Economic Growth a Modest 4.4% In 2010, World Bank Predicts

The World Bank yesterday projected that economic growth in Cambodia would reach 4.4 percent in 2010 as export and investment levels are expected to register only modest gains after last year’s recession.

In a periodic regional forecast, the Bank also said that, other than Mongolia, Cambodia was the only low-income country in the region to experience a contraction in its economy last year.

After years of averaging more than 10 percent annual growth, Cambodia’s economy contracted by 2 percent last year, according to the Bank. The government last month announced that, to the contrary, the economy had grown by 0.1 percent in 2009.

Despite the prediction of positive growth this year, the report said “much uncertainty remains over the medium term” for the Cambodian economy. “Many Cambodians remain poor and with few assets that could be used to add to investment.”

The uncertainty over “the medium term is subject to the external environment, because Cambodia is subject to the global situation,” said Huot Chea, economist for the World Bank in Cambodia, adding that over 60 percent of all exports from Cambodia currently go to the US.

From over 6,000 products that can be exported to both the US and the European Union with favorable trade tariffs, Cambodia sends less than 10 items on the list, Mr Chea said, highlighting the vulnerability of Cambodia’s economy to external shocks.

More than two thirds of all imports to Cambodia still come from just four countries—Thailand, Vietnam, Singapore and China.

“We need to…diversify our economy with a strong base and continue structural reform,” he said.

Cambodia must try and take advantage of East Asia’s status as the region that is leading the global economic recovery by creating additional export partners closer to home, he added.

Exports from Cambodia are projected to rise only slightly this year to $4.1 billion from $3.9 billion last year and foreign direct investment is also expected to bounce back to $725 million from $515 million last year.

That projection is still less than 2007 levels, which peaked at $866 million, according to the report.

Debt levels in the country are expected to rise to $3.53 billion from $3.17 billion last year, a sign that lending levels from banks will increase, the report said.

Due to increased government spending last year, the World Bank estimated that the country’s budget deficit stood at 6 percent of GDP in 2009.

In order to decrease the deficit, the 2010 government budget seeks to withdraw some of the spending by cutting military allowances, reforming salary supplements for civil servants and introducing a property tax, according to the Bank report, which predicted that the deficit would drop to 5.2 percent this year.

However, the report warned regional governments that withdrawing fiscal stimulus too soon could disrupt the recovery, especially as growth is expected to be much below previous levels in the coming years.

“The ‘old normal’ is no more—and fiscal policy needs to adjust to the changed circumstances,” it said.

Although FDI levels decreased by 35 percent in Cambodia last year, it is very encouraging to see that bank lending is beginning to pick up, said Ivailo Izvorski, lead economist for the World Bank, who spoke from Tokyo via satellite at a news conference held at the World Bank’s offices.

Capital flow has, however, ceased to come back to previous growth levels.

“Therefore, countries such as Cambodia have to persist with the structural reforms,” Mr Izvorski said, noting that new policies specific to encouraging more incentive to investors—namely in trade and improvement of the business environment—must be continued to help rekindle confidence in the private sector.

“Growth will be gradual,” said Joshua Morris, managing director for Emerging Markets Investments, an equity fund with investments in Cambodia and Laos. “The explosive investment growth three years ago was probably based on a bubble in the West and additional capital looking for new paces to invest.”

But slower growth is perhaps not all that bad.

Mr Morris said that Cambodia was starting to see “a stronger investment platform” and “more stable investment opportunities” as opposed to what previously amounted to speculative investment decisions in bubble areas of the economy like construction.

“People are looking more critically at what are business fundamentals,” he said. “Investment is now done on an opportunity-by-opportunity basis.”

Still, in September the World Bank dropped Cambodia 10 places on its annual “Doing Business” report, ranking Cambodia at a lowly 145 out of 183 countries whose business environments were compared.

In Cambodia, it still takes 85 days to start a business, putting the country 173rd in that category, four places lower than the previous year’s report. Cambodia was also ranked 127th with regards to trading across borders, compared to 122nd in the last report.

The World Bank report released yesterday also noted that during last year’s recession job losses in Cambodia’s higher-paying manufacturing, construction and tourism companies led people to seek work in the lower paying agricultural sector, resulting in a swelling of those employed in informal sectors.

The report found that female manufacturing workers experienced a cut in salary from 1,300 riel-per hour in 2007 to 900 riel in 2009. Male workers in the sector saw an equally large drop from 1,580 riel-per hour in 2007 to 1,050 riel today.

However, the report said that labor intensive industries and manufacturing should be considered as a frontier for future growth in low-income countries in the region as labor costs in China increase and transport links between countries improve.

Officials from the Ministry of Finance could not be reached for comment on the report’s findings.

 

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