As Recovery Takes Hold, Risks Mount, ADB Says

Though the beginning of Cambodia’s economic recovery appears to be well under way, a high current accounts deficit and below-average foreign reserves are raising doubts about stability, the Asian Development Bank said yesterday.

“Except for Cambodia, Lao PDR, and Vietnam, the external position of the region’s economies remains strong,” the ADB said in a periodic report on Asian economies. “High current account deficits and low foreign reserves in Cambodia, Lao PDR, and Vietnam are causing concern.”

Over time, these factors can increase debt levels and create vulnerability to economic shocks, according to the ADB.

The report shows that between June 2009 and March 2010, the government’s foreign reserves rose 15 percent to $3 billion. In Indonesia, by contrast, foreign reserves rose by 25 percent during the same period to $69.2 billion.

The government’s fiscal deficit is also expected to rise during the course of the year from 5.9 percent of GDP in 2009 to 7.4 percent of GDP in 2010, according to the report. The Finance Ministry announced Monday it expected public spending to rise by 50 percent next year.

However, the government has said it will tighten monetary and fiscal policy to reduce the deficit to 5.3 percent amid concerns of inflationary pressures and too much domestic financing of the budget.

“On balance, the government has been responsive to the challenges posed by the financial crisis and has been able to maintain relative stability in the macro-economy,” said Peter Brimble, ADB’s senior country economist in Cambodia. “In Cambodia’s case, indications of growth in exports, a recovery in tourism, and increases in foreign direct investment indicate that it may indeed be time to begin to draw down the economic stimulus program.”

Nonetheless, Mr Brimble said that the narrow base of Cambodia’s economy would probably see the recovery move at a slower rate than elsewhere in the region.

“Cambodia was affected particularly strongly by the financial crisis compared to neighbors such as Lao PDR, with significant revenues from mining and hydro-power, and Vietnam, with a much larger domestic economy,” he wrote in an e-mail. “As such, it is likely that economic recovery will take hold a little slower.”

The ADB’s GDP projection of 4.5 percent in Cambodia is considerably lower than elsewhere in the emerging East Asia region, which is expected to grow by 8.1 percent this year.

Though figures for this year are not yet available, Cambodia’s debt mounted during last year’s economic crisis, when additional spending measures were introduced in order to cushion Cambodia from the effects of the global economic crisis, which saw the economy contract by about 2 percent.

Public debt in Cambodia rose from 16 percent of GDP in 2008 to 22 percent of GDP last year. It was still unclear yesterday whether the extra spending planned by the government will be sourced from debt accumulation or increased tax revenues.

Mr Brimble said that according to the latest government estimates, total external debt in 2009 was $2.85 billion, or 27.5 percent of GDP. This is expected to increase to $3.35 billion, or 29.7 percent, this year.

The ADB report also said that both tourist arrivals and garment exports were expected to recover from last year’s lows. According to preliminary figures from the Commerce Ministry released earlier this month, garment exports in the first five months of this year jumped by 14.1 percent to $1.01 billion, building on export levels recorded between January and April during which garment exports rose by 11.41 percent.

Visitor arrivals have risen by 11.53 percent in the first five months of the year to more than one million, while air arrivals have risen by 12.17 percent.

 

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