Cambodia’s debt a concern

Construction work continues on a new Chinese-funded bridge spanning the Tonle Sap river yesterday in Phnom Penh. (Heng Chivoan)

Wednesday, 29 February 2012
Don Weinland
The Phnom Penh Post

“And there have been a couple of examples where the work hasn’t been up to the quality it should be“

An International Monetary Fund and World Bank report has questioned Cambodia’s ability to deal with future financial crises if government borrowing increases.

While the report indicated that Cambodia was at low risk for severe debt problems, it highlighted the need for effective management of new debt and rapidly growing build-operate-transfer, or BOT, projects, which include the hydropower dams and road reconstruction conducted by Chinese companies.

This month alone, the Kingdom courted more than US$800 million in Chinese loans for infrastructure projects.

In two different speeches in February, Prime Minister Hun Sen said Cambodia would borrow $302 million from China for roads and irrigation systems, and would apply for an additional $500 million for similar construction.

The joint report estimated Cambodia’s debt to countries at about 28 per cent of gross domestic product for both 2011 and 2012.

Although debt levels were projected to increase from about $4 billion to $5.6 billion over the next four years, its share of GDP will decrease by about a percentage point to near 27 per cent.

Threatening to increase this otherwise sustainable share of GDP were the potential liabilities of BOT projects, should investment in the large-scale works be lost.

An additional 5 per cent of GDP would be added to the debt stock if investments in 10 per cent of the projects were lost, according to the report.

“It comes down to the quality of the infrastructure. If Cambodia gets a loan to build a road, and substandard materials are used, it then has to be rebuilt in a year’s time,” former ANZ Royal CEO Stephen Higgins told the Post this month.

The result is outstanding debt and further building costs.

“And there have been a couple of examples where the work hasn’t been up to the quality it should be,” he said, although he declined to name the parties responsible.

Liabilities posed by BOT projects do not always surface in the standard measures of an economy’s health, Olaf Unteroberdoerster, deputy division chief of the IMF’s Asia and Pacific Department, told reporters during a press conference in December.

Unlike public debt, the projects are most often contracted to private companies and are not reflected in the national budget, he said.

“The issue here is, because these projects are undertaken by private-sector partners, these projects don’t directly go through the budget and affect the fiscal indicators … We do not necessarily have the full picture,” Unteroberdoerster said at the time.

Few statistics or studies have been conducted on China’s BOT work in Cambodia, Chheang Vannarith, executive director of the Cambodian Institute for Cooperation and Peace, said yesterday.

The lack of information has left the public in the dark on the costs and liabilities of the projects.

“Transparency is the key issue here,” he said.

China holds the largest bilateral loans to Cambodia, at 66 per cent at the end of 2010, the joint report showed.

In October, Cambodia owed more than $730 million to China at interest rates substantially higher than that owed to other sovereign creditors, according to information compiled by the NGO Forum on Cambodia.

Cambodia has proven its ability to weather financial crises, and the country can expect continued growth for the next few years, National Bank of Cambodia director general and spokeswoman Nguon Sokha said yesterday.

Ongoing diversification of the country’s economy has lessened its susceptibility to external shock, she said, adding that the risks mentioned in the report were all contingent on a future financial crisis.

“We are confident we will continue to grow in the short term,” Nguon Sokha said.