IMF Warns of Rapid Credit Growth

The International Monetary Fund (IMF) has warned that a recent surge in lending by Cambodia’s banks could put the country’s financial stability at risk.

In a report released Tuesday, the Washington-based organization projected that Cambodia’s gross domestic product (GDP) will grow by 6.7 percent in 2013, up from the 6.5 percent growth projected for 2012.

But the prospects of reaching its potential to grow at 7.5 percent in the medium-term “hinge critically on the global economic recovery and ongoing reforms to upgrade the infrastructure and promote economic diversification, as well as enhance public sector revenue and service delivery,” the fund says in the report, which is based on a consultation conducted by IMF staff late last year and highlights some of the economy’s vulnerabilities.

“On the domestic side, rapid credit growth and excessive risk taking by banks could threaten financial stability, labor market tensions could disrupt textile exports, and extreme weather conditions could affect agricultural production,” the report warns.

In the context of more than 30 percent year-on-year growth in private-sector lending by banks in Cambodia in both 2011 and 2012, the report addresses the question “When is credit growth too fast and how to deal with it?”

It notes that credit in the country already amounts to 37 percent of GDP, a high proportion for a low-income country. At the current rate of growth, Cambodia’s ratio of credit to GDP would be larger than the average for more advanced “emerging market” countries, the report adds.

The IMF says the gap between GDP growth and credit growth “would rapidly widen and by early 2013 would surpass a level last seen in 2008, at the height of Cambodia’s real estate boom, which ended in a bust.” The report also says the construction sector rebounded last year due to cheap and available credit for building projects.

Khon Savuth, chief the statistics office of the Commerce Ministry’s CamControl department, said that imports were worth $8.13 billion in 2012, compared with $6.6 billion in 2011.

“The main point is that we imported a lot of construction materials, as well as raw materials for garments” last year, he said, adding that exports, dominated by garments and agricultural products, also went up, from $4.88 billion in 2011 to $5.49 billion in 2012.

To address the boom in lending, the National Bank of Cambodia (NBC) in September increased by 0.5 percent the reserve requirement for banks.

However, the IMF says, “the reserve requirement does not automatically mean tighter credit conditions as many Cambodian banks still have excess liquidity, a number of them are lowering interest rate spreads to compete for market share, and some increasingly rely on cheaper external funds from foreign banks.”

Those in the finance sector played down the risks of banks overheating.

NBC director-general Nguon Sokha said that the growth in credit was something the central bank was aware of, but should not be of great concern at present.

“We continue to monitor credit growth and we encourage the banks to strengthen the quality of credit,” she said.

Canadia Bank chief executive Michael Lor said “One would need to look holistically at a few ratios in order to comment fairly on this matter.” He said strong economic growth in Cambodia and in the region, under-control inflation—at 3.4 percent for 2012 rising to 4.6 percent in 2013, according to the IMF’s projections—should be taken into account when assessing loan expansion in the country.

“Also, and more specifically, delinquent ratios [the proportion of loans that are not paid back] in Cambodia were generally on an improving trend,” he said.

In its report, the IMF also notes that, despite a rise in the amount of revenue the government collects from tax in recent years, it has not risen dramatically as a proportion of GDP, limiting the government’s ability to spend.

The government’s domestic revenue was on track to reach more than $1.85 billion in 2012, up from $1.61 billion in 2011, according to Ministry of Economy and Finance figures for the first 10 months of the year.

But the IMF estimates that domestic revenue amounted to just 13.2 percent of GDP in 2012, compared with 11.5 percent in 2009.

To increase its revenues, the report recommends the government collect taxes more effectively, reform tax policy and make tax institutions more accountable.

“Careful management of fiscal risk by better monitoring of contingent liabilities related to [public-private partnerships] is also important to safeguarding fiscal space,” it says, likely referring to ambitious infrastructure projects signed by the government, largely with Chinese companies.

The report also says that while the NBC has made progress on supervising the banking sector, “more decisive actions are needed in establishing an adequate and well-coordinated system of financial supervision.”

It reiterates a 2010 recommendation to freeze the granting of new banking licenses, given the “stretched” capacity of the NBC to supervise the sector.

Ms. Sokha of the NBC said that the criteria applied before granting banking licenses had been tightened, and that licenses were still available to banks that have something to offer Cambodia.

Further, she said, “We’ve added staff to the supervisory bureau. Also the quality of our supervision capacity has improved. “It’s an ongoing effort at the NBC.”

(Additional reporting by Phok Dorn)

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