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Saturday, April 17, 2010

Bankers at odds over Cambodia's financial crisis


By Brian Caplen

Cambodia's government-engineered slowdown after five years of unsustainable economic growth could not have been implemented at a worse time, coming as it did just before the global financial crisis. Consequently the crisis has hit Cambodia's banks hard, though just how hard is a matter of some debate between the IMF and the country's senior bankers. Writer Brian Caplen

After five years of unfettered capitalist growth during which property prices rose 10 fold and Phnom Penh's colonial streets clogged up with Range Rover and Lexus cars, Cambodia was finally hit by a double whammy.

A government-engineered slowdown followed by the impact of the international crisis turned into a rout - property prices halved, construction ground to a halt and the banks got hit by a wave of non-performing loans (NPLs). Or did they?

On almost every financial and economic issue in Cambodia - from growth rates to the exchange rate to regulation and the risks in the banking system - the International Monetary Fund (IMF) and other multilaterals, such as the World Bank, are ranged against the central bank and the commercial bankers who say that things are not as bad as the agencies claim.

While the IMF accuses the banks of not coming clean as to the true extent of their NPLs, the banks say they have the risks under control and can manage through the downturn.

"The IMF is anti-bank and anti-central bank," says a senior banker with one of Cambodia's smaller banks who did not wish to be named.

Rather more diplomatically, Peter Kooi, a director of Acleda Bank, one of Cambodia's big four banks, in which the International Finance Corporation (IFC) has a stake, says: "Bank chief executives feel that the IMF's position [on NPLs] is not so clear and we are not sure how it arrived at its figures."

Chea Sok, Acleda's chairman and a former deputy governor of the central bank, says: "The agencies say there is a problem [with the banking system] but the central bank does not think there is a problem."

A differing of opinion

This divergence in view between the IMF and the central bank - the National Bank of Cambodia - came to a head with the release of an IMF staff report released last November. In a section of the executive summary entitled 'Staff's views', the report says: "In light of the deterioration in banks' balance sheets and rising credit risks, the authorities should strictly enforce corrective actions and urge banks to bring forward compliance with new minimum capital requirements ahead of the end-2010 deadline." But in the following section giving 'Authorities' views', the report says: "...while the authorities agreed on the need to deal firmly with problem banks, they preferred a more gradual approach."

Later in the report, the IMF describes the impact of the property crash and the weakened state of bank balance sheets. "Contributing factors centre on weak risk management, earlier supervisory lapses, and excessive credit growth... NPLs are rising, but the figures officially reported by banks likely fail to capture the true extent of the problem. Sensitivity analysis informed by other countries experiencing similar property cycles to Cambodia points to potentially larger loan losses and capital deficiencies, raising the risk of bank insolvencies."

In a closer focus on the banking sector in the same report, the IMF points out that reported NPLs rose to 5.25% by June last year, up from 3.75% in December 2008, but the agency posits that the true level is much higher. "A number of banks continue to report few or no NPLs, suggesting incomplete adherence with the new loan classification and provisioning regulation. Moreover, the evergreening of loans and capitalisation of interest still takes place to avoid loan loss recognition and provisioning and possible capital writedowns. These practices appear particularly acute for overdraft loans used to finance land purchases during the recent property boom."

Small concerns

Much of the IMF's concern is directed at the smaller banks in Cambodia. There are more than 30 banks in the country but most of them are fighting over small slices of the market not staked out by the big four - Acleda, ANZ Royal Bank, Cambodian Public Bank and Canadia - which have a 75% share and are considered to be sound and stable.

Many of Cambodia's banks have set up offices in Phnom Penh's own version of Wall Street - Kramuon Sar Avenue - now overlooked by the city's first major office high-rise tower, the 30-storey Canadia Tower, which, complete with helipad, is a real symbol of Cambodia's frenetic growth period.

But elsewhere in the city, work has stopped on some of the satellite towns and new housing complexes that were being built for a middle class that some analysts believe does not really exist. (Work is still in progress, however, on Camko City, the project pictured in our photo overleaf of an advertising hoarding.)

Even one of the capital's most venerable tourist attractions - the colonial-style Foreign Correspondents' Club with a veranda overlooking the Tonle Sap and Mekong rivers - was reported in the English-language Cambodia Daily to be struggling under the effects of the owning company's real estate debts.

Two extremes

In the space of 35 years, Cambodia has experienced both the most extreme form of communism - in which money was abolished and intellectuals were sent to work in the countryside - and a Wild West-style of capitalism in which credit growth and property price increases ran way out of line with economic fundamentals.

Along with the bubble, however, the boom did promote positive economic changes.

ANZ Royal Bank, a joint venture between ANZ and a Cambodian investor, opened its doors in 2004 and has spearheaded the modernisation of the country's banking sector. It launched the country's first ATM and with 19 branches has now become ANZ's largest operation outside Australia and New Zealand.

ANZ Royal's head of corporate and institutional banking, James Lowrey, says: "Over the three-year period from 2005 to 2008, property values increased 10-fold, credit growth was between 50% and 80% a year and eventually, by late 2007, outpaced deposit growth. The property boom created wealth that was converted into cash and funded the Lexus and other big cars which are now on the streets. Some investors doubled up and bought new properties mostly with debt.

"By early 2008 inflation went to 40% and the central bank had to put the brakes on."

In taking this action, the National Bank of Cambodia would have almost certainly considered advice from the IMF, whose Phnom Penh offices are contained within the bank's precincts. The IMF has been in Cambodia since 1995 and has enacted two lending programmes but the launching of a third programme, as discussed in 2004/05, was stymied by unpaid debt principal of $162m to the US (relating to food assistance dating back to the pre-Khmer Rouge period in the 1970s) and $457m to Russia relating to the period of Vietnamese occupation in the 1980s.

IMF recommendations

The IMF's resident representative in Cambodia, John Nelmes, says that when credit and prices starting growing too fast, the fund recommended that the central bank tighten monetary policy. But as Cambodia is a largely dollarised economy and there is no short-term government or central bank paper market for conducting market operations, this was bound to be challenging. With 94% of bank deposits in dollars and the gross international reserves of the central bank only sufficient to cover 70% of dollar deposits, there was no way the bank could act as the lender of last resort.

So what the central bank did in May 2008 was to raise commercial bank reserve requirements from 8% to 16% of deposits. It also tripled minimum capital requirements from $12m to $36m to be completed before the end of 2010 and imposed a limit of 15% of the lending portfolios as the maximum directed at real estate.

The impact was fairly dramatic. "Overnight, credit to the market stopped," says ANZ's Mr Lowrey. Acleda's Mr Kooi adds: "For the banking sector it was the first time in the past 10 years that it had to adjust after enjoying double-digit growth rates."

So far so good. Banks starting raising deposits and deleveraging in earnest. But what neither the central bank nor the IMF foresaw was the subsequent impact of the international crisis on Cambodia.

Germent dependence

Cambodia has a very narrow economic base with just four growth drivers - garments, tourism, construction and agribusiness. Garments account for about $4bn of Cambodia's $5.2bn-worth of exports and this sector, along with tourism, was badly hit by the international crisis. The double whammy of the property bust and the impact of the international crisis meant that Cambodia was the worst hit among the Asian countries, with an economy that shrank 2.7% in 2009 after growing at 13.3% in 2005 and more than 10% in 2006 and 2007, according to IMF statistics.

But even this figure is disputed. Central bank governor Chea Chanto has put the growth rate at 2.1% and among the bankers there are various estimates. What is certain is that shortly after cooling down the economy, the severity of the international crisis meant that the central bank had to lower reserve requirements from 16% back down to 12%. There is no interbank lending market in Cambodia so the central bank introduced an emergency liquidity overdraft facility. But has any bank accessed it? The IMF's Mr Nelmes says that some banks have but obviously he cannot say which ones. The bankers say they are not aware of any bank using it.

Undermining stability

The IMF report says that even as liquidity pressures ease, "some banks are self-insuring and reducing loan-to-deposit ratios by raising new deposits, but at considerable cost, which may eventually undermine stability". The banks are paying 5% on six-month term deposits in dollars and then placing them at the central bank where they receive close to 0%, says the report. "The profit squeeze has adversely affected banks' ability to absorb loan losses and resume lending growth. Proper provisioning against NPLs would further reduce profits."

ANZ, which is regarded as one of Cambodia's most stable banks, puts its NPLs at about 4% to 5%. "A year ago we established a special team to deal with problem loans and of course followed the group's standards on provisioning," says Mr Lowrey. "We have been careful to play into the cultural situation and to sit down and talk with debtors. A number of outstanding loans have recently been repaid."

Acleda's Mr Kooi says that less than 10% of the bank's lending portfolio is property related and that NPLs are 0.8%. Acleda, however, may be unusual as it was established in 1993 as a microfinance institution and, even though it now has the country's largest deposit base, its average loan size is $2226. Microfinance institutions with small loan sizes tend to have better payment records than banks. With 235 branches, Acleda has the largest network of any Cambodian bank.

The IMF is not the only multilateral to warn about risks in Cambodia's banking system. The World Bank has also raised concerns, prompting a wave of speculation in the local press as to which banks might be at risk. Julia Brickell, resident representative of the IFC - part of the World Bank group - in Cambodia, says: "Things were bad here but not as bad as they might have been or as we originally expected. The central bank worked hard to try and contain the crisis."

Among the moves by the central bank was the issue of a prakas (directive) on the reporting of exposures and risk concentrations, which was followed by an audit of the major banks. In fact one banker from a smaller institution complains that the supervisors are enforcing the rules too strictly. "We had a borrower with four loans held through related companies, only one of which was in default. The central bank wanted us to declare all four loans as NPLs, which is much stricter than the rules require," he says.

Cambodia's banks as of June 2009

A rare agreement

What everyone agrees on is Cambodia's need for more market mechanisms - interbank and short-term paper markets - to make monetary and financial operations easier. One proposal is to securitise the deposits that banks keep at the central bank and use the securities for interbank trading.

With the other big economic issue in Cambodia - dedollarisation - the IMF, the central bank and the commercial banks part company again. Cambodia's dollarisation became entrenched during the 1992-93 period under the United Nations transitional Authority in Cambodia, when dollars poured in. Now the challenge is to dedollarise.

The IMF's Mr Nelmes accepts that large-scale administrative moves to dedollarise would backfire but says that if companies were told to price in both dollars and the local currency it would help to shift expectations.

In the IMF report, under 'Staff's views', it says: "The monetary stance is broadly appropriate but allowing greater exchange rate flexibility would help facilitate adjustment and protect international reserves." Under the 'Authorities' views' section, it says: "[The] call for limiting foreign exchange intervention underplays seasonal demand as well as supply factors, as well as the important role of exchange rate stability in anchoring inflation expectations." Meanwhile, the banks worry that loans priced in dollars would be at greater risk of default if exchange rate volatility increased even though many revenue streams are also in dollars.

Cambodia may only be a small country but it seems to find itself at the centre of some interesting economic and development debates.
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Cambodian, Thai troops clash

PHNOM PENH - CAMBODIAN and Thai troops exchanged fire briefly on their border on Saturday - the latest in a series of clashes between the neighbours, officials from both countries said.

The shoot-out on Cambodia's north-western border lasted for about 15 minutes, but there were no reports of casualties, Cambodian defence ministry spokesman Chhum Socheat told AFP.

'While our troops were patrolling the border, the Thai soldiers opened fire at them. So our troops fired back,' he said.

He said troops from both sides fired rockets and grenades as well as rifles, but calm returned after a meeting between Cambodian and Thai military commanders in the area.

The Thai military confirmed the shoot-out. 'It was a misunderstanding and nobody was injured in the clash,' said a Thai army officer who asked not to be named.

Cambodia and Thailand have been locked in nationalist tensions and a troop standoff at their disputed border since July 2008, when Cambodia's 11th century Preah Vihear temple was granted Unesco World Heritage status.

The latest skirmish was in a different area to the temple, which has been the focus of deadly clashes between the two armies in the past. Relations deteriorated further in November after Cambodian Prime Minister Hun Sen appointed fugitive former Thai premier Thaksin Shinawatra as his economic adviser and refused to extradite him to Thailand. -- AFP

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Supporting Khmer Rouge Tribunal

The United States will provide additional funding to support the work of the Khmer Rouge Tribunal.

Khmer Rouge Tribunal spokesman Lars Olsen speaking to former members of the ultra-Maoist group in Anlong Veng, Cambodia at the home of Ta Mok, a former senior leader believed to have been responsible for many of the regime's worst atrocities. The poster on the tree shows a Khmer Rouge leader at his arraignment, 09 Apr 2010


The United States will provide additional funding to support the work of the Khmer Rouge Tribunal. Ambassador Stephen Rapp, United States Ambassador at Large for War Crimes, made the announcement March 31st in Phenom Penh. He said that the court made significant progress last year, and in light of that progress, the U.S. Government plans to contribute $5 million to support the court's operations in 2010.

Ambassador Rapp said, "This decision to provide further funding for the court reflects our commitment to see this process through to its conclusion and help Cambodia build a society based on the rule of law." The planned contribution will bring total U.S. financial support for the United Nations sponsored tribunal to $6.8 million.
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When the Khmer Rouge took power in 1975, Cambodia had a population of over seven-million people. By the time that regime was overthrown in 1978, an estimated one-million-five-hundred-thousand Cambodians had perished.

The Khmer Rouge regime targeted military and civilian leaders of the former government, ethnic minorities, intellectuals, physicians, teachers, and other professionals. Those who resisted or questioned the regime were often tortured and killed. The Khmer Rouge systematically emptied urban areas, forcing residents into the countryside, where they lacked food, tools, medical care and other necessities. Many died from disease and malnutrition.

The United States has long been a supporter of efforts to bring to justice senior leaders and those most responsible for the atrocities committed under the Khmer Rouge regime. Thirty thousand Cambodians witnessed the proceedings of the Khmer Rouge Tribunal in person and millions more watched on television. "The whole world," said Ambassador Rapp, "is aware that Cambodia is truly moving forward from a dark period in its history."
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