Moody's: Cambodia's rating constrained by narrow economic base, policy limitations

Global rating agency Moody's Investors Service said Thursday that despite rapid growth, the small size and the narrow diversification of Cambodia's economy constrained its B2 rating. The limited effectiveness of monetary policy due to a high rate of dollarization was also a rating constraint, the rating agency said. Cambodia's B2 sovereign bond rating and stable outlook reflected Moody's assessment of the country's "very low" economic and institutional strengths, its "low" government financial strength, and its "low" susceptibility to risks from financial, economic and political events, it said in a statement. According to a just-released Moody's report titled "Credit Analysis: Cambodia," the country's GDP per capita is one of the lowest amongst all Moody's-rated countries. However, economic growth following the end of the civil conflict in 1991 has been rapid, supported by a shift to a more open economy and strong capital inflows. The statement said Moody's expected the country's GDP growth to remain at 7 percent through 2013 and 2014, aided by higher foreign direct investment, a recovery in exports, and an uptick in construction activity. At the same time, growth was increasingly supported by rapid private sector credit expansion. The rating agency said Cambodia's "very low" institutional strength reflected the lack of transparency, weak governance, and the limited scope of its monetary policy. Moody's noted that 96 percent of Cambodia's total deposits were foreign-currency denominated, which had rendered reserve requirements as the primary tool for influencing credit conditions, thus constraining the choice of policy instruments. The budget deficit had consolidated noticeably from the peak seen in 2009, but remained above the peer median, it said, adding that Cambodia financed its deficits mainly using aid flows. "This situation has in turn limited efforts to raise tax and resulted in some fragmenting of expenditure," the statement said. While current account deficits were high, they were easily financed through official transfers, aid flows, and foreign direct investment. Consequently, foreign reserves had been edging higher. The agency added that Cambodia's susceptibility to event risks was low -- despite its exposure to global demand and volatile oil prices -- because it had sufficient buffers to counter risks to trade flows, a relatively stable government, and a sound banking system.