The bubble formed by consecutive years of rapid credit growth and increasing concentration in the property sector is approaching its zenith, and Cambodia must act now to soften the blow when the current cycle comes to an end, international lending institutions and credit agencies have warned.
Private sector credit has expanded by nearly 30 percent a year on average since 2013, doubling the credit-to-GDP ratio to 62 percent by the end of 2015. The fastest growth has been in the real estate and housing finance sectors, which averaged 50 percent growth last year and into the first-half of 2016.
The trend has put Cambodia on a “dangerous trajectory”, according to one foreign economist, and unless the country can rein in lending it could be in for a hard landing.In May, global credit ratings agency Moody’s Investors Services warned that bank lending in Cambodia continues to outpace nominal GDP growth and is increasingly narrowly focused. While there were signs the pace of credit growth had slowed, it warned of the rising risk of a sudden downturn.
“The pace of increase in overall credit, and the risks associated with speculative real estate activity in some markets, point to the probability of a boom-bust cycle – which would have severe effects on the economy and banking system – despite the central bank having implemented measures to curb growth in bank loans,” Moody’s said.
The International Monetary Fund (IMF), which has issued similar warnings for years, took on a more ominous tone in its annual Article IV consultation report, released last month. The UN agency said Cambodia – where meteoric credit growth was driving one of the “fastest financial deepening episodes” in history – was overdue for a correction.
“The duration of the current credit boom, which began at around end-2011, significantly exceeds the average length of past credit booms, leading to the build-up of financial stability risks,” the report said.Moreover, the credit intensity of growth – the amount of new credit generated for each unit of GDP growth – has risen, implying that “credit is becoming less efficient in generating growth and investment.”
Signs that Cambodia’s property boom, a key driver of credit growth, was approaching an end led Markus Rodlauer, deputy director of the IMF’s Asia Pacific department, to conclude during an Article IV visit in July that Cambodia should take immediate measures to engineer a “soft landing”.
“We believe that the credit of the real estate sector is on a dangerous trajectory that needs to be slowed down,” he said. “The longer it takes [to do this] the more people that will be hurt when it stops.”
Within weeks the first warning shots rang out. The Singaporean developer behind The Bay, a $500-million mixed-use development on the capital’s Chroy Changvar peninsula, announced in August that it was pulling the plug on the residential phase of the multi-tower project due to a glut of supply.
Just 48 hours later, the Ministry of Economy and Finance delivered more bad news, reporting that condominium sales had plummeted by 50 percent during the first six months of the year, and sales of units in gated communities had dropped off by nearly a third.
“There is an urgent need to stabilise credit growth at a sustainable pace to facilitate the soft-landing of the country’s real estate market,” it said in its biannual economic assessment.
While the government said a gradual deceleration of credit growth and property activities in early 2016 suggested the risks of an abrupt property sector collapse – like the one experienced in 2008 – were diminishing, it said policymakers must focus on reining in credit flows, especially to speculative real estate investments.
Cognisant of the growing financial risks, the National Bank of Cambodia (NBC) has taken steps to dampen credit momentum and build buffers to absorb financial shocks. In March, it hiked the minimum capital requirements, while September was the deadline for banks and microfinance institutions to comply with a new Basel III-compliant liquidity coverage ratio (LCR).
In Channy, president of Acleda Bank, the country’s largest commercial bank, said the new measures were already having an impact on lenders by tightening liquidity.“If you want to increase your loan growth, you first need to increase your capital and LCR,” he said.
While a sudden downturn in the real estate sector would be expected to increase defaults, a bigger risk to financial institutions is the devaluation of the collateral used to secure debt. As virtually all lending in Cambodia is collateralised against land, a precipitous fall in property prices could put many debtors in negative equity.
Channy, however, said lenders have been cautious and even a sharp price contraction would likely be absorbed.“Property valuation by lenders is very conservative and the loan’s value [compared] to collateral is never one-to-one. In many cases the loan size is just 50 percent of the value of the collateral,” he explained.
While short-term projections remain positive, economists concur that after a long spell of heated credit growth, winter is coming.