Debt Sustainability Framework Debt Sustainability Analysis

(Cambodia)

DMF Stakeholders’ Forum June 3-4, 2015, Manila, Philippines

Thirong PEN

Deputy Director General

General Department of Budget

Ministry of Economy and Finance

Kingdom of Cambodia

1

Outline

1. Legal Framework

2. Institutional and HR Development 2.1. Institutional Development

2.2. HR Development

3. DSA Exercise

4. Preliminary Results and Conclusions 4.1. Preliminary Results

4.2. Conclusions

5. Views on the DSF

2

1. Legal Framework

3

Law

• Law on Public Financial System

• Law on Government Securities

• Law on National Budget

Sub-decree

• Sub-decree on Public Debt Management

“The Sub-decree orders the Ministry of Economy and Finance (MEF) to conduct a debt sustainability analysis (DSA) at least every two years

and update as necessary.”

Cambodia receives only highly concessional loans.

2. Institutional and HR Development

4

2.1. Institutional Development

• Integration of Middle Office (MO) function into the Back

Office (BO) in 2010

• Merging MO and BO into a single office (ODAC) after

Ministry’s restructuring in late 2013 (Details in next slides)

• Expansion of MO team from 2 to 6 staff

5

Ministry of Economy and Finance (MEF) Structure

Minister

Secretary of State

Under Secretary of State

Cabinet Advisors

GD of Sub-national Finance

GD of State Property & Non-tax Revenue

GD of Internal Audit

GD of Economic & Public Finance Policy

GD of Customs & Excise

General Inspectorate General Secretariat

GD of Public Procurement

GD of National Treasury GD of Budget

GD of Taxation

GD of Financial Industry

6

General Department of Budget (GDB)

7

Debt Management Office

PPP Unit

Director General

Deputy Director General

3 Deputy Director Generals

Department of Cooperation and

Debt Management (DCDM)

Department of Investment

(DI)

Department of General Affairs

Department of Financial Affairs

Department of Budget

Formulation

DCDM Structure

8

Director

Deputy Director

Bilateral Cooperation 1

Office

Bilateral Cooperation 2

Office

Deputy Director

Multilateral Cooperation 1

Office

Multilateral Cooperation 2

Office

Deputy Director

Debt Management, Administration and Consolidation Office

Front Offices Back-Middle Offices

2.2. HR Development

Debt Sustainability Analysis (DSA):

• 1st Training by the ADB, IMF & WB, Manila, Philippines, 2007

• 2nd Training by the IMF & WB, Dhaka, Bangladesh, late 2010

• 3rd Training by the WB expert, Phnom Penh, August 2013

• 4th Training by the WB, Bangkok, Thailand, March 2014

• 5th Training by the WB, Shanghai, China, November 2014

Other Analysis Trainings:

• DPA Training by UNCTAD, September 2012

• Training on Contingent Liabilities Management, June 2013

• Other in-house trainings by ADB consultants

9

3. DSA Exercise

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• Cambodia’s Vision 2020

• NSDP/PIP

• Macro Framework

• RMS 2014-2018

• DMFAS

• Consultations with the IMF and other experts

Key Inputs

• Baseline Scenario

• Stress Test Scenario

• Alternative Scenario

DSA • Debt Strategy

• Borrowing Limit

• Priority sectors (policy)

• Risk monitoring indicators/policies/ mechanisms

• Very concessional loan

• Key reform programs

• Institutional capacity

Key Outputs

3. DSA Exercise (Con’t)

Cambodia is using LICs template (Medium Policy Thresholds, 3.25 ≤ CPIA ≤ 3.75) since 2011.

The 5 key debt indicators to be monitored

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Debt Ratio Thresholds (Medium Policy)

PV of external debt

% of GDP 40

% of Exports 150

% of Revenue 250

Debt service

% of Exports 20

% of Revenue 20

3. DSA Exercise (Con’t)

New borrowing for 2014-18: • Scenario 1: SDR 600 million – 700 million p.a.

• Scenario 2: SDR 800 million – 1,000 million p.a.

Key macro assumptions: • GDP growth: average 7%

• Revenue growth: average 0.5% (2014-18) & 0.3%-0.4% (2019-34) (in % of GDP)

• Exports: average 10% to GDP

• Exchange rate: 1USD = 4,050 – 4,200 KHR

Alternative Scenario: • GDP growth: average 7% (2014-18), 6% (2019-22) & 5% (2023-34)

• Revenue growth: average 0.5% (2014-18) & 0.2%-0.3% (2019-34) (in % of GDP)

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4.1. Preliminary Results (1/4)

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Borrowing Scenario 1 (Excluding Old Debts)

e- Debt service-to-Revenue ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

b- PV of debt-to-Exports ratio

0

20

40

60

80

100

120

140

160

2015 2020 2025 2030 2035

a- PV of debt-to-GDP ratio

0

5

10

15

20

25

30

35

40

45

2015 2020 2025 2030 2035

c- PV of debt-to-Revenue ratio

0

50

100

150

200

250

300

2015 2020 2025 2030 2035

d- Debt service-to-Exports ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

Most extreme shock

(Exports shock)

Baseline

Historical scenario

Threshold

Alternative Scenario

4.1. Preliminary Results (2/4)

Borrowing Scenario 1 (Including Old Debts)

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e- Debt service-to-Revenue ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

b- PV of debt-to-Exports ratio

0

20

40

60

80

100

120

140

160

2015 2020 2025 2030 2035

a- PV of debt-to-GDP ratio

0

5

10

15

20

25

30

35

40

45

2015 2020 2025 2030 2035

c- PV of debt-to-Revenue ratio

0

50

100

150

200

250

300

2015 2020 2025 2030 2035

d- Debt service-to-Exports ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

Most extreme shock

(Exports shock)

Baseline

Historical scenario

Threshold

Alternative Scenario

4.1. Preliminary Results (3/4)

Borrowing Scenario 2 (Excluding Old Debts)

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e- Debt service-to-Revenue ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

b- PV of debt-to-Exports ratio

0

20

40

60

80

100

120

140

160

2015 2020 2025 2030 2035

a- PV of debt-to-GDP ratio

0

5

10

15

20

25

30

35

40

45

2015 2020 2025 2030 2035

c- PV of debt-to-Revenue ratio

0

50

100

150

200

250

300

2015 2020 2025 2030 2035

d- Debt service-to-Exports ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

Most extreme shock

(One-time depreciation shock for

figure a; Exports shock for figures

b, c, d & e)

Baseline

Historical scenario

Threshold

Alternative Scenario

4.1. Preliminary Results (4/4)

Borrowing Scenario 2 (Including Old Debts)

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e- Debt service-to-Revenue ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

b- PV of debt-to-Exports ratio

0

20

40

60

80

100

120

140

160

2015 2020 2025 2030 2035

a- PV of debt-to-GDP ratio

0

5

10

15

20

25

30

35

40

45

2015 2020 2025 2030 2035

c- PV of debt-to-Revenue ratio

0

50

100

150

200

250

300

2015 2020 2025 2030 2035

d- Debt service-to-Exports ratio

0

5

10

15

20

25

2015 2020 2025 2030 2035

Most extreme shock

(Exports shock)

Baseline

Historical scenario

Threshold

Alternative Scenario

4.2 Conclusions

• Cambodia’s debt is “sustainable” and remains at “low risk” of debt

distress;

• Annual borrowing limit for 2014-18: max. of SDR 700 million;

• Priority sectors: infrastructure support growth and improved

productivity;

• Maintaining macroeconomic stability by key reform programs

• Maintaining concessionality of new loans

• Monitoring and managing contingent liabilities

• Institutional capacity

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5. Views on the DSF

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Pros Cons

- Cost-free tool for evaluating the

country’s debt distress and see the

future trend over the long run.

- Supporting tool to define the

country’s annual borrowing limit.

- Ensures the country meets

international best practices and

comparability across countries.

- A complicated tool with more than

40 worksheets (unused

worksheets should be hidden)

- Hard to find the input data since

the requirement is too long (21

years=1-year estimate + 20-year

projection) hence the results are

less accurate.

- No advanced training is provided.

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Thank you!