Economy Strong but IMF Warns of Risks

Strong exports, increasing numbers of tourists and a recovering real estate sector are driving strong economic growth this year, but the gross domestic product outlook could still be offset by an unstable global economy, weak demand from the West and an overheating banking sector, the International Monetary Fund (IMF) said on Friday.

Addressing reporters at the end of an 11-day mission to assess Cambodia’s economy, Olaf Unteroberdoerster, deputy division chief of the IMF’s Asia-Pacific department, warned that further regulations would have to be enforced by the central bank to avoid too much credit flooding the banking sector.

The IMF predicts that GDP growth in Cambodia will reach 6.5 percent this year—in keeping with a government prediction made in February.

“Over the medium term, Cambodia’s growth rate could reach a potential of about 7.5 percent, provided there is continued improvement in the business climate, infrastructure, and public service delivery,” Mr. Unteroberdoerster said in his prepared remarks.

“Potential downside risks in Cambodia could be a complicating factor, stemming mainly from potential labor market instabilities, extreme weather conditions, and rapid credit expansion affecting banks’ health,” Mr. Unteroberdoerster said at the IMF’s office in Phnom Penh.

On track to grow at a rate of more than 30 percent this year, loan disbursals in Cambodia rank among the highest in Asia, Mr. Unteroberdoerster said, adding that the rapid growth of the banking sector warrants closer monitoring. “It may also call for further action to curb excessive risk-taking by banks,” he said.

“Better coordinated surveillance among all relevant supervisory agencies is also critical to ensuring the stability of a rapidly evolving financial system,” Mr. Unteroberdoerster added.

Still, Mr. Unteroberdoerster said the National Bank of Cambodia had taken some initiatives to tighten up regulations in the banking sector.

“The recent launch of the Credit Bureau is improving risk management and credit allocation practices by banks and microfinance institutions,” he said.

The IMF said that Cambodia’s garment sector continues to enjoy double-digit growth—up 14 percent in the first six months of this year—buoyed by sustained demand in the U.S. and Europe. But Mr. Unteroberdoerster warned that while fairly robust, the Cambodian economy is not immune to the effects of further jitters in those countries, which are still grappling with high deficits and sluggish economies.

And after years of trying, Cambodia has still done very little to diversify its economy, which relies mostly on garments to generate revenues.

Severe flooding across the country last year forced the government to revise its GDP outlook for 2011, pegging it down to 6 percent from 7 percent earlier in that year. But Mr. Unteroberdoerster said the long-term impact of last year’s floods was not as bad as originally expected.

“Agriculture continues to play an important role in the economy,” he said.

“It is our assessment that agriculture this year will contribute to growth in line with past trends, and we believe that next year it will continue to expand at about 3 to 4 percent,” he said.

In addition to strides made in the garment sector, tourism arrivals increased by 27 percent in the first half of 2012 compared to the same period last year. Inflation is expected to reach 3.5 percent this year, and 4 percent in 2013.

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