Moody’s Ratings has upgraded its Cambodia outlook from negative to stable, citing reduced exposure to U.S. tariffs and the country’s ability to absorb external shocks.
“The risk of a severe and persistent tariff shock from the U.S. has diminished following the reduction of U.S. tariffs on Cambodian exports to levels broadly in line with regional peers,” the U.S. rating agency said last week.
Moody’s said it expects GDP growth to “moderate and stabilise at a lower rate in the near term.”
The upgrade comes despite the war on Iran, continued tariff uncertainty, and border tensions with Thailand eroding tourism revenues and remittances.
“We expect Cambodia to absorb the external shock without a material weakening of its fiscal metrics, foreign direct investment inflows, and without significant erosion of external buffers amid strong reserve coverage,” Moody’s said.
ROBUST POTENTIAL
Moody’s affirmed its B2 rating for long-term borrowers in light of low incomes, weak institutions and high dollarisation balanced by a “highly affordable government debt burden and still-robust medium-term growth potential.
“Fiscal metrics remain supported by concessional financing, while strong reserve buffers continue to underpin external stability, notwithstanding persistent downside risks from financial sector vulnerabilities amid ongoing property market downturn.”
Cambodia’s local and foreign currency country ceilings are unchanged at Ba3 and B1.
GAPS
The two-notch gap between the local currency ceiling and the sovereign rating reflects “low economic diversification, weak institutional strength, a modest government footprint, and moderate external vulnerability risk.”
The one-notch difference between the foreign and local currency ceilings “incorporates our assessment of Cambodia’s weak policy effectiveness, a track record of transfer and convertibility restrictions in times of stress, and a relatively open capital account.”
Moody’s revised Cambodia’s outlook to negative in April last year after the U.S. announced a 49 percent reciprocal tariff — the second-highest in the world.
At the time, it estimated that such a scenario could reduce real GDP growth by about 3 percentage points from this year.
But under an agreement signed by Samdech Moha Borvor Thipadei Hun Manet and U.S. President Donald Trump in Kuala Lumpur in October, the U.S. cut the tariff to 19 percent — in line with duties the U.S. imposed on regional competitors.
Moody’s estimates the 19 percent tariff will cut GDP growth by only around 1 percentage point. “This materially lowers the likelihood of a sharp and sustained growth dislocation,” it said.
TRANS-SHIPMENT TARIFFS
Uncertainty persists over tariffs on trans-shipped goods.
The United States has already imposed triple-digit duties on solar equipment made by Cambodian subsidiaries of Chinese companies.
But Cambodia has agreed to cut all tariffs on U.S. goods. It also aims to better enforce rules of origin — like mandatory origin certification and enhanced inspections — and strengthen coordination between government agencies.
“We do not expect trans-shipment-related tariffs to materially disrupt Cambodia’s export[s],” the rating agency said.
Overall exports are expected to remain resilient, fueled by garments and increased non-garment exports — notably auto parts, tyres, and electronics.
But amid border tensions with Thailand, “we expect tourism and remittance inflows to remain weak through 2026 … with a recovery only from 2027.
“In addition, a prolonged conflict in the Middle East adds further downside risks through higher import costs and continued pressure on garment exporters’ margins stemming from elevated shipping and logistics costs.”
‘SIZEABLE FOREIGN-EXCHANGE RESERVES’
At the same time, financial sector risks remain elevated.
[4/7/2026 10:35 AM] Nimul: “The prolonged downturn in the real-estate sector continues to weigh on bank asset quality and credit growth, with the large size of the banking system relative to the economy amplifying potential macro-financial risks,” the rating agency said.
“While we do not expect an acute banking crisis, these vulnerabilities are likely to remain a drag on growth and policy flexibility over the medium term.”
Moody’s notes that Cambodia’s external position is supported by strong inflows of foreign direct investment (FDI) and “sizeable foreign-exchange reserves”. These have been running at multi-year highs — reaching US$19 billion in early 2026, equivalent to about seven months of imports.
The International Monetary Fund (IMF) considers a minimum three months as the “rule of thumb” and finds that countries with higher reserves are generally able to better cushion economic activity from external shocks.
According to Moody’s, the war on Iran and border tensions with Thailand “have dampened near-term growth” in Cambodia. But “we do not expect these pressures to materially undermine external financing conditions.”
Moreover, “FDI has remained resilient, driven primarily by Chinese inflows into manufacturing and industrial projects, and continues to finance the current account deficit.”
‘DEBT LEVEL REMAINS MODEST’
The country’s debt burden is seen edging close to 30 percent this year, reflecting deeper fiscal deficits amid weakening growth along with support for migrant workers returning from Thailand and vulnerable households.
But “Cambodia’s debt level remains modest, lower than the median of B-rate sovereigns,” Moody’s said, noting that the country largely relies on official multilateral and bilateral creditor support for government borrowings, which supports high debt affordability.
“Reliance on concessional loans also insulates Cambodia against the possibility of an abrupt market-driven spike in the cost of debt,” it said.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS
On environmental, social and governance risks, Cambodia’s credit impact score is CIS-4.
On the environment, the rating agency noted the country’s exposure to droughts and floods, which can disrupt agriculture and deter tourism. Water management is also an issue given “very weak access to safe drinking water, with poor water storage and infrastructure facilities.”
Exposure to social risks reflects low incomes, poor health and education, and weak access to other basic infrastructure.
Governance risks reflect “relatively weak institutional arrangements, a high incidence of corruption, generally weak rule of law, and transparency issues, which compound policy effectiveness.”
FUTURE RATING ACTIONS
Moody’s said a rating upgrade could arise if the government carries out reforms to address institutional weaknesses, policy effectiveness and competitiveness.
“Such reforms would also likely contribute to a material increase in economic diversification, stronger foreign direct investment inflows and more robust per-capita income growth,” it said.
“Material reduction in macro-prudential and banking sector risks would also likely exert upward pressure on the rating.”
On the other hand, trade disruptions or geopolitical developments could put downward pressure on the ratings.
Such developments could erode prospects for growth and FDI while elevating external vulnerability.
“A downgrade could also result from a significant weakening of financial stability, including prolonged stress in the banking sector that undermines macroeconomic stability or materially worsens fiscal and external metrics,” the agency adds.
OTHER RISKS
On Cambodia’s “ba3” economic strength rating, Moody’s said this reflects a slump in the country’s construction and real-estate sectors.
“We also factor in challenges related to economic competitiveness, a narrow export base — notwithstanding some recent diversification — and low, albeit rising incomes, which point to low shock-absorption capacity.”
[4/7/2026 10:35 AM] Nimul: The country’s “baa1” fiscal strength rating meanwhile reflects contingent liability risks related to public-private partnerships and the property downturn — also reflected in its “b” rating for risks in the banking sector. AKP