Moody’s: VN economy can absorb shocks better than Cambodia

Wednesday, Aug 16, 2017 16:03

Both Viet Nam and Cambodia have strong economic growth prospects and face risks posed by their financial systems. However, Viet Nam’s institutions are stronger, according to Moody. — Photo

Viet Nam and Cambodia share several economic characteristics, but Viet Nam’s larger, more diverse economy has the greater capacity to absorb shocks, said a Moody’s report released on Tuesday.

The credit rating agency’s conclusions are contained in the report titled “Governments of Cambodia and Viet Nam – Viet Nam’s economic diversity supports stronger credit profile, despite higher Government debt than Cambodia’s”.

According to Moody’s, both nations have strong economic growth prospects and face risks posed by their financial systems. However, Viet Nam’s institutions are stronger. Continued robust growth, and broad economic and financial stability should control its Government’s relatively elevated debt.

In Cambodia, strengthening government revenue collection and macroeconomic and exchange rate stability together with the authorities’ efforts to address institutional weaknesses and diversify the economy should continue to support sovereign credit quality, although progress is likely to be gradual.

“Viet Nam’s larger, more diverse economy offers greater resilience to shocks, and the country’s exports are spread across a variety of products and markets. Viet Nam’s reach into higher value-added products is reflected in higher income levels that bolster households’ capacity to absorb economic shocks,” the report said.

In contrast, garment and textiles production and a few other low value-added manufacturing dominate Cambodia’s exports, which are largely for the US and the European Union markets, thus exposing the economy to sector- and market-specific shocks.

Cambodia’s institutions face greater challenges, but reforms are in train. Its ongoing reforms to reduce corruption and enhance laws are positive, although it has yet to materially strengthen its institutions. Its central bank has a track record of delivering economic and exchange rate stability, which supports foreign direct investment (FDI) inflows, but high dollarisation continues to limit the effectiveness of the monetary policy.

Viet Nam’s stronger institutions and greater policy effectiveness have contributed to a more conducive business environment, which has had positive effects across the wider sovereign credit profile.

The overall fiscal strength of the two economies is similar, although it encompasses different constraints. Cambodia’s smaller fiscal deficit, lower government debt and higher debt affordability - reflecting its larger concessional funding base - are its credit strengths relative to Viet Nam. However, Viet Nam’s increasing shift to domestic funding sources, though more expensive, reduces government liquidity risk and lowers the sovereign’s vulnerability to currency depreciation. – VNS

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