Credit ratings agency Moody’s has affirmed its long-term rating for Cambodia but changed its outlook from positive to negative, citing “significant uncertainty surrounding US trade policy and sweeping tariffs”.

The confirmation of the B2 rating “balances low-income levels, a weak institutional framework and high dollarization, which limit policy flexibility, against a highly affordable government debt burden and robust growth potential,” the rating agency says in a statement released on April 28.

Also unchanged is the local currency country ceiling rating at Baa3 and the foreign currency ceiling rating at B1.

The two-notch gap between the local currency ceiling and sovereign rating reflects, the agency finds, “low economic diversification, weak institutional strength, a modest government footprint and moderate external vulnerability risk”.

The foreign currency ceiling’s one-notch gap with the local currency ceiling indicates, the agency adds, “weak policy effectiveness, a track record of transfer and convertibility restrictions in times of stress and a relatively open capital account”.

Cambodia’s debt burden was “modest” at less than 30% of GDP last year, Moody’s notes, lower than the median of B-rated sovereigns.

“The country largely relies on official multilateral and bilateral creditor support for government borrowings, which supports high debt affordability,” the agency states. “Reliance on concessional loans also insulates Cambodia against the possibility of an abrupt market-driven spike in the cost of debt.”

Trade shock threatens export earnings, FDI

On the negative outlook, Moody’s points to downside risks to Cambodia’s growth prospects, “given significant uncertainty surrounding US trade policy and sweeping tariffs.”

Cambodia’s exports to the United States account for close to 40% of total exports and nearly 20% of GDP, Moody’s highlights, one of the highest rates in the Asia-Pacific region. “Should the tariffs rise well above the 10% currently in place, and more generally global economic growth slow down markedly and durably, Cambodia’s near- and long-term growth would be severely impacted.”

America’s “reciprocal tariffs” against most trading partners announced on April 2 – since shelved for 90 days – include a 49% levy on US imports from Cambodia, the highest rate in the world after the 50% tariff for Lesotho.

“A severe trade shock would reduce export earnings from the garment sector and diminish foreign direct investment ( FDI ) flows,” the agency warns, “eroding long-term growth potential and increasing external vulnerabilities.”

Attractiveness to Chinese investors under threat

Demand for clothing and footwear, accounting for more than half of Cambodia’s exports, Moody’s points out, is likely to be sensitive to tariff-related price increases. “As trade tensions between the US and China intensify,” it argues, “Cambodia’s attractiveness as a conduit for Chinese investments and goods to reach advanced economies, including the US, could diminish as the US administration attempts to close this channel.

Given its high trade exposure and weakening global credit, if reciprocal tariffs are imposed, “Cambodia is expected to be one of the Asia-Pacific sovereigns most impacted”, Moody’s shares, resulting in the agency’s GDP growth forecast of 5.3% for this year being reduced by almost 2 percentage points.

“This adds further downside risks to our growth outlook for 2025-27, as we factor in financial stability risks stemming from the ongoing downturn in the real estate sector,” the rating agency says. “Although the tourism sector is recovering to pre-pandemic levels, the shift in tourist composition from Chinese visitors to those from neighbouring countries has significantly diminished tourism receipts.

“Consequently, if sweeping US tariffs persist, they could derail the gradual recovery efforts of the past two to three years, adversely impacting our assessment of Cambodia’s economic strength.”

Moreover, the uncertainty could erode business confidence and consumer sentiment, reducing inflows of FDI, which accounted for nearly 10% of GDP last year.

Current account pressure offset by forex reserves

“Weakening external demand could turn current account surplus into deficits, making it challenging to finance the widening current account deficit with moderated FDI inflows,” Moody’s notes, “thereby increasing external vulnerabilities.”

In forecasts for Cambodia last week, the International Monetary Fund projects a relatively rare current account surplus of 2.3% of GDP for this year and 1.1% for next year, reversing a deficit of 1.7% last year. With the exception of a surplus of 1.3% in 2023, this contrasts with deficits of between 3% and almost 30% since 2017.

However, the risk of Cambodia’s current account balance swinging back into deficit, Moody’s says, is offset by “robust” foreign exchange reserves of US$18.3 billion at the end of February – equivalent to almost eight months of import coverage.

ESG profiles

Cambodia’s environmental, social and governance ( ESG ) credit impact score of CIS-4 reflects, Moody’s states, “exposure to environmental and social risks and overall weak governance profile and limited resilience”.

Environmental risks ( E-3 issuer profile score ), it notes, are driven by climate risks – droughts, floods and weak access to safe drinking water, along with poor water storage and infrastructure facilities.

Cambodia’s exposure to social risks ( S-4 issuer profile score ), the agency adds, reflects low incomes, poor health and education services, and weak access to other basic infrastructure.

The credit profile ( G-4 issuer profile score ) “reflects relatively weak institutional arrangements, a high incidence of corruption and generally weak rule of law and transparency issues, which compound policy effectiveness.”

Return to stable outlook depends on US

Despite the negative outlook, Moody’s reports that its rating committee found on April 23 no material changes in Cambodia’s economic fundamentals, institutions, governance, fiscal and financial strength, or susceptibility to event risks.

But “an upgrade is unlikely in the near future,” it says. “We would consider revising the outlook back to stable if we had a higher level of confidence that Cambodia’s economic strength and external metrics are not likely to be materially weakened by developments in US trade policy and tariffs globally.

“Conversely, we would likely downgrade the ratings if we concluded that higher tariffs and slower global trade and growth would lead to a significant deterioration in Cambodia’s growth outlook and a substantial decline in FDI inflows.

“This would indicate structurally weaker growth, thereby weakening our assessment of Cambodia’s economic strength.

“Such a scenario would see external metrics deteriorate, increasing pressure on financing the current account deficit and raising external vulnerability risks, and weaken fiscal metrics by eroding the government revenue base, leading to a significant increase in the debt burden.

“Additionally, we would likely downgrade the ratings if strains on asset prices were material or prolonged, leading to liquidity and solvency concerns in the banking system and raising macro stability risks.”