Economy Forecast to Languish Until 2000

An in-depth report by the Lon­don-based Economist magazine predicts Cambodia’s beleaguered economy will remain stagnant until 2000. 

The Economist Intelligence Unit report on the first three quarters of 1998 paints a dim outlook for economic recovery. Pinning the blame both on the regional economic crisis and domestic uncertainties, the report forecasts sluggish growth, a weak riel and a continuing slump in investment and tourism.

It is an assessment, say local analysts, with which many people in Cambodia concur. “Next year will be pretty grim,” one Asian analyst said last week. “I’ve spoken to bankers, businessmen, diplomats. They all agree. Things are going to get worse before they get better.”

The report, released last month by a unit of the weekly economic magazine, reiterates what other think tanks and anecdotal evidence have also stated—that a hoped for quick recovery following the July 26 polls has not materialized.

According to the Economist report, investment will remain flat as foreign companies continue to take a wait-and-see approach. Even after a new government is formed, investors are likely to be cautious if long-standing political differences remain unresolved, it suggested.

“The most important thing is confidence,” agreed the Asian economic analyst.

The ongoing regional stock and currency crisis, which the Economist predicts won’t end until at least 2000, will also continue to have an impact. Investment from Asian countries, which in the past has been among the largest investors, the report noted, will remain flat.

The strength of the US dollar also deters foreign invest­ors, especially Asian ones, the report claimed. Investors have said the depreciation of regional currencies means that many countries, such as Indonesia and Thailand, now have cheaper labor costs than Cambodia. According to the report, Cambodia has lost its traditional competitive advantage in labor costs.

But some analysts questioned whether the reliance on the US dollar has had an entirely negative impact. One Western economist suggested that Cambodia’s dollarized economy also has benefits, such as stability, lack of inflation, and the absence of costs in­volved in foreign currency ex­change.

Foreign aid, analysts say, could tide the government over until investment and tourism begin to come back. But the report stated that the effect of international aid—which accounts for about half of the government’s revenue—is unlikely to be felt immediately.

All this, the report summarizes, means there is little chance that the economy is going to grow significantly this year.

While it offered no prediction of its own, it said the government’s forecast of 3.5 percent is “too optimistic.” GDP growth slowed to 2 percent last year, following 7 percent growth in 1996.

It also predicted a further depreciation of the riel from its current rate of 3,900 to the US dol­lar—although not by as much as the riel has fallen in the past 18 months.

And it suggested that the weak riel may affect the country’s international reserves.

According to the International Monetary Fund, reserves excluding gold were strong by the end of March, sitting at $299.9 million. By the end of the second quarter, however, they had slipped to $284.9 million.

The modest decline, the report speculated,  may be due to a decline in imports caused by the weak riel.

But one economist said recovery could not be specifically pegged to the year 2000, and could happen sooner. He also noted that the current inflation rate, which in August sat at 13.98 percent annually, is still relatively good for a developing economy.

“To be fair, [the government] has maintained macroeconomic stability,” said the Western analyst.

He added  the exchange rate “is not bad” and Cambodia has not yet seen the hyperinflation that is afflicting other developing nations.




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