Cambodia Staff Report for the 2011 Article IV Consultation — Debt Sustainability Analysis

Cambodia has been upgraded to a “medium performer” based on the World Bank’s Country Policy and Institutional Assessment (CPIA) and now faces a low risk of debt distress (from moderate last year). While external debt burden indicators do not breach the relevant indicative thresholds under the baseline scenario, the debt level is sensitive to shocks as indicated in standard bound tests.2 Under an alternative scenario with a higher level of borrowing over the medium and long term, Cambodia may lose its low debt distress rating. In particular, the scope for absorbing additional risk, including from contingent liabilities related to the rapid growth of infrastructure projects outside the budget and the banking system, would be substantially smaller. All this underscores the need for a prudent borrowing strategy, underpinned by continued fiscal consolidation over the medium term, and improvements in debt and contingent liability management, which should be incorporated in the authorities’ upcoming debt strategy document.