As Cambodia’s economy recovers from last year’s recession, growth will heavily depend on agriculture and agro-processing expansion while continued diversification and growth in the garment and tourism industries will remain important, the World Bank said yesterday with the release of its economic update on East Asia and Pacific economies.
In a periodic report on regional economies, the Bank forecast growth of 4.9 percent this year for Cambodia and 6 percent next year, which fell in line with projections by the Asian Development Bank and International Monetary Fund.
The report projected garment sector exports would grow by 14 percent and that tourism would grow by 9 percent. The report also foresaw $639 million in foreign direct investment this year, with nearly $800 million in 2011. Last year, FDI reached only $511 million.
Speaking during the launch of the report at the World Bank office in Phnom Penh, Country Economist Stephane Guimbert said that while garments, tourism and agriculture would continue to be the few major economic pillars in Cambodia, there were undeveloped areas within each.
“The point is these are very broad sectors actually, and within the three sectors you have many, many ways to diversify,” he said. Still, he said overall diversification continues to be a problem, adding, “Cleary one of the risks continues to be the weak diversification of the economy.”
He called the government’s new rice policy, “encouraging” as it is designed to do more than increase rice production by diversifying the sector with milling, processing and increased trade. Growth in agro-processing should offset problems with lower-than-expected production because of late rainfall this year, according to the report.
Even with the expected agriculture growth, the country still lacks irrigation and serviceable roads in many areas, something government officials have said the government will continue to address in the 2011 budget.
In August, Prime Minister Hun Sen announced the government planned to increase rice exports to a million tons annually by 2015–50 times above the current capacity of 20,000 tons. The policy includes providing more money for loans and guarantees for commercial financing for agriculture-related enterprises.
Only Monday, Mr Hun Sen announced plans to sign a deal exporting rice to China on the back of the new policy.
Mr Guimbert said, “A good outcome of the rice policy that the government put forward would be to have continued growth at the farm level but to have much more rapid growth at the trading, milling level.”
Mr Guimbert said that the garment industry was already diversifying and that factories were beginning to manufacture items new to the Cambodian industry such as suits and shoes.
Hang Chuon Naron, secretary of the state at the Finance Ministry, said the government’s effort to diversify the economy had focused on expanding food processing and agriculture. The government is also working to expand tourism throughout the country, he said.
Improvements in roads and lower electricity costs have been chief among those programs, along with policies to secure financing for rice mills and other agro-business.
While garments and tourism are rebounding, he sounded a note caution.
“The risks are the global recovery, especially US recovery but also in Europe, the external risks mainly,” he said.
Risk aversion among banks and the potential unwillingness to provide loans to diversify the economy will continue to be a risk, he said.
“It’s going to take some time to rebuild the flexibility that there was in the financial sector,” he said.
Guimbert also said that as Cambodia drafts the 2011 budget it would need to reduce deficit spending as it prepares for positive growth in the economy.
“The budget now should be less focused on the short term stimulus and go back to earlier discussion of how to address longer term structural issues such as infrastructure, quality of education, these kind of issues,” he said.
Dieter Billmeier, vice president of Canadia Bank, said that while banks would be more thorough in processing loan applications compared to before the recession, loans were essential to banks’ profitability.
Canadia’s loan portfolio has increased from $390 million in December to $475 now with loans to agriculture, particularly food processing, as well as trading and import export companies, he said.
“It would be stupid to sit on an $800 million deposit base and not extend our loan portfolio. We would lose money,” he said. “We believe the trust in economic growth is back. People will invest again.”
ADB’s chief country economist, Peter Brimble, said programs to increase investment such as the rice policy could benefit more sectors like tourism and garments by addressing the entire value chain.
“Take a careful look at how to improve the sectors,” he said.