Private debt, much of it concentrated in the rapidly deflating real estate sector, has already emerged as a political problem for Prime Minister Hun Manet.
Not all is well in the Kingdom of Hun. Hun Manet, Cambodia’s new prime minister, who inherited the role from his father in August, prepares to meet with the business community on November 13 at the much-anticipated Government-Private Sector Forum. The government has been parlaying with business groups for months. But anger is brewing. The public is still angsty over possible tax rises. Hun Manet has denied that there will be any, but anyone who looks at his government’s Panglossian Pentagonal Strategy (an advanced economy by 2050!) knows that more tax is coming, as I argued here last month. I hear that a coterie of chambers of commerce has united to demand new reforms and guarantees from Hun Manet at the upcoming forum.
Most likely, though, proceedings will be dominated by talk about the imposing property market and the encroaching disaster of private debt. Put simply, tens of billions of dollars of Chinese money poured into Cambodia in the 2010s, leading to a housing bubble and rampant speculation, primarily from Cambodia’s middle classes, who thought that Chinese funds and soaring prices would never dry up. Loans and mortgages were taken to purchase land and homes. But the COVID-19 pandemic and a drop off in private Chinese investment have resulted in falling property prices. See a fuller list here, but to give an example: the asking price of single villas has collapsed since 2020, falling from $2,000-2,500 per square meter to just over $1,000; average unit prices for twin villas have also fallen sharply.
Most at risk are the property developers, many of whom have gone broke and cannot finish construction. However, some were also the providers of loans and mortgages to investors, raising questions about those liabilities if the developers fail. More worrying, many developers guarantee investors monthly yields. For instance, an investor buys a $50,000 apartment, and the developer guarantees $250 or so a month. Many Cambodians, including low-income households, thought these yields would repay their entire mortgages. It seemed a reasonable gamble. But many have ended up penniless while still owing repayments, leading to an untold number of personal tragedies.
Indeed, the developers themselves were betting on being able to find renters (which is now difficult), and some now have to pay the yields out of their own pockets. Or, in some cases, not paying them at all. You know the situation is dire when the authorities start arresting oknhas. Perhaps as many as a dozen tycoons, including Hy Kimhong, director of Piphup Deimeas Investment and director of microfinance institution AMZ, have been arrested over alleged fraud, principally for owing tens of thousands of investors money.
It’s against this worrying background that we can turn to the banking sector in Cambodia. According to the World Bank’s East Asia and Pacific Economic Update, published in October, domestic credit to the private sector stood at 182 percent of GDP, the highest rate of the Southeast Asian countries listed (and that was for 2022, the latest year on record). By comparison, in China, it was 220 percent. The deposit-to-loan ratio was just 80 percent for 2023, also the worst in the region and a fall of 13 percentage points from 2022. Liquid assets were just 18 percent of short-term liabilities, down 7 percentage points from 2022 and again the region’s worst.
“The rapid credit growth and relatively high private sector debt, with concentration in real estate-related exposures pose key risks to Cambodia’s macro-financial stability,” the World Bank said recently. The IMF stated in a report published in October that the non-performing loan (NPL) rate was 4.6 percent in August. According to the World Bank, the NPL rate in microfinance institutions, which are assessed separately from commercial banks, stood at around 4 percent in mid-2023. Some reckon the NPL rate is higher than officially stated.
According to the central bank, as of the end of 2022, some 14 percent of private loans were for home ownership, 9 percent were linked to the real estate sector, and 9 percent were for the construction sector – so more than a third of private debt is related to the housing market. One reason why the problem seems so much worse this year – and debt is the thing that most middle-class Cambodians now want to talk about – is because the government told banks and lenders to defer repayments during the pandemic. As such, NPLs that were obvious between 2020 and 2022 were rolled over. The saccharine Khmer Times and Phnom Penh Post are seemingly only allowed to be critical of anything in Cambodia when it comes to debt.
On the one hand, the Cambodian government is applauded for having a small national debt – around 36 percent of GDP at the last count. Certainly, Laos (with a debt of at least 120 percent of GDP) or Thailand (around 60 percent) look on with jealousy. And Manet’s government in recent weeks has tried to placate any alarm on this front. “Cambodia will not borrow beyond [its] means. We borrow to bolster our economy, not for purchasing luxury cars and airplanes. These loans serve our collective interests and will not result in the loss of our sovereignty to any country,” Hun Manet told a crowd on November 2.
Minister of Economy and Finance Aun Pornmoniroth has also been busy reassuring the public and investors. This is partly a result of the recent public furor over taxation. As noted, everyone knows that government revenue and expenditure will rise, and if taxation isn’t going to pay for it (which Manet suggested, untruthfully), then it will have to come from more debt.
On the other hand, what the Cambodian government has done is to allow its citizens to take on the debt burden. It has relied on foreign governments (China and Japan, principally) and its own people to spur investment. Of course, the government can say it didn’t tell its people to indebt themselves so much. Indeed, much of it resulted from greed and speculation, as people took risky gambles. Nor, indeed, was the COVID-19 pandemic Phnom Penh’s fault. That said, neither did the government do too much to deter speculation and rapid debt accumulation in the 2010s. And there’s a reason why many Cambodians think they need to speculate on the property market: they don’t have pensions, healthcare is expensive, and the government’s narrative was that the good times wouldn’t end.
Hun Manet says he will unveil some new policies at the Government-Private Sector Forum later this month. My guess is that he’ll announce a proposal put forward earlier this year that allows foreigners to buy property in boreys, the gated communities where much of the toxic credit in the property sector is located. That might entice more private Chinese investors, especially now as capital flight from China is once again all the rage. (Some $49 billion left China in August, the largest amount since 2015.) It’s possible Hun Manet will also announce some other financial relief in the form of tax holidays and policy reforms.
But here’s the question: does private debt become state debt when it becomes too high? Earlier this year, the government gifted the property and construction sectors tax holidays and other benefits. But it’s worth considering what happens if the banking system does begin to crack, if NPLs rise too high. Does the government step in to offer bailouts, not just of the lenders but also borrowers? Does it sell off bonds to help the property sector? Does it interfere more directly? Will it require more cash handouts of the sort we saw during the COVID-19 pandemic? Considering that private debt accounts for more than 180 percent of GDP, how much toxic debt would the government be willing to buy up to write off? It doesn’t take much before you’re looking at the national debt soaring above the 50, 60 percent of GDP mark. When is something too big to fail?
Speaking in January, Vongsey Vissoth, now minister of the Council of Ministers and one of the new government’s most influential politicians, made a few interesting remarks, as reported by Voice of America. “Our problem is that real estate and construction can have a credit crunch, a lack of [access to] credit,” he said, adding that around 80 percent of property developers “depend on [credit from] the banking system and the cash flow from buyers… We must jointly solve this problem, it’s not merely about one individual [company].” Then, he added: “We don’t have the option to let this sector collapse because it’s a huge economic pillar.”
The article was originally published by The Diplomat.