Cambodia risks overheating as credit booms: IMF

Tue Jan 8, 2013

• In past year, private credit rose by nearly a third

• National income expanded by 6.5 percent last year

Jan 8, 2013 (Reuters) - Cambodia's financial system could be overheating, posing a risk to the country's strong economic growth, International Monetary Fund staff reported after their annual health check on the economy.

In the past year, private credit expanded by nearly a third in Cambodia and reached 37 percent of national income, zooming above levels seen in similar low-income countries in Southeast Asia, IMF staff said in documents released on Tuesday.

The ratio between credit and national income is now much higher than the long-term trend, which puts the economy at risk. The National Bank of Cambodia should do more to cool down bank lending beyond simply raising reserve requirements, as it did recently, the IMF staff said.

While the staff views do not represent the official position of the IMF, the Fund's executive board largely agreed with the staff's conclusions, according to a separate document released on Tuesday.

"While the recent increase in the reserve requirement for foreign currency deposits is welcome, (the directors) considered that further gradual increases may be needed to guard against excessive risk-taking by banks," the IMF said after the board's discussion.

Easy financial conditions and demand for credit have helped fuel the boom.

Cambodia has been a rare bright spot in the sluggish global economic recovery, with national income expanding 6.5 percent last year, buoyed by garment exports to Europe and a burgeoning tourist industry. The IMF projects the economy will grow 7.5 percent by 2017, in line with its potential.

Cambodia is also attracting a small but growing share of foreign investment in Southeast Asia as companies seek cheaper alternatives to China and as Cambodia expands its electricity supply.

It also helps that Cambodia is perhaps Asia's most open place for investors, allowing 100 percent foreign ownership, easy repatriation of profits and a dollarized economy that minimizes currency risks.

Separately, Cambodia's executive director on the IMF's board, Der Jiun Chia, defended the country's credit policies and said most loans have been of good quality.

"Credit growth does not appear to be out of line with the vast development needs in Cambodia nor with the need to diversify the economic base," he said in a statement.

The IMF directors said Cambodia also faces risks from an expansion of the euro area crisis, and from extreme weather such as drought or floods that could hit the dominant agricultural sector. They also called on the government to improve infrastructure and the investment climate, and to promote rural development.

Cambodia has one of the lowest incomes per capita in Southeast Asia, about $820 in 2011, according to the World Bank.

The government's land policies have also drawn increasing scrutiny from the country's international donors, which supply almost half the country's budget. The World Bank froze fresh aid to Cambodia in 2010 over forced evictions of families. (Reporting by Anna Yukhananov; Editing by Peter Galloway)