Moody's Ratings has upgraded its outlook for the Government of Cambodia from negative to stable and affirmed its B2 long-term issuer rating.

In a statement released in Singapore on May 16, Moody’s says the better outlook reflects Cambodia's “improving external position amid narrowing trade deficits and gradual recovery in tourism and FDI inflows”.

The affirmed B2 long-term rating “balances a weak institutional framework, low income level and political risks against strong growth prospects and highly affordable government”, it says.

Real estate downturn  

Moody’s says the stable outlook captures “downside risks to financial stability and the banking system stemming from the downturn in real-estate sector following a period of sustained high credit growth”. But it concludes that the risk of potential spillover to sovereign contingent liabilities is low.

"Cambodia's banking sector is highly fragmented and the system is dominated by foreign banks limiting financial support from the government in case of material stress,” it says.

However, Moody's sees ongoing contingent liability risks related to public-private partnership projects focused on infrastructure and transportation following the property sector downturn and slower investment from China.

Slower credit growth

The rating agency notes that credit growth slowed to 13.1% last year after expanding at an average pace of 25% for four years. But credit still remains high, exceeding 120% of GDP last year.

“The combination of oversupply and a cyclical downturn in the real-estate sector poses risks to Cambodia's growth and financial sector stability,” Moody’s says.

“In particular, slower transaction volumes and downward pressures on property prices can result in liquidity concerns for some real-estate developers facing a credit crunch while private consumption will be dampened, posing challenges on the country's economic recovery."

Bank capital buffers still high

Financial sector risk has risen, with non-performing loans climbing to 5.4% last year, from 3.2% a year earlier, for banks, and to 6.7% from 2.6% for microfinance institutions.

“Higher funding costs amid global tightening cycle and a surge in loan-loss provisions will weaken profitability further,” Moody’s says.

“Nonetheless, the banking sector's capital buffers remain high at above 20% despite deterioration in internal capital generation.

“Against this backdrop, the central bank raised the reserve requirement for foreign currency deposits to 12.5% from 9.0% in 2024 to ensure financial institutions keep sufficient liquidity.”