Cambodia's farmers and the many garment factory workers face a tough time ahead. Photo: AFP

A debt crisis was already brewing in Cambodia before the Covid-19 pandemic spawned a global recession. But without proper management, Cambodia’s economic woes risk turning into a financial crisis, too.  

The World Bank estimated that outstanding loans from the banking and microfinance sectors were worth more than 100% of the country’s gross domestic product – or about US$25 billion – for the first time last year, while the true value of Cambodians’ indebtedness is likely much higher, given the size of the illegal money-lending market.

The National Bank of Cambodia, the central bank, has even warned of the “destabilizing effects on the economy” of rising individual debt, according to its Financial Stability Review published in April last year.

Another World Bank report, from 2018, noted that “the growth of domestic credit in Cambodia has been faster than any other country in East Asia – increasing nine-fold in 12 years.”

This is most obviously seen in poorer Cambodians, who are now reliant on small loans from microfinance institutions (MFIs). Cambodia, in fact, has become one of the most reliant countries in the world on MFI credit, often with disastrous consequences. The average size of a loan from an MFI rose from only $200 to $1,000 in the decade up to 2014, and is now much higher.

Covid-19 is already ruining Cambodia’s economy, even if the number of infected cases in the country remains relatively low. The tourism sector has ground to a halt because Chinese tourists are no longer vacationing abroad. Supply chains in China were halted as several provinces entered lockdowns, and now exports to Europe and the United States, Cambodia’s main export markets, have also slowed as those states undergo shutdowns.

According to an association that represents small businesses and the self-employed, the incomes of small businesses in Cambodia have dropped almost 70% since the beginning of the Covid-19 pandemic.  

By another estimate, roughly one-third of all workers – or more than 200,000 people – in Cambodia’s vital garment sector could be temporarily laid off as mills can no longer operate. The government had promised these garment workers they would receive 60% of the minimum wage – two-thirds covered by the state and one third by employers.

But this means workers will only take home $114 per month and it completely cuts overtime pay, which many depend on financially to stay afloat. Moreover, it will mean many urban workers won’t be able to send a proportion of their wages to their families in the countryside, who depend on these remittances to survive.

Added to this, the rural economy faces a dire future. Droughts suffered last year pushed the agricultural sector, especially rice farming, to its limits. This was exacerbated by protectionist tariffs imposed by the European Union on certain rice exports from Cambodia, as well as China’s inability to meet its ever-rising quotas on rice imports from Cambodia.

Agricultural exports will almost certainly decline this year. The recent decision by Hanoi to shut down Vietnam’s borders with Cambodia is already having dire consequences, as Vietnam is one of the largest purchasers of Cambodian food produce. The price of fresh cassava tuber, for instance, dropped from 380 riels to about 200 riels per kilogram in just over a week. Moreover, Cambodia is now suffering yet another drought.

As a result, an even greater number of Cambodians will now have to depend on credit in the coming months, perhaps even until next year, to pay for the most basic daily needs. Many small businesses, too, will only be able to survive through loans, hoping to stem declining revenue for a few months through credit.

This is, of course, unavoidable. The other option is economic collapse. As such, the National Bank of Cambodia has responded by relaxing lending rules for financial institutions and lowering interest rates for certain collateral. The government has also set aside $2 billion, a quarter of the value of this year’s state budget, to help the economy, with tax breaks and some cash payments on offer for businesses in the vital tourism and garment sectors.

The central bank should be applauded. On the one hand, its measures should allow banks to increase their liquidity through low-interest loans, so they will have enough funds to accept delayed payments from customers for several months, preventing businesses and households from defaulting. This should allow households and businesses to use the money they now have in productive ways, so as not to limit consumption and investment in order to pay for daily necessities.

On the other hand, the central bank’s new measures should also allow banks and MFIs to lend to customers more freely, spurring investment and consumption. No one knows just how much credit will be necessary to weather this storm. For the garment workers temporarily laid off and receiving the government’s promised 60% of their salary, they are each going to lose at least $76 per month.

Hypothetically then, if 30% of this workforce – 240,000 people – is laid off and forced to take out a loan to cover these losses for six months, it will see credit rise by $109 million. And that’s just for garment workers. The amount of additional credit needed by small businesses and workers in other sectors, especially the massive number of self-employed, will be considerably higher.

Prudence is necessary. The central bank has been right in recent years to demand more collateralization from banks and other financial institutions, and new rules have seen banks move to limit their exposure. More pressure from central bankers has also forced financial institutions to collect more savings from customers in recent years. But the ratio of non-performing loans is certain to rise, though by how much remains to be seen, while personal savings will decline.

The hope – and best-case scenario – is that toward the end of the year, as the crisis comes to an end, the global economy picks up. For Cambodians, this will mean wages normalize and exports boom by the end of 2020, and they can then begin paying back debts taken now. Banks and MFIs can then start reducing the quantity of loans handed out, and try making outstanding debts more sustainable.

But this isn’t guaranteed, and there should be some planning as to what happens if the global economy picks up again but Cambodians remain overly reliant on credit. All market economies depend on a balance of greed and fear. Too much greed and there’s a bubble; too much fear and there’s a bust. In the best-case scenario, the current fear should turn into greed once the Covid-19 crisis is over, as businesses look to invest heavily and boost production.

The problem, however, as many economists have pointed out, is that after crises businesses tend to remain fearful. They do not immediately spring back to pre-crisis levels of production, they don’t immediately reinvest revenue, preferring instead to maximize profit, and workers conserve their money, rather than spend it freely.

If this happens, and debt keeps climbing even as the economy picks up, Cambodian banks and MFIs will face considerable problems. How much laxity should they give indebted customers who cannot repay, even if they are earning again? How long should they lend at low interest, which further spurs borrowing? When does economy-saving credit become so large that it imperils the financial sector?

These are not easy questions to answer. But they are vital to avoid a debt crisis.

David Hutt is a political journalist based between the Czech Republic and Britain. Between 2014 and 2019, he was based in Cambodia, covering Southeast Asian affairs. He is Southeast Asia columnist for The Diplomat and a regular contributor to Asia Times. He reports on European political affairs and Europe-Asian relations. Follow him on Twitter @davidhuttjourno