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Rating Action:

Moody's affirms Cambodia's B2 issuer rating; maintains stable outlook

17 Mar 2017

Singapore, March 17, 2017 -- Moody's Investors Service has today affirmed Cambodia's issuer rating at B2 with a stable outlook.

The factors driving the rating affirmation and stable outlook are Moody's expectations that:

(1) Policies to strengthen fiscal health and preserve macroeconomic stability will set the stage to buffer and respond to potential negative global economic and financial shocks;

(2) Vulnerabilities in the highly dollarized financial system, very low incomes, weak rule of law and control of corruption and factious political environment will remain sovereign credit constraints.

Cambodia's local currency bond and deposit ceilings were raised to B1 from B2. The long-term foreign currency bond ceiling was raised to B1 from B2. The long-term foreign currency bank deposit ceiling is unchanged at B3. The foreign currency short-term bond and deposit ceilings are also unchanged at Not Prime.

RATINGS RATIONALE

RATIONALE FOR RATING AFFIRMATION AT B2

FIRST DRIVER -- STRENGTHENING GOVERNMENT REVENUE COLLECTION AND MACROECONOMIC STABILITY BOLSTER POLICY FLEXIBILITY

The government's demonstrated track record of increasing revenue collection underscores some improvement in fiscal policy effectiveness. As part of the 2014-2018 Revenue Mobilization Strategy, enhanced administration and compliance in tax collection have driven a multi-year upward trend in government revenues, which we estimate rose to 19.6% of GDP in 2016, higher than for many similarly-rated sovereigns.

Ongoing efforts toward increasing government revenues provides the Cambodian government greater ability to fund spending on capital goods and socioeconomic development that enhances the country's competitiveness and achieves more balanced economic development. Growing domestic revenues will also strengthen the government's ability to adapt to any future tapering in grants or concessionary funding.

As a small, open economy, Cambodia is potentially exposed to exchange rate volatility. Significant exchange rate volatility or pressure on the central bank's foreign exchange reserves to prevent it would jeopardise macroeconomic stability. However, monetary policy is effectively delivering exchange rate stability, an important factor supporting foreign direct investment inflows (FDI). In turn, FDI inflows finance the country's large current account deficit, preserve macroeconomic stability, and support GDP growth. We expect Cambodia's low wages costs, limited foreign investment restrictions and proximity to regional markets will support continued robust FDI inflows into the country and contribute to a build-up in foreign exchange reserves.

The central bank's recent policies aim to enhance the resilience of the financial system to shocks and facilitate greater use of the domestic currency, which over time, could improve the effectiveness of monetary policy. The doubling in the minimum capital requirements for banks and other financial institutions and implementation of a Basel III-compliant liquidity coverage ratio aim to bolster financial stability. The central bank continues to promote greater use of the Cambodian riel via policies to reduce local currency transaction costs and increase riel liquidity within the banking system.

SECOND DRIVER -- FINANCIAL SYSTEM RISKS, WEAK INSTITUTIONAL FRAMEWORK, LOW INCOMES AND FACTIOUS POLITICAL ENVIRONMENT ARE RATING CONSTRAINTS

The signs of improved policy effectiveness are balanced by credit challenges that are likely to constrain the sovereign profile over the medium term.

The financial system is larger and the loan-to-deposit ratio is higher than for many B-rated sovereigns. Financial system risks could manifest in tighter liquidity conditions, lower economic growth and contingent liabilities to the government. Notwithstanding the recent measures mentioned above, given the economy's high dollarization levels, the central bank has limited capability to act as a lender of last resort.

Moreover, Cambodia's scores on Government Effectiveness, Rule of Law, and Control of Corruption in Worldwide Governance Indicators are lower than other B-rated sovereigns and hamper prospects for economic diversification. The government's adoption of an Anti-Corruption law and streamlining and modernization of online tax registration and payments systems mark steps towards reducing corruption and improving the rule of law. However, the extent to which these measures will improve the operating environment is yet to be revealed.

Furthermore, incomes, as measured by GDP per capita at purchasing power parity, are low relative to other B-rated sovereigns, despite more than doubling over the past decade. As a result, Cambodia is relatively susceptible to economic and financial shocks. The economic base is fairly narrow, with growth reliant on garment exports, tourism and construction and, as a result, exposed to sector-specific shocks.

Against this backdrop, a flare-up in domestic political tensions before or after the elections has the potential to hinder FDI inflows and, more generally, reduce the attractiveness of doing business in Cambodia. Meanwhile, should the election outcome lower the impetus for reform to address institutional weaknesses that would be credit negative.

RATIONALE FOR STABLE OUTLOOK

The stable outlook balances Cambodia's vulnerability to negative shocks with mitigants.

Cambodia's high dollarization of both loans and deposits makes it vulnerable to a potential sharp appreciation of the US dollar and spike in US and domestic interest rates that could result in tighter liquidity and precipitate an abrupt reversal in credit growth that has fuelled construction activity and property prices, leading to significant job losses. Political developments have the potential to raise risks around the continuation of robust FDI inflows and impetus for reform.

Mitigating factors include the country's strong economic growth prospects over the medium term, which should help foster a return of investment in the aftermath of a potential shock. In addition, Cambodia's low government debt and the highly-concessional nature of its borrowings supports high debt affordability and overall fiscal strength.

WHAT COULD CHANGE THE RATING UP

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

WHAT COULD CHANGE THE RATING DOWN

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.

GDP per capita (PPP basis, US$): 3,498 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.9% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.5% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.5% (2016 Actual) (also known as External Balance)

External debt/GDP: 48.2% (2016 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 March 2017, a rating committee was called to discuss the rating of the Cambodia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew Circosta
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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