A money changer holds a fan of the Cambodian riel currency in a file photo. Image: Facebook

The message from Cambodia’s central bank and financial executives is that all is well on the financial front. This month, for instance, they pointed to 20.7% growth in lending in the first half of the year, low inflation and growing deposit-taking as cause for reassurance. 

But they surely know the Covid-19 pandemic – and the economic crisis it has wrought – is taking a rising toll on the economy and borrowers’ ability to repay their loans.

“The main risks are the prolonging of Covid-19 and a fall in people’s income and business,” National Bank of Cambodia Governor Chea Chanto acknowledged to local media last month.

This would, he added, “decrease deposit and credit growth, increase loan rescheduling, cause a drop in the construction and real estate sector and a slowdown of the inflow of capital from foreign countries to the kingdom’s banking sector.”

Moreover, it might imperil the foundations of a banking sector that has grown rapidly in recent years on what some view as too much unstable credit.

The sector certainly seems more jittery than usual, and perhaps with good reason. Last month ACLEDA, a major bank, sought reprisals after a report published by three local NGOs portrayed the plight of borrowers who cannot afford to service their loans.

Claiming it was published to “defame the banking and financial sector,” ACLEDA also petitioned Cambodia’s authoritarian government to “take action against any individuals or groups who incite [the people], leading to economic instability and a loss of trust in the banking system.”

An ACLEDA Bank employee counts US currency inside the bank in Phnom Penh, May 25, 2020. Photo: AFP/Tang Chhin Sothy

The Cambodia Microfinance Association, an industry body, also lashed out at the report this week, revealing a certain defensiveness and ill-ease in the sector. Prime Minister Hun Sen has also made threats against those who appear to either criticize or raise questions about the banking sector’s health.

According to government data, Cambodia has, so far, weathered the Covid-19 health crisis relatively well, with only 156 confirmed cases and zero deaths. However, many point to minimal testing for the exceptionally low numbers.

But the pandemic’s economic crisis has already torn apart sections of the economy, chiefly the vital manufacturing and tourism sectors.

The World Bank’s worst-case estimate from May projected an economic contraction of -2.9%. More recently, the Asian Development Bank said a contraction of -5.5% was possible, which would be one of the worst rates in the region. 

According to the World Bank, unemployment figures have shot up to about 20%. The crisis has particularly hit rural migrants and those in the informal sector the hardest, it said.

Much of the damage remains uncalculated and probably won’t reveal itself fully for some time. Indeed, the economy is unlikely to return to pre-virus levels until at least 2022, if not later.

The current economic crisis has also added strain on a financial sector already under pressure before the pandemic struck, chiefly due to how quickly Cambodians have incurred massive debts over a short space of time.

Last year, public debt topped the 100% of GDP mark for the first time, having grown nine-fold in the previous 12 years, the fastest rate in East Asia, according to the World Bank.

Cambodian central bank governor Chea Chanto gives an address in a file photo. Image: Twitter

As a percentage of GDP, Cambodian’s debt is now the second-highest in Southeast Asia, after Vietnam. According to the central bank, assets held amongst financial institutions now account for 204% of GDP.

The National Bank of Cambodia warned in its Financial Stability Review in April 2019 that rising individual debt will have “destabilizing effects on the economy.”

In part, that’s because a substantial proportion of this debt is held by the nation’s poorest, thanks in large part to the expansion of the microfinance sector, which critics say has become more predatory and profit-oriented in recent years.

The average microfinance loan is now more than double GDP per capita, at US$3,804, the world’s highest average microloan debt per borrower. 

Moreover, much of Cambodia’s debt remains hidden, extended either by illegal money lenders or largely unmonitored real-estate developers who provide credit to homebuyers often without regulation.

News reports claim a crisis is brewing in Cambodia’s microfinance sector, now worth about $10 billion, as many borrowers will not be able to make repayments due to a faltering economy.  

A spokesman for the Cambodian Microfinance Association (CMA), an industry body, told Nikkei Asian Review last month that various microfinance institutions (MFIs) had restructured loans for some 220,000 customers, representing a minority of borrowers.

The industry body asserts that no MFI has forced borrowers to sell their collateralized land to raise funds for payments, as alleged by NGOs. In April, more than 100 NGOs, trade unions and community groups called on MFIs to suspend repayments, which some institutions have done.

International rights groups have waded into the rising financial controversy.

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

“Many Cambodians fear losing their land more than catching the coronavirus because they can’t pay back their loans and the government has done little to help them,” said Phil Robertson, deputy Asia director at Human Rights Watch.

“The Cambodian government should immediately order a freeze on debt collection and interest accruals of those harmed by the pandemic, and hold financial institutions that fail to comply accountable.”

The central bank has also issued guidance for banks to accept delayed payments, but this is not compulsory and banks and MFIs say they will only do so on a case-by-case basis.

At the moment, though, it’s almost a lose-lose situation for the lenders and borrowers if banks call in unpaid debts.  

According to Human Rights Watch, on April 27, 135 communities, unions, and local civil society groups appealed to the government for an urgent response to the debt crisis exacerbated by Covid-19, rejecting case-by-case debt relief measures upon borrowers’ requests, and calling instead for a debt collection moratorium.

Many of the largest banks and MFIs are now foreign-owned and therefore more susceptible to accusations of bleeding the poor, while Cambodia’s protean ruling party might turn on banks and MFIs if a bigger public backlash risks political instability.

Another reason is that Cambodia’s housing market bubble burst in places last year and land prices have fallen further since the pandemic. 

This means the value of many collateralized land titles is now worth less than when the related loans were taken out and now there are much fewer speculators looking to buy land, so banks will be less apt to accept property in lieu of repayments.

Moreover, if representatives from the banking sector are honest in their recent comments, there is no shortage of liquidity within the sector. Indeed, the central bank months ago cut liquidity requirements, freeing up close to $2 billion in new lendable credit among Cambodia’s banks, according to one recent estimate.

A Prasac Microfinance account holder at an ATM machine. Photo: Twitter

Just this month, Prasac Microfinance Institution, the largest MFI in Cambodia by assets, received $150 million in new credit streams from one of its new shareholders, South Korea’s KB Kookmin Bank.

“This shows the unshaken confidence in Prasac and Cambodia’s financial sector as a whole and outlook for the country’s sustained economic recovery,” Say Sony, Prasac’s executive vice-president, told local media. As of June, Prasac’s gross loans were valued at $2.6 billion.

Yet banks and MFIs cannot go on indefinitely deferring payments in the hope that the economy begins to pick up.  For financial institutions, a recovering economy should allow them to begin re-collecting the majority of loan repayments at the same time as issuing new loans.  

Another virus spike in Europe and the United States – or a lengthy continuation of the “first wave” as seen in the US – and new lockdowns would imperil Cambodia’s export-driven manufacturing base and tourism sector for even longer. It would also have a direct impact on borrowers’ ability to repay.   

The financial sector may ultimately want another round of state intervention, either through fresh tranches of cash subsidies to poor households without work and struggling to repay their debts, or direct financial infusions into the banking sector. To be sure, the central bank won’t want to decrease liquidity requirements again.

Yet the government is seemingly struggling with its own debt, with unanswered questions about the exact size of the current budget deficit.  

Despite claiming in March that it has $2 billion set aside for stimulus measures – which some analysts told Asia Times last month is doubtful – the government has been forced to reduce the value of previously promised payments to the unemployed.

Moreover, it recently announced an “austerity” rather than an expansionary budget for next year, which amounts to about half as much as this year’s allocation.

A microfinance customer in Cambodia holds a loan denominated in the local currency, the riel. Photononstop via AFP / Philippe Lissac

Phnom Penh is thus on a borrowing spree, seen in a recent $250 million loan from the Asian Development Bank. It is reportedly now looking for more than $1 billion from other sources.    

“Expect more borrowings because we need to spend a lot [to boost the economy],” Vongsey Vissoth, the Ministry of Economy and Finance’s permanent secretary of state, told local media earlier this month.   

One solution may be for Phnom Penh to use more of the national debt to bail out the most at-risk household borrowers. Those numbers, by all accounts, are set to rise as the economy declines.