Cambodian Economy Grows at 6.5 % in 2008: 4.75% predicted in 2009

BY SOY SOPHEA

The global slowdown will probably mean lower foreign investment in Cambodia and its economic growth is likely to slow to 6.5 percent this year and 4.8 percent in 2009, according to David G. Cowen, Deputy Division Chief of Asia and Pacific Department of the International Monetary Fund (IMF).

Cowen said garment exports and tourist arrivals are slowing, reflecting a rapid downturn in the economies of key trading partners, as well as illustrating the strain on Cambodia’s competitiveness. This is due in part to the strength of both the riel and U.S. dollar, operating in a situation of tighter global liquidity conditions.

“We see that the external conditions will continue to be very challenging. We are expecting foreign investment to be lower next year and that is one of the reasons we are forecasting a lower growth rate in the construction sector,” he said during a press conference at the end of a visit in Cambodia from October 23 to November 7.

Following several years of very strong performance, Cambodia’s economy faces a number of challenging headwinds, the IMF noted that after a robust start, growth momentum eased over the course of 2008, and more recently, the economy has began to experience adverse effects as the implications of global financial stress are felt.

“These factors are expected to lead to an easing in growth to 6.5 percent in Cambodia, slowing to 4.75 percent as 2009 progresses.” he said at the press conference on November 7, in Phnom Penh.

Cowen, who met with Cambodian economy officials, private sector delegates, donors, NGOs, and Labor unions, as well as the National Bank of Cambodia, said that Cambodia had attracted around $750 million in foreign direct investment (FDI) in 2008 but the figure was likely to be 25 to 30 percent lower next year.

Garments brought in $3.8 billion last year and the country attracted 2.1 million tourists, helped by the return of relative political stability.

Hang Chuon Naron, Secretary General at the Ministry of Economic and Finance, said that the economic growth forecast in 2008 was produced by his ministry with all cooperation form the IMF.

“We have predicted economic growth would stand at 7 percent in early this year, but this figure has been revised down to 6.5 percent due to the global financial crisis. The Royal Government of Cambodia has accepted the forecast,” he told the Cambodia Weekly by telephone after IMF released the statement during the press conference on November 7.

The Secretary General continued to say that Cambodian economic growth for 2009 is expected to grow at 4.45 percent. However, he said that the next year’s economic forecast is merely a prediction. “Practically, it will either increase or decrease, depending on the performance of the big players in the global economy.”

However, Naron said that a reversal in these factors in the second half of 2008, led by lower oil prices, should result in a decline in headline inflation from a peak of about 26 percent in May to around 15.50 percent by year’s end. With domestic demand pressures projected to ease, inflation should continue trending downward next year.

Cowen added that the external current account deficit (including official transfers) is estimated to have widened significantly in 2008, to 12.25 percent of GDP, reflecting the impact of higher oil prices and strong imports fueled by domestic demand.

He continued to say that given strong inflows in the first half of 2008, gross international reserves rose to about $2.2 billion at end of September 2008. For 2009, the current account inflows account for around eight percent of GDP because the impact of lower oil prices slowing import demand more than offsets weaker garment exports and tourism.

However, the visiting mission also commended the authorities for maintaining a policy of steady budget implementation, particularly through the election period.

Fiscal policy discussions centered on the appropriate response to the projected slowdown in economic activity in Cambodia. The mission considered that, given weakening growth prospects and a projected reduction in inflation pressures, some countercyclical easing of fiscal policy would be warranted in 2009.

The National Bank of Cambodia responded appropriately by doubling the reserve requirement on foreign currency bank deposits to 16 percent in June. The mission emphasized that firm enforcement of prudential regulation would help to safeguard Cambodia’s banking system.

In its latest forecast for world economic growth, IMF sharply revised its growth projections downward, saying that “global activity is slowing quickly.”

“Prospects for global growth have deteriorated over the past month, as financial sector de-leveraging has continued and producer and consumer confidence have fallen,” according to an IMF World Economic Outlook report, published on November 6.
IMF also said that world growth is projected to slow from five percent in 2007 to 3.75 percent in 2008 and just over two percent in 2009, with the downturn led by the underperformance of advanced economies.