Sources: ADB’s Asian Development Outlook database; staff estimates.
By Sam Campbell
Economics Today------------------------------------------------------------------Cambodia’s likely GDP growth, a key indicator of the health of the economy, seems to be very open to interpretation, with estimates for 2009 ranging from a 2.75 percent contraction to the almost unbelievable 6 percent increase still being peddled by some Cambodian government officials.
Predictions made earlier in the year have recently been revised, a reflection of the uncertainty about Cambodia’s immediate prospects, even among experts.
The Asian Development Bank (ADB) lowered its GDP projection to a 1.5 percent contraction for 2009. In a Sept 22 update to the Asia Development Outlook 2009, the ADB said it expected a contraction because of a sharper than expected downturn in clothing exports, construction activity and tourism arrivals. “The economy is now expected to contract by 1.5 percent in 2009, rather than record slight growth [0.5 percent] as anticipated in ADO 2009,” the ADB wrote.
US Department of Commerce data show that Cambodian clothing exports to the US dropped by 27 percent in the first 5 months of 2009 from the corresponding period of 2008, the ADB noted. Order books for clothing in May were significantly lower than a year earlier. Tourist arrivals fell by 3 percent in the first 4 months of 2009 and the decline in construction activity was a consequence of falling FDI, notably from Korea, the ADB added.
The IMF also downgraded its projection after a Sept 9-23 visit from an IMF mission from Washington D.C. to Cambodia. After examining the government’s macroeconomic policy, and meeting representatives of the business community and development partners, the IMF lowered its prediction to a 2.75 percent contraction.
“The global economic crisis is having a larger impact on Cambodia’s economy than previously anticipated,” the IMF wrote in a Sept 23 statement, especially on textiles exports, tourism and construction, which, along with farming, are the four pillars of the Cambodian economy
John Nelmes, IMF resident representative in Cambodia, told Economics Today that Cambodia currently “has three flat tires out of four.”
“The data that we’ve seen confirmed that the impact on three of the four main drivers of growth has been more severe than what we anticipated earlier,” he said Sept 25. “Despite good agricultural production, the other sectors are more than offsetting that.”
Garment export volumes have dropped by slightly less than 15 percent so far this year, he said. The US buys 65 percent of Cambodian garments, but a sharp decline in retail and other consumption in the US has dragged down orders.
The Economist Intelligence Unit (EIU) is forecasting a 1.5 percent contraction in Cambodia’s real GDP this year, a figure the EIU noted is the Cambodian economy’s worst performance since records began in the mid-1990s.
Still, that is actually an improvement on their initial forecast of a 3 percent contraction, revised upward in September. “Cambodia hasn’t reported any new GDP results, but we thought an upward revision was warranted in response to changes to our global forecast, as fiscal and monetary stimulus by the world’s advanced economies means that the global recession is likely to be less severe than we first thought,” Nick Owen, the EIU’s Asia Editor, told Economics Today.
“The garment sector will face weaker demand as a result of the global recession and especially the slowdown in the US, which is Cambodia’s main export market and accounts for more than 50 percent of its export earnings,” Owen said. “Construction activity will slow as the mainly South Korean companies that have financed a series of high-profile property developments in Phnom Penh scale down work amid a global shortage of credit and a slump in property prices. Activity in the tourism sector, a major source of economic growth in recent years, is also set to slow owing to a fall in visitor arrivals, especially from South Korea, Cambodia’s main tourism market.”
Prof. Hing Thoraxy, senior researcher at the Cambodian Institute for Cooperation and Peace (CICP), was more positive, saying he thought Cambodian GDP would grow more than 2 percent. He said that other institutions had used data different from the government’s more accurate data, especially for the construction and tourism sectors. “In tourism, IMF focus only the figures of arrivals by air without focusing arrivals by land route and by waterways, and it’s also the same situation in the construction sector.”
Crumbling Pillars
Tourism air arrivals have fallen by double digits, around 13-14 percent, the IMF said. An increase in land arrivals from neighboring countries wouldn’t make up the shortfall because visitors arriving by land tend to spend less, Nelmes explained. “Tourists that arrive by air are from countries that have higher per-capita incomes and they tend to be the tourists that stay longer and spend more money.”
The tourism sector is “under significant pressure, and we think that in real terms the sector will probably see a decline of around 10 percent this year. Hotels, particularly in the upper end, are facing very low occupancy rates, and some aren’t seeing forward bookings rise as much as they would have expected” for the upcoming high season.
While there should be “a minor bounce back” for Cambodian tourism next year, the global economic crisis (GEC) has “caused a very large negative shock to people’s wealth … with rising unemployment in the US and in Europe.” Amid such uncertainty, consumers cut back on nonessentials such as long-haul vacations, often preferring a ‘staycation’ in their own country.
Cambodia’s tourism sector at least has unique attractions such as Siem Reap’s legendary Angkor temples, which help Cambodia stay attractive as a destination during a downturn. The beleaguered garment sector is not so lucky.
Regional competitors, like Vietnam and Bangladesh, have managed to increase their share of the critical US market, the IMF said, while relatively uncompetitive Cambodia—hamstrung by high production prices and low productivity— remains stable with around a 2 percent market share.
“This, I think, is indicative some of the difficulties that are being faced in the Cambodian garment industry,” said John Nelmes. “Bangladesh is a low cost producer and they’ve managed to increase their market share in the US because of a shift in consumption patterns … and Vietnam is highly competitive; costs of production are lower in Vietnam and productivity is higher. So Cambodia is really facing intense competitor pressures, and those are only going to intensify because of a drop in US demand and global demand, and an excess of global supply.”
Although the IMF “sees some recovery” for the garment sector next year, downward pressures mean it will be “a very challenging time,” Nelmes said.
The construction sector is perhaps in an even more unenviable position.
A number of slowed or postponed large construction projects, constricted bank lending, a sharp fall in property prices and a significant slowing in foreign direct investment (FDI)—from US$815 million in 2008 to US$490 million in 2009—spelled a tough time for construction, the IMF said.
Imports of construction materials, a reliable indicator of overall construction activity, are down around 20-30 percent, said Nelmes. He expected the construction sector to decline by around 8 percent, a sharper contraction than the IMF had predicted in March.
Private spending will inevitably take a hit as a result of turmoil in these key sectors.
The EIU’s Nick Owen said that lower international prices for agricultural commodities will depress farmers’ incomes, while a correction in the inflated property market “will have a negative wealth effect on consumers in Phnom Penh and other cities. Higher unemployment among industrial workers will also restrain private consumption. Gross fixed investment will contract in 2009. As a result of tighter global credit conditions, Cambodia will attract less foreign investment, and domestic savings will be insufficient to sustain previous investment rates.”
A Bright Spot
Despite what he called uneven weather conditions, agriculture is the bright spot of the economy, Nelmes said. He said infrastructure development and a good harvest should mean growth in agriculture of around 5 percent in 2009, and probably the same next year.
But farming in Cambodia is still largely reliant on the weather, a lack of irrigation making growth unreliable and subject to natural disasters like droughts and floods—both seen in parts of the kingdom earlier this year.
In any case, in 2010 all three of the hit sectors—garments, tourism and construction—will rebound back into growth, Nelmes tentatively predicted. In fact, the IMF have raised their prediction for 2010 to 4.25 percent growth (up from March’s 3 percent prediction).
“The contraction in these three key sectors has been sharper so we are expecting next year … we’re going to see a little bit more positive growth.”
However, the risks “in general remain on the downside,” he cautioned, as uncertainties in global economy make recovery fragile and pinned on global stimulus.
The ADB has likewise projected growth to resume in 2010 at about 3.5 percent, as a gradual recovery in the global economy stimulates clothing exports and tourism. But the ADB’s prediction is also dependent on a global recovery that “should provide support for growth in incomes and consumption.”
Th EIU’s Owen said that making predictions about Cambodia is made more troublesome by the lack of reliable data. “Concerns over the reliability of reported GDP results and concerns over the independence of the statistical authorities from government also complicate forecasting,” he said. “Some forecasters may seek to second-guess the authorities, predicting positive GDP growth this year, when merchandise exports, investment approvals and other indicators make a contraction seem all but certain.
Forecasting would be more reliable if the authorities reported GDP and other economic results more frequently, he said. More comprehensive reporting of economic performance would also be helpful.”
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by Patrick Falby
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