A Cambodian woman holds riel bank notes. Photo: AFP Forum
A Cambodian woman holds a stack of riel bank notes. Photo: AFP Forum

Vattana San, 24, took out his first loan two years ago to purchase a new motorcycle. His parent’s farm, on the outskirts of Phnom Penh, the capital, was turning a profit and the new vehicle allowed him to travel more easily into the city, where he had just started a new service sector job.

But a bad harvest the following year meant his parents couldn’t afford to repay their debts, so he neglected his own loan to lend a helping hand.

Then one loan turned into two as his family’s financial situation deteriorated to an extent they were forced to sell the farm land that provided their livelihood and income to pay back lenders.

Vattana’s indebted family is not alone. Cambodia’s total household debt stood at US$2.9 billion in April 2018, compared to US$2.35 billion the same month last year, according to the CEIC, a US-based data research company that used National Bank of Cambodian data in its research.

A decade ago, when Cambodia was still largely a subsistence economy, total household debt was only US$200 million. Recent fast growth, with the economy projected to grow 7.2% this year, has come with more debts as Cambodians enter a more consumption-driven modern economy.

By the end of 2016, 1.25 million (36%) of Cambodian households had some sort of debts or liabilities, according to the 2016 Cambodia Socio-Economic Survey, produced by the National Institute of Statistics (NIS).

The figure, most likely higher now as household debt levels have risen since the research was published, accounts for debts to banks, micro-finance institutions, underground lenders and family.

On the surface, Cambodia’s household debt looks manageable, accounting for only 12.3% of nominal gross domestic product (GDP) at the end of 2017, compared to just 10.3% in 2016, according to CEIC.

In neighboring Thailand, for instance, household debt hover around 80% of GDP, with many Thais saddled with auto and mortgage loans. But Cambodia’s problem hides behind the headline figure, as loans are increasingly taken out for unproductive purposes, economists say.

Kimty Seng, a local economics lecturer, says he is concerned that if borrowers don’t soon change the ways they use their loans it will threaten the entire financial system.

Analysts say that many borrowers take loans for non-productive purposes, such as purchasing vehicles and consumer items, or simply to pay off other debts. Few borrowers, they say, put their loans towards investments that can boost their future incomes.

As many fail to raise more capital from their borrowings, they then struggle to meet repayment schedules and eventually default. In other cases, borrowers take out additional loans from other creditors to repay their original debts.

Kimty says a “vicious cycle of high-interest indebtedness” is a major cause of the rural land loss that is accentuating Cambodia’s divide between rich and poor. He adds that once Cambodian borrowers are stuck in this cycle it is very difficult to escape, a problem that is compounded by inflation.

A woman working at a money exchange shows 500 Cambodian riel notes in a file photo: Photo: Reuters/Samrang Pring

Wracked by decades of civil war, Cambodia has made marked gains in poverty reduction in recent years. Yet many of those who left “poverty”, as defined by the United Nations and other international organizations, still teeter in a precarious position where they could easily fall back with even mild market fluctuations, including rises in global interest rates.

A paper published by Kimty in 2018 points out that the ratio of average loans compared to per capita gross national income (GNI) has increased steadily over the past decade, especially between 2012 to 2014, peaking at one point at above 100%.

This suggests “that the borrowers’ indebtedness is on average above their income levels,” so they become over-indebted, he wrote. Average per capita disposable income in 2016 was US$1,212, while the average amount of an outstanding loan that same year was US$1,833, according to the NIS.

This problem could get worse as the cost of living keeps rising. GNI per capita in Cambodia increased from US$750 in 2010 to US$1,230 last year, according to the World Bank’s latest reports.

Yet the country’s Consumer Price Index also rose dramatically over the years, with the costs of all goods increasing by 2.9% from April 2017 to April 2018, according to the NIS database.

A 2017 World Bank report projects Cambodian inflation to keep rising year-on-year, spiking by as much as 5.2% between 2018 and 2019. Kimty says rising prices are causing borrowers to take out even more loans to maintain consumption levels.

Asia Times interviews confirmed that many borrowers have taken out additional loans in order to pay for daily needs. In 2016, roughly 33% of loans were used to pay for “household consumption needs,” a figure that rose to 45% for borrowers in Phnom Penh, according to NIS data.

A Cambodian woman vendor carries food for sale on a ferry in Phnom Penh on August 15, 2018. Photo: AFP/Tang Chhin Sothy

Analysts note that incomes are rising at higher rates in urban than rural areas, and more quickly for the already-wealthy than the poor. Around 60% of all Cambodians are employed in the agricultural sector.

In 2016, monthly per capita disposable income in rural areas was just US$85, compared to US$183 in Phnom Penh and US$135 in other urban areas, NIS statistics showed. The same research showed the highest quintile (or top 20% of earners) accounted for 51% of all disposable income and 42% of all household consumption.

The lowest quintile, in comparison, had just 2.8% of the total disposable income, and 9% of consumption. The bottom 60% of earners only accounted for 26.6% of national disposable income, the survey showed.

Cambodia’s poortest tend to live in rural areas, where rates of indebtedness are highest. NIS figures from 2016 show that there was an estimated 1,085,000 indebted households in rural areas, compared to 31,000 in Phnom Penh and 137,000 in other urban areas.

Media reports have recently profiled villages where almost 90% of households owe money to a financial institution. Interest rates on loans tend to be higher in the countryside, the reports said.

Falling agricultural prices are contributing to default risks. The last two years have seen historic lows in the price of cassava, pepper, pumpkin and corn, among others. This is due to increased competition from cheaper foreign imports and fluctuations in export markets.

A Cambodian farmer cuts rice in a field in Cambodia’s Kampong Speu province in a file photo: Photo: AFP/Tang Chhin Sothy

Meanwhile, agricultural prices paid by middlemen are often set below market rates with the knowledge indebted farmers need money immediately to repay loans. Meanwhile, reports of so-called “debt bondage” are rising across the country, some analysts say.

In southeastern Kandal province, for instance, workers are known to agree to transfer their debts to banks or MFIs to the owners of the brick factories where they work. Many of the workers do not receive fixed salaries and most cannot stop working until their transferred debts are fully repaid.

Workers often bring their family members to also labor at the factories, where they effectively serve as human collateral for the debts they owe and can rarely pay off, Radio Free Asia reported. Some have incurred debts so large that multiple generations have been required to toil at the brick kilns, the same report said.

There are indications that the practice is not exclusive to the brick-making sector and could be an underreported phenomena in Cambodia. Others, rather than transferring their debts and working debt bondage, simply leave the country altogether.

A 2016 report by Brett Dickson & Andrea Koenig conducted for the International Organization for Migration (IOM) found that roughly 40% of Cambodian workers returning from Thailand said their main reason for leaving Cambodia was financial debts. It was the third most common reason given by respondents to the survey.

Migrant Cambodians working in Thailand are transferred to the border by Immigration Police before they return home during a mass exodus at Aranyaprathet/Poipet. Photo: AFP Forum via NurPhoto/Gavin Gough

Last year, a UN Office on Drugs and Crime (UNODC) report on human trafficking to Thailand stated that one factor influencing emigration from Cambodia “appears to be personal or family debt”, though it specifically examined debts incurred from MFIs.

“The nexus between microfinance debt, migration and trafficking in persons is not currently well documented or explored in research literature but warrants further attention and analysis,” the report said.

It is unknown exactly how many Cambodians are now working in Thailand, though one estimate puts the figure at 1.5 million, with as many as one-third undocumented and therefore working illegally.

Since land titles are often used as collateral on loans, an additional problem is that many borrowers are “compelled to repay the loans by selling land,” says Solinn Lim, the country director of Oxfam in Cambodia

“This displaces landless farmers forcing them to migrate illegally, mostly to Thailand, in search for jobs. This in turn affects the social safety net – the family system, education of children, health and security,” she says.

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