Moody's: Cambodia's robust growth and modest government debt burden are rating supports, but rapid credit growth could pose financial stability risks

Moody's Investors Service says that Cambodia's B2 sovereign issuer rating is supported by its robust and stable growth path and modest government debt burden.

However, the country's concentration in garment production and low per capita income weigh on overall economic strength. In addition, the rapid pace of credit growth -- which has slowed somewhat over the last year -- could pose financial stability risks.

Moody's conclusions were contained in its just-released credit analysis titled "Government of Cambodia - B2 stable " and which examines the sovereign in four categories: economic strength, which is assessed as "low (-)"; institutional strength "very low"; fiscal strength "moderate (-)"; and susceptibility to event risk "moderate (-)".

The report constitutes an annual update to investors and is not a rating action.

On GDP growth, Moody's says Cambodia's real economic growth in 2016 will edge lower, to 6.8% after 7.0% in 2015. Garment exports and tourism, key drivers of growth, face headwinds from lackluster global demand.

Slowing growth in China (Aa3 negative) will also have negative implications for Cambodia's economy, given China's importance as a source of investment, trade, and concessional loans.

Moody's points out that Cambodia's robust GDP growth in recent years has been accompanied by rapid credit growth. Total bank credit increased by 23.4% in 2015, slower than in the previous three years, but still outpacing nominal GDP growth. About one fifth of bank credit is absorbed by construction, real estate and mortgages. The pace of increase in overall credit, and the risks associated with speculative real estate activity in some markets, point to 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 stable outlook on the sovereign's rating suggests that risks are balanced.

Credit positive developments would include: 1) prudent fiscal management that creates room to adapt to any future decline in concessionary aid; 2) continued strong growth in foreign direct investment; and 3) steps to address institutional and political weaknesses.

Downward credit pressure would stem from: 1) a sustained and structural slowdown in the garment and tourism industries; 2) a crystallization of contingent liabilities related to the power sector that could derail fiscal consolidation; 3) growth in credit that points to rising risks of a boom-bust cycle; and 4) political turmoil that undermines consumer and investor confidence.