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Investing.com -- Moody’s Ratings has revised the Government of Cambodia’s outlook from stable to negative, while maintaining the B2 long-term issuer rating. This change reflects potential threats to Cambodia’s growth prospects due to uncertainty surrounding US trade policy and potential increased tariffs.
Cambodia’s export relationship with the US, accounting for approximately 40% of the country’s exports and nearly 20% of its GDP in 2024, is one of the highest among the Asia-Pacific (APAC) economies. Any significant increase in tariffs, along with a substantial and sustained slowdown in global economic growth, could have a severe impact on Cambodia’s near- and long-term growth. This comes at a time when growth is already strained due to a prolonged downturn in the real estate sector, which is affecting private consumption and increasing risks in the banking sector.
A major trade shock could lead to reduced export earnings from the garment sector and lower foreign direct investment (FDI), negatively impacting long-term growth potential and heightening external vulnerabilities. Furthermore, escalating trade tensions between the US and China could affect Cambodia’s role as a conduit for Chinese investments and goods to reach advanced economies, including the US.
Despite these challenges, Moody’s affirmation of the B2 rating takes into account low income levels, a weak institutional framework, and high dollarization, which limit policy flexibility. These factors are offset by a manageable government debt burden and robust growth potential.
Cambodia’s local and foreign currency country ceilings remain unchanged at Ba3 and B1 respectively. The differences between these ratings and the sovereign rating reflect low economic diversification, weak institutional strength, a modest government footprint, and moderate external vulnerability risk.
The negative outlook is indicative of downside risks to Cambodia’s growth prospects due to significant uncertainty surrounding US trade policy and tariffs. If 49% reciprocal tariffs were to be implemented as originally proposed, it could potentially reduce real GDP growth by nearly 2 percentage points in 2025, from the current forecast of 5.3%.
The ongoing downturn in the real estate sector and the shift in tourist composition from Chinese visitors to tourists from neighboring countries, which has significantly diminished tourism receipts, add further downside risks to the growth outlook for 2025-27. If US tariffs persist, they could derail the gradual recovery efforts of the past 2-3 years, adversely impacting the assessment of Cambodia’s economic strength.
Uncertainty surrounding US trade policy and tariffs could also substantially undermine business confidence and consumer sentiment, leading to a significant decline in FDI flows. In 2024, FDI was equivalent to nearly 10% of GDP, enabling the country to maintain basic balance surpluses. However, weakening external demand could turn the current account into deficits, making it challenging to finance the widening current account deficit with moderated FDI inflows, thereby increasing external vulnerabilities. Despite these risks, Cambodia’s foreign-exchange reserves, excluding gold, remain robust at $18.3 billion as of the end of February 2025, providing approximately 7.5 months of import coverage.
The affirmation of the B2 rating balances low income levels, a weak institutional framework, and high dollarization, which limit policy flexibility, against a highly affordable government debt burden and robust growth potential. Cambodia’s debt burden remains modest at below 30% in 2024, lower than the median of B-rated sovereigns. The country largely relies on official multilateral and bilateral creditor support for government borrowings, which supports high debt affordability.
The potential for an upgrade or downgrade of the ratings depends on several factors. An upgrade is unlikely in the near future due to the negative outlook. However, the outlook could be revised back to stable if there is increased confidence that Cambodia’s economic strength and external metrics are not likely to be materially weakened by developments in US trade policy and tariffs globally.
Conversely, the ratings could be downgraded if higher tariffs and slower global trade and growth lead to a significant deterioration in Cambodia’s growth outlook and a substantial decline in FDI inflows. This would indicate structurally weaker growth, thereby weakening the assessment of Cambodia’s economic strength. Such a scenario would see external metrics deteriorate, increasing pressure on financing the current account deficit and raising external vulnerability risks, and weaken fiscal metrics by eroding the government revenue base, leading to a significant increase in the debt burden.
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