The ratings balance strong growth prospects and improving policy setting, against vulnerability posed by narrow and underdeveloped economic and export profile, and structural fiscal weaknesses.
--We affirmed the 'B+/B' foreign and local currency sovereign ratings on Cambodia, and the outlook is stable.
--Robust donor engagement underpins domestic and external liquidity and conditions policy formulation.
Standard & Poor's Ratings Services today affirmed its 'B+' long-term and 'B' short-term sovereign credit ratings on the Kingdom of Cambodia. The outlook on the ratings remains stable.
The ratings on Cambodia are supported by the country's record of strong growth in a framework of improving macroeconomic policies. Political stability and a liberal economic and trade regime generated an average annual real GDP growth of 9% between 2000 and 2008.
"Medium-term growth prospects remain favorable as tourism and the garment export sectors emerge from the trough of the global recession, with an additional fillip in three to four years as the nascent hydrocarbon industry reaches production stage," said Standard & Poor's credit analyst Agost Benard.
Hence, after this year's projected 0.5% GDP contraction, we expect Cambodia to resume a growth path approaching 7%-8% in the medium and long term. This will continue to reinforce the country's positive debt dynamics, founded on its conservative fiscal framework and low-cost debt structure, Mr. Benard said.
The ratings are also underpinned by the continued engagement of international donors, which anchors policy formulation and provides substantial fiscal and balance-of-payments support. This positive relationship reflects Cambodia's favorable record of meeting conditionalities and sensible macroeconomic policy setting; we expect these conditions to continue.
The ratings on Cambodia are constrained by vulnerability of growth and external liquidity owing to the country's underdeveloped and narrow economic profile. Agriculture, which contributes 30% of GDP but employs more than 70% of the labor force, suffers from output volatility and lacks an associated light industry.
"Industry is centered around the low value-added garment and textile sector, while tourism is concentrated in just two major locations. Both sectors have high import content, such that less than half of the associated foreign exchange earnings remain in the country," Mr. Benard said.
The ratings are also constrained by the country's high, albeit declining, public sector debt and its exceedingly low revenue mobilization capacity. General government revenue of about 12.5% of GDP (including grants) is one of the lowest among rated sovereigns in Asia-Pacific, as is the country's tax revenue component at 10% of GDP. Although Cambodia has a favorable tax structure, some sectors, such as agriculture, remain outside the tax net. The narrow revenue base, combined with pressing capital expenditure needs, requires ongoing budget support by foreign donors.
This article is based in part on the following criteria article: "Sovereign Credit Ratings: A Primer," published May 29, 2008, on RatingsDirect.
See also "Asia-Pacific Sovereign Report Card: Amid Encouraging Signs, A Bumpy Road Lies Ahead," published June 9, 2009, on RatingsDirect.
Complete ratings information is available to RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Find a Rating.
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