A Change of Guard

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Tuesday 29 December 2015

Risks Remain Despite Cambodia’s Robust Growth: IMF Representative

Risks Remain Despite Cambodia’s Robust Growth: IMF Representative 

Yong Sarah Zhou, IMF’s resident representative in Phnom Penh, spoke with VOA Khmer’s Aun Chhengpor and Oum Sonita recently about the reasons for the country’s healthy growth, as well as some of the risks on the horizon. (Photo: Aun Chhengpor/VOA Khmer)

According the International Monetary Fund (IMF), Cambodia’s economy has grown by 7.0 percent during 2015.

[Editor’s Note: According the International Monetary Fund (IMF), Cambodia’s economy has grown by 7.0 percent during 2015. The fund predicts that the rate of expansion is set to continue, with 7.2 percent annual growth expected until the year 2020. The IMF’s resident representative in Phnom Penh, Yong Sarah Zhou spoke with VOA Khmer’s Aun Chhengpor and Oum Sonita recently about the reasons for the country’s healthy growth, as well as some of the risks on the horizon.]

The Cambodian government regularly touts its success in managing the country’s macroeconomic policy. Does the IMF agree that the economy is well run?

Cambodia’s robust economic performance can be attributed to its hard-won macroeconomic stability, meaning low inflation, stable currency balance, and the modest fiscal deficit. Beyond that, strong growth is also linked to its efficiency improvements, supported by open economic regime, its location in the world’s fastest growing region, and its favorable population dynamics. Those factors helped Cambodia to become one of the world’s fastest growing economies in the past two decades. Also, there are new challenges facing Cambodia in the next generation until the new phase of rapid transformation and becoming an emerging market economy.

Could you explain the IMF’s analysis that the garment, construction and real estate sectors are the three key pillars of Cambodia’s economy?

Garment exports are supported by Cambodia’s relatively low wages and its preferential access to the European Union markets in the Everything But Arms agreement (EBA). So Cambodia’s garment export enjoys the tax-free treatment for exporting to the EU. The robust real estate and construction activities are driven by positive investor confidence, including the prospects of the integration with the ASEAN, which resulted in higher demands for condominiums and retail offices. Also, the real estate and construction booms are supported by very strong domestic demands from the growing young generation needing houses. Beside these sectors’ performances, robust growth is also supported by the rapid credit growth.

Each of these three sectors carry an element of risk, with frequent labor issues in the garment industry, and talk of a bubble in the real estate market, which is also linked to construction. Is it fair to say that Cambodia’s economic growth is still fragile?

First, the stronger dollar and the projected growth slowdown of the E.U. could reduce garment exports, which occupies some 70 percent of the total exports of the economy. And the competitiveness can be further eroded with wage increase, surpassing the productivity improvement in the garment sector. The uncertainties related to the wage policy negotiation and the labor disputes could further disrupt the garment production and affect investor sentiment. In addition, the rapid credit growth, increasing external barriers to the companies that are based on the real estate and construction booms, actually imposes rising financial sector vulnerabilities.

Some suggest that despite strong economic growth, the gap between rich and poor is widening, with those who escape severe poverty remaining vulnerable. How does the IMF advise the country on this?

For Cambodia, our advice is focused on an inclusive growth path, including intensive resource mobilization or revenue collection, and financial investment in education, housing and infrastructure. Our advice also emphasizes improving composition efficiency of public expenditure. And also, securing financial sector stability, increasing effectiveness of monetary policy, and implementing structural reform to promote structural transformation and diversification to reduce poverty.

Some people are concerned about increasing credit among those with low financial literacy. What do you think?

For us, we don’t yet have the data to show the exact share of the credit allocated to those with low financial literacy. We don’t have that data. Cambodia’s current rapid credit growth is broad-based across commercial banks, as well as micro finance institutions, whose customers mainly center in the rural areas, tending to have low financial literacy. IMF is actually playing an important role in promoting financial inclusion in the country. They improve the people’s livelihoods, reduce poverty, and promote economic development.

China is Cambodia’s main donor and investor. Is it possible that the slowdown of the Chinese economy poses a threat to economic growth in Cambodia?

In the longer term, China’s transition to a slower yet safer and more sustainable growth path would benefit global growth and [global] stability. But in the short term, it’s likely an uneven impact as we have seen recently that the commodity exporters and those who export final products directly to China have suffered negatively from China’s transition. On the other hand, as China moves up its supply chains, countries with low labor costs, like Cambodia, could actually benefit from China’s exit from labor-intensive goods by capturing those opportunities. As we mentioned before, Cambodia has to improve its competitiveness. As Cambodia’s main creditor and investor, a weaker-than-expected slowdown China may actually impose negative impacts on FDI [foreign direct investment], tourism, and banking channels.

With the ASEAN Economic Community officially beginning at the end of the year, is the Cambodian economy at risk as it becomes part of a larger market of more than 600 million people?

The risk will actually rise from constraints behind the borders. That’s why Cambodia has to work to address the various obstacles related to its competitiveness and the business environment. Cambodia can promote competitiveness by lowering its overall costs of doing business by upgrading its infrastructure, reducing transportation, energy and logistics costs, fixing the skill gaps, improving legal and regulatory environment in the public services.

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