Macroeconomic Management in Response to Financial Crisis
Second Cambodia Development Cooperation Forum
Dr. Hang Chuon Naron
Secretary General, Ministry of Economy and Finance
4th  December 2008



Part I. Impact of the
Global Financial Crisis
on Cambodia

Impact of the Crisis
  • There will be some impact, mostly indirect to the real sector, resulted in lower GDP growth in 2008 and in 2009;

  • Cambodia’s banking sector, as a whole, remains resilient, impact is limited to small banks;

  • Although the foreign currency deposits experienced slight reduction, credit to the private sector continues to grow, drawing on the excess of liquidity of the banking sector.


Economic Growth

  • GDP growth is expected to slow down to 6.8% in 2008 and 4.8% in 2009, the lowest growth since 1998;

Cambodia’s Financial Sector

  • Cambodia’s banking system remains sound, well capitalized and highly liquid.
  • The capital adequacy ratio (net assets or net worth/ weighted assets according to the degree of risks) was 26% in 2007, well above the regulatory minimum of 15%.
  • The liquidity ratio (liquid assets/ total assets) was 50% in 2007. Non-performing loans (NPLs) declined from 9.5% in 2006 to 3.4% in 2007 and further to 2.6% in June 2008.

Liquidity of the Banking Sector

Liquidity dropped by -1.6% in Sept and -5.4% in Oct; foreign currency deposits dropped by -2.2 in Sept and -5.4% in Oct, while credit to the private sector continues to grow by 1.6% in Sept and 1.7% in Oct.

Tourist Arrival

Balance of Payments

Macroeconomic Policies

  • The 2009 budget provide fiscal stimulus to sustain economic growth;
  • Macroeconomic management requires balancing between promoting growth and reducing inflation;
  • Further strengthening of banking sector, focusing on improvement in supervision, auditing and institutional strengthening, will continue.




Part II. Inflation & Policy

Inflation (%), Average, Year on Year

Trends of Inflation in 2008

Causes of Inflation

  • Understanding the causes of inflation is critical for applying the right medicine to cure it.
  • There are 3 types of inflation
    • Demand-pull inflation
    • Cost-push inflation or supply shock inflation
    • Built-in inflation


Capital Flows and Inflation

  • In recent years, capital flows have played an increasingly important role in the balance of payments.
  • Since 2005 the capital and financial account of the balance of payments rose sharply.
  • Capital flows have helped to finance large current account deficits associated with higher imports and higher economic growth.

Forms of Capital Inflows

Capital Flows and Inflation

  • Capital flows have induced growth in the money supply and have caused inflation to rise, as the National Bank of Cambodia has intervened in the foreign exchange market to buy excess supply of foreign exchange in order to stabilize the nominal exchange rate.
  • From mid 2006 to mid 2008, Cambodia’s international reserve position increased by US$1 billion, while it took 12 years to increase international reserves from US$100 million in 1994 to US$1 billion in mid 2006.

Gross Foreign Reserves, in millions $

  • The international reserves increased to US$2 billion in June 08

Graph 1. Money, credit and inflation

  • Milton Friedman states “Inflation is always and everywhere a monetary phenomenon”

I. The Resulting Demand-Pull Inflation

  • Caused by increases in aggregate demand due to increase in private and government spending.

  • Inflation is caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output).

Trend in Monthly Exchange Rate

Measures to Reduce Bank Lending

  • NBC imposed:
    • (i) a ceiling of 15% on each commercial bank’s share of total loans to the real estate sector, with effect from 26 June 2008, and
    • (ii) a doubling to 16% of the commercial banks’ minimum reserve requirement, with effect from end-July 2008.


  • Relax some restrictions on capital outflows, by allowing commercial banks to invest excess reserves abroad.


Policy Responses to Inflation

  • NBC has taken the following monetary measures
    • Conduct prudent and tight monetary policy
    • Pursue the exchange rate policy of managed float
    • Promoting de-dollarization
    • Increase reserve requirement of commercial banks from 8% to 16% to absorb liquidity from economy
    • Allow financially sound banks with excess of liquidity to invest some of their assets abroad.
    • Increase minimum capital from $13m to $36.5m for commercial banks and increase to a minimum of $7.3m for specialized banks

II. Cost-Push Inflation

  • Caused by drops in aggregate supply due to increased prices of input (like oil, food, wages).
  • Higher input cost are then passed on to consumers in form of higher output prices.
  • The acceleration in inflation in large part reflects the impact of higher energy and commodity prices.

Oil Price ($/B, Brent, Dubai, WTI)

World Price for Commodities

Fiscal Measures to Absorb Shocks

  • Real wages of civil servants (e.g. increasing the base wage by 20%, spouse and children allowances by 100%, and teacher allowances by 10%), additional 20,000 riels;
  • Subsidies to offset higher fuel and electricity costs;
  • Special financing for rice millers to increase rice stocks and internal distribution systems and
  • Reduced taxation on the importation of agricultural machinery.

Fiscal Policy to Curb Inflation
  • Re-introduce the imports of food products such as pork

  • Temporarily suspend for 3 years the 1% minimum profit tax for garment factories, thus allowing for an increase in minimum wage to employees

  • Reduce customs tariffs and taxes on imports for the agriculture inputs

  • Introduce temporary VAT exemption on agriculture products

  • Government cuts down on spending and increases deposits in the banking system.

III. Built-In Inflation

  • Induced by adaptive expectation, often linked to the price/wage spiral.
  • It’s a vicious circle where employees demand increase in salary above CPI rate then employer pass on the extra cost to consumers.

Policy Responses to Inflation

  • Public awareness campaign, educational and policies to increase conservation and energy efficiency
  • Improving of agriculture policies which aim to upgrade infrastructure, irrigation systems as well as providing subsidies toward high-yield and key agricultural product like fertilizer.
  • Macroeconomic policies will be further tightened in response to generalized inflation pressure.

Policy Responses to Inflation

  • Strictly maintain the budget within the framework of the 2008 Budget Law and continue the policy of non-bank financing.
  • In case of increase in necessary spending, limit current budget surplus to 2.5% of GDP;
  • Maintaining the overall fiscal deficit at around 1% of GDP in 2008 and 2009 to contain inflation expectations;
  • In case of revenue shortfalls, MEF will propose new saving measure or reduce/cutting non-priority expenditures.

Additional New Measures

  • Strengthened the enforcement of property tax and unused land tax, including implementation of capital gain tax;
  • Continue to implement public investment expenditures relates to physical infrastructure along with education and health sectors;
  • All government agencies required to propose new savings measure and collect revenues from all possible sources;
  • Reduce new recruited government staff by 10% for 2009

Possible New Fiscal Measures

  • Increase excise on liquor and luxury goods
  • Using actual import transaction prices for assessing taxation, including alcohol, tobacco and petroleum;
  • Introduce VAT for electricity and water;
  • Further strengthen collection of stamp duties on land transactions;
  • Introducing a property tax initially in major urban areas;
  • Increasing excises rates, especially on beers and cigarette
  • Replacing current tax incentives with investment allowances, tax credits, and accelerated depreciation.

Food Crisis=Risk + Opportunity

  • Agriculture, which Cambodia has big potentials, due to the endowment of land and climatic conditions
  • Physical infrastructure, especially transportation and telecommunications;
  • Electrical power and water supply;
  • Human resource development;
  • Labor-intensive and export industries;
  • Tourism, which Cambodia also has great potentials, notably with the presence of historical and cultural heritages, tradition and natural sites, such as forests, lakes, sea and attractive scenery




Thank You

Macroeconomic Management in Response to Financial Crisis

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