Rich Countries’ Reforms May Slow Recovery

The general consensus among economists in Cambodia points toward an economic recovery in 2010 after more than a year of financial strain that saw mass job losses, lower investment levels and little innovation in an otherwise stagnant marketplace.

With modest projections-the International Monetary Fund and the World Bank both estimate Cambodia’s growth levels of above four percent in 2010-experts say any recovery will be weak.

According to a global economic outlook released last week by the World Bank, the crisis and the regulatory reaction to the financial excesses of previous years may have lasting impacts on financial markets, raising borrowing costs and lowering levels of credit and international capital flows.

“As a result, trend growth in developing countries may be reduced by between 0.2 and 0.7 percentage points annually over the next five to seven years as economies adjust to tighter financial conditions,” the report said. “Overall, potential output in developing countries could be reduced by between 3.4 and 8 percent over the long run, compared with its pre-crisis path.”

In other words, Cambodia is not out of the woods yet.

For Cambodia, “the challenge is to ensure rapid growth in sectors that create jobs. It is very important to see continuing rapid growth in agriculture, both to raise income and to ensure food security,” said Stephane Guimbert, senior country economist for the World Bank in Cambodia.

“But agriculture can’t be expected to absorb the 250,000 or so young workers joining the labor market every year. Hence it is important that growth rebounds in labor-intensive sectors, just as the growth in the garment industry was a key source of job creation over the past decade,” he added.

In a post on Mr Guimbert’s blog that was posted in late December, he asks whether the recovery is on its way for Cambodian workers and entrepreneurs.

Signs in tourism are “mixed,” while the construction sector shows some positive signs towards recovery, he wrote in the post.

And although high rice prices could prove beneficial for the agricultural sector, “businesses are much, much less optimistic about their 2010 plans than they were a year ago,” his post continued.

As for foreign direct investment levels, Mr Guimbert said they will remain low when compared to previous years when growth levels were hovering at around 10 percent.

“FDI levels will remain tight, in particular for lower income countries,” he wrote. “Improving each country’s competitiveness and attractiveness will therefore remain of critical importance, especially for Cambodia, which has over the past decade successfully relied on FDI to finance essential parts of its economic growth.”

FDI inflows are projected to decline from recent peaks of 3.9 percent of GDP in developing countries to around 3 percent of GDP, according to the World Bank report.

As global economies rebound from the financial turmoil experienced in credit markets, tougher credit regulations on the international front could also reduce the potential for investment worldwide, experts say.

Although acknowledging this reality, Mr Guimbert said additional regulations “might encourage further diversification in investments.”

This week, while speaking at an international banking conference in Phnom Penh, Tal Nay Im, director-general of the National Bank of Cambodia, said financial institutions were still at “moderate risk” and called on all banks to enhance their performance by improving their payment systems and integrating further with international markets.

“The financial crisis has taken its toll on capital markets and the local financial market remains underdeveloped,” she said.

Also at the event Phu Leewood, secretary-general of the National Communications Technology Development Authority, warned of overly strict regulations on banks, which in the US and Europe have already seen ceilings placed on bonuses for executives.

“Is it legal, is it practical to put a cap on financial institutions in the US whereas before they had a free market system?” he asked.

Prak Boreth, director at Cambodia Project Planning & Development Management, a consultancy firm for investment projects here, said any growth in Cambodia’s economy would be reduced to the agricultural and natural resource sectors, both of which are currently experiencing a wave of optimism.

“But the construction sector might just stay stable,” he said, adding that the garment sector would only undergo a very slight recovery during the course of this year.

In countries like “Vietnam, corruption is less than in Cambodia. When you export one container from Cambodia you might spend more than $500. In Vietnam it might be only $300,” he added.

The World Bank report says that the “inefficiency of domestic financial sectors resulting from corruption, weak regulatory institutions, poor protection of property rights, and excessive limits on competition can make borrowing costs in developing countries 1,000 basis points higher than in high-income countries.”

Trade levels in December with Thailand, South Korea and Vietnam are all still down by over 20 percent compared to the previous year, though recent gains are beginning to show some encouragement.

The government is prioritizing domestic demand, which is said to act as a key driver for growth.

“In particular, shifts from negative to positive growth in Malaysia and Thailand and a solid acceleration in activity in Indonesia and Vietnam should underpin the turnaround,” the World Bank report says.

However, fiscal space for Cambodia still remains extremely limited. The IMF has raised concerns over Cambodia’s budget deficit of nearly seven percent in 2009. Hence, the government seems to be looking to increase its revenue, as seen this week by its decision to hike up electricity prices.

The year 2010 will no doubt prove less bumpy than last year. But there are still a few potholes to hit along the way.

 

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