Friday, 19 December 2008

The Mirror of the Cambodian Economy in 2009

Posted on 18 December 2008
The Mirror, Vol. 12, No. 591

“Cambodia made remarkable achievements in terms of macro-economic stability, but there are many concerns which create an increasingly unclear situation for the future of the economy. The growth of the GPD was on average 11.1% since 2004, and 10.2% in 2007, and the annual inflation rate was 5.1%.

“The demands for garment export from foreign countries are lower, the profits from the construction sector are diminishing, and the number of tourists drops, so that it is estimated that the GDP growth drops to 6.7% in 2008 and 4.9 in 2009. This drop is estimated to occur, despite expanding taxation. As for the expenses, the negative figures of net exports will increase in 2008 and in 2009, and investments will also decline much.

“There are many challenges affecting four important fields of possible growth. First, the rising price of rice seems to provide many opportunities for Cambodia, a rice exporting country, although the size of response by strong supplies is still unclear, because of the recent drop of price and of agricultural investments, which are still limited.

“Second, the garment sector is affected by the meltdown of the economy in the United States of America, which is a big export target country for Cambodia (though many companies are partly protected, because they serve the low end market with cheap prices); in 2009, the restrictive protection measures by the United State of America and by the European Union towards China come to an end, which is a big challenge, because this country has big garment export capacities.

“Third, the construction sector is declining by 17%, compared to the first six months of last year.

“Fourth, tourism is also affected by the global economy which is weaker than before, and by the border disputes with Thailand. The increase in the number of tourists visiting Cambodia declined from 20% last year to only 13% in the first six months of 2008.

“Commercial recession will further drop in 2009, because the export of garments to foreign countries will decline more. The growth of exports declined from 18% last year to 4% in the first six months of 2008. On the contrary, the growth of imports is strong, reflecting the increase of local demand and higher prices for the import of fuel early in this year. Consequently, the current account deficit is estimated to grow from 8.4% of the GDP in 2007 to 12.3% in 2008.

“Although there is a plunge in exports, the cost of the import of fuel which is now lower than before, and the diminishing local demand seem to make the current account deficit decline to around 8% of the GDP in 2009. Foreign investment is forecast to drop from a high level of 10% of the GDP in 2007 to only 5.2% in 2009, because foreign investors become more careful to invest in different developing countries.

“The pressure of inflation starts to drop. Inflation of the consumers’ price for twelve months went up to the highest rate at 25.7% in May 2008, an increase to the double compared to late 2007, before it declined to 18.1% in October 2008. Food prices have contributed much to the inflation to grow to the high current level, as food accounts for a big share of more than half of the consumers’ price index.

“The increase of local demand is also a factor when banks increased credit in circulation, out of the amount of money held in banks and also related to the flow of foreign capital. The effect of the rising price of fuel imports was decreased by administrative intervention in the price. Even though there is a considerable drop of the price of food and of importing energy, the inflation in twelve months is estimated to decline from 16% last year to only 10% in late 2009.

“The central bank’s restrictive currency policy helps to reduce inflation and financial hazards. The central bank increased the requirement of capital held by the banks in July 2008 to the double amount, setting a ceiling for loans to the real estate sector, increased the required capital holding rate in September 2008 for the third time, and limited the withdrawal of cash from the central bank in October 2008.

“As a results of those measures, the increase in credit taken out by the private sector during twelve months declined from 103% in June 2008 to 82% in September, and it is estimated that it will drop to 42% in December 2008. The stable currency exchange rate, on average Riel 4020 per US$1 in the first six months of 2008, dropped little since the middle of the year, motivating the central bank to stop interventions in the currency exchange market.

“Recent concerns show the difficult balancing of taxation policy. At first, the government responded to the effects of high food and fuel prices by implementing a stricter taxation policy to ease the inflation pressure on the economy which uses the dollar as a measure of reference.

“However, in the meantime in view of some positive aspect of the growth rate and the declining inflation pressure for whatever reasons, the government is changing to new ways, and it is making plans to increase expenses. The taxation recession is estimated to change little at 2.2% of the GDP in 2008 (before considering aid), and the government estimated that it will increase to 3.5% in 2009.

“The government continues its different reform efforts, although there was some decline during the elections. The improvement of the legal framework (especially the adoption of a law about the handling of assistance which makes it easier for companies to use their real estate as collateral for borrowing money), helped to move Cambodia up in an investment report for 2009 (from 150th to 135th, among 181 countries).

“Another important new reform was the institution of an automated system for customs data at the Sihanoukville port in May 2008. In September 2008, the government began to implement the second stage of its Rectangular Strategy by focusing on good governance and rural development again.”

Samleng Yuvachun Khmer,
Vol.15, #3456, 16.12.2008

Newspapers Appearing on the Newsstand:
Tuesday, 16 December 2008

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