Moody’s cautious on GDP growth, warns of credit bubble

GLOBAL credit rating agency Moody’s Investors Services said yesterday that Cambodia’s B2/stable sovereign credit rating was supported by its robust economic growth and modest debt burden, but its narrowly focused industrial sector and low incomes were weighing on overall economic strength. In addition, the fast pace of credit growth, though slowing over the last year, could pose financial stability risks.

Moody’s projected in a report to investors that Cambodia’s real economic growth will edge lower to 6.8 per cent in 2016 after clocking in at 7 per cent in 2015, citing external factors expected to dampen foreign revenue inflows.

“Garment exports and tourism, key drivers of growth, face headwinds from lacklustre global demand,” it said. “Slowing growth in China . . . will also have negative implications for Cambodia’s economy, given China’s importance as a source of investment, trade and concessional loans.”

Moody’s identified a significant risk in the Kingdom’s rapid credit growth in recent years, warning that a bubble was forming. Bank lending increased by 23.5 per cent in 2015, and while slower than in the previous three years, it outpaced nominal GDP growth and was heavily concentrated in the property sector.

“The pace of increase in overall credit, and the risks associated with speculative real estate activity in some markets, point to the probability of a boom-bust cycle – which would have severe effects on the economy and banking system – despite the central bank having implemented measures to curb growth in bank loans,” the report said.

The report did not constitute a ratings action, Moody’s said, though no schedule was provided for the next review.

“Our last rating action on Cambodia was in 2013, when we affirmed the rating at B2/Stable,” Moody’s analyst Anushka Shah said in an email. “Unless there are developments that prompt us to do otherwise, the time horizon for us to review a rating is typically three years.”

Svay Hay, president and CEO of Acleda Securities, said sovereign credit ratings are an important tool for investors to assess the risk level of a country’s investment environment. He said the ratings are “used by investors when looking to invest in particular jurisdictions, and also take into account other related risks”.

Cambodia’s B2 rating is five notches below investment grade, and at a level that indicates Moody’s judges any potential debt instrument issued by the country would be at a high risk of default.

“B2 is a speculative grade,” said Hay, adding that to attract investors a debt issuer must balance the level of risk with a suitable return on investment.

“Simply speaking, a high credit rating means a lower risk of default, thus offering lower yield, while a low credit rating means a higher risk of default,” he said. “Lower-rated bonds or debt instruments generally have higher yields.”

The rating will become increasingly important as Cambodia looks to issue its first-ever sovereign bond.