Watching from the sidelines

Wed, 26 August 2015 ppp

Ananth Baliga

An investor looks at screens showing share prices at a securities firm in Qingdao, in eastern China’s Shandong province yesterday. AFP

As Chinese markets plunged 8.49 per cent on Monday sending jitters across global indices, industry insiders yesterday were cautious about its potential spillover effects into the Kingdom, suggesting a wait-and-watch approach to its impact on foreign investment, tourism and the construction sector.

Jay Menon, lead economist for trade and regional cooperation at the Asian Development Bank, said the depreciation in the Chinese yuan and the GDP slowdown in China – one of the reasons for the Shanghai stock exchange plummeting on Monday – will reverberate through the region.

“For Cambodia, the impacts may come mainly through reduced FDI inflows from China, as well as from tourism,” Menon said.

Given Cambodia’s regional integration, Menon said an indirect effect will be seen from the slowing down of neighbouring countries, as well as from one of the Kingdom’s major trading partners – the US.

“Also, globally if the US recovery is affected, then this could spill over to Cambodia given its continued reliance on the US as an important export market,” he added.

Cambodia is exposed to large Chinese infrastructure investments, like hydropower dams and roadways, while at the same time private sector investments from China are in several key sectors, including agriculture, real estate and garments.

While the Shanghai Composite Index continued its slump yesterday, ending 7.63 per cent lower than its Monday closing, other indexes across most global markets bounced back from their respective slides.

At the time of print, US stocks had rebounded strongly from Monday’s scare, with the Dow Jones Industrial Average up 2 per cent in early trading.

A 40 per cent drop in the Shanghai exchange from its peak two months ago is “common sense coming back into the market”, given the strong gains made 12 months prior, said Stephen Higgins, managing partner of Cambodia-based investment firm Mekong Strategic Partners.

Higgins said China’s investments in Cambodia were generally large, long-term infrastructure investments, which were unlikely to be affected by “short-term movements in either the currency or the stock market”.

“Longer term, if the economic fundamentals in China do deteriorate to a significant extent, there may be a genuine impact on Cambodia, but it’s too early to make that call yet,” Higgins added.

China’s much talked about 3 per cent currency depreciation over the past two weeks, he said, was an issue affecting several economies in the region.

The Thai baht has lost more than 10 per cent in the past year and the Malaysian ringgit is down 25 per cent.

Even a slowdown to 6.5 per cent growth in China was still healthy enough to suggest that there would be investment opportunities stemming from the world’s second-largest economy.

“As we’ve seen with Japan over the past couple of decades, slower economic growth at home doesn’t stop a country from investing overseas,” Higgins said.

Credit rating firm Moody’s released an announcement yesterday maintaining its B2 rating for Cambodia.

Moody’s said that Cambodia’s rating was supported by a “healthy” growth outlook and “modest” debt, low per capita income and weak governance.

The report goes on to say that China’s slowdown could have spillover effects into Cambodia, as the Kingdom receives significant benefit from Chinese trade, concessional loans, and investment.

“Moody’s central economic scenario is that China’s real GDP growth will slow only gradually, to a 6.5%-7.0% range this year and next, which suggests that the repercussions for Cambodia, if at all, will be limited” the report read.

“Nonetheless, there are several channels through which the economy could be impacted.”

While Cambodia will not face a direct impact to its economy from the massive slide in Chinese markets, indirect effects could be seen in the key sector of tourism and future FDI inflows, said Hiroshi Suzuki, lead economist at the Business Research Institute for Cambodia.

“Cambodia is a highly dollarised economy. It means that the Cambodian currency is appreciating [compared] to those of China and neighbouring rival countries,” .

“This could be some disadvantage for investment decision making to export-oriented sector.”