IMF Cuts 2011 Growth Outlook to Below 6%

Predicts growth of 7.25 percent in 2012, warns of credit risk in banking sector

Damage to Cambodia’s rice crop from widespread flooding earlier this year will likely cause economic growth to fall below 6 percent, according to the Inter­national Monetary Fund (IMF), which yesterday offered the lowest gross domestic product prediction so far.

“In our current assessment, overall GDP growth in 2011 would be slightly below 6 percent, but this assessment is subject to further evaluation, as we are in the early stages of assessing the full impact of the floods on agricultural output,” said Olaf Un­teroberdoerster, deputy division chief for the IMF’s Asia and Paci­fic department, at a news conference in Phnom Penh.

In a statement, the IMF chose to only provide a fixed estimate on GDP growth, excluding the country’s flood-hit agricultural sector. Not accounting for the damage caused by the floods, the IMF said that economic growth would reach 7.5 percent this year, the highest rate in four years. The real figures, however, show how big of a blow flooding had on the economy this year, and how well other sectors of the economy are performing in comparison.

Asked why the IMF had decided to only provide a GDP figure excluding production in agriculture, Mr. Unteroberdoerster said: “Under the current circumstances, with the floods and the fact that agricultural output is more volatile, we consider that a measure of non-agriculture GDP growth is a better barometer of the underlying strength of Cambodia’s economy.”

Cambodia’s agricultural sector accounts for roughly a third of the economy and nearly 80 percent of the country depends on agriculture as a source of revenue.

Assuming that the agriculture sector fully recovers, economic growth is predicted to reach 7.25 percent in 2012 and “move toward a stronger medium-term potential of 7-8 percent,” the IMF said in the statement.

“Buoyant garment exports, increasing tourist arrivals, and a gradually-improved real estate sector have supported a broadening recovery,” it said.

The expectations for economic growth stands in contrast to the government’s own outlook, which has estimated growth this year to be 6 percent. The Asian Development Bank has projected growth of 6.8 percent.

The press conference, organized by the IMF, was held at the end of a 10-day mission by economists from the Fund in Washington, which publicized its findings of the so-called Article IV discussions – an annual assessment – with the government.

As part of its assessment of the economy, the IMF concluded that the government has limited fiscal space due to extra spending that was carried out during the economic crisis in 2009. To increase that space, the IMF said that further efforts must be made to increase revenues. Although the government has announced a new tax on property, it has so far been unable to take in new revenues due to difficulties collecting taxes.

The IMF also said that the government should make more effort when providing investors here with timely and accurate statistics on the economy. Investors say they are turned off investing in certain sectors because of the lack of statistics available.

“Investors have a great problem investing in Cambodia because of the lack of information,” said Christophe Forsinetti, CEO of the venture capital firm Devenco, who was present at the IMF’s meeting with the private sector this week.

For example gathering statistics on consumer demand or average wages of the middle class is still difficult.

“If you’re going to build a business you need all this and we don’t have it,” Mr. Forsinetti said, adding that many businesses in the services and retail sectors remained underdeveloped for this reason.

The result is that there are not yet any large-scale institutional investors in Cambodia. Most investors are still those willing to take high risks with the incentive of getting in earlier and reaping high returns on the back of rapid economic growth.

Mr. Unteroberdoerster also said that the IMF had recommended the government further reduce its budget deficit, which is estimated to reach 3 percent this year.

“We believe that there needs to be further progress in bringing the deficit down in fiscal consolidation,” he said, adding that the government was making some inroads into directing more funding toward key areas such as health and education.

Nevertheless, the budget is still heavily weighted towards the Ministry of Interior and Defense.

Mr. Unteroberdoerster also said that credit growth in the banking sector should not speed up any further, having grown by 32 percent as of the end of October. The IMF predicts lending nationwide will grow by 35 percent by the end of the year.

“The current high growth of credit warrants monitoring,” he said. “Thirty-five percent is close to the pre-crisis boom. If you take that yard stick we think that this is about to reach Cambodia’s speed limit.”

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