ASEAN KEY DESTINATIONS
Credit growth poses economic risk, IMF warns
Cambodia: Rapid credit growth – increasingly financed by bank flows from abroad – poses significant risk to Cambodia’s economy and requires prudential policies to cool lending and reduce exposure, the International Monetary Fund (IMF) warned in a report released yesterday.
“The priority is to address growing financial stability risks by stabilising and moderating the pace of credit growth to more reasonable levels, while closely monitoring the effect on growth,” the IMF concluded in a report on its latest Article IV consultation.
It said while Cambodia’s short-term economic outlook remains broadly favourable, credit-intensive GDP growth has not been accompanied by an increase in private investment.
The Kingdom’s credit market has expanded at about 30 per cent a year over the past three years, far outpacing the adjustment of safeguards that protect the financial sector from economic shocks and downturns.
“The speed of financial deepening has been striking, with credit growing much more rapidly than in peer Asian economies during their take-off,” the report said.
The growing presence of banks and particularly microfinance institutions (MFIs) has fuelled rapid credit growth. Cambodia’s credit-to-GDP ratio doubled in the last three-years and now stands at over 50 per cent, about twice the median rate for low-income countries, the report noted.
The IMF recommended that the National Bank of Cambodia (NBC) impose a discretionary countercyclical capital buffer, a policy where banks set aside capital during periods of high financial growth to cover possible losses during cyclical economic downturns. It also urged the central bank to raise the reserve requirement of banks “substantially” in order to put the brakes on credit growth and mitigate financial stability risks.
Currently, the central bank imposes a 12.5 per cent reserve requirement on banks and 8.5 per cent on MFIs.
Apart from raising and aligning the two rates, the IMF recommended that the NBC tighten its reins on deposit-taking MFIs by expanding the reserve requirement to include the capital they borrow from abroad.
Moreover, it said real estate developers, who often provide credit and are increasingly funded by foreign flows, “should be brought under strict regulatory and supervisory control”.
Another chief area of concern was the unrestrained lending of certain financial institutions. Loan-to-deposit (LTD) ratios continue to climb and breached the symbolic 100 per cent threshold in February, while many banks are heavily dependent on foreign capital to cover these loans.
“LTDs in banks have risen indicating a heavier reliance on non-core funding, with 20 banks having LTD ratios over 100 and 12 banks with LTDs over 200 percent,” the report said. “The rise in non-core liabilities reflects the increased reliance on short-term external borrowing, raising liquidity risks.”
The IMF also recommended that the central bank impose sectoral concentration limits on lending, particularly given the growing exposure of real estate.
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