Announcement: Moody's: Cambodia's B2 rating balances strengthening government finances and exchange rate stability against financial system risks

Moody's Investors Service says that Cambodia's B2 rating is supported by ongoing efforts to strengthen government finances and effective delivery of exchange rate stability, which increase policy flexibility.

These factors are balanced by financial system risks, a weak institutional framework, low incomes and a factious political environment that constrain the credit profile.

Moody's conclusions were contained in its just-released annual credit analysis "Government of Cambodia -- B2 Stable".

This analysis elaborates on Cambodia's credit profile in terms of Economic Strength, Low (-); Institutional Strength, Very Low (+); Fiscal Strength, Moderate (-), and Susceptibility to Event Risk, Moderate (+), which are the four main analytic factors in Moody's Sovereign Bond Rating Methodology. It does not constitute a rating action.

Moody's report says that strengthening government revenue collection bolsters the domestic funding base and supports continuing high debt affordability. Meanwhile, a stable exchange rate and price stability support foreign direct investment (FDI), and in turn economic growth and the balance of payments.

Financial system risks could manifest in tighter liquidity conditions, lower economic growth and contingent liabilities to the government. Given the economy's high dollarisation levels, the central bank has limited capability to act as a lender of last resort. Rising political tensions and weak rule of law and control of corruption could hinder the continuation of robust FDI inflows and impetus for reform. In addition, the narrow economic base and low incomes weigh on the shock absorption capacity of the economy.

The stable outlook on the B2 rating balances both upside and downside risks.

Credit-positive developments would include 1) steps to address institutional weaknesses, such as the rule of law and control of corruption, which hinder policy flexibility and effectiveness; 2) continued strong growth in FDI that boosts GDP growth and incomes; 3) further strengthening in policymaking institutions that bolsters Cambodia's ability to adapt to any future tapering in concessionary funding; and 4) a marked rise in economic diversification that mitigates susceptibility to negative shocks.

Downward rating triggers would stem from 1) persistent strong credit growth that points to a misallocation of lending and inflates an already large financial system; 2) political turmoil that undermines economic activity on a sustained basis, and 3) a sustained, structural slowdown in the garments and tourism industries.