Taking stock of Cambodia’s most recent economic and financial developments, officials from the International Monetary Fund announced yesterday that Cambodia’s economy would contract by 2.75 percent this year as the impact of the global economic crisis is having a larger effect on Cambodia’s economy than had been previously anticipated.
The 2.75 percent contraction stands in contrast to the IMF’s last projection in March, which predicted Cambodia’s economy would shrink by 0.5 percent for the year. The announcement follows the Asian Development Bank’s prediction Tuesday that Cambodia’s economy would shrink by 1.5 percent this year, a significant reassessment from an ADB projection made less than six months ago that estimated a positive growth of 2.5 percent this year.
“Since we were here in March… there are several areas of the economy that are not performing as well as we had expected,” said David Cohen, the IMF’s deputy division chief for the Asia and Pacific Department, while speaking at a news conference in Phnom Penh.
Mr Cohen said that two weeks of discussions with government officials, representatives from the country’s business community, and the development sector had shown that Cambodia’s economy was particularly vulnerable due to its openness and “very narrow production base.”
Still, the IMF predicts Cambodia’s economy to make a modest recovery next year, with GDP growth for 2010 currently predicted to be 4.25 percent.
On current trends, Mr Cohen said that higher government spending aimed at providing the economy with much needed stimulus during the financial crisis means that the IMF now projects the country’s budget deficit to climb to 6.75 percent of GDP this year, up from around 2.75 percent in 2008.
“We caution the government that an overly expansionary fiscal stance could add some inflation pressures next year,” said Mr Cohen, adding that the seven-member IMF team from Washington had recommended the government reduce its budget deficit to at least 5.5 percent. The IMF predicted year-on-year inflation to be around 5.25 percent by the end of 2009, partly due to a fall in domestic demand. The year-on-year inflation at the end of 2008 stood at 13.46 percent, according to figures from the National Institute of Statistics.
Mr Cohen said that “large increases” in civil service and military wages were largely instigating the rise in the budget deficit and that state expenditure should more readily be aimed at health, education and rural development. Government deposits from the banking sector—calculated to be at 7 percent of GDP—would be liable to pay for some of the budget deficit, he said.
According to the IMF’s findings, garment exports are expected to decline this year by 15 percent due to low levels of consumer spending in the US, where two thirds of Cambodia garment exports are dispatched.
“Cambodia remains less competitive vis-a-vis some of the other garment exporters in the region and has been losing some market share to places like Bangladesh and Vietnam,” Mr Cohen said. “I think there is still quiet a bit of uncertainty about the garment sector for the rest of the year.”
Consultations with the tourism sector highlighted a sharp reduction in tourism spending, despite visitor arrivals for the first eight months of this year rising by about 1 percent compared to last year.
“Tourist arrivals might not be the best indicator [for] actual spending taking place in the sector,” said Mr Cohen, underlining that visitors from Vietnam—Cambodia’s largest destination for visitor arrivals—often spend less time and money in the country than visitors from North America, Western Europe and East Asia, who have all seen “sharp falls in arrivals.”
The construction sector is also set to contract this year with approvals for new construction projects and lending to the property sector down sharply, he said.
The agricultural sector, however, is predicted to boost its production by 5 percent as investment in rural infrastructure projects increases.
Scott Lewis, a managing partner with the private equity fund Leopard Capital said that sectors more reliant on domestic demand such as agriculture could well rebound faster than those whose growth is influenced by demand from outside the country.
“I would say that [the downturn] is probably worse than people expected. At the outset people expected Cambodia not to be affected as much,” he said, adding that Cambodia’s dependence on garments and tourism was the main reason for the economy’s flagging state.