 a) Exports ................................................................................................................................... 13 b) Imports ................................................................................................................................... 13 Inflation ......................................................................................................................................... 14 The monetary sector....................................................................................................................... 14 a) Monetary aggregates, interest rates, and exchange rates .......................................................... 14 b) The banking sector ................................................................................................................. 15 The fiscal sector ............................................................................................................................. 17 a) Revenue composition ............................................................................................................. 17 b) Expenditure composition ........................................................................................................ 18 c) Fiscal balance ......................................................................................................................... 19 d) Annual budget for 2016 .......................................................................................................... 19 C. Outlook and risks ................................................................................................................... 22 D. Key Messages and Policy Options .......................................................................................... 23 E. Selected Issue – Financial Sector Developments: Opportunities and Risks .............................. 26 a) Financial sector overview and trends ...................................................................................... 26 b) The banking sector ................................................................................................................. 27 c) Microfinance sector ................................................................................................................ 28 d) Insurance sector ...................................................................................................................... 30 e) Cambodia securities exchange, market infrastructure, anti-money laundering and reporting ... 30 f) Key messages ......................................................................................................................... 31 Cambodia: Key Indicators .............................................................................................................. 34 A. Executive Summary commodity prices constrained also growth in the agriculture sector. Rising exports and falling oil prices underpin While remaining robust, growth in 2015 eased slightly to an improved external position. The current 7.0 percent, slightly below the 7.1 percent achieved in 2014. account deficit narrowed to 10.8 percent of GDP The performance of the garment sector improved in 2015, in 2015, compared with 11.9 percent in 2014. The while signs of economic moderation and weakness persisted deficit was financed by continued strong FDI in the tourism and agriculture sectors, respectively. inflows, estimated to have reached US$1.8 billion Cambodia’s real growth is projected to remain healthy at (or 10 percent of GDP) in 2015. The resilient 6.9 percent in 2016, driven partly by a significant increase external performance resulted in rapidly rising in government spending. Strong garment exports should help gross international reserves, which reached US$5.6 to offset a slowdown in agriculture, while the construction billion (or 4.4 months of imports) by end-2015, sector is expected to continue to remain an engine of growth. compared with US$4.6 billion in 2014. Downside risks to this outlook include potential renewed labor issues, continued appreciation of the US dollar, slower Continuing rapid expansion of the financial economic recovery in Europe, and spillovers from a sector has accommodated economic growth, slowdown in the Chinese economy. The downward trend in and inflation picked up in late 2015. Domestic poverty is expected to continue over the next few years, albeit credit growth accelerated further, to 27percent at a slower pace, given the context of sluggish agriculture year-on-year in 2015, spurred on by rising growth. domestic demand for consumption and construction. Meanwhile, private sector deposits Recent developments growth halved to 16.6 percent year-on-year in 2015. As a result, the loan-to-deposit ratio rose to Cambodia’s export-led growth gained 95.6 percent. Growing internal demand has also momentum after the second quarter of last pushed up inflation, which reached 2.3 percent year and real growth is estimated to have year-on-year in February 2016. The Cambodian reached 7.0 percent in 2015. Following a riel (CR) appreciated slightly, reaching CR 4,008 slowdown in early 2015, garment exports—one of per US dollar in February 2016, compared with the main drivers of growth—rebounded in the CR 4,075 per US dollar in December 2014. second half of the year, ending at a nominal year- Appreciation of the riel against the Thai baht and on-year growth rate of 12.3 percent, compared the Vietnamese dong also continued, while the real with 9.2 percent in 2014. Having relatively good effective exchange rate (REER) appreciated labor market stability coupled with gradually further. moving up the value chain appear to have helped the sector expand. In 2015, the construction sector Fiscal performance has improved, with continued to expand, driven by sustained foreign substantial revenue growth and contained direct investment (FDI) into the sector, although expenditures continuing to curb the overall approvals decelerated. Total tourist arrivals in fiscal deficit. Tax revenue increased from around 2015 grew by 6.1 percent (reaching 4.78 million 10 percent of GDP in 2010 to 15.1 percent in visitors), compared with 6.9 percent in 2014, 2015, thanks to improved administration and despite recovering tourism activity in Thailand and strong economic growth. Total domestic neighboring countries. Rice production in 2015 is collection reached an estimated 17.5 percent of estimated by the authorities to have been lower GDP in 2015, while spending is expected to have than in 2014, partly caused by drought; sluggish remained contained at 20.5 percent of GDP, improvements in yields and depressed agriculture despite increasing wage pressures. The overall Cambodia Economic Update April 2016 >> 1 government deficit including grants narrowed to and export diversion away from Cambodia unless 0.8 percent of GDP in 2015, compared with 1.4 key constraints, such as high energy costs, percent in 2014, despite a decreasing grant regulatory impediments to doing business, and component. Cambodia’s debt distress rating in the infrastructure bottlenecks, are successfully latest World Bank/IMF Debt Sustainability addressed.1 This could gradually constrain growth Analysis remained low. unless key structural reforms discussed in the key messages section below are proactively addressed. Outlook The rapidly expanding financial sector has Growth is expected to reach 6.9 percent in been supportive of growth, but poses also 2016, partly underpinned by a significant some challenges. At 38 percent, credit growth to increase in government spending. Strong the construction sector continued to grow fast in garment sector exports are expected to help to 2015. While being relatively shielded from external offset weakness in the agriculture sector, while the financial volatility, the economy remains foreign direct investment-driven construction is dependent on bank flows in the form of foreign expected to continue to be a major engine of currency deposits. Given the limited room for growth. Robust export growth will also support a monetary policy and the impossibility for the narrower current account deficit. The central National Bank to act as a lender last resort due to bank’s directive (Prakas) issued in March 2016 high dollarization, as well as the absence of an doubling banks’ capital requirements is expected inter-bank market, continued high domestic credit to help strengthen the rapidly expanding banking growth increases the risks to financial stability in sector. The 2016 budget reflects expansionary Cambodia. fiscal policy, with spending increasing by 3.6 percent of GDP, of which 1.4 percent is due to Other downside risks to this outlook include rising wages and the rest to capital expenditure and potential labor issues, continued appreciation of non-wage spending. the US dollar in a context of dollarization, slower economic recovery in Europe, spillovers from a Further reduction of poverty is expected for slowdown in the Chinese economy. A hard landing both urban and rural households throughout of the Chinese economy would dampen growth 2015-2016. For urban households this is explained prospects, mainly due to potentially lower Chinese by the economic sectors in which they participate tourist arrivals in the short term and slower FDI (mainly construction and services). For rural inflows in the medium term. While Cambodia is households there has been an increase in sources likely to be shielded from financial volatility due to of income different to agricultural self- its limited capital markets, bank inflows remain employment income. sensitive to public confidence and market perceptions. In the medium term, growth is expected to remain between 6 and 7 percent, in a context Key messages and policy options of increasing external competition. Given the narrow production and export base and garment Concentration in the US and EU export exports (about 70 percent of total) heavily markets in a setting of erosion in trade concentrated in the EU and US markets, the preferences requires structural reforms aimed economy is exposed to mounting competition. at boosting competitiveness. As With the Trans-Pacific Partnership (TPP) and the abovementioned, the economy is increasingly free trade agreement (FTA) between Vietnam and exposed to greater competition, given the the EU, there are significant risks of investment potential negative impacts for Cambodia of the 1 See the full report on Cambodia Investment Climate Assessment (2014) at http://documents.worldbank.org/curated/en/2014/01/23946799/ cambodia-investment-climate-assessment-2014-creating-opportunities- firms-cambodia Cambodia Economic Update April 2016 >> 2 TPP and the FTA between Vietnam and the EU ‘shadow banking’ market make it difficult to in the medium to long term, as well as the rise of quantify the risks more precisely. First and Myanmar. A series of policy options aimed at foremost, several gaps need to be addressed in underpinning external competitiveness include terms of data collection and supervision capacity. improving the overall business environment, This includes improving information on non- investing in human capital, and addressing performing loans, related-party exposures and infrastructure gaps. country-risk exposures, while developing early warning systems in the mid-run. It will also be Improving the overall business environment important to improve inter-agency coordination would enhance competitiveness across by deepening the existing collaboration. Second, sectors, underpinning product and market further strengthening of the regulatory framework diversification, while also helping firms to be well is also needed to ensure macro-financial stability. prepared to take advantage of the single market Authorities have introduced some important and production base goal set by the AEC. A better measures recently, including increasing the capital trained and skilled workforce will certainly help, requirement of financial institutions, the reserve taking advantage of Cambodia’s demographic requirement for foreign borrowing, and the dividend. Addressing the key constraints, namely liquidity coverage ratio. Finally, fast growth in high energy costs and infrastructure bottlenecks, microfinances would require also from enhancing point to the need to scale up public investment to consumer protection and financial literacy. sustain external competitiveness. In order to remain competitive, the authorities could also consider progressively increasing budget allocations to productive and competitive investment projects. In the medium term, concessional borrowing may come increasingly from regional sources, such as the newly established Asian Infrastructure Investment Bank (AIIB), as well as from bilateral sources such as Japan and China. Steadily declining development partner-financed public investment will also require a short-term response whereby additional allocations come from the government budget. Careful prioritization of expenditures and continued buoyant revenue collection will help to make this affordable, if increases in the wage bill can be curbed. Meanwhile, it will also be necessary to further strengthen the rules and regulations governing the management of capital investment projects, as envisaged by a public investment management assessment currently under discussion. Finally, further enhancing supervision and coordination, regulation, and consumer protection to safeguard financial stability would be advisable, in a moment of fast credit growth. Information deficiencies and a large Cambodia Economic Update April 2016 >> 3 THE CAMBODIAN ECONOMY AT A GLANCE Cambodia’s export-led growth continues … …with rising garment and footwear production… Real GDP growth continues to be robust. (Percent) Garment and footwear exports acclerated in 2015 8 (US$ million) 7.4 Footwear 7.3 8,000.0 35.0 7.5 7.1 7.1 6.9 Garment 7.0 7,000.0 Change (%, y/y) (RHS) 30.0 7 6,000.0 25.0 6.5 5,000.0 20.0 4,000.0 6 15.0 3,000.0 5.5 10.0 2,000.0 5 1,000.0 5.0 2011 2012 2013 2014 2015e 2016p - - Source: The authorities and Bank staff estimates 2011 2012 2013 2014 2015 e = estimate; p = projection Source: The Cambodian authorities …and deepening of the construction sector… … offsetting the decline in agriculture... Approved construction projects (US$ million, Annual rice production (Metric tons million) YTD) Total production (million tons) Y/Y % change (right scale) 4,000.00 Construction Approval 440 10.0 10.0 Average US$/m2 (RHS) 9.5 3,500.00 8.0 420 9.0 3,000.00 8.5 6.0 400 2,500.00 8.0 7.5 4.0 2,000.00 380 7.0 1,500.00 2.0 360 6.5 1,000.00 6.0 0.0 340 5.5 500.00 5.0 -2.0 0.00 320 2010 2011 2012 2013 2014 2015e Dec-13 Dec-14 Dec-15 Source: The Cambodian authorities Source: The Cambodian authorities …while healthy FDI inflows finance the external gap … …and rising collection helps fiscal consolidation. Trade and current account deficits, and FDI (Percent of GDP) General government fiscal deficits. (Percent of GDP) 15 2.0 10 5 0.0 0 -2.0 -5 -4.0 -10 -6.0 -15 -8.0 Deficits (incl grants) -20 Deficits (excl grants) Current account excl off. transfers Trade balance FDI -10.0 -25 2008 2009 2010 2011 2012 2013 2014 2015e 2016b 2010 2011 2012 2013 2014 2015e Source: The Cambodian Source: The Cambodian authorities and Bank staff estimates authorities b= budget Cambodia Economic Update April 2016 >> 4 B.Recent Economic Developments the US dollar, slower economic recovery in Europe, and spillovers from a slowdown in the Chinese economy. The economy is highly dependent on exports, in particular garment and An overview footwear exports, to two major destinations, the EU and the US. A hard landing of the Chinese Cambodia’s export-led growth has continued economy would dampen growth prospects, mainly despite US dollar appreciation. Garment due to potentially lower Chinese tourist arrivals in exports, one of the main drivers of growth, the short term and slower FDI inflows in the accelerated at a year-on-year growth rate of 12.3 medium term. percent in 2015 in value terms, compared with 9.2 percent in 2014.2 Regained labor market stability Figure 1: Garment and footwear sector performance and the gradual shift towards higher value-added improved, offsetting stagnant agricultural production products appear to have helped the sector adjust in 2015. Contribution to annual real growth (In percent) and expand, despite the appreciation of the US Agriculture Services dollar. Ind - Garment & footwear Ind - Others Ind - Construction Taxes less subsidies Real GDP growth 8 7.3 7.4 7.1 8 The two main sectors, namely garments (and 6.0 7.1 7.0 6.9 footwear), and construction (and real estate), 6 6 are estimated to have provided half of last year’s total growth. The garment and footwear 4 4 sector was the most dynamic, making the largest contribution to growth, at one-third of real growth 2 2 in 2015, while the construction (and real estate) sector followed, providing about one-sixth of the 0 0 total. As earlier projected, the tourism sector continued to underperform in 2015, while the -2 2010 2011 2012 2013 2014 2015e 2016p -2 agriculture sector stagnated. Growth, therefore, Source: The authorities and World Bank staff estimates. e= estimate; p = projection. was robust and a revised estimate by the authorities placed it at 7.0 percent in 2015, slightly below the 7.1 percent achieved in 2014 (Figure 1). Cambodia is likely to be shielded from global financial volatility due to its limited capital Growth is expected to remain robust at 6.9 markets. Nonetheless, it is worth noting that bank percent in 2016. Strong garment and footwear flows in the form of foreign currency deposits performance helps to offset weakness in remain sensitive to public confidence and market agricultural production, while construction activity perceptions putting a premium on sound is expected to ease, as the number of project macroeconomic management. approvals decelerated in 2015. The tourism sector The real sector is expected to improve as there has been a recovery in tourism activity in neighboring a) Garments countries, in particular Thailand, given the dependency of Cambodia’s relatively new tourism Garment production, which goes mainly sector on Thailand’s more developed tourism towards exports and is one of the main drivers sector. of growth, accelerated at a year-on-year growth rate of 12.3 percent in 2015 in value Downside risks to this outlook include potential terms, compared with 9.2 percent in 2014 renewed labor unrest, continued appreciation of (Figure 2).3 The return of a relatively stable labor 3Figures based on customs data. Discrepancies may exist with respect to the figures as presented by other government agencies. Cambodia Economic Update April 2016 >> 5 market and the gradual shift towards higher value- respectively (Table 2). The value of garment added products4 appear to have helped the sector exports to the US, however, peaked in 2014 and expand, overcoming challenges on the domestic has stagnated since then. front despite the appreciation of the US dollar. Figure 2: Export prices to the EU and the US edged up in 2015. (US$ per dozen) While the volume of garment exports continues to drive export growth, the 45.0 US market EU market contribution from prices has recently started 40.0 to pick up (Table 1). Rising volume has continued to drive garment exports growth over the past four 35.0 years, while the contribution from rising prices 30.0 improved in 2015, accounting for 28 percent of total garment exports gain in 2015 (Table 1). This 25.0 seems to indicate that Cambodia is gradually 20.0 moving into higher value-added products. Sep-14 Sep-12 Sep-13 Sep-15 Jan-12 Jan-13 Jan-14 Jan-15 Mar-13 Mar-12 Jul-12 Jul-13 Mar-14 Jul-14 Mar-15 Jul-15 May-12 May-13 May-14 May-15 Nov-12 Nov-13 Nov-14 Nov-15 Table 1: Volume and price increases contributed 71.9 Source: The Cambodian authorities. percent and 28.1 percent, respectively, in 2015. Table 2: The value of garment exports to the EU Increase US$ 2012 US$ 2013 US$ 2014 US$ 2015 contributed most, at 60.8 percent of the total increase. due to: mln (%) mln (%) mln (%) mln (%) (In US$ million) Volume 418.0 149.4 573.5 76.2 561.8 121.3 487.2 71.9 2014 2015 Change % Contribution Price -138.2 -49.4 178.8 23.8 -98.8 -21.3 190.7 28.1 Total value 5,489.3 6,167.2 677.9 100 Total 279.9 100.0 752.3 100.0 463.0 100.0 677.9 100.0 o/w Source: The Cambodian authorities. EU 2,172.8 2,585.0 412.2 60.8 US 1,889.3 1,888.2 -1.2 -0.2 Garment exports to the EU—the largest Japan 326.5 463.9 137.4 20.3 export market—absorbed 42 percent of total Others 1,100.6 1,230.1 129.5 19.1 garment exports, and continue to drive Cambodia’s overall garment exports growth. Source: The Cambodian authorities. However, garment exports to the US, accounting In volume terms, total garment exports rose for 31 percent of total garment exports, have by 14 million dozens (or 8.9 percent year-on- already peaked. While trending downwards in year) in 2015. Of this, 78.3 percent, 14.2 percent, recent years, prices of garment exports to both the and 19.3 percent were contributed by increases in EU and the US markets (Figure 2) held up well in garment exports volumes to the EU, Japan and 2015, despite tighter competition in the context of other destinations (outside the US), respectively an appreciating US dollar. (Table 3). In contrast, garment exports volume to Garment exports to the EU were responsible for most of the export gains in 2015, while some destination diversification was also observed. Of the total increase in garment exports value amounting to US$678 million (or 12.3 percent) in 2015, 60.8 percent, 20.3 percent and 19.1 percent came from increases in exports to the EU, Japan and other destinations outside the US, 4While the garment sector seems to be shifting towards higher value-added products in 2015, it is necessary to examine detailed exported products and prices to confirm this. Cambodia Economic Update April 2016 >> 6 the US market declined, with a negative contribution of 12 percent. Box 1: The Trans-Pacific Partnership1 On October 4, 2015, 12 Pacific Rim countries Table 3: Volume of garment exports to the EU concluded negotiations on the Trans-Pacific contributed most, at 78.3 percent of the total Partnership (TPP). If ratified by all signatories, the increase in garment exports volume. (Million agreement could raise GDP in member countries by an dozens) average 1.1 percent by 2030. It could also increase 2014 2015 Change % Contribution member countries’ trade by 11 percent by 2030, representing a boost to regional trade growth, which Total volume 159.1 173.2 14.1 100 had slowed to about 5 percent on average during 2010- o/w 14, down from about 10 percent during 1990-2007. To EU 57.2 68.3 11.1 78.3 the extent that the benefits of reforms in TPP member US 70.4 68.7 -1.7 -11.9 countries have positive spillovers for the rest of the Japan 5.0 7.0 2.0 14.2 world, the detrimental effects of the agreement due to Others 26.5 29.2 2.7 19.3 trade diversion and preference erosion on non- Source: The Cambodian authorities. members will be limited. The global significance of the agreement depends on whether it gains broader international traction. The solid garment exports performance in 2015 was underpinned by the gradual recovery The benefits of TPP will mostly derive from reductions in major high-income countries, in particular in non-tariff measures (NTMs) that benefits services. in the Euro area and the US. The recovery, For TPP members, only 15 percent of the GDP which gained traction in 2015, has been increase would be due to tariff cuts, whereas cuts in NTMs in goods and services will account for 53 percent increasingly driven by stronger domestic demand and 31 percent of the total increase in GDP, in those economies as labor markets and credit respectively. conditions improve.5 Garment exports performance is expected to remain strong in 2016, The largest gains in GDP are expected in smaller, open given continuing high growth of imports of fabric, member economies, such as Vietnam and Malaysia (10 percent and 8 percent, respectively). Both countries will the main input for garment production. benefit from lower tariffs and NTMs in large export markets and at home, and from stronger positions in b) Footwear and agricultural commodities regional supply chains through deeper integration. TPP may accelerate structural shifts between industries Footwear is rapidly emerging as a major based on comparative advantage and scale economies. source of exports, largely destined for the EU Skilled labor-intensive sectors (such as chemicals, market. Footwear exports have been growing vehicles and machinery) are likely to expand faster in some advanced economies, while unskilled labor- rapidly at an average annual rate of 35 percent over intensive sectors (such as textiles, apparel and metal the past five years. The value of total footwear products) are likely to expand faster in some emerging exports rose to US$660 million in 2015 (Table 4), market member countries. from only US$108 million in 2009. Agricultural The 12 member countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New commodity exports such as milled rice and rubber Zealand, Peru, Singapore, the US and Vietnam. Source: January 2016 Global Economic Prospects, Spillovers amid Weak Growth, January exports which experienced high growth in 2015 2016, World Bank. appears to be partly the result of a low-base effect, given the 20 percent year-on-year decline garment tariff liberalization becomes effective in the rates experienced by both rubber and under a free trade agreement between the EU and milled rice exports in 2014. Vietnam. Similarly, Cambodia’s garment exports to the US are likely to face tougher competition Cambodia currently enjoys the EU’s once members of the Trans-Pacific Partnership Everything-But-Arms (EBA) preferential (TPP) receive preferential treatment. (See Box 1 treatment for its garment exports. However, for more details on TPP.) much more intense competition is expected once 5 Global Economic Prospects, Spillovers amid Weak Growth, January 2016. Cambodia Economic Update April 2016 >> 7 construction sector. This has been facilitated by Table 4: Rising exports of footwear and milled rice are Cambodia’s liberal trade and investment regime. largely due to improving export performance to the Figure 4: The volume of construction equipments EU. and steel imports is rising as a result of the 2013 2014 2015 ongoing construction boom. Exports YoY % 0.8 (US$ YoY % YoY % chang Construction equipments Steel million) Value change Value change Value e 0.7 Millions of metric tons Footwear 360.35 21.2 471.24 30.7 659.89 40.0 0.6 Milled rice 262.27 92.8 210.4 -19.7 315.30 49.8 0.5 Rubber 175.17 6.5 138.69 -20.8 165.39 19.2 0.4 Source: The Cambodian authorities. 0.3 0.2 c) Construction and real estate 0.1 Construction remains dynamic. Expansion of 0 2013 2014 2015 the construction sector continues apace, focusing Source: The Cambodian authorities in particular on luxury high-rise residential and commercial buildings concentrated in the center of International experience indicates that the capital, Phnom Penh. Growth in annual construction plays a unique role in economic construction permit approvals, however, has growth and is often a key barometer of economic decelerated, expanding by just 2.3 percent year-on- conditions. Construction increases a country’s year in 2015, compared with 17.5 percent year-on- physical infrastructure, a critical factor in year in 2014 (Figure 3). sustaining long-term growth. The performance of the construction sector both affects and is Figure 3. High-end construction building demand influenced by general economic conditions. is expanding, as seen in the rising average cost per Although generally smaller in size than other m², while the number of approved construction sectors, its activity has a greater impact on output projects has decelerated. 35 440 and employment in the rest of the economy, given Approved amount (% change) 30 Cost (US$/m2, RHS) its close inter-linkages with other sectors.6 420 25 400 Figure 5: Construction and real estate share in 20 380 total (fixed asset) amount of approved foreign 15 invesment projects. (In percent) 360 10 62% 5 340 0 320 2013 2014 2015 32% Source: The Cambodian authorities. 9% Rising imports of construction equipment and 1% 2% materials, including steel products, continue 2011 2012 2013 2014 2015 to support the construction boom (Figure 4). Given the relatively modest size of the domestic Source: The Cambodian authorities market, anticipation of the opportunities arising from implementation of the AEC in 2016 Risks associated with the construction and continues to underpin the recent expansion of the real estate boom are increasing, given that it has 6The Driving Force behind the Boom and Bust in Construction in Europe, Yan Sun, Pritha Mitra, and Alejandro Simone, IMF Working Paper, WP/13/181. Cambodia Economic Update April 2016 >> 8 fueled land and house price speculation across Figure 6: Tourist numbers visiting Angkor Phnom Penh and in other urban centers, as well as Archaeological Park decelerated, as did revenue a rapid credit expansion that could eventually lead collection at the Park. to the emergence of a bubble. However, unlike 70.0 Revenue (in mln of US$) Visitors (in mln, RHS) 2.5 traditional housing developments that were mainly 60.0 financed domestically, the recent surge in modern 50.0 2.0 high-rise residential and commercial building 1.5 40.0 development has been largely undertaken by joint- ventures between local and international partners, 30.0 1.0 and financed mainly by FDI (Figure 5). 20.0 0.5 10.0 0.0 0.0 d) Tourism 2010 2011 2012 2013 2014 2015 Source: The Cambodian authorities. The tourism sector has eased. Tourist arrivals in 2015 grew by 6.1 percent year-on-year (reaching Asia has become the major source of tourists, 4.8 million visitors), compared with 6.9 percent in contributing almost 85 percent of the total 2014 (Table 5). Arrivals by air moderated most, gain in arrivals to Cambodia over the past five increasing by 8.9 percent year-on-year in 2015, years (Table 6). Cambodia has been successful in compared with 12.7 percent in 2014. However, the attracting foreign tourists, with the number initial recovery of regional tourism activity, arrivals in 2015 at 4.8 million, almost double the particularly in Thailand, is expected to have a 2.5 million arrivals seen in 2010. However, the positive impact on arrivals to Cambodia. tourism sector appears to be increasingly Table 5: Arrivals to Cambodia eased further in 2015. dependent on arrivals from Asia, with the However, improving arrivals to Thailand are expected to contribution of arrivals from Europe declining positively impact tourism activity in Cambodia. (Tourist since 2010. Cambodia’s neighbors, namely arrivals, in million) Vietnam, China, Lao PDR and Thailand, Cambodia Thailand Vietnam contributed about 70 percent of the total increase 2013 2014 2015 2013 2014 2015 2013 2014 2015 of 2.2 million visitors between 2010 and 2015. Total arrivals 4.2 4.5 4.8 26.5 24.8 29.3 7.5 7.8 7.9 - Change (y/y) 17.5% 6.9% 6.1% 18.8% 6.4% 17.7% 12.5% 3.8% 0.8% Table 6: Asia has become the main source of tourists, o/w Air arrivals 2.0 2.3 2.5 15.4 15.5 18.4* 6.0 6.2 6.3 contributing almost 85 percent of the total increase in Change (y/y) 17.2% 12.7% 8.9% 8.7% 1.0% 18.6% 6.8% 4.0% 0.8% arrivals over the past five years. Contribution to tourist Source: The Cambodian authorities, TAT, Vietnam's Ministry of Culture, Sports and Tourism. arrivals growth by country of origin since 2011 (In percent) * Based on Jan-Oct 2015 arrival numbers. 2011 2012 2013 2014 2015 Asia 80.1 84.1 83.7 84.6 84.2 Easing tourist arrivals in 2015 slowed revenue Vietnam 26.7 23.1 20.0 19.6 20.9 collection at the Angkor Archaeological Park, China 18.6 14.5 16.8 19.2 25.5 the largest tourist attraction site in Cambodia Lao PDR 9.7 15.0 18.9 18.4 13.8 Thailand -8.7 4.9 4.2 6.5 8.9 (Figure 6). In 2015, the number of tourists visiting Europe 14.3 11.3 12.3 11.2 10.1 the park increased by only 2 percent to 2.1 million America 4.9 4.2 3.8 3.9 5.1 and its revenue rose by merely 1.2 percent to Africa 0.4 0.1 0.1 0.1 0.2 US$60.05 million.7 Middle East 0.3 0.3 0.2 0.2 0.3 Total 100.0 100.0 100.0 100.0 100.0 Source: The Cambodian authorities. 7According to the Apsara Authority. For more details, see http://apsaraauthority.gov.kh/?page=detail&menu1=649&ctype=docume nt&id=649&ref_id=13&lg=kh Cambodia Economic Update April 2016 >> 9 Increasing tourist arrivals to Thailand to have dropped by 1.1 percent year-on-year (including arrivals by air) bode well for (Table 7). In addition, farmers are facing falling improving arrivals to Cambodia, given the agriculture commodity prices that negatively affect dependence of Cambodia’s relatively new their earnings. This calls for higher productivity to tourism sector on Thailand’s more developed withstand lower prices, and for diversification to tourism sector. less water-intensive crops. Table 7: Slower rice production in 2015/16 than in e) Agriculture 2014/15 was due to less favorable weather conditions. After sustaining a high growth rate, averaging Rice production 2014/15 2015/16e Change (%) 5.5 percent in real teams during 2005-13, Planted area (ha, mln) 3.056 3.027 -0.9 agriculture GDP growth flattened, expanding o/w rainy season 2.565 2.562 -0.1 just 0.3 percent and 0.2 percent year-on-year in Harvested area (ha, mln) 3.029 2.996 -1.0 2014 and 2015, respectively (Figure 7). Less o/w rainy season 2.538 2.536 -0.1 favorable weather conditions, especially Production (metric tons, mln) 9.227 9.329 -1.1 o/w rainy season 7.144 7.175 0.4 intermittent rainfall, over the past few years have Other crops As of Change As of Feb 2015 had a negative impact on agriculture production. (planted areas in ha) Feb 2016 (%) As rice farming remains traditional, falling rice Corn 24,312 23,483 -3.4 prices appear to have had less negative impact on Cassava 12,887 19,641 52.4 Bean 11,442 13,582 18.7 rice production (than other types of agriculture production, such as rubber and cassava).8 Source: The Cambodian authorities (final wet and estimated dry season rice production, February 2016), http://www.maff.gov.kh/reports/67-monthlyreport.html Figure 7: Agriculture GDP growth flattened, expanding by just 0.3 and 0.2 pecent year-on-year Figure 8: Rice production peaked in 2013 and has in 2014 and 2015, respectively. (At constant 2000 since declined. (In million metric tons) prices, YoY % change) Total production (million tons) Y/Y % change (right scale) 6.0% 10.0 10.0 9.5 5.0% 8.0 9.0 4.0% 8.5 6.0 8.0 3.0% 7.5 4.0 2.0% Agriculture GDP 7.0 2.0 6.5 1.0% 6.0 0.0 0.0% 5.5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e 5.0 -2.0 2007 2008 2009 2010 2011 2012 2013 2014 2015e Source: The Cambodian authorities. Source: The Cambodian authorities. e= estimates. e=estimate. The agriculture sector continues to be highly dependent on rainy season rice production . The modernization of agriculture would help Despite efforts made to improve Cambodia’s to sustain productivity in the long run. As irrigation system and its diversification of crop discussed in the Selected Issue of the October production, the agriculture sector continues to 2015 Cambodia Economic Update, the recent depend heavily on wet season rice production, report by the World Bank entitled “Cambodian which is heavily reliant on rainfall. As a result, rice Agriculture in Transition: Opportunities and Risks”9 production in 2015 is estimated by the authorities suggests that the recent slowdown in Cambodia’s 8 This is explained by the drop in rice planted areas which was less than that of rice harvested area (and rice production). 9 The full report can be accessed at http://documents.worldbank.org/curated/en/2015/08/24919384/cambo dian-agriculture-transition-opportunities-risks. Cambodia Economic Update April 2016 >> 10 agricultural growth may also signal a longer-term processing industry. (See the full report for more growth decline unless total factor productivity is detailed recommendations.) improved. Figures 8 and 9 illustrate that rice production peaked at 9.39 million metric tons in Employment, income and consumption 2013 and has since decreased, along with declining growth of paddy yields. Cambodia’s demographic dividend is contributing towards economic expansion and per capita income growth. The labor force Figure 9: Slow yield and cultivated area expansion growth resulted in stagnant and declining annual is currently growing faster than the population rice production since 2013. (In million metric tons) dependent on it, freeing up resources for 2.00 2.00 investment and family income growth. Unlike 1.50 1.50 many regional countries, Cambodia experienced an increase of the working age population (15-64 1.00 1.00 years) of almost 1.2 million persons, rising to 10 0.50 0.50 million in 2014 from 8.8 million in 2009 (Table 8), 0.00 0.00 according to the 2014 Cambodia Socio-Economic Survey (CSES). On average, Cambodia adds -0.50 by Land by Yield rice production -0.50 162,000 to its labor force annually, of which -1.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e -1.00 159,000 are employed in the economy. Source: The Cambodian authorities. Table 8: Population and labor force aged (15-64 years) by sex and geographical domain, 2009 and 2014. (In ’000 In the context of depressed international and percent). agriculture commodity prices, new challenges arise. While the 2008 global food price spike provided an opportunity to leverage agricultural growth and made farmland expansion profitable, the recent decline of global food prices and a more competitive global rice market with the reentry of Thailand and Myanmar have put pressure on Cambodia. It is advisable to move the focus from higher production and exports to stronger rice- based farming systems that are diversified, commercial, and resilient to climate change, and supported by a modernized value-chain and cost- Source: 2014 Cambodia Socio-Economic Survey, National Institute of Statistics, October 2015. effective logistics. Four sets of policies recommended by “Cambodian Agriculture in Cambodia has also experienced a sharp Transition: Opportunities and Risks” taken together decline in the share of the employed can help to support that move. The first is population working in agriculture, pointing to maintaining a private-sector-friendly agricultural productivity improvements, given the continued policy environment, with added attention to contribution of the sector to economic growth. lowering the regulatory burden in farm input The agriculture sector’s share of total employed sectors. The second is strengthening the population (aged 15 to 64 years old) shrank by environmental sustainability of agricultural almost 2.5 percent a year during 2009-14, dropping production. The third is improving the quality of to 45.3 percent in 2014, from 57.6 percent in 2009 public agricultural programs and, as feasible within shedding half a million jobs (Table 9). During this Cambodia’s total government budget, increasing period, the employment shares of the services and allocations to more effective programs. The fourth industry sectors rose to 30.4 percent (with is helping to develop the agribusiness and agro- additional 0.8 million new jobs) and 24.3 percent Cambodia Economic Update April 2016 >> 11 (with additional 0.5 million new jobs) from 26.5 in 2009-14 (Figure 11), while the percentage of percent and 15.9 percent, respectively. households who own durable goods, for example, cellphones, motorcycles and televisions, increased Table 9: The share of the population employed in agriculture dropped to 45.3 percent in 2014 from 57.6 rapidly (Table 10). percent in 2009, shedding half of a million jobs while Figure 11: Share of food consumption in total the services and industry sectors created 0.8 and 0.5 consumption dropped across geographical domains. million jobs, respectively. Employed population by (Percent). industry. (In ’000) 54 2009 2014 +/- change 2009 2014 50 48 Employed population 7,469 8,235 766 46 46 ’000 43 40 39 Agriculture (Primary) 1/ 4,302 3,730 -572 Industry (Secondary) 2/ 1,188 2,001 814 Services (Tertiary) 3/ 1,979 2,503 524 Share (%) Agriculture (Primary) 57.6 45.3 -12.3 Industry (Secondary) 15.9 24.3 8.4 Cambodia Phnom Penh Other urban Other rural Services (Tertiary) 26.5 30.4 3.9 Source: 2014 CSES. Total 100 100 Table 10: Ownership of durable goods increased rapidly Using International Standard Industrial Classification (ISIC Rev 4.0): 1: Agriculture, forestry, and across geographical domains. Percent of households fisheries; 2: Mining & quarrying, manufacturing, electricity, gas, stream and air conditioning supply, water supply, sewerage, waste management and remediation activities and construction; owning durable goods. (In percent) 3: wholesale, retail, repairs, transportation, storage, accommodations, food services, information, communication, financial, insurance, real estate, professional, scientific, technical, administrative activities, public administration, defense, education, health, arts, entertainment, other services 2009 2014 activities and more. Items of durable Cambodia Phnom Other Other Cambodia Phnom Other Other goods Penh urban rural Penh urban rural Source: 2014 CSES. Radio 43 41 45 42 33 34 28 33 Television 60 96 80 53 66 95 83 59 Sustained economic growth enabled per Video tape 29 60 47 23 23 34 27 21 capita disposable income to double during recorder/player* Stereo 14 40 16 10 5 19 4 3 2009-14 (Figure 10). Monthly per capita disposable Cell phone Satellite dish 44 1 93 2 70 3 35 1 83 2 96 0 90 2 80 2 income of ‘other rural’ rose fastest, at 120 percent Bicycle 68 45 61 71 61 42 60 64 during 2009-14, reaching CR 265,000 in 2014 Motorcycle Car 49 4 86 20 67 8 43 2 66 5 90 20 74 9 61 2 from CR 121,000 in 2009. Jeep/Can 1 3 3 1 1 1 1 1 PC 3 25 7 1 6 28 11 2 Figure 10: Per capita disposable income of ‘other rural’ increased fastest during 2009-14. Average per Poverty month per capita disposable income in ’000 riels. 700 Phnom Penh Other urban Other rural Cambodia Sustained robust economic growth during the 600 past two decades has had a significant positive 500 impact on poverty reduction, and the 400 331 downward trend in poverty is expected to 300 265 continue for the next few years. The findings of 200 158 121 the latest Cambodia Socio-Economic Survey 100 discussed above point to further poverty reduction 0 up to 2014. Per capita GDP is expected to reach 2009 2010 2011 2012 2013 2014 US$1,145.1 in 2015, increasing by 5.6 percent Source: Cambodia-Socio Economic Survey from the level observed in 2014. However, poverty incidence is believed to be As the standard of living improved, so the share of food consumption in total consumption declined still higher in rural areas than in urban areas. While rural households reaped the benefits of Cambodia Economic Update April 2016 >> 12 growth in the agricultural sector seen in the period Figure 12: Healthy FDI inflows continue to finance 2008-10, in more recent years, urban households the current account deficit. Trade balance, current have benefitted from the expansion of the garment account balance, and FDI (Percent of GDP) and construction sectors. Further reduction of 15 Current account excl off. transfers Trade balance FDI poverty is expected for both urban and rural 10 households throughout 2015-2016. For urban 5 households this is explained by the economic 0 sectors in which they participate (mainly -5 construction and services). For rural households -10 there has been an increase in sources of income -15 different to agricultural self-employment income. -20 -25 Cambodian households remain highly 2008 2009 2010 2011 2012 2013 2014 2015e Source: The authorities and Bank staff estimates. vulnerable. The recent success in reducing e = estimate. poverty has resulted in many households now living just above the poverty line. The impact of a) Exports negative shocks (such as droughts, regional unrest, etc.) on poor households is exacerbated because of As discussed in the real sector above, the limited social protection systems in place. merchandize exports accelerated in 2015, driven by high growth in garment and The external sector footwear exports, and resuming rubber exports. Underpinned by relatively good labor Cambodia’s external position remains stable, market stability and by the gradual shift towards underpinned by healthy inflows of FDI. As an higher value-added products, garment and oil importer, Cambodia benefits from the slump in footwear exports accelerated in value terms at oil prices, which also has a positive impact on the year-on-year growth rates of 12.3 percent and 40.0 current account balance. Low oil prices, together percent in 2015, respectively, compared with 9.2 with improved export performance, has led to a percent and 30.7 percent in 2014. Growth in total narrowing of the current account deficit, which exports accelerated to 15 percent y-o-y in 2015, declined to 10.8 percent of GDP in 2015, compared to 7.5 percent in 2014, contributing to compared with the revised estimation of 11.9 the narrowing in current account balance. percent of GDP. The deficit is financed by continuing strong FDI inflows, estimated at b) Imports around 10 percent of GDP in the period 2012-15 (Figure 12). Healthy FDI inflows and a strong Import growth continues to be driven largely garment exports performance have resulted in by strong domestic demand for both rising gross international reserves, which reached investment and consumption. While remaining US$5.6 billion (or 4.6 months of imports) by end- strong, import growth eased to 10.5 percent y-o-y 2015, from US$4.6 billion in 2014. in 2015, compared to 11.9 percent in 2014. The ongoing construction boom has contributed to growth in construction material imports, whereas the recent decline in oil prices is supporting rising demand for petroleum and vehicle imports (Figure 13).10 Domestic demand pressures are also stimulating imports of consumer goods, especially foodstuff and beverages. Imports of foodstuff and 10 Another major imported item is the fabric used in the production of garments that are almost entirely for export. Cambodia Economic Update April 2016 >> 13 beverages accelerated further, growing by 64 Notwithstanding depressed foodstuff and oil percent year-on-year in 2015. prices, regional inflation is mixed. Inflation in Thailand and Singapore turned negative in mid- Figure 13: While motor vehicles imports accelerated 2015 (Figure 15). Inflation in Cambodia, China due to rising domestic demand, petroleum imports and Malaysia, however, has edged up slightly. moderated with the decline in oil prices. (In US$ Figure 15: Regional inflation is mixed. Inflation in million) 1,158.40 some countries, namely Cambodia, China and 1052 1,036.60 Malaysia, has edged up. (YoY % change) 894.3 10 10 645.4 Cambodia Vietnam 8 Thailand Laos 8 543.9 Singapore Malaysia China 344.6 6 6 211.3 139.9 4 4 2 2 2013 2014 2015 Motor vehicles Petroleum products Foodstuff and beverages 0 0 Source: The Cambodian authorities -2 -2 Sep-13 Sep-14 Sep-15 Jan-13 Jan-14 Jan-15 Jul-14 Mar-13 Jul-13 Mar-14 Mar-15 Jul-15 May-13 May-14 May-15 Nov-13 Nov-14 Nov-15 Inflation Source: Regional countries' statistics offices. As a result of rising domestic demand, The monetary sector inflationary pressures have increased. Inflation edged up to 2.3 percent year-on-year by February a) Monetary aggregates, interest rates, and 2016, compared with 1.2 percent by end-2014 exchange rates (Figure 14). Largely driven by continuing domestic demand pressures, rising food, restaurant, health Broad money growth slowed, although the and furnishings sub-indices have pushed up rapid expansion of the financial sector inflation since the fourth quarter of 2015. Some continued to accommodate economic other sub-indices, such as those for housing, expansion. Due to the slowdown in foreign utilities and transport, remain in negative territory. currency deposits growth, broad money Figure 14: Inflation has edged up slightly due to decelerated to 14.7 percent year-on-year in June rising food and other prices (restaurant, health and 2015, compared with 29.9 percent in 2014 (Figure furnishings). Contributions to 12-m inflation (Percent) 16). This may be partly explained by a decrease in global liquidity in anticipation of an increase in US Others Transport sub-index Food sub-index Housing & utilities sub-index interest rates. During the same period, the 6.0 5.0 Y/Y contribution from foreign current deposits to 4.0 broad money declined to 8.3 percentage points in 3.0 2015, from 25.1 percentage points in 2014. 2.0 1.0 0.0 -1.0 -2.0 -3.0 Sep-13 Sep-14 Sep-15 Jan-13 Jan-14 Jan-15 May-13 May-14 May-15 Source: The Cambodian authorities. Cambodia Economic Update April 2016 >> 14 Figure 16: Broad money supply growth eased as exchange rate. The riel appreciated slightly, foreign currency deposits slowed. Contribution to reaching CR 4,008 per US dollar in February 2016, broad money supply growth (YoY % change) compared with CR 4,075 per US dollar in 45 December 2014. Appreciation of the riel against Riel in circulation 40 the Thai baht (and the Vietnamese dong) also 35 Riel deposits continued, reaching CR 114.9 per baht in February 30 25 Foreign currency deposits 2016, compared with CR 125.3 per baht in 20 December 2014 (Figure 18). 15 10 Figure 18: The riel has continued to gain against the baht and dong, and now against the US dollar. 5 Riel per Baht Riel per 1000 dong 0 220.0 Riel per US$ (RHS) 4,250 Feb-13 Feb-14 Feb-15 May-13 Aug-13 May-14 Aug-14 May-15 Aug-15 Nov-13 Nov-14 Nov-15 4,200 200.0 Source: The Cambodian authorities. 4,150 180.0 4,100 4,050 160.0 Slower growth of foreign currency deposits 4,000 may have exerted some pressures on lending 140.0 3,950 and deposit interest rates, which have been 120.0 3,900 3,850 edging up since early 2015 (Figure 17). The 100.0 3,800 weighted average of 12-month US dollar deposit Apr-12 Apr-13 Apr-14 Apr-15 Jan-15 Jan-12 Jul-12 Oct-12 Jan-13 Jul-13 Oct-13 Jan-14 Jul-14 Oct-14 Jul-15 Oct-15 rates increased to 4.45 percent in 2015, up from 4.3 percent in 2014, while the 12-month US dollar Source: The Cambodian authorities. lending rate also rose to 11.61 percent, from 11.54 percent in the same period. The interest rate The nominal effective exchange rate (NEER) spread—the difference between the nominal and the real effective exchange rate (REER) lending and deposit rates—narrowed slightly to have experienced an accelerated appreciation 7.16 percent in 2015, down from 7.24 percent in after the second half of 2015. The NEER index 2014, as the lending rate hike was more than offset (2010=100) rose to 113.8 in January 2016 from by deposit rate increases. The spread, however, 106.7 in December 2014 while the REER index remains large. (2010=100) increased to 122.9 in January 2016 from 113.1 in December 2014. The appreciation is Figure 17: 12-month deposit and lending rates exerting pressures on the balance of payments and edged up. (Percent per year) growth. 12.0 5.0 11.8 Lending rate 4.8 b) The banking sector Deposit rate (RHS) 11.6 4.6 Rapid financial deepening continues. Private 11.4 4.4 sector credit growth remained high, at 27 percent 11.2 4.2 year-on-year, or US$9.8 billion, by end-2015, 11.0 4.0 compared with 24.8 percent year-on-year at end- 10.8 3.8 2014 (Figure 19). Private sector deposits growth, 10.6 3.6 however, halved to 16.6 percent year-on-year, or US$10.3 billion, by June 2015, compared with 30.6 Sep-13 Sep-14 Sep-15 Jan-13 Jul-14 Jul-13 Jan-14 Jan-15 Jul-15 Mar-13 May-13 Mar-14 May-14 Mar-15 May-15 Nov-13 Nov-14 Source: The Cambodian authorities. percent year-on-year at end-2014, in the context of global financial volatility. The loan-to-deposit Overall price stability remains underpinned by ratio, therefore, rose to 95.6 percent. For a more the stable Cambodian riel versus the US dollar detailed discussion on “Recent Developments of the Cambodia Economic Update April 2016 >> 15 Financial sector: Opportunities and Risks” see the Figure 20: Loans and mortgages to the selected issue section below. construction and real estate sector rose further in 2015. (Percent of total) Deceleration in foreign currency deposits may 25% obey external conditions. With its highly dollarized economy, and with one-third of its 20% exports going to the US, Cambodia seems to be 15% influenced by US monetary policy and the US business cycle. Cambodia’s economic cycle seems 10% to have moved in sync with that of the US. 5% Figure 19: High credit growth continued while deposits growth halved in 2015. (YoY % change) 0% 2008 2009 2010 2011 2012 2013 2014 2015 50 Deposits by the private sector 45 Source: The Cambodian authorities. Credits to the private sector 40 35 30 25 To further strengthen the banking sector, the 20 liquidity coverage ratio and, more importantly, 15 the recent directive (Prakas) of March 22, 2016, 10 5 on minimum registered capital of banking and 0 financial institutions issued by the central Aug-14 Aug-13 Aug-15 Feb-13 Feb-14 Feb-15 Jun-13 Jun-14 Jun-15 Apr-13 Apr-14 Apr-15 Dec-13 Dec-14 Dec-15 bank, have been introduced. The directive Oct-13 Oct-14 Oct-15 Source: The Cambodian authorities. stipulates that the new capital requirements (Table 11) will be met within two years of signing. The share of domestic credit provided to the Table 11: Minimum capital requirements construction and real estate sector increased (Equivalent in US$ million) further, reaching 20 percent of total domestic credit in 2015, compared with 19 percent (or Requirements Types of banks or financial US$1.8 billion) in 2014 (Figure 20). The share, institutions Previous New however, remained below the peak of 23 percent in 2008, in the run up to the global financial crisis Locally incorporated commercial when the housing bubble in Phnom Penh banks 37.5 75 eventually burst. This had limited impact on the Branches of foreign banks 12.5 75 economy and the banking sector because the Branches of investment-grade construction and real estate sector was largely foreign banks 12.5 50 foreign financed at that time. Specialized banks 7.5 15 The expansion of the banking sector Deposit-taking microfinance 2.5 30 continues to squeeze banks’ net foreign assets. At present, the rise in foreign liabilities more than Microfinance 0.625 1.5 offsets the increase in foreign assets (Figure 21). In Source: The Cambodian authorities view of this, the central bank has introduced reserve requirements of 12.5 percent for foreign With strong FDI inflows and exports, the borrowing. central bank’s gross international reserves rose, reaching US$5.6 billion (or 4.6 months of Cambodia Economic Update April 2016 >> 16 prospective imports) by the end of 2015.11 This a) Revenue composition compares with US$4.6 billion at the end of 2014. Strong revenue performance continues, Figure 21: Banks' NFAs declined as the rise in foreign outperforming the targets set forth in the 2014- liabilities more than offset the increase in foreign 18 Revenue Mobilization Strategy (RMS). Tax assets. (US$ million) revenue increased from around 10 percent of 6,000 1,000 GDP in 2010 to 15.1 percent in 2015, thanks to NBC's GIR DMB's NFA (RHS) 800 improved enforcement and auditing mechanisms 5,000 600 set out in the RMS, among others. When including 4,000 400 non-tax revenue, total collection, estimated at 17.5 200 percent of GDP in 2015, was slightly below that of 3,000 0 2014 (Figure 22). 2,000 -200 -400 1,000 Figure 22: As a result of improved administration, -600 domestic revenue has risen substantially since 2014. 0 -800 General gov't revenue. (Percent of GDP) Apr-07 Apr-12 Sep-07 Dec-08 Sep-12 Dec-13 Jan-06 Feb-08 Oct-09 Jan-11 Feb-13 Oct-14 Jun-06 Jul-08 Mar-10 Aug-10 Jun-11 Jul-13 Mar-15 Aug-15 May-09 May-14 Nov-06 Nov-11 Direct taxes Indirect taxes 18.0 Trade taxes Non-tax and others Note: FC: foreign currency, GIR: gross internatinal reserves, NFA: net foreign assets, 16.0 DMB: deposit money bank. 14.0 12.0 The fiscal sector 10.0 8.0 8.5 8.1 8.0 6.0 6.8 Fiscal consolidation underpins macroeconomic 4.0 5.4 5.7 6.0 6.6 stability and contributes to the accumulation of 2.0 3.4 3.2 2.5 2.9 government deposits. Despite slightly weaker - 1.7 1.7 1.8 2.2 economic performance, improved revenue 2009 2010 b=budget; e=estimate. 2011 2012 2013 2014 2015e 2016b administration boosted domestic collection, Source: The Cambodian authorities and World Bank staff estimates. estimated to have reached 17.5 percent of GDP in 2015. Total expenditure was contained at 20.5 The composition of revenue collection seems percent of GDP, as public sector wage increases to slowly move towards direct taxation. An were offset by a decline in capital spending. This increase in direct tax collection was observed in resulted in an improved overall fiscal deficit 2015, whereas trade-related collection declined as (including grants) of 0.8 percent of GDP in 2015, required under ASEAN Free Trade Area. compared with 1.4 percent in 2014 (Figure 25). The introduction of full program-based budgeting Regional comparisons also show that since 2015 has supported budget-policy linkage Cambodia performs well in revenue collection and improved accountability and results. Service when measured against a number of its delivery units, mainly schools classified as budget neighbors (Figure 23). Cambodia has significantly entities, have started to directly receive funds from improved revenue collection over the past few the national level and are accountable for the funds years, and presents nowadays levels similar to they manage. Initial challenges in implementing those of other ASEAN countries. Relative to program-based budgeting, however, slowed GDP, Cambodia collected more revenue in 2014 disbursements during the first half of 2015. than the Philippines and Lao PDR did in 2012 (latest available revenue data). 11 Includes all foreign exchanges including Chinese Yuan used as reserves. Cambodia Economic Update April 2016 >> 17 Figure 23: Cambodia's revenue collection compares well respect to neighbouring countries. International experience shows that the Revenue excluding grants (Percent of GDP, 2012) following institutional factors may improve public sector performance: (i) well-defined roles, 21.4 responsibilities and accountability; (ii) appropriate 18.8 18.0 17.8 human resource management practices; and (iii) in 16.6 the education and health sectors, there is evidence 14.5 that increasing the scale of operations may improve efficiency.12 It is important to sustain capital expenditure, which has shrunk as a percentage of GDP. Development partner-financed capital budget declined further, from 6.3 percent of GDP in 2014 Cambodia Lao PDR (2014) Malaysia Philippines Singapore Thailand to an estimate of 5.1 percent of GDP in 2015, as Source: World Develoment Indicators the country has now reached lower middle-income status. This may pose a challenge in the future, since improved infrastructure is urgently needed to The World Bank has now been engaged to enhance the country’s competitiveness and strengthen revenue administration at a achieve more balanced economic development. number of key revenue agencies, in particular Most ministries continue relying on donors to the General Department of Taxation. This is in build infrastructure, whereas capacity to build it on addition to the support provided in the overall their own remains limited. reform of public finances under the Public Financial Management Reform Program. World Figure 24: The rising wage bill was offset by declining externally-financed investment, Bank support currently focuses on compliance containing overall spending. Gov't spending management, including taxpayer services, and tax (Percent of GDP) audits. 25 Donor-financed capital Gov't-financed capital Wage Non-wage b) Expenditure composition 20 7.1 7.8 6.2 7.0 6.9 6.7 6.7 6.3 Public expenditure has been characterized by 15 a continuing rapid wage bill increase, offset by 4.8 4.4 4.3 4.5 5.0 5.7 6.4 7.2 10 a decline in public investment to contain overall government spending. The wage bill 5 8.2 7.3 rose to 6.4 percent of GDP in 2015, from 5.5 6.4 6.8 7.0 6.3 5.1 4.7 percent in 2014 (Figure 24). Wages are likely to 0 2009 2010 2011 2012 2013 2014 2015e 2016b remain on the rise as the minimum basic monthly b=budget; e=estimate. salary is targeted to increase to at least CR 1.0 Source: The Cambodian authorities and World Bank staff estimates. million (equivalent to US$250) by 2018. Efforts have been made to link the rising wage bill with To counter this trend, authorities are planning improvements in human resource management to scale-up public-financed investment. and public service delivery under a civil service Domestically financed capital, mainly in reform initiative. However, public sector reform operations and maintenance, increased from 1.9 will likely only produce meaningful results in the percent of GDP in 2014 to 2.3 percent in 2015, medium term. and a further increase is envisaged in the 2016 budget. The Government is also revisiting public 12Improving Public Sector Efficiency: Challenges and Opportunities by Teresa Curristine, et al., OECD Journal on Budgeting Vol. 7 – No. 1, 2007 Cambodia Economic Update April 2016 >> 18 investment management procedures, as well as the d) Annual budget for 2016 Concessions law, to allow for a most robust framework for both public investment and public- The 2016 annual budget can be categorized as private partnerships. expansionary. In absolute terms, total expenditure for 2016 is budgeted to surge to c) Fiscal balance CR 18,288 billion, an increase of CR 2,948 billion, or 3.6 percent of GDP, compared with the Buoyant revenue collection and contained estimated level of CR 15,340 billion disbursed in overall spending have resulted in a narrowing 2015.13 This is the largest increase in recent years of the overall fiscal deficit (including grants), (Figure 26). Of the total 3.6 percent of GDP estimated to reach 0.8 percent of GDP in 2015. increase, non-wage, wage and capital investment This compares with 1.4 percent of GDP in 2014. are boosted by 1.7 percent, 1.4 percent, and 0.5 Excluding grants, the overall fiscal deficit also percent of GDP, respectively. The total narrowed to 3.0 percent of GDP, compared with expenditure in the 2016 budget represents 22.3 3.8 percent of GDP in 2014. The fiscal deficit percent of GDP. continues to be financed by external funds. Figure 26: A surge in total spending is budgeted in Rising domestic revenue has continued to 2016. Budgeted increases versus previous year's actuals enable the government to accumulate (2015 performance is estimated) (Percent of GDP) deposits. Deposits rose to 9.0 percent of GDP, or 0.5 US$1.6 billion, at the end of 2015. The accumulation of government deposits provides a Wage Non-wage Capital 1.7 cushion that the government can use during times of shocks. Previously, Cambodia introduced a 0.4 0.2 fiscal stimulus, amounting to about 2 percent of 1.1 1.2 1.4 GDP, to mitigate the negative impacts of the -0.1 2008-09 global financial crisis. Fiscal policy has -0.8 been largely the sole policy instrument to maintain macroeconomic stability and to mitigate shocks, as 2014b 2015b 2016b the country’s monetary policy is constrained by its Source: The Cambodian authorities and World Bank staff estimates. high level of dollarization. The wage bill is budgeted to reach a record high of 7.2 percent of GDP in the 2016 budget. Figure 25: The fiscal deficit has improved as a result of fiscal consolidation efforts. General gov't Given the target of achieving a minimum public fiscal deficit (Percent of GDP) sector basic wage of at least CR 1 million (or 2.0 US$250 equivalent) a month by 2018, annual wage 0.3 Deficits (incl grants) Deficits (excl grants) budget increases need to be closely monitored.14 0.0 -2.0 -1.4 -0.8 The non-wage component receives the largest -4.0 -3.3 -3.3 -2.7 boost in 2016, having been compressed since -4.4 -4.6 -4.1 2011. The rising non-wage component may help to -6.0 ensure that priority spending, including operations -8.0 and maintenance budgets, are adequately funded. -10.0 Detailed budget data, however, are not available to 2008 2009 2010 2011 2012 2013 2014 2015e 2016b confirm this. b=budget; e=estimate. Source: The Cambodian authorities and World Bank staff estimates. 13The relative increase will be smaller if actual disbursement for 2015 is 14 Public forum on 2015 budget law (risks and challenges section), higher than the estimated disbursement of CR 15,340 billion. December 22, 2015, Ministry of Economy and Finance. Cambodia Economic Update April 2016 >> 19 The capital budget for 2016, however, Allocations to the social sector continue to continues to be contained. The externally- improve in 2016. The domestically-financed financed (development partner-funded) budget for the Ministry of Education, Youth, and component is budgeted to shrink further to 4.7 Sports (MoEYS) continues to rise, reaching 2.5 percent of GDP in 2016, declining from 5.1 percent of GDP in 2016 (Figure 27). The 2016 percent of GDP in 2015. This is likely to pose a budget for the Ministry of Health (MoH), challenge in the future, since improved however, remains at 1.4 percent of GDP as infrastructure is urgently needed to enhance the spending efficiency continues to be further country’s competitiveness and achieve more strengthened. In absolute terms, the budgets for balanced economic development. the MoEYS and the MoH rose to CR 2,069 billion, equivalent to US$510 million (or a 29 percent year- Good revenue performance is expected to on-year increase) and CR 1,110 billion, equivalent continue in the 2016 fiscal year. It is, therefore, to US$274 million (or a 8.4 percent year-on-year projected that the authorities will meet the target increase), respectively. of 17.5 percent of GDP in 2016 as budgeted. Figure 28: Transport continues to receive the While domestic revenue budgeted for in the 2016 largest share of capital budget. 2016 capital fiscal year, at 17.5 percent of GDP, is similar to the budget by sector. (Percent of GDP and % share) level of the estimated collection in 2015, it is Public health, 0.4, Education, Others, 2.0, 0.2, 3% substantially higher than the 16.3 percent of GDP 27% 5% Agriculture, target set in the RMS. The revenue for 2016 1.5, 20% continues to rely on indirect tax, but a larger direct tax contribution, increasing to 3.2 percent of GDP (from 2.8 percent of GDP budgeted in 2015) is targeted. Non-tax revenue of 2.26 percent of GDP Transport, Energy, 0.7, budgeted for in 2016 is below the target of 2.4 2.6, 35% 10% percent of GDP set in the RMS. Source: The Cambodian authorities Note: The education sector covers education and vocation training ministries; the agriculture sector covers agriculture, rural, water, and enronment ministries; and the transport secor The fiscal deficit including grants is, includes transport, aviation, and telecommunication ministries. therefore, budgeted to widen to 4.1 percent of GDP in 2016, compared with 0.8 percent of The transport sector continues to receive the GDP estimated for 2015. This is due largely to highest priority, absorbing more than one the surge in budgeted total expenditure, together third of the total capital budget. The agriculture, with a declining grants component. energy, and health sectors follow next, receiving 20 Figure 27: MoEYS receives another boost in the percent, 10 percent, and 5 percent of the total 2016 budget, while MoH remains almost capital budget, respectively. unchanged relative to GDP. Domestically financed budgets (Percent of GDP) 2.5 The 2016 budget adopted late last year pursues 2.1 Health 1.8 continued budgetary reform with the Education 1.7 1.6 1.6 1.6 1.7 expansion of full program-based budgeting. 1.6 1.4 1.5 1.4 1.5 1.4 1.5 1.4 1.4 This is envisaged in the Concept Paper on 1.0 1.0 1.3 1.3 1.3 1.2 Strategic Direction of Reform of Budget System 0.9 0.9 0.9 (2013-20). Implementation of full program-based budgeting has been broadened to cover an 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015b 2016b additional 15 ministries and agencies.15 Program- Source: The Cambodian authorities. based budgeting now accounts for about 57 b=budget. 15Those 15 ministries/agencies are: Information, Environment, Social Telecommunication, Tourism, Water Resource and Meteorology, Supreme Affairs, Civil Aviation (State Secretariat), Commerce, Posts and Court, Appeal Court, the National Assembly, the Senate, Foreign Affairs Cambodia Economic Update April 2016 >> 20 percent of the total (domestically-financed) current budget appropriated to line ministries and agencies. The World Bank/IMF debt sustainability analysis (DSA) conducted in 2015 indicates that Cambodia’s debt distress rating remain s low, with all debt burden indicators projected to remain below their respective thresholds. The results also indicate that debt sustainability continues to be vulnerable to shocks to economic growth, exports and the fiscal position, calling for continued structural reforms to bolster the economy’s resilience against external shocks, and to mobilize domestic revenues. At the end of 2014, the estimated stock of Cambodia’s external public debt, including arears, stood at around US$5.5 billion, or 33 percent of GDP. Note that Cambodia’s debt distress rating has been consistently low since 2011. This is mainly underpinned by the overriding principle of balanced budgeting of the fiscal position and borrowing only on concessional terms.16 and International Cooperation, National Audit Authority, and Anti- women’s affairs, labor, land, public works, justice, and finance. For more Corruption Unit. Source: 2016 Budget Law. In 2015, program budget details, see www.pfm.org.gov. covers only ten ministries education, health, rural development, agriculture, 16 The concessional terms borrowed are those with a grant element of 35 percent or above. Cambodia Economic Update April 2016 >> 21 C.Outlook and risks Partnership (TPP) and the free trade agreement (FTA) between Vietnam and the EU, there are significant risks of investment and export Growth is expected to reach 6.9 percent in diversion away from Cambodia unless key 2016, partly underpinned by a significant constraints, such as high energy costs, regulatory increase in government spending. Strong impediments to doing business, and infrastructure garment sector exports are expected to help to bottlenecks, are successfully addressed.17 This offset weakness in the agriculture sector, while the could gradually constrain growth unless key foreign direct investment-driven construction will structural reforms discussed in the continue to be a major engine of growth. In the recommendations section below are proactively mid run growth is expected to remain right below addressed. 7 percent (Table 12). The rapidly expanding financial sector has Further reduction of poverty is expected for been supportive of growth, but poses also both urban and rural households throughout some challenges. At 38 percent, credit growth to 2015-2016. For urban households this is explained the construction sector continued to grow fast in by the economic sectors in which they participate 2015. While being relatively shielded from external (mainly construction and services). For rural financial volatility, the economy remains households there has been an increase in sources dependent on bank flows in the form of foreign of income different to agricultural self- currency deposits. Given the limited room for employment income. monetary policy and the impossibility for the Central Bank to act as a lender last resort due to Robust export growth will also support a high dollarization, as well as the absence of an narrower current account deficit, forecasted inter-bank market, continued high domestic credit below 10 percent in 2016 and 2017. Exports of growth increases the risks to financial stability in goods are expected to continue growing at two Cambodia. Nonetheless, the Central Bank’s digits, supported by economic recovery in Europe. directive (Prakas) issued in March 2016 doubling Import growth is expected to gradually ease as banks’ capital requirements is expected to help construction permit approvals declined in 2015. strengthen the rapidly expanding banking sector. Fiscal policy is expected to remain Other downside risks to this outlook include expansionary in the short to medium term. The potential labor unrest, continued appreciation of 2016 budget reflects expansionary fiscal policy, the US dollar in a context of dollarization, slower with spending increasing by 3.6 percent of GDP, economic recovery in Europe, spillovers from a of which 1.4 percent is due to rising wages and the slowdown in the Chinese economy. A hard landing rest to capital expenditure and non-wage spending. of the Chinese economy would dampen growth This is likely to continue in 2017 and 2018, in the prospects, mainly due to potentially lower Chinese context of Commune and General elections. tourist arrivals in the short term and slower FDI inflows in the medium term. While Cambodia is Increasing external competition could result likely to be shielded from financial volatility due to in lower than expected growth in the medium its limited capital markets, bank inflows remain to long term. Given the narrow production and sensitive to public confidence and market export base and garment exports (about 70 perceptions. percent of total) heavily concentrated in the EU and US markets, the economy is exposed to mounting competition. With the Trans-Pacific 17 See the full report on Cambodia Investment Climate Assessment (2014) at http://documents.worldbank.org/curated/en/2014/01/23946799/ cambodia-investment-climate-assessment-2014-creating-opportunities- firms-cambodia Cambodia Economic Update April 2016 >> 22 Table 12: Selected Economic Indicators, projections diversification as envisaged in the Industrial 2016 – 2018 Development Policy (IDP), while also helping 2014 2015e 2016p 2017f 2018f firms to be well prepared to take advantage of the Real GDP (% change yoy) 7.1 7.0 6.9 6.8 6.8 single market and production base goal set by the GDP at factor cost, at AEC. Addressing the key constraints, namely high market prices (% 6.8 7.1 6.8 6.8 6.7 energy costs and infrastructure bottlenecks, point change yoy) Agriculture 0.3 0.2 0.1 1.4 1.1 to a need to scale up public investment to sustain external competitiveness. Industry 10.1 11.7 9.7 7.3 6.8 Services 8.4 7.4 8.0 9.1 9.2 A better trained and skilled workforce will Inflation (eop, % 1.2 2.8 3.0 3.5 3.8 certainly help taking advantage of Cambodia’s change) Fiscal balance demographic dividend. To complement the including grants (% of -1.4 -0.8 -2.8 -2.9 -4.1 ongoing Global Partnership for Education basic GDP) Exports, goods & education project, the government has requested services (% change 8.6 9.2 14.9 9.1 11.7 IDA funding to improve outcomes in lower yoy) secondary education. The education budget Imports, goods & services (% change 10.7 7.4 9.6 9.9 11.6 significantly increased to 17.1 percent of the yoy) national budget in 2015 (16.2% in 2014). National Current account balance excluding Assessment System (NAS) has been -11.9 -10.8 -9.3 -9.3 -10.0 official transfers (% of institutionalized, and its results are used to inform GDP) Foreign direct policy planning. Key challenges going forward investment, mn of 1,677 1,803 1,653 1,748 1,780 include improving the quality of public service US$ Source: The authorities and World Bank staff estimates and projections. delivery. e = estimate, p = projection, f=forecast In order to remain competitive, the authorities could also consider progressively increasing budget allocations to productive and D.Key Messages and Policy Options competitive investment projects. As Cambodia becomes a lower middle-income economy, it is experiencing a gradual decline in development- partner financing, in particular grants. Cambodia is The risks of being so heavily dependent on currently still reliant on development partners to EU and US markets for Cambodia’s narrowly build physical infrastructure (from roads to concentrated garment products are rising. The schools). While in the medium term concessional economy is exposed to greater competition, given borrowing may increasingly come from regional the potential negative impacts for Cambodia of the sources, such as the newly established Asian TPP and the FTA between Vietnam and the EU Infrastructure Investment Bank (AIIB), as well as in the medium- to long-term timeframe. As from bilateral sources such as Japan and China, identified by the latest investment climate steadily declining development partner-financed assessment, the key constraints, such as high public investment will also require a short-term energy costs, regulatory impediments to doing response whereby additional allocations come business, and infrastructure bottlenecks, need to from the government budget. Careful be proactively addressed to enhance external prioritization of expenditures and continued competitiveness. buoyant revenue collection will help to make this affordable, if increases in the wage bill can be Improving the overall business environment curbed. Meanwhile, it will also be necessary to would enhance competitiveness across further strengthen the rules and regulations sectors, underpinning product and market governing the management of capital investment Cambodia Economic Update April 2016 >> 23 projects, as envisaged by a public investment important measures recently, including increasing management assessment currently under the capital requirement of financial institutions, discussion. the reserve requirement for foreign borrowing, and the liquidity coverage ratio. A Public Investment Management (PIM) assessment under discussion would help Fast growth in microfinances would require strengthening the framework for government- also from consumer protection and increasing financed capital. While Cambodia uses standard financial literacy. As more people shift to formal operation procedures for its development partner- savings, there is a need to build a financial safety financed projects, the government’s own net, underpinned by strong prudential supervision, investment guidelines are loose and vary across regular information-sharing between the ministries. The ongoing PIM exercise supported government and regulators, and a back-up by the World Bank Group is expected to help to arrangement from the government budget. At the strengthen the ability of the government to plan, household level, several years of rapidly expanding appraise, budget, implement and monitor microfinance and bank credit have enabled infrastructure projects by identifying a series of Cambodia to make rapid progress in extending feasible measures for improvement in the different financial services to the poor and to rural areas. areas. The Government is also revisiting the However, rapid micro-credit growth may lead to Concessions law, to allow for a most robust over-heating, and several anecdotes point to the framework for both public investment and public- poorest heading towards over-indebtedness, with private partnerships. limited financial literacy possibly enabling market abuses. Therefore, it will be essential to ensure Enhanced supervision and inter-institutional successful implementation of the recent directive coordination could be considered to safeguard doubling capital requirements by promoting financial stability. Information deficiencies and a consolidation and mergers, which can help large ‘shadow banking’ market make it difficult to underperforming banks and microfinance quantify the risks more precisely. First and institutions to become healthy. foremost, several gaps need to be addressed in the collection of data, such as those for non- International experience points to a performing loans, related-party exposures and framework of minimum standards for sound country-risk exposures. These tasks can be tackled banking supervisory practices that are in the short term. Further improvement of universally applicable. These include: (i) clearly supervision capacity, while strengthening and defined supervisory powers; (ii) responsibilities developing necessary indicators to support early and accountabilities among supervisory warning systems so that measures can be authorities; and (iii) appropriate prudential developed to mitigate systemic risk, could be regulations. A number of preconditions for addressed in the medium term. It will also be effective banking supervision are: (i) a well- important to improve inter-agency coordination established framework for financial stability policy by deepening the existing collaboration, data- formulation; (ii) a clear framework for handling a sharing, clarity on roles and responsibilities in a crisis situation; and (iii) an appropriate level of crisis, and enhancing crisis-preparedness capacity. systemic protection (or a public safety net). For a more detailed discussion and recommendations, Strengthening of the regulatory framework see the selected-issue topic “Recent would be advisable to ensure macro-financial Developments of the Financial Sector: stability. The continued rise of the loan-to- Opportunities and Risks” in the selected-issue deposit ratio, contributing in part to the ongoing section below. construction boom, warrants also close monitoring. Authorities have introduced some Cambodia Economic Update April 2016 >> 24 E. Selected Issue – Financial Sector Developments: Opportunities and Risks a) Financial sector overview and trends Starting from a low base, Cambodia’s financial market is deepening quickly, underpinning robust economic growth. The ratio of broad money (M2) to GDP increased from 53.4 percent in 2013 to 66.3 percent by end-2015.18 Financial institutions’19 assets, deposits and loans represented 109 percent, 57 percent, and 54 percent of GDP, respectively at end-2015. Underpinned by improving confidence, the financial sector20 has undergone a rapid transformation, with more financial products being developed and introduced. While the banking sector continues to dominate the financial market, with a rapid increase in the number of banks entering Cambodia in recent years, the microfinance sector is also expanding rapidly. As of February 2016, the financial system comprised 36 commercial banks;21 11 specialized banks;22 34 microfinance institutions; seven microfinance deposit-taking institutions, together with 36 registered microfinance operators; six financial leasing companies; and five third-party payments processors. The insurance sector comprises nine insurance companies (six non-life and three life), one reinsurer and three micro-insurer.23 With the recent introduction of the Cambodia Securities Exchange, three companies have been listed, while six securities underwriters, one securities dealer and three securities brokers have emerged. The number of financial institutions has increased rapidly in the past few years and resulted in a six-fold increase in financial inclusion data to 23 percent in Global Findex Survey 2014 (Figures S1 and S2) and increased to 51.41 percent in 2015, based on the public data.24 However, interest spreads in the Cambodian riel and US dollar for one- year maturity remain wide, at 9.43 percent and 7.16, respectively, in July 2015. Figures S1 and S2: Comparison of Financial Inclusion: (1) Cambodia increased by 19 percentage point (pp) from 2011 to 2014 and (2) poorest 40 percent group also increased dramatically. % Financial Inclusion 2014 14pp 100 Vietnam 90 15pp 15pp Thailand 80 70 Phillippines 60 50 16pp Mongolia 10pp 40 Malaysia 19pp 30 20 Indonesia 10 - China ia a a m ia es na ia Cambodia nd di nm es s a l go in hi bo ay la tn on pp ya C ai on e am al d Vi Th M illi M In M 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% C Ph Acc w/FI only Acc w/FI + Mobile Mobile only 2011 2014 Source: 2014 World Bank’s Global Findex Report 18 As reported in the December 2015 monetary survey. 19 Licensed banks and microfinance institutions. 20 The financial sector comprises banks and microfinance institutions regulated by the National Bank of Cambodia (NBC), insuranc e companies and non-financial service-providers like real estate brokers, audit and accounting firms regulated by the Ministry of Economy and Finance (MEF), and se curities companies, brokers, dealers regulated by the Securities Exchange Commission of Cambodia (SECC). 21 Of the 36 commercial banks, there are 13 locally incorporated, 12 foreign subsidiaries, and 11 foreign branches. 22 Of the 11 specialized banks, there are one state-owned, four local majority ownership, six foreign majority ownership. 23 There is also an NGO which is licensed as Community Based Health Insurance Implementer provider. 24 The financial inclusion computation (based on the latest available data) is as follows: 2.3 million depositors with the banki ng sector (2015), 2.3 million borrowers with the microfinance sector (2014), and 0.6 million account holders with WING, totaling 5.244 million. Estimated number of adult population is 10.2 million of out 15 million population. Therefore, financial inclusion is 51.4 percent (5.244/10.2). Data on financial inclusion, however, vary with some sources show higher financial inclusion than others. Cambodia Economic Update April 2016 >> 25 b) The banking sector The rapidly expanding banking system supports Figure S3: Total credit to the construction economic growth, while competition among banks (% of sectorCredit GDP) has tripled over the past five as a share of GDP, by sector reduces borrowing costs and improves access to years. finance. Total credit provided by the banking system 25 Contruction, real estate, and mortgage rose to 54 percent of GDP, serving 2.3 million borrowers 22 20 Trade in 2015, compared with only 27 percent of GDP, lending to just over a quarter of a million borrowers in 2010. 25 15 Manufacturing % of GDP Borrowing costs have been substantially reduced, as the 10 13 weighted average of short-term lending rates dropped to 10 11.6 percent per year in 2015, down from 22.04 percent 5 4 5 per year in 2010. 2 0 Despite strong competition, the banking system 2010 2011 2012 2013 2014 2015 remains concentrated. The top five banks account for Source: National Bank of Cambodia. more than half of all banking sector assets. The banking system experienced an asset growth rate of about 30 percent each year in the period 2010-14. Improved confidence in the banking system encouraged private sector deposits, which grew at an average rate of 23 percent per year over the same period. Growth of banks’ assets and deposits, however, has moderated recently, decelerating to 22.1 percent and 16.6 percent, respectively, at the end of 2015. Meanwhile, outstanding credit provided by the banking system continues to increase rapidly, reaching about 30 percent year-on-year in the past five years. Banks’ loan-to-deposit ratio, therefore, increased to 96 percent at end- 2015 from 87 percent at end-2014. Credit growth continues to provide necessary financing to facilitate a surge in investment and an increase in domestic consumption, with a growing middle-class in the context of a largely stable political and institutional environment. The authorities are encouraged to pay particular attention to credit for speculative sectors and/or possible weak-repayment-capacity borrowers. As at the third quarter of 2015, lending to the trade and construction26 sectors accounted for 34 percent and 20 percent of total credit, respectively. As a percentage of GDP, lending to the construction sector (including real estate and mortages) has tripled over the past five years, from 4 percent in 2010 to 13 percent in 2015 (Figure S3). Persistently high credit growth also squeezes banks’ liquidity. Banks’ average liquidity ratio is, therefore, declining, and fell from 85 percent in the second quarter of 2014 to 80 percent in the fourth quarter of 2014. To mitigate liquidity pressures, an inter-bank market was established by the authorities with the introduction of negotiable certificates of deposit in 2013. However, in the absence of government bond markets, this nascent inter-bank market, which is crucial for some banks that face liquidity shortages, remains highly dependent on trust and collaboration among banks to further expand and deepen. The establishment of a government bond market can benefit Cambodia in terms of better managing the Government’s fiscal position, offering a wider range of investable financial products, better managing financial institutions’ liquidity, and setting up yield benchmarks. The overall solvency ratio, mainly Tier 1, remains healthy, as it is higher than the prudential requirement of 15 percent. The solvency ratio of the banking sector declined slightly to 21.50 percent in 25 2010 Annual Reports, National Bank of Cambodia and 2015 Cambodia Microfinance Association (CMA) 26 Consisting of the construction, real estate, and mortage sectors. Cambodia Economic Update April 2016 >> 26 the fourth quarter of 2014, from its peak in the second quarter of 2012. However, the financial condition of some banks seems to be less satisfactory. The concentrated banking system has resulted in the top five performing banks generating a return on equity (ROE) of over 25 percent, whereas the average ROE of the banking sector was 16 percent as at the end of 2014.27 The rapid expansion of the banking system may entail some risks due to the reliance on foreign funding. In terms of overall risk status, Standard and Poor’s classification of the banking sector in Cambodia is in group “9” under its “Banking Industry and Country Risk Assessment”28 dated December 24, 2015. The banking system receives increased foreign funding and is therefore exposed to greater volatility of international capital markets. Foreign bank entrants, many of them are small and mid-sized banks, have limited ability to mobilize domestic savings, and depend largely on injections of foreign funds. Nonetheless, over the past two years they have grown rapidly and now account for nearly 40 percent of all new lending. This triggered the introduction reserve requirements of 12.5 percent for foreign borrowing. On the other hand, the reported level of non-performing loans remain stable at low levels. The current reported level of non-performing loans (NPL) in banks has hovered below 3 percent of total loans since the first quarter of 2011, and is not among the highest by international comparison.29 The NBC has improved its supervisory oversight of credit risk by tightening the classification of NPL. However, more could be done by requiring banks to establish prudential treatment for restructured loans and strengthening reporting and disclosure requirements on NPLs. Table S1 below illustrates performance indicators of banks. Table S1: Performance indicators of Cambodia’s banks Indicator (%) 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 3Q2015 Total loans expansion (year-on-year growth) 32.11 31.97 31.96 25.58 29.43 22.90 27.30 27.00 31.8 Total loans to GDP ratio 40.40 43.08 47.39 47.74 50.26 50.42 53.40 56.71 N/A Total customer loans to customer deposit 86.46 90.46 104.05 97.24 97.75 90.68 92.96 95.86 N/A ratio NPLs to total loans 2.31 2.52 2.55 2.70 2.59 2.63 2.56 2.22 N/A Source: National Bank of Cambodia. c) Microfinance sector Microfinance institutions (MFI) have played a very important role, providing access to finance to a mostly rural population that would otherwise have to rely on unregulated private money lenders. The relatively nascent microfinance sector is experiencing explosive growth (Figure S4). The 34 microfinance institutions and seven micro-deposit-taking institutions (MDI), accelerated their credit growth to 46 percent year-on-year in 2015, and reached a record high of US$2.9 billion outstanding loans, catering to 2 million borrowers, compared with only US$426 million and 0.9 million borrowers at the end of 2010.30 MFI performance has been remarkable, with an average return on equity (ROE) of 22 percent, and continued rapid lending growth. 27 Another nine banks earned more than 10 percent and the remainder earned below this threshold. 28 BICRA scores country’s economic and banking industry risks and ranks from 1 (low risk) to 10 (high risk). The economic risk i ncludes economic resilience and imbalances resulted from high credit growth while the latter considers regulatory & supervision framework, competitive dynami cs, and system-wide funding sources of the banking industry. 29 According to IMF Financial Soundness Indicators, as at end-2015, the countries with highest level of non-performing loans relative to notably, Moldova 16.7%, Pakistan 12.5%, Macedonia (FYR) 11.2%, Kazakhstan 9.2%, and the Russian Federation 7.4%. 30 2011 Annual Report, the National Bank of Cambodia and 2015 Cambodia Microfinance Association (CMA). Cambodia Economic Update April 2016 >> 27 Figure S4: MFI’s growth has moderated while MDI’s Figure S5. MFI credit has grown rapidly in every growth is on the gradual upward trend. economic sector. MFIs’ Credits Classified by Sector 9000 80 MDIs Assets 3500 52% 8000 MDIs Credits 70 3000 MFIs Assets 2500 7000 45% 105% MFIs Credits 60 2000 MDIs Asset Growth 52% 6000 1500 60% MDIs Credit Growth 50 43% 5000 1000 KHR bn (%YOY) MFls Asset Growth 40 500 4000 MFIs Credit Growth 0 30 3000 20 2000 1000 10 0 0 2013 2014 2010 2011 2012 2013 2014 *% above each bar represents growth rate 2014/2013 Source: NBC and Cambodia Microfinance Association Source: National Bank of Cambodia and Cambodia Microfinance Association. Figure S6: Credit growth was remarkable in the construction and household sectors. Figure S7: Average amount of outstanding credit by geographical domain. ('000 riels) 12,000 9,857 Cambodia Phnom Penh 10,000 Other Urban Other Rural 7,283 6,989 6,896 6,771 6,582 6,488 8,000 5,394 6,000 4,622 4,043 3,952 3,801 3,609 3,363 3,357 2,900 2,762 4,000 2,274 2,264 1,913 1,875 1,844 1,621 1,536 2,000 - 2009 2010 2011 2012 2013 2014 Source: National Bank of Cambodia and Cambodia Microfinance Association Source: 2014 Cambodia Socio-Economic Survey, NIS The level of concentration of the microfinance sector is even higher than that of the banking sector. The top 12 Cambodian MFIs/MDIs account for 98 percent of the microfinance market by loan portfolios, and 97 percent by borrowers. Microfinance credit has grown rapidly in every economic sector (Figures S5 and S6). However, microfinance credit growth is uneven, with a few big players dominating.31 Meanwhile, MFIs’ lending relative to bank lending grew from 16.2 percent in the first quarter of 2013 to over 20 percent in 2015. This reflects the more competitive growth strategy of MFIs compared with commercial banks, and probably the stronger preference for, and popularity of, MFI products compared with banks’ products. Credit growth of MFIs was remarkable in the construction and household sectors. This rapid MFI expansion has the potential to quickly improve access to finance, in particular for the rural population. The expansion, however, contributes partly to the trend towards multiple loan-taking that correlates with non-repayment among borrowers. The 2014 Cambodia Socio-Economic Survey found increasing amounts of outstanding credit per household, in particular for rural households, while outstanding 31 According to MIX Market research. Cambodia Economic Update April 2016 >> 28 credit owed by Phnom Penh households remained stable (Figure S7). A recent study by Oikocredit in November 2015 highlights the likelihood of increasing multiple loans in Cambodia, suggesting a trend towards consumer indebtedness that may not be sustainable. Furthermore, some micro-deposit-taking institutions show declining solvency over the past two years and are very close to the prudential threshold. This is happening in the context of no deposit protection scheme and rapid growth (45 percent in 2015) of the deposit base, which topped US$1.3 billion from 1.4 million depositors. Indebtedness is rising, especially in rural areas, and the information gap remains a challenge in Cambodia. d) Insurance sector Cambodia’s insurance sector is small but gradually expanding, with total premium revenues of US$60 million in 2014. The majority of premium volume is from general insurance (property line) and life insurance. There is very little health insurance, which is usually offered by companies with foreign ownership and typically servicing foreign-owned corporates with operations in Cambodia. The largest insurer by premium volume holds a 45 percent market share, with a leading position in general insurance. The new Insurance Law enacted in July 2014 initiated compulsory Motor Third-Party Liability Insurance (MTPL) and micro-insurance activities in Cambodia. In terms of MTPL, only a small number of vehicles are covered under MTPL, even though Cambodia has seen a surge in motorists in recent years, with an estimated 10 traffic fatalities occurring daily. In terms of micro-insurance, one of the leading micro-insurers, achieving considerable success in a two-province pilot project, has rolled out nationwide micro-insurance cover for death, accidental injury, and salary-replacement during hospitalization treatment. The product’s strength lies in its simplicity, which enables easy sales with very basic information to widespread lower-income markets. While the new law has undoubtedly opened up new opportunities in Cambodia, the general challenges in the insurance sector remain to be addressed. For example, there are limited long-term investment instruments for insurers to manage their assets and liabilities. In addition, the risk-based supervisory practices need to be further enhanced. e) Cambodia securities exchange, market infrastructure, anti-money laundering and reporting The newly established stock market has a low trading volume.32 Trading on the new stock exchange is thin, having as it does only three listed companies, which limits the scope for portfolio and risk diversification by individual investors. Capital raised through the capital market remains modest, standing at 0.2 percent of GDP, and market capitalization was 0.86 percent of GDP as at March 1, 2016. The Cambodia Securities Exchange (CSX) index peaked on April 20, 2012 at 1,096.77, with trading volume of 488,000 shares, but the index closed at only 390.73 on March 2, 2016, with trading volume of just 8,759 shares. The information infrastructure for lending has been improved markedly, commensurate with the rapid expansion of the financial sector. The successful introduction of a private credit bureau,33 the Credit Bureau of Cambodia (CBC),34 with which all banks and MFIs must participate, underpins the improvement in coordination and strengthened supervision. As of April 2015, the CBC covered 4.2 million individuals,35 including both positive and negative credit information, which licensed banks and MFIs are required to share, and to check with in the process of credit decisions. As a result, banks and MFIs have reported 32 The Cambodia Securities Exchange Co. Ltd. (CSX) was launched on April 18, 2012. 33 A Prakas on Credit Information System was adopted in 2011, and with a joint investment from some of the banks, the MFI association, and a New Zealand- based technology company, together with IFC technical cooperation, the first private bureau was launched. 34 Credit Bureau Cambodia was launched in March 2012. 35 This number covers closed, active, and inquired borrowers. Cambodia Economic Update April 2016 >> 29 substantial improvements in credit quality since participating in the CBC, for example by reducing their exposure to borrowers with multiple loans. Cambodia was taken off the list of countries subject to the Financial Action Task Force’s (FATF) monitoring process under its ongoing global Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT) compliance process. Following a review of compliance with AML and CFT standards, in February 2015, FATF observed significant progress in Cambodia’s AML/CFT regime and noted that Cambodia had established the legal and regulatory framework to meet its commitments in its action plan.36 Cambodia’s dynamic enterprise sector has spurred growth in accounting and auditing activities in the past 10 years, albeit from a very low base. According to the National Accounting Council (NAC),37 since 2010 all public-interest entities should be reporting in line with International Financial Reporting Standards (IFRS),38 and other non-financial enterprises according to IFRS for Small and Medium-Sized Enterprises (SMEs), a simpler financial reporting standard. The 2010 Financial Sector Assessment Program (FSAP) highlighted some weaknesses in the accounting and auditing framework in Cambodia. It emphasized the importance of improving the quality of data from financial institutions to enable the appropriate assessment of risks and to implement a strategic plan for transition to IFRS. 39 f) Key messages Authorities have recently introduced some important measures aimed at improving the resilience of the financial sector. The implementation of the recent directive (Prakas) of March 22, 2016, on minimum registered capital of banking and financial institutions issued by the NBC is key to further strengthen the banking sector including microfinance. This will encourage consolidation and mergers in the banking sector.40 The recent introduction of reserve requirements of 12.5 percent for foreign borrowing and the liquidity coverage ratio will also support the strengthening of the banking sector. Other recent Prakas regulate home-host relations related to information-sharing, as well as emergency liquidity assistance (ELA). Additional measures that could help further to improve supervision and information exchange in the short and medium term include the following: (i) Refining data collection. It is advisable to implement more conservative prudential treatment for restructured or re-scheduled loans and NPLs in each economic sector, large exposures, related-party exposures, banks’ top-20 exposures, and country-risk exposures. It would be beneficial to improve the analytical tools by recommending clarification of the provisions coverage ratio, the large exposure ratio and the liquidity ratio, and improved approaches to system-level analyzes. 36 Nevertheless, the Government of Cambodia continues to work with the Asia Pacific Group in ongoing efforts to address the full range of AML/CFT issues identified in its mutual evaluation report. In addition, the NBC is conducting a self-assessment of Money Laundering and Terrorist Financing (ML/FT) risks under the National Risk Assessment (NRA) process. 37 The National Accounting Council (NAC) within the MEF is the standard-setting body for the profession, and the Law of Corporate Accounts (2002) established the legal framework for national standards of accounting. 38 The definition of public-interest enterprise, however, is not fully understood, and the implementation has been weak. 39 The authorities plan on the phased introduction of IFRS by financial institutions, and are considering revisions to the prudential regulatory framework and amendments to prudential regulations and financial reporting and external audit requirements to ensure alignment with IFRS. 40 Since the framework for mergers is not well formed in Cambodia, the implementation of new capital requirements would need to be managed carefully to maintain confidence in the system. Cambodia Economic Update April 2016 >> 30 (ii) Ensuring that loan classification is consistently applied from bank to bank, while the existing rules allowing for immediate upward reclassification of restructured loans could be reviewed. These tasks can be done within a short-term timeframe. (iii) Revising the formula for calculating banks’ liquidity to capture the time dimen sion. It is advisable to improve the analysis of liquidity risk by re-examining the ratio indicator to include only highly-liquid assets, by working with financial institutions to improve asset classification. It is advised to monitor potential risks, such as the emergence of non-resident loans and deposits in the banking system. (iv) Additional prudential measures could instill further stability to the sector in the medium run. As banks have increased their concentration and increasingly rely on foreign funding they may be adding to systemic risks. This may be the case, in particular, for the banks that represent a large share of retail, corporate and inter-bank deposits. There is also a suspected large and increasing volume of “shadow-bank” lending to the construction and real estate sector. Therefore, further tools to moderate credit risk, such as required stricter loan-to-value ratios for collateralized lending to possible speculative businesses, would help to improve resilience. These tasks will likely require a medium-term timeframe to implement. (v) Limitations on consumer lending relative to portfolio size may also be warranted , to rein in possible overheating in the consumer credit market. In this regard, further attention to improving consumers’ financial literacy, in particular for the rural population. (vi) Further improving the credit information system by expanding the CBC to cover legal entities. In this regard, CBC is working with the Ministry of Commerce, which maintains a registry of some 500,000 enterprises, in order to link enterprise registration information to credit histories. (vii) Further improving data quality and encouraging disclosure policy. Market confidence can be further improved by public disclosure of the financial performance of the financial sector. This can be done by improving accounting and auditing practices in the financial sector. (viii) Conduct a high-level crisis simulation exercise. This exercise aims to create opportunities for the authorities to use their respective existing crisis-management arrangements in terms of legal instruments, operational framework, inter-agency and intra-agency information sharing and coordination arrangements, and communication with key stakeholders and the public. The authorities are making efforts to close critical gaps in crisis preparedness and the country’s crisis management framework, which are exacerbated by the dollarized structure of the economy and financial system.41 The work to enhance the crisis management framework complements an expert review of the National Bank of Cambodia Law and the Law on Banking and Financial Institutions, and drafted amendments that provide, among other things, for the NBC’s ability to carry out bank resolution for systemic and non-systemic banks. It is also recommended to set up a Committee for Financial Stability,42 41 In February 2014, the NBC, the MEF, and the SECC signed a Memorandum of Understanding (MOU) on est ablishing a policy level Working Group (WG), which also led to the formation of a technical Core Team. 42 The signing of an initial MOU among supervisory agencies enhanced cooperation at the policy and technical level s. However, collaboration among financial regulators can be further improved. It is also important to have a clear legal mandate for macro -prudential oversight, and to consider adopting the proposed law changes that would empower the NBC to carry out bank resolutions. Cambodia Economic Update April 2016 >> 31 empowered to oversee financial stability and to deal with a systemic crisis.43 Given the time-consuming process of amending laws, this would need to be a medium-term action. For medium to long term, the authorities plan to update the 2011 Financial Sector Development Strategy (FSDS) taking into account the 2010 Financial Sector Assessment Program (FSAP). The authorities may consider using the updated/revised FSDS as the basis for deciding future direction with the aim of building a functioning financial sector, supporting future economic developments for the next 5-10 years. This would guide policy direction to enhance the following practices, in line with international standards: regulatory and supervisory framework including insolvency regime, crisis management practice, data quality, disclosure policy, corporate governance, risk management practices, accounting and auditing practices, and consumer protection. In addition, the revised FSDS may address the high dollarization, asset- liability mismatches both in terms of currency and maturity mismatches, limited financial instruments, and more. 43 The committee may be co-chaired by the NBC and the MEF. Cambodia Economic Update April 2016 >> 32 Cambodia: Key Indicators 2012 2013 2014 2015e 2016p 2017f 2018f Output, Domestic Demand and Prices Real GDP (% change yoy) 7.3 7.4 7.1 7.0 6.9 6.8 6.8 Domestic demand (% change yoy) 9.9 11.3 10.1 12.6 10.7 11.1 12.5 Consumer price index (eop, % change yoy) 2.5 4.6 1.2 2.8 3.0 3.5 3.8 Public Sector (% of GDP) Government revenues 15.3 15.1 18.0 17.5 17.5 17.5 17.0 Government expenditures 21.0 21.5 21.5 20.5 22.3 22.0 22.5 Government balance excluding grants a/ -5.9 -6.6 -3.8 -3.0 -4.8 -4.5 -5.5 Government balance including grants a/ -3.3 -2.7 -1.4 -0.8 -2.8 -2.9 -4.1 Foreign Trade, BOP and External Debt Trade balance (US$ million) -2,455.7 -2,598.4 -3,213.0 -3,217.1 -3,301.7 -3,552.6 -3,693.3 Exports of goods (US$ million) 5,632.8 6,890.2 7,408.4 8,519.6 9,550.0 10,520.0 11,830.0 (% change yoy) 7.9 22.3 7.5 15.0 12.1 10.2 12.5 Key export (% change yoy) 1/ 7.0 17.6 11.7 14.5 14.0 14.0 14.0 Imports of goods (US$ million) 8,088.5 9,488.6 10,621.4 11,736.7 12,851.7 14,072.6 15,523.3 (% change yoy) 20.6 17.3 11.9 10.5 9.5 9.5 10.3 Current account balance (US$ million) 2/ -1,376.0 -1,378.1 -1,969.9 -1,984.9 -1,884.3 -1,999.2 -2,332.7 (% GDP) -9.7 -9.0 -11.9 -10.8 -9.3 -9.3 -10.0 Foreign direct investment (US$ million) 1,697.9 1,826.1 1,676.9 1,802.7 1,652.9 1,747.7 1,780.0 External debt (US$ million) 4,547.4 5,110.7 5,555.4 6,020.0 6,469.3 6,894.5 7,343.0 (% GDP) 32.1 33.3 33.4 32.8 32.0 32.2 31.6 Debt service ratio (% exports of g&s) 1.0 1.1 1.3 1.4 1.5 1.6 1.7 Foreign exchange reserves, gross (US$ million) 3,463.0 3,642.5 4,657.9 5,672.1 6,398.7 6,847.7 7,258.9 (prospective months of imports of g&s) 3.7 3.5 4.1 4.5 4.7 4.6 4.1 Financial Markets Domestic credit (% change yoy) 29.6 28.6 28.4 27.0 25.8 25.0 24.5 Short-term interest rate (% p.a.) 11.6 11.3 11.5 11.7 12.0 11.8 11.5 Exchange rate (Riel/US$, eop) 3,995.0 3,995.0 4,075.0 4,054.0 4,058.0 4,062.0 4,067.0 Real effective exchange rate (2010=100) 105.4 109.9 113.1 119.8 121.8 124.3 127.4 (% change yoy) 0.5 4.3 2.0 1.3 1.7 2.0 2.5 Memo: Nominal GDP (US$ million) 14,188 15,362 16,623 18,363 20,190.7 21,412.1 23,243.7 Sources: National data sources, IMF, and World Bank staff estimates. e = estimate; p = projection; and f = forecast. a/Includes expenditure adjustments 1/Garments and footwear. 2/Excluding official transfers. Cambodia Economic Update April 2016 >> 33