Cambodia’s Financial Outlook Rating Drops on Opaque Imports

4 min read
A gold bar (Bullion Vault/Flickr)

International credit rating firm Moody’s downgraded Cambodia’s financial outlook from stable to negative over a “severe widening” in the gap between imports and exports and a lack of transparency.

The crediting institution made its assessment after Cambodia’s current account deficit — the difference between the value of imported goods and services and the value of exports — widened to 46% in 2021. It averaged around 9.5% for the past 10 years, it said.

The increase in imports was related to a surge in non-monetary gold of over 500% alongside a rise in fuel and construction supplies. Cambodia’s main export revenues from manufactured goods and tourism remained low, Moody’s added.

Cambodia saw unusually large exports of gold in 2020, followed by massive imports the following year.

Moody’s did not attempt an explanation of the gold trade, but said “the volatility in gold imports since the beginning of 2020 may be temporary.”

Even so, “Cambodia’s current account deficit remains significant (approximately 20% of GDP in 2022) even if monetary gold imports are disregarded,” it said.

The value of imports was previously offset by foreign investment, but it was not enough in 2021, instead being covered by “unspecified sources of capital flows,” the report said.

“The opacity of these flows highlights transparency concerns, and as a result, the funding of forecasted current account deficits appears highly uncertain,” it said.

It added that Cambodia’s debt burden remained only “moderate,” its interest burden was better than its peers, and its foreign exchange reserves — though going down — remained at $17 billion as of 2021.

Moody’s report also offered a broader economic outlook.

It predicted GDP growth at 4.5% this year and 5.5% in 2023, up from 3% GDP last year. But GDP growth would not reach pre-pandemic levels “within the next few years” due to weakening global growth, it estimated.

Cambodia’s luxury property sector also decelerated, Moody’s noted. This decrease could be good for economic stability in the long run, but the potential of a “disorderly unwinding” in the sector posed a risk for Cambodia’s economy, Moody’s said.

It also assessed Cambodia as having high rates of corruption, and added that it could do more to develop human capital: “low per capita incomes and a poor provision of health and education services as well as weak access to other basic infrastructure have constrained human capital development,” it said.

Stephen Higgins, a founder and partner of the investment group Mekong Strategic Partners, noted that there was an “odd” shift in Cambodia’s imports, which he believed was mostly related to gold.

“According to the World Bank, last year it was the 2nd worst in the world at 46% of GDP, behind only Equatorial Guinea, and this year it is still looking pretty ugly,” he said in a message. (Equatorial Guinea’s most recent current account balance rate, at 146% of GDP, was from 1996, according to the World Bank.)

“I don’t believe it is really as bad as the official numbers are showing, but it is understandable that it would make the likes of Moody’s nervous,” he continued.

Cambodia’s net trade plunged from -$2.2 billion in 2020 to -$12.7 billion last year, according to the World Bank.

Jayant Menon, a senior fellow at the ISEAS-Yushof Ishak Institute and a former ADB lead economist, said Cambodia would do well to shed more light on its imports, especially of gold, but global shifts remained the major concern.

The ratings downgrade would be seen as reflecting external factors such as slowing global growth and rising import prices, he said.

“Once these factors resolve and tourism picks up further, the current account should narrow and the ratings should be upgraded,” he said.

In October, Moody’s also downgraded NagaCorp, the Hong Kong-listed firm behind Phnom Penh’s sprawling casino complex NagaWorld, to a B2 ranking with a negative outlook.

“The downgrade reflects NagaCorp’s slower-than-expected operational recovery such that the company will likely require external financing to repay its outstanding $545 million bond maturing in July 2024. The refinancing risk is exacerbated by tight funding conditions in the current economic environment and limited sources of liquidity for the company,” said Yu Sheng Tay, a Moody’s Analyst, in the announcement. “The negative outlook reflects NagaCorp’s heightened refinancing risk. At the same time, it reflects ongoing uncertainties around the pace of recovery in the company’s operating performance.”

Among the concerns flagged, Moody’s noted that NagaCorp relies on external funding and concentrates its debt, while the corporation’s ownership is also highly centralized with CEO Chen Lip Keong. In addition, the firm noted the slow recovery of the tourism sector and increased monitoring of the junket operators that drive big-spending whales into casinos, and NagaWorld in particular.

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