Nonperforming loans drag Cambodian economy; Thai border shut
And a phone call that almost toppled the Thai government.
For about a decade, Cambodia’s economy was a rocket. Starting in 2009, the country saw average annual growth of 7.6%, a Chinese investment and dollar-fueled property boom that spawned highrises and boreys alike, and an official poverty rate that fell from 34% to 18%. Consumption was high, the country was the fourth-fastest-growing globally among middle-income countries, and then-PM Hun Sen brushed off concerns of having overloaded on Chinese debt.
But since a pandemic-induced slowdown, recovery has been uneven, despite new PM Hun Manet predicting an annual growth rate of 6.5%. The World Bank threw water on that hope in its latest report, projecting just 4% annual growth and pointing to a “high level of private debt, coupled with a faster-than-expected increase in nonperforming loans” as jeopardizing the country’s overall financial stability.
There are a few interesting pieces to pull out here. First, nonperforming loans (NPLs) — meaning loans that aren’t being paid back — have risen dramatically, jumping to 7.9% in the banking sector and 9% for the microfinance sector, compared to 3.2% and 2.6% in 2022. Despite the attention on the failures of the property sector, the development bank reports that NPLs are concentrated in hotels and restaurants, retail, and mining, not real estate. Although roughly 10% of total loans have been restructured under a 2024 scheme, NPLs are expected to keep rising, in part because the restructure scheme is scheduled to expire at the end of this year, and some of those restructured loans are likely to become NPLs.
So why does this matter? NPLs are important because of the vicious cycle they create: On the lending side, banks are forced to set aside money to cover NPLs, which hurts profits and makes banks less investment-worthy (and ultimately more prone to failure). On the borrowing side, NPLs make it difficult to get credit and thus can lead to secondary rounds of nonpayment and bankruptcy. Together these dynamics lead to less investment, which weakens the economy, which in turn makes it more difficult for borrowers to repay — which can spiral downwards if there is no intervention.
Second, on tax collection: A few weeks ago, we noted a small item on domestic tax revenue, which was down in 2025 compared to previous years. The World Bank’s report placed this in broader context, showing that Cambodia’s tax collection has steadily declined from about 16% of GDP to around 13.5% in the years since the pandemic.
What’s unique about Cambodia is just how low its tax collection is compared to other developing nations — especially given Manet’s goal of becoming an upper-middle-income country by 2030 — as well as the type of taxes it’s collecting. Cambodia has trailed behind both APAC countries and lower middle-income countries as a whole in terms of tax-to-GDP ratio, per the World Bank. What’s more, VAT — a tax on goods and services — makes up about one-third of Cambodia’s tax revenues, a far higher share than its neighbors. (VAT is considered an “indirect” tax, as opposed to a direct tax on profit and income). Cambodia’s income tax revenue meanwhile represents 3.9% of GDP, up from 2.6 in 2015, placing Cambodia squarely behind the ASEAN, East-Asia Pacific and Africa averages.
Again, why does this matter? At the risk of sounding like a grandparent waxing poetic from their rocking chair: taxation is a foundational way for developing countries to create what economists call “fiscal space” — the ability to invest in universal social programs, education and industrial policies that would help diversify the economy long-term and raise incomes. Combined with Cambodia’s growing fiscal deficit, the World Bank warns that the lack of a strong tax base could “constrain the ability of the government to address emerging challenges and the inadequacy of spending in sectors like healthcare relative to middle-income countries, improve the quality of public services, and mitigate impacts of climate change risks on its economy.” Not great.
Politically, PM Manet’s government must delicately navigate the tax question to appease both pay-to-play elites and frustrated citizens already suffering a “negative and large” impact from indirect taxes. Although Cambodia has some elements of a formal personal income tax, including a salary tax, Manet faces a challenge in that the majority of the Cambodian workforce is informal. (His previous attempt to formalize taxes ended in humiliation when Hun Sen stepped in publicly and forced Manet to walk back the changes). Regardless of how Manet chooses to manage it, the World Bank stated plainly that “Cambodia will need to improve its tax system in the coming decades to realize its vision of becoming a high-income country.”
In border news:
The Thai military has closed the border to nearly all Cambodian travelers, marking the biggest escalation thus far in the growing border dispute, while a former ally of Thailand’s ruling party said it would seek a no-confidence vote against Prime Minister Paetongtarn Shinawatra amid the fallout.
As most are aware by now, Senate President Hun Sen released a 17-minute audio recording of a June 15 call between himself and Thai PM Paetongtarn Shinawatra on Wednesday. The release came after Hun Sen claimed that an earlier, shorter version of the clip posted online must have been “leaked” by one of the 80 Cambodian and ruling party officials he had shared it with. (Oops).
Thai nationalists have criticised Paetongtarn for the content of the 17-minute call, in which she criticizes an outspoken Thai military leader by calling him an “opponent” and laments to Hun Sen that she’s under domestic political pressure.
The reaction was swift: the Bhumjaithai Party, a major ally, quit the ruling coalition, narrowing the ruling party’s parliamentary majority and throwing Paetongtarn’s premiership into question. Some have called for Paetongtarn — the country’s youngest-ever PM who has held the position for less than a year — to resign, while others have slammed Hun Sen. Defence Minister Phumtham Wechayachai said Hun Sen must “take responsibility for his actions,” while the Thai PM’s deputy secretary-general lodged a police complaint accusing Hun Sen of violating Thai security laws by secretly recording and leaking the conversation.
On Tuesday, the Bhumjaithai Party said it would seek a parliamentary no confidence vote against Paetongtarn, for which it needs the backing of another 30 lawmakers outside the party. (Thus far, Paetongtarn has claimed she still has widespread support and has resisted calls to resign).
Meanwhile, Cambodia banned the import of Thai fuel and gas starting Monday in a move that PM Hun Manet insisted was “not an act of panic.” Manet wrote on Facebook that Cambodia has “the capacity to import fuel and gas from other sources, enough to meet the domestic consumption needs of our people, even for a month, even forever is not a problem.” This seems uncertain at best given that close to 20% of Cambodia’s fuel was imported from Thailand in 2024, according to most recently available trade data.
In other news:
— In the avalanche of border-related updates and news, there was seemingly no reaction from the Cambodian establishment to a complaint filed against Hun Sen in Thailand, alleging he was involved in the murder of former CNRP lawmaker Lim Kimya, who was shot point blank in Bangkok in January. The complaint refers to an Al Jazeera documentary on the killing of Kimya.
—Ministry of Mines and Energy chief Keo Rattanak met with a TotalEnergies executive and claimed the company was exploring investment opportunities in Cambodia. The French oil and gas multinational is expanding in Southeast Asia, with recent deals in Indonesia and Malaysia.
— Deputy Prime Minister Sun Chanthol promised “a successful outcome” in the third round of tariff negotiations with the U.S. Since “Liberation Day” on April 2, various opinion pieces have lamented that the Trump tariffs have arguably pushed Southeast Asia closer to China than ever.
— Two cases of bird flu have been detected in five days, including one case that led to the death of a Svay Rieng man, according to the Ministry of Health. Cambodia has recorded six bird flu cases and five deaths so far this year.
— Some enterprising scammers created a fake Hun Sen Facebook account in Thai and asked people to send 300 Thai baht via TrueMoney, with a promise of sending back 50,000 baht “when the battle is won.”
— State media are using the border dispute as an excuse to accuse Thailand of being Southeast Asia’s biggest “distribution center” for scamming, while complaining that Thailand is accusing Cambodia of the same.
See you next week!
"Non-performing loans" are indeed a potential problem as described but may I suggest more factors are explained? First cheap credit, even free grants, were given to Cambodia providers, with the good intention of economic growth and poverty alleviation. It was loaned out far too easily, and not cheaply by the way, with some loans approved without adequate due diligence, often merely on the basis that land titles were taken as security. Too many families lacked financial literacy, not understanding the true interest cost and their long-term ability to repay. They depended on one bread-winner in insecure employment. When families encountered problems, harsh methods were employed by the loan providers to seek recovery, ones that most authorities around the world would not accept let alone participate in. Indeed then Prime Minister Hun Sen tried to distance authorities from such behaviour. In recent years banks and MFIs cajoled by the National Bank of Cambodia, and those original over-generous donors like the World Bank Group, are having to improve. Despite this throughout the country many families remain today harmed by their experiences.