Scale of recovery uncertain, bank says, citing inflation risk, threats to rice harvest
Cambodia’s economic recovery will be modest and remains vulnerable to rising inflation and potential failures to stimulate domestic job growth with public spending, the Asian Development Bank said yesterday.
“Slippage in these areas would put the forecasts at risk,” the ADB said in its annual Asian Development Outlook report for 2010, which predicted economic growth in Cambodia to reach 4.5 percent in 2010 and highlighted the need for improved competitiveness in the garment and tourism sectors.
The ADB added that the economy’s recovery could also take a tumble if this year’s harvest is perturbed by any more extreme weather conditions.
The growth prediction echoed last week’s World Bank forecast of 4.4 percent economic growth. Cambodia’s economy contracted by 2 percent in 2009, according to both the World Bank and the ADB, though the government last month announced that the economy had actually grown by 0.1 percent last year.
The ADB report also warned that the region’s early recovery from the global financial crisis could have implications for exchange rates and the supply of money. Global food prices are again on the rise and the price of oil could experience further hikes on the back of rising demand, according to analysts.
“The quick return to high growth could accelerate the increase in consumer and asset prices,” the report said. “For developing Asian policy makers, this means that asset price trends must be watched and preventive action taken before disruptive asset bubbles materialize.”
Rising inflation “is a very clear possibility,” said Steven Higgins, CEO of ANZ Royal Bank, agreeing with the premise that both food and oil prices would continue to increase.
“All these things particularly in a fast growing economy, like Cambodia is getting back to, are going to create problems,” he said.
Increasing food prices, the ADB said, could prove particularly stinging for countries like Cambodia, where a majority of the population are net food consumers and spend much of their household income on purchasing food staples.
Neou Seiha, senior researcher at the Economic Institute of Cambodia, said yesterday that as commodity prices rise, Cambodia would experience higher prices on imports of food and beverages from neighboring countries.
How Cambodia offsets these hikes will depend on its ability to increase both domestic food production and its own exports.
The ADB report put inflation in 2010 at 5 percent but only on the condition that food and oil prices remain stable and the dollar’s value does not sink any further.
Consumer prices rose by 7.3 percent in February compared to the same month in 2009, according to data from the Planning Ministry’s National Institute of Statistics. Food and non-alcoholic beverages rose 8.7 percent during the twelve-month period from February 2009, while the price of gasoline and diesel jumped by 34.4 percent and 26.1 percent respectively.
Mr Seiha added that any recovery in Cambodia this year would be muted and that economic growth would not reach levels experienced prior to 2008 when the global financial crisis started to affect the country.
“The big question is whether we can get double digit growth,” he said.
Analysts say that GDP growth of around 4 percent will not be sufficient to stimulate much job creation.
Any recovery in the economy must also translate into job creation “to eliminate the anxiety over eroded personal wealth and income, which is holding back spending,” the ADB report states.
Despite an increase in garment exports to the US in the first two months of this year, new jobs in the sector is yet to be realized, industry experts say.
According to the ADB report, construction activity is expected to grow at a “moderate rate” of about 4 percent this year and agriculture output is projected to expand by 4.7 percent on the back of slightly improved irrigation and more access to high-yield seeds.
Government revenues are also expected to increase this year with new taxes being applied to luxury vehicles and property and imports are expected to recover quicker than exports.
Huot Chea, economist for the World Bank in Cambodia, said it was very uncertain how Cambodia’s economic recovery would pan out.
“We can only hope that the resilience in the US economy is faster so that Cambodia will benefit more,” he said.
In Southeast Asia, growth is forecast to rebound to 5.1 percent in 2010, mainly thanks to a recovery in global trade and a rebound in investment.
This is the lowest recovery rate in the whole of Asia, with East Asia expected to grow at 8.3 percent and South Asia at 8.2 percent in 2010.
