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Cambodia not quite yet in a China debt trap

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While other developing nations slip into foreign debt death spirals, Cambodia sits in a relatively hale spot on league tables monitoring who is likely next at risk of tumbling into a so-called China “debt trap.”

Whereas Ethiopia and Zambia are the latest to request restructuring of their China-owed debts, joining Pakistan, Sri Lanka and Laos, among others, there is no sign of panic in Phnom Penh as rising global interest rates blow holes in balance sheets worldwide.

But buried in a recent The Economist article was a warning for Cambodia. “In time,” the British publication insinuated, Cambodia may be yet another country that has to go hat in hand to Beijing, by far its largest bilateral creditor. 

For now, the risks are slight but Phnom Penh’s debt profile will shift substantially if a US$50 billion, 10-year infrastructure master plan, much of which is likely to be funded through credit, is fully budgeted.   

Alasdair Scott, the International Monetary Fund’s mission chief for Cambodia, notes that the most recent joint World Bank and IMF Debt Sustainability Analysis found that Cambodia is at low risk of external and overall debt distress. 

Public debt climbed to 35% of GDP by the end of 2021, up from 28.2% in 2019, according to the World Bank. The rise was mostly the result of the pandemic, which set back economic growth, cut tax receipts and forced the government to take on more debt as it intervened to limit the pandemic’s impact. 

“The projections show the total public and publicly-guaranteed debt-to-GDP ratio increasing by around 5 percentage points during the next decade, but remaining stable at around 40%,” Scott told Asia Times. 

By comparison, neighboring Laos’ debt-to-GDP ratio rose from 68% to 88% of GDP between 2019 and 2021. Economists reckon debt of over 40% of GDP for a developing country like Cambodia is around where the situation could become dicey depending on various variables.

“Our total external debt is now at between 33% and 35% of the GDP, which is still lower than the threshold of 40%,” noted Meas Soksensan, a finance ministry spokesman, during a press conference last month. 

A Cambodian woman holds riel bank notes. Photo: AFP ForumCambodia’s debt profile isn’t yet in the danger zone though rising US interest rates will cause new strains Photo: AFP Forum

Kimlong Chheng, an economist at the Asian Vision Institute, a local think tank, reckons there won’t be much change in Cambodia’s debt-to-GDP ratio for 2023 or 2024. 

“GDP is expected to grow by between 5-6% during this period, so despite the volume of borrowings increasing, that will be compensated by the growing GDP,” he said. The World Bank reckons the economy will grow at 4.5% this year and 5.5 percent in 2023. 

Yet with debt climbing from 28.2% of GDP in 2019 to 35% in 2021, that’s “a really rapid increase” over just two years, warns Sophal Ear, associate dean and associate professor in the Thunderbird School of Global Management at Arizona State University. 

“Cambodia risks becoming a wholly owned subsidiary of China at this rate,” Ear added. “The African proverb applies: If you have your hands in another man’s pocket, you must move when he moves.”  

Total debt owed to China reached US$4.05 billion, or 44.3% of Cambodia’s credit stock, by the end of 2021, according to the World Bank’s latest economic update. 

Cambodia’s total public debt stock stood at $9.7 billion as of June 2022, according to the country’s Public Debt Statistical Bulletin published earlier this month. Of that, 68% came from bilateral partners, chiefly China, and 32% from multilateral lenders. 

According to the bulletin, the government signed new concessional loans worth around $635 million in the first six months of this year. Over the same period, the state paid $213 million in debt servicing, of which $155 million was to bilateral creditors. 

Arguments about China’s alleged “debt trap” policies are hotly debated by academics.

According to some, Beijing wants to lure countries through credit and then take possession of their key assets, including important infrastructure works, in lieu of repayments when those debts cannot be serviced. Debts also bind national governments to Beijing, increasing its leverage over those countries. 

Others say developing countries have simply gotten greedy, believing they can get rich by following China’s same debt-driven, infrastructure-led development path and have been too quick to invest in (corruption-rich) megaprojects that look good on paper but prove to be inefficient or commercially unviable.

Those projects have also been hives for official corruption and budgetary slippage in many countries, with Chinese lenders perceived as willing to look the other way as long as the credits have sovereign guarantees.  

Best of friends: Xi Jinping (L) Cambodian Prime Minister Hun Sen in Phnom Penh on December 21, 2009. Photo: AFP/Tang Chhin SothyChinese President Xi Jinping (L) and Cambodian Prime Minister Hun Sen (R) toast in Phnom Penh in a file photo. Photo: AFP / Tang Chhin Sothy

Hun Sen, Cambodia’s prime minister, has vehemently rejected “debt trap” talk for his country. “I want to reaffirm that we cannot become the debtor to only China. Similarly, China has no intention of trapping Cambodia as the debtor,” he stated during a conference in Tokyo in May.

For debt to be manageable, three things need to happen, economic and financial experts say. First and foremost, Cambodia’s economy needs to resume growing quickly in the post-pandemic era. Manufacturing has recovered this year while construction and tourism, the two other key drivers of growth of the past two decades, are likely to revive next year. 

As long as GDP increases at a faster rate than new debt accumulation, the debt-to-GDP ratio should remain stable or even fall, the experts say. But “a debt ratio is not a one size fits all thing,” warns Ou Virak, president of the Phnom Penh-based Future Forum think tank. 

“Poor countries are much more exposed to shocks and generally less resilient,” he added. We are lucky our garment export numbers are looking solid and have been a savior during the pandemic. We will need recovery in other sectors as well. Tourism will be a tough one.”

Second, the government needs to spend its loans wisely. Almost all of the country’s outstanding loans have been spent on infrastructure projects. The World Bank reckons 82% has gone on “financed public investment in the infrastructure sector.” 

In June, Minister of Public Works and Transport Sun Chanthol announced plans for a new $50 billion, 10-year infrastructure master plan which will aim to improve significantly the nation’s transport and energy links, including designs for several new deep-sea ports and trade-facilitating warehouse facilities. 

How that $50 billion worth of spending will be financed is in question.

Sun met with senior officials of the Asian Development Bank, a multilateral lender, earlier this month to ask for assistance with the master plan, which would normally mean through loans. Japan and South Korea, two other important creditors, have provided loans for parts of the plan already under development. 

But it’s most likely that Phnom Penh will look to China for a significant percentage of the scheme’s funding. The government says that it has only tabled projects that will boost economic development and growth. 

Transport Minister Sun Chanthol has big, debt-driven spending plans. Image: Facebook

Yet its own financial resources are limited and dwindling. Fiscal reserves slipped to 17% of GDP in February 2022, down from 22.5% a year earlier.

At the same time, the normally frugal government under the ruling Cambodian People’s Party (CPP) has become rather more spendthrift in recent years, mainly as it tries to invest in socio-economic development, namely education and healthcare, that went underinvested for decades. 

Because of the pandemic, the state budget for 2022 was set at $8 billion, up 6.8% year on year. Talks are currently ongoing for next year’s budget, but it’s unlikely the government will significantly cut back expenditures.

After all, 2023 is also an election year and the CPP won’t want to upset voters, despite having already killed off its only viable political challenger, the Cambodia National Rescue Party (CNRP). 

Any downturn in revenue collection caused by a slower-than-expected post-pandemic recovery will likely cause Phnom Penh to seek external loans for state budget financing.  

Moreover, a host of new free trade agreements that have recently or will soon come online will likely weaken customs collections due to falling tariffs, the government has warned recently.

It hopes that domestic tax collection will rise to compensate for customs losses, which isn’t inconceivable in sight of a greatly improved and simplified tax collection system in recent years.

State budget revenue collection reached around $3.9 billion in the first eight months of this year, or 70% of the full-year target, said Finance Minister Aun Pornmoniroth earlier this month.

Third and finally, Cambodia will need to become less reliant on foreign creditors for its debt profile to be manageable. According to the World Bank, all of Cambodia’s public debt is external.

Of that, some 43.5% of Cambodia’s total debt stock is US dollar-denominated, making it especially vulnerable to rate hikes in Washington. (Cambodia uses the US dollar and the local riel.) Despite China being Cambodia’s largest creditor, only 14.5% of its total debt is yuan-denominated. 

Cambodia’s debts are largely dollar-denominated. Imaage: Twitter / Cambodia Daily

In March, the government authorized a prakas, or edict, on the Issuance of Government Securities, which will allow authorities to raise loans domestically. At the beginning of September, the central bank issued the first tranche of the country’s first-ever sovereign bond, which it hopes will raise $300 million in total. 

While most economists are for now unperturbed about Cambodia’s debt profile, there are certain signs that it may be on a delayed but similar path as Laos, Pakistan and Sri Lanka. As a developing nation, Cambodia needs more credit including from China.

How Cambodia invests those loans and whether they boost productivity will be key to debt sustainability and the risk of ultimately falling into a debt trap. 

Follow David Hutt on Twitter at @davidhuttjourno

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