Cambodia's Rating Constrained by Narrow Economic Base and Policy Limitations

Despite rapid growth, the small size and the narrow diversification of Cambodia's economy constrain its B2 rating, says Moody's Investors Service.


The ratings agency says the limited effectiveness of monetary policy due to a high rate of dollarisation is also a rating constraint.


Cambodia's B2 sovereign bond rating and stable outlook reflect Moody's assessment of the country's "very low" economic and institutional strengths, its "low" government financial strength, and its "low" susceptibility to risks from financial, economic and political events.


According to a just-released Moody's report titled, "Credit Analysis: Cambodia," the country's GDP per capita is one of the lowest amongst all Moody's-rated countries.


However, economic growth following the end of the civil conflict in 1991 has been rapid, supported by a shift to a more open economy and strong capital inflows.


Moody's expects the country's GDP growth to remain at 7% through 2013 and 2014, aided by higher foreign direct investment, a recovery in exports, and an uptick in construction activity. At the same time, growth is increasingly supported by rapid private sector credit expansion.


Cambodia's "very low" institutional strength reflects the lack of transparency, weak governance, and the limited scope of its monetary policy.


Moody's notes that 96% of Cambodia's total deposits are foreign-currency denominated, which has rendered reserve requirements as the primary tool for influencing credit conditions, thus constraining the choice of policy instruments.


The budget deficit has consolidated noticeably from the peak seen in 2009, but remains above the peer median. Cambodia finances its deficits mainly using aid flows. This situation has in turn limited efforts to raise tax and resulted in some fragmenting of expenditure.


While current account deficits are high, they are easily financed through official transfers, aid flows, and foreign direct investment. Consequently, foreign reserves have been edging higher.


Cambodia's susceptibility to event risks is low -- despite its exposure to global demand and volatile oil prices -- because it has sufficient buffers to counter risks to trade flows, a relatively stable government, and a sound banking system.



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