In its assessment of Cambodia at the end of last year, the executive board of the International Monetary Fund (IMF) warned that the country was vulnerable to “elevated” levels of private debt.

To rein in private credit growth – projected at 15% this year – the board urged authorities to normalize prudential requirements to pre-Covid settings, boost supervision, and prepare to raise requirements for provisions.

The board also “underscored the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks”.

Yuanta Securities (Cambodia), a subsidiary of Yuanta Financial in Taiwan, says keeping private credit growth rates similar to the past five-year average of 20% “may no longer be feasible or advisable”.

In a research update for August, Yuanta highlights the need for a long-term approach, shifting the focus towards qualitative rather than purely quantitative growth.

By being responsible and cautious, “relevant stakeholders may mitigate potential risks and ensure the stability and health of Cambodia’s banking industry and overall economy”, the securities firm says.

Oversaturated?

Since the end of Cambodia’s civil war in 1998 and the closure of a dozen banks with weak capital ratios a couple of years later, the country’s banking sector has witnessed astonishing growth.

Using National Bank of Cambodia figures and its own data, Yuanta estimates that total credit skyrocketed from 13% of GDP in 2006 to 195% last year.

Over the same period, the number of bank branches swelled sixfold from 2.3 per 100,000 adults to 13.5. And the number of deposit accounts soared from 3 million in 2015 to 16 million last year.

Such indicators – including domestic credit to the private sector, estimated at 177% of GDP at the end of last year – have raised concerns that the banking industry is saturated and the private sector over-indebted.

But Yuanta argues that credit as a percentage of GDP can be misleading when comparing Cambodia to other countries, given its “substantially larger” informal economy and “significantly smaller” government final consumption expenditure.

These can make the country’s GDP appear much smaller than that of other counties, thereby inflating the credit ratio.

After adjusting for government final consumption expenditure and the informal economy, Yuanta reckons Cambodia’s private debt is “relatively lower” compared to more advanced economies like Thailand, Malaysia, Singapore, and South Korea.

Still, the rapid growth rate of private debt “raises concerns about potential over-indebtedness, highlighting the financial sector’s susceptibility to external shocks”.

Different from Thailand

Thailand went through this nightmare three decades ago. Private debt soared in the first half of 1990s and then slumped in the second half, exacerbated by the Asian financial crisis of 1997.

But “Cambodia’s current situation is fundamentally different from Thailand’s back then”, Yuanta says.

Whereas Thailand’s private sector relied heavily on foreign credit in those days, Cambodia’s “relies almost solely on credit from domestic banking industry”.

“It is more important for Cambodia’s banking sector, as the major domestic lender, to be mindful of the growth rate and maintain a sustainable ratio moving forward.”

Yuanta concludes that Cambodia’s private sector has room for double-digit growth of 10% percent over the next five years – and then about 7% in line with nominal growth – with credit to the private sector easing to 140% of GDP.