Report shows need for Cambodia to diversify exports

Global credit rating agency Moody’s Investors Services said yesterday that while it has retained Cambodia’s B2/stable sovereign rating alongside Vietnam’s B1/positive rating, the Kingdom’s low diversification of exports has put it at higher risk from external shocks than its eastern neighbour.

In a report that compared economic development in Cambodia and Vietnam, Moody’s noted that while both countries share similar overall fiscal strengths, Vietnam’s larger and more diverse economy is underpinned by higher incomes and stronger institutions which provide better shock absorption.

Moody’s added that Vietnam’s continued robust growth and broad economic and financial stability should cap its government’s relatively elevated debt.

As for Cambodia, while it has smaller fiscal deficits and a lower government debt, which provide it large access to concessional loans, the economy is still constrained due to its dependence on garment exports.

“Garment and textiles production and a few other low value-added manufacturing dominate Cambodia’s exports, which are largely destined for the US and the European Union, exposing the economy to sector- and market-specific shocks,” the report said.

The report added that despite Cambodia undertaking government reforms and increasing its tax collection efforts, Cambodian institutions face greater challenges than Vietnamese institutions in weeding out corruption and enforcing the rule of law, which in turn affects the ability of the Kingdom to deliver a high credit rating.

Additionally, Moody’s placed Cambodia at a higher level of political risk than Vietnam based on the fact that foreign direct investment (FDI) could be hindered if tensions between Cambodia’s ruling party and opposition stand in the way of its reforms.

“Should political tensions lower the impetus for reform to address institutional weaknesses, that would be credit negative,” Moody’s said.

Nevertheless, Miguel Chanco, lead Asean analyst for the Economist Intelligence Unit, said Cambodia could diversify its export basket to make it more resilient to shocks if it properly invested in educational reforms and increased government spending.