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The current financial
crisis being witnessed in the United States and other
developed countries is unprecedented since the 1930
Great Depression. Although it represents a major
challenge for ASEAN and Asia as a whole, its impact on
ASEAN economies is expected to be mitigated. Our region
had gone through these painful experiences 10 years ago,
when the Asian Financial Crisis swept through the region
and left behind considerable damages of the financial
tsunami. The current financial crisis, coupled with high
inflation, would lead to lower economic growth for ASEAN
countries.
Cambodia will fare much
better than other countries in the region of the world,
due to the lack of direct exposure of Cambodian banks to
the US subprime. Nevertheless, Cambodia is currently
faced with two important, albeit manageable challenges:
(i) indirect impact of the global financial crisis; and
(ii) high inflation.
I.
Macroeconomic Performance in 2008
High economic growth and
strong political stability that Cambodia has experienced
during the last decade has been recognized by many as
the “Miracles on the Mekong”. The new Royal Government
of Cambodia resumes its duties in the fourth legislature
with renewed dynamism and commitment to carry on its
noble and historical mission with firm commitment and
renewed determination to accelerate development and
implementation of the comprehensive, in-depth state
reform.
Economic growth was
robust, averaging at 9.4 percent during the last decade,
10.6% during the last five years, 2003 to 2007, with the
record high of 13.3 percent in 2005, 10.8 percent in
2006 and 10.2 percent in 2007. Growth is projected to be
lower at 7% in 2008 and 6.5% in 2009, reflecting the
global economic slowdown. Inflation is expected to be
20% in 2008, but will be reined in to a single digit in
2009.
Our international
resources position has been favorable and was doubled
during the last two and a half years only, from $1
billion in 2006 to $2 billion in June 2008. It took 12
years for Cambodia’s gross foreign reserves to increase
from $100 million in 1994 to $1 billion in 2006.
1.1.
The Banking
Sector
Total assets of commercial
banks grew rapidly during the last three years. The grow
rate was 21-24% in 2003-2005, but accelerated to 39% in
2006 and 74% in 2007.
However, Cambodia’s
banking system remains sound, well capitalized and
highly liquid. The capital adequacy ratio (net assets or
net worth/ weighted assets according to the degree of
risks) was 26% in 2007, well above the regulatory
minimum of 15%.
Cambodia’s banking system
is highly liquid. The liquidity ratio (liquid assets/
total assets) was 50% in 2007. Non-performing loans (NPLs)
declined from 9.5% in 2006 to 3.4% in 2007 and further
to 2.6% in June 2008. The profitability of the banking
sector has doubled last year.
Bank deposits and loans
continue to grow in 2008, reflecting public confidence,
despite the devastating global credit crunch. The last
three years have seen phenomenal growth in bank
deposits, reflecting increase in capital flows, foreign
direct investment, portfolio investment, and the growth
in exports of goods and services (especially a growing
tourism sector). Bank deposits grew 47% in 2006, 61% in
2007 and 36% in the first half of 2008, roughly $800
million in 2007 and US$1 billion in 2008.
Domestic credit to the
private sector also grew rapidly during the last three
years. While domestic credit to the private sector was
growing on average 30% annually in 2003-2005, it grew at
the rate of 53% in 2006, 78% in 2007 and 70% in the
first half of 2008. Year on year, credit grew 100% in
the first quarter of 2008. Cambodia’s banking system is
highly centralized and the centralization of commercial
banks continues to grow during the last few years, with
the five largest banks account for 71% of loans.
Such rapid growth poses
some challenges for the banking sector: (i) the quality
of loans might have degraded; (ii) the rapid expansion
of the banking sector has outstretched the central bank
(National Bank of Cambodia)’s capacity to supervise
commercial banks; and (iii) increase exposure of banks
to real estate; and (iv) increased inflation.
To sustain growth and
ensure the soundness of the banking sector, the
authorities have taken steps to recapitalize bank,
improve prudential regulations and strengthen
supervision:
•
Increase
reserve requirements of commercial banks from 8% to 16%
in order to absorb liquidity from the economy,
especially to tighten lending bank loans to the private
sector, following sharp increase in the credit to the
private sector;
•
Limit
commercial bank’s exposure to some high risk sectors,
especially the real-estate sector, by introducing a 15%
ceiling for loans to real estate;
•
(By an NBC
Directive dated 19 September 2008) increase the minimum
capital from 50 billion riel ($13 million) to 150
billion riels ($36.5 million) for commercial banks,
unless they have an influential shareholder that is a
bank or financial institution with an investment grade
rating from a reputable rating agency; and increase
minimum capital to 30 billion riels ($7.3 million) for a
specialized bank;
1.2.
Financing
Economic Growth
Cambodia has witnessed
increase in both foreign direct and portfolio
investments during the last five years, reflecting
steady improvement in investment climate and the
dominant role played by the private sector in promoting
social and economic development. Foreign investment
funds have become more and more popular and contributed
to high economic growth.
Cambodia’s economic growth
relies on the following for pillars:
•
US$600
million in ODA a year for building social and physical
infrastructures to improve environment for economic
development, poverty reduction and institutional
reforms;
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