Australia and New Zealand Banking Group CEO Michael Smith struck a cautionary note for Cambodia’s economy despite expressing his hopes on Thursday for a more cheerful year ahead, a view that was reiterated by economists on Friday.
“After a very difficult 2009, economic growth is expected to be about 5 percent,” Mr Smith said in a speech to the Australian Business Association of Cambodia.
But beyond what he described as a generally “optimistic” outlook for Cambodia’s economy, Mr Smith showed little hesitation when adding a note of caution.
“Although there has been a strong recovery in asset markets in the past 12 months, that recovery is much less felt in the real economy, which I think remains pretty subdued,” Mr Smith told the audience on Thursday.
Using the metaphor of “a major financial earthquake,” Mr Smith said that further “aftershocks” in the world economy would be felt this year as regulatory constraints on banks tighten access to credit and both businesses and households continue to repair their balance sheets.
On top of this, higher levels of government spending during the course of the economic crisis have meant that Cambodia’s budget deficit has risen to levels that economists say must be reduced to avoid hiking up public debt.
In December, the International Monetary Fund emphasized the need for the government to reduce domestic financing by redirecting spending only into areas most in need: health and education. And last month, the UN announced that Cambodia was “off track” to meet more than half the benchmarks comprising seven of the eight global development goals, which include halving extreme poverty and reducing child mortality to two thirds of 1990 levels by 2015.
“Now with businesses and households continuing to show caution government debt levels are worryingly large,” Mr Smith said.
“I guess the easy answer is that you have to restrict that spending to make sure it’s spent wisely.”
Mr Smith said his hopes for the future rest on Cambodia’s ability to integrate itself with the wider region through improving its infrastructure, a trend already underway with rehabilitation work on Cambodia’s railway in progress and improved road links to its neighbors.
When asked about the garment sector, so long the main pillar of Cambodia’s economic growth, Mr Smith predicted only a slight recovery this year.
John Nelmes, resident representative for the IMF, said he expected recovery to be slow this year.
“I would expect that job growth is likely to be somewhat muted as companies make more use of their existing employees by extending hours and moving employees back to full time from part time work,” Mr Nelmes wrote in an email on Friday.
Lim Sovannara, national economist for the UNDP, echoed that opinion, and said that any “substantial recovery” would have to wait for the second half of this year.
“I don’t think employment in the garment and construction sectors will get back to the pre-crisis level sometime this year,” Mr Sovannara wrote in an email message. “Investors are loosing a bit of confidence,” he added.
High unemployment and large public debt levels in Europe and the US could well spell more strain for Cambodia’s garment industry and also keep the numbers of foreign tourists down below pre-crisis figures.
While investor interest in Asia is high in global terms, Cambodia must be aware that competitiveness within the region is on the rise and it too needs to stay competitive to compete, Mr Nelmes.
“To position itself to take better advantage of regional growth, Cambodia needs to ensure that inflation remains in check – so that competitiveness isn’t undermined,” Mr Nelmes added.
Inflation in Cambodia is greatly influenced by external forces, especially the price of oil and gas.
Mr Sovannara said that oil and gas prices would again rise this year as the world economy recovers.
“It will once again put a lot of pressure on spending power, especially on those whose wages could not keep up with inflation.”
