Economy remains in peril: IMF

Thursday, 10 December 2009
By Steve Finch
Phnom Penh Post

Banking and garment sectors must evolve, organisation says

Photo by: SOVAN PHILONG
Customers wait to be served last month at the head branch of Canadia Bank in Phnom Penh. The IMF warned Tuesday that banks are still hiding bad loans, which are exacerbating structural risks in the financial sector.

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The outlook for Cambodian garment exports is clouded by structural changes.

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Growth on the slide

The following data gives the change in GDP:
2006 + 10.8pc
2007 + 10.2pc
2008 + 6.7pc
2009 - 2.75pc*
2010 + 4.25pc*

* indicates a projection
Source: IMF

THE International Monetary Fund issued a stark warning to Cambodia’s struggling garment industry and financial sector in a report late Tuesday that highlighted persisting structural problems. The organisation said that in 2009, Cambodia will experience its first recession in years.

Following consultations with the Cambodian government that ended on November 18, the IMF reported that the Kingdom’s banking sector remains vulnerable despite increasing liquidity after a credit squeeze that started a year ago.

“While banks’ liquidity has improved, staff noted that bank balance sheets have further weakened and credit risks have risen sharply over the past year,” the report said.

The report pointed to rising rates of non-performing loans (NPLs) – which hit 5.25 percent in June – as a continuing concern for the industry, “but the figures officially reported by banks likely fail to capture the true extent of the problem”, it added.

The National Bank of Cambodia (NBC) has increased oversight of the sector and conducted spot checks to complement more-stringent classification rules, the IMF said, but a shortage of resources has prevented adequate supervision.

More damning was the report’s suggestion that the central bank has not shown sufficient willingness to clamp down on the banking industry, a sector that has continued in some cases to report zero NPLs.

“While the authorities agreed on the need to deal firmly with problem banks, they preferred a more gradual approach,” the IMF said, without naming the lenders that continued to underreport bad loans.

“The NBC has taken measured steps to deal with problem banks, with much more forceful action needed to reduce systemic risks,” it added.
NBC officials were unavailable for comment Wednesday.

Stephen Higgins, CEO of ANZ Royal, agreed with the IMF that the central bank had made progress, adding that banks in Cambodia remain well-capitalised compared with other markets, a factor that helps to combat the threat of bad loans.

“The NBC has already been quite strict in enforcing the new asset-classification regime, and I think there is no doubt that their supervision capacity is stronger,” he said Wednesday. “I think the NBC should be applauded for the steps they are taking.”

The IMF said that profitability of banks will continue to be adversely affected while increasing deposits remain with the central bank instead of being offered to lenders, but Higgins said demand remains low and quality borrowers lacking.

ACLEDA Bank profits soared more than 72 percent in the third quarter compared to the previous period, and ANZ Royal saw profits rise 25 percent in the same quarter over the period from January to March.

But the persistent lack of openness in the sector means other banks have not broken down their financial results in public.

The IMF maintained its prediction of a 2.75 contraction in GDP for this year, citing the continuing problems facing the tourism industry, property sector and, most notably, garment exports in what is set to be the worst economic performance by the Kingdom in recent years. Cambodia saw double-digit GDP growth in 2006 and 2007, and 6.7 percent last year.

The garment sector, the country’s primary export industry, remains mired in a downturn with little sign of recovery given the underlying structural issues that have kept costs high and maintained an enduring “productivity gap” with the rest of the region.

“The outlook for Cambodian garment exports is clouded by structural changes in the market, in addition to lagging competitiveness,” the IMF said. “The global recovery is not expected to be consumer-led, dimming prospects for 2010.”

Statistics compiled by the US Office of Textiles and Apparel show that Cambodia’s garment downturn in the first eight months – a 23.1 percent decline in exports to its primary market the United States – was more severe than the global industry average of a 14.3 percent drop, showing that the Kingdom had failed to compete during the global economic crisis.

Bangladesh, by contrast saw exports rise 4.7 percent, and neighbouring Vietnam’s shipments to the US dropped just 1.2 percent over the same period.

“We have always tried to address the issues of costs and productivity; however … some of these issues, such as infrastructure deficiencies, are not within our control and take a long time to resolve,” Ken Loo, secretary general of the Garment Manufacturers Association of Cambodia (GMAC), said Wednesday. “The issue of the price of electricity is a case in point.”

The IMF report noted that Cambodian electricity cost US$0.22 a kilowatt-hour versus just $0.07 in Vietnam.

Garment bulk buyers in Taiwan and Hong Kong, for example, sourced from “the most cost-efficient” factories first, the report said.

“Declining orders [during the crisis] have left fewer allocated to garment manufacturers with relatively high unit costs and compress profit margins for all.”

Cambodia is unlikely to benefit from reduced tariffs on its garments exported to the US anytime soon, the IMF predicted, given that relevant free trade agreements are currently stalled “due to political considerations”, including the Doha round.

The Kingdom is subject to average tariff of 16 percent on shipments to the US.

Loo said that although GMAC continues to work with the government and relevant stakeholders in a bid to fix underlying weaknesses in the sector, the future remains unclear.

“Without … cooperation from all parties, it would be extremely difficult for us to recover from this current economic crisis,” he said.