According to our latest Regional Economic Outlook Update (October 2014), Asia’s near-term growth prospects remain solid amid downward revisions for other regions. Despite a mild slowdown earlier this year, Asian economies are expected to grow at 5.5 per cent in 2014 and 2015, broadly in line with the pace of the last couple of years. With some exceptions, the inflation outlook should remain benign across most of the region. This regional outlook bodes well for Cambodia’s prospects, especially in light of its increasing regional integration.
However, downside risks have increased, but so has resilience, including in countries that had been most affected by the period of heightened volatility that followed the market’s reaction to the talks of reduced bond purchases by the US Fed last year. Yet, further action is needed both in the region and in Cambodia to strengthen policy buffers and address medium-term challenges to stability and growth.
What is driving Asia’s solid growth outlook? First, stronger global growth should help propel exports across most of the Asia and Pacific region. In fact, after a weak first quarter, export growth has started to gather steam, and with the strengthening growth in the United States and the expected recovery in the euro area, the export momentum should remain relatively strong.
Second, global financial markets have rallied, helped by expectations of higher growth and increased risk appetite. This environment has also contributed to greater capital flows into Asia, which have contributed to higher stock prices, lower spreads, more favourable borrowing conditions for corporates, household and governments, and strong credit growth. Policies in Asian economies have also been generally supportive – in particular, real short-term interest rates remain typically below their pre-global financial crisis levels. These factors should help support robust domestic demand growth going forward.
The favourable outlook for the Asia and Pacific region masks important sub-regional differences. In China, growth should remain strong in the near term, helped by the recent stimulus measures. We expect some gradual moderation to a more sustainable growth path throughout next year, as the ongoing slowdown in the real estate sector and efforts to curb credit growth and rebalance the economy slow investment growth. In Japan, Abenomics is still providing a lift but growth should come in slightly below 1 per cent this year and next, with rising private investment, helped by the weaker yen, higher stock prices and rising corporate profits, partly offsetting the effects of fiscal consolidation on domestic demand. In India, activity has picked up strongly and the growth momentum should build on rising business confidence, investment, and exports. ASEAN economies should also see robust growth in 2014 and a slight acceleration in 2015, partly reflecting their exposure to the stronger global economy.
This relatively favourable regional backdrop coupled with an improving domestic demand is expected to support Cambodia’s growth outlook. In Cambodia, growth is projected to be above 7 per cent this year and edge up to 7.5 per cent over the medium term with needed support from strong reform efforts.
Despite the solid outlook, Asia continues to face significant risks to stability and growth. In the near term, investors could overreact to rising US interest rates and pull money out of the region, leading to sudden spikes in financial market volatility, higher borrowing costs and, ultimately, lower growth. Higher corporate leverage and rising household debt could also amplify the adverse effects of higher interest rates on investment and growth. Finally, an escalation of geopolitical tensions could hurt exports and activity more broadly.
What is the role for policies in the region? Recent actions taken by Asian policymakers have boosted confidence and improved resilience in several economies, including India, Indonesia and Malaysia.
But addressing medium-term risks calls for a renewed push for structural reforms across the region, which has seen a steady deterioration of its long-term growth outlook in the past few years. Such reforms would not only make Asia’s growth stronger and more sustainable, but would also lower its vulnerability to further growth disappointments and financial market shocks coming from the West.
What does this regional outlook mean for Cambodia? The main takeaway for Cambodia from the latest Regional Economic Outlook Update is to take advantage of the regional economic tailwinds to push through the reform efforts. As the experience of other developing and emerging market economies have shown, a favourable growth environment often makes reform efforts easier to implement.
On specific policy measures, the government’s emphasis on improving its revenues and delivery of public services, especially in education and health is both timely and necessary to make growth more inclusive and sustainable in the medium term. Continued efforts to increase domestic revenue and improve spending efficiency would help finance Cambodia’s vast development needs in soft and hard infrastructure while building increased fiscal buffers, critical for an open and highly dollarised economy like Cambodia to address any external shocks.
A broader civil service reform is also crucial to accompany the public wage increases to avoid jeopardising fiscal consolidation. Given the rapid growth of the banking system and microfinance institutions in Cambodia in recent years, a key challenge is to strike a balance between financial access and financial stability, as highlighted by the first National Bank of Cambodia Macro-economic Conference in July. This may require a more sustainable pace of credit growth, continued improvement in regulation and supervision and development of money and foreign exchange markets.
No doubt Cambodia’s growth performance so far has been impressive. But the policy challenges evolve as countries undergo economic transitions. Going forward, reform measures need to support a growth strategy that would not only attract FDI but also, equally importantly, encourage domestic investment to support economic diversification, job creation and fulfill the aspirations of Cambodians for a more inclusive growth.
Faisal Ahmed is the IMF’s resident representative in Cambodia.