RAM Ratings assigns gB1(pi) rating to Cambodia, improved business environment needed to drive economy forward

Published on 18 November 2014

RAM Ratings has assigned respective global-scale and ASEAN-scale sovereign ratings of gB1(pi)/stable and seaBB3(pi)/stable to Cambodia. The ratings are anchored by poor government revenue generation, a below-average business environment, substantial contingent risks, and low household income resilience. However, these negatives are broadly balanced by the economy’s fast-paced growth and large capital inflows in the form of FDI, foreign loans and grants which continue to support the economy.  

Cambodia’s economic growth has been impressive, averaging 7.0% over the past 4 years, mainly supported by the garment and tourism industries. The relocation of factories from China and Vietnam to Cambodia to exploit competitive-priced labour and take advantage of Cambodia’s preferential access to EU markets has driven the performance of the garment industry. In addition, large capital inflows have helped build the economy and fund the country’s large current account deficit.

“In order to drive the economy forward and sustain the large FDI inflows, greater effort is required to improve the overall business environment,” notes Esther Lai, RAM’s Head of Sovereign Ratings. Coupled with the rising minimum wage, a poor business environment may erode competitiveness going forward. The government has embarked on reforms to improve the business environment, such as reducing regulation in setting up businesses and improving infrastructure development. The latter has led to a widening of the current account deficit (2013: 10.5% of GDP) as a result of heavy machinery and equipment imports needed for infrastructure projects. We note that the deficit, however, is fully funded by FDI and foreign loans and grants.

Meanwhile, the poor revenue generation and a high reliance on grants also constrain the rating. Looking ahead, a broader government revenue base is vital to support Cambodia’s fiscal position and in line with the government’s commitment to raise revenue by 0.5% of GDP annually to ensure fiscal sustainability. Separately, household income is highly susceptible to shocks. As a result of the large percentage of households living below or barely surpassing the poverty level, livelihoods are highly susceptible to adverse economic and weather conditions. This is amplified by substantial concentration risk (the bulk of Cambodia’s exports are garments exported to the West) and the frequent occurrence of droughts and floods.

On a separate note, contingent risks that Cambodia faces stem from the sovereign’s large private-public partnerships which could weigh on its fiscal position. In addition, an underdeveloped banking regulatory environment coupled with rapid credit growth and the Central Bank’s stretched supervisory capacity is a concern in respect of financial stability.

Media contact
Serene Tan
(603) 7628 1088
serene@ram.com.my