After a decade of high GDP growth, Cambodian economy must diversify to weather current global economic storm, says new World Bank report

Photo by: HENG CHIVOAN

A Phnom Penh garment factory. The World Bank said Cambodia must diversify to sustain growth.

State of the economy

A World Bank report paints a picture of short-term weakness and medium-term opportunity.

Narrow economic focus

• Garments, tourism, construction and agriculture have driven Cambodia's growth, and all except agriculture are vulnerable to the slowdown.

Over-dollarisation

• Ninety-four percent of GDP is in dollars, which minimises currency fluctuations, but limits the scope of monetary and exchange policy.

Industrial growth

• Industry growth has averaged 16 percent per year, with garments leading the way at 28 percent growth per year. This sector is especially vulnerable to the slowdown.

Low agriculture yields

• Yields have improved, but still lag behind regional competitors. Rice yields per hectare stand at 2.6 tonnes, versus 3.5 to five tonnes regionally.

FDI growth

• Foreign direct investment skyrocketed tenfold between 2003 and 2007, but investment was concentrated in a narrow range of sectors and remains vulnerable to the slowdown.

CAMBODIA is highly vulnerable to the global economic crisis, despite strong growth over the past decade, according to an extensive World Bank study released last week.

The assessment comes in stark contrast to the views of many analysts in and outside the government who have said previously that the country is relatively sheltered.

"We actually think [the Cambodian economy] is quite exposed.... This year, access to capital could be much lower. Therefore, Cambodia is going to be exposed to the crisis," said Stephane Guimbert, the World Bank's senior country economist, who was instrumental in writing the report.

He emphasised that the medium- and long-term outlook is positive, but that the shortterm impact of the crisis will be strong.

"Economic growth of the past decade is a remarkable achievement, but it is unlikely to be sustainable," reads the 99-page report, which Guimbert said took about one year to prepare. The report says that only four sectors have driven growth, three of which are under severe pressure from the slowdown.

"Garments and tourism will directly suffer from the global slowdown - especially in the US for garments - and South Korea, for tourism. Construction was also weakening and will further slow down as foreign investment in real estate slows down," says the report.

Garments and tourism will directly suffer from the global slowdown.

Fall from grace

One of the main areas of concern was banking, which has been seen as a bright spot in an otherwise gloomy economy.

"Reported performance of the banking system appears to be in line with or better than most banking systems - but this might be misleading," says the report.

The report raises a red light about bank transparency, auditing, accounting supervision, and nonperforming loans, pointing to two unnamed banks as "a major concern" if property or the broader economy heads into a downturn.

Welcome criticism

The report was welcomed by the private sector and opposition sources.

A source in the banking industry said that the report raises much-needed alarm bells about the financial sector.

"The National Bank of Cambodia has sensible regulations in place that are not enforced. They just don't have the resources. There has been about a 60 percent increase in banks over the past year, but resources certainly have not grown 60 percent," said the source.

"Not all banks are using credible methods.... Some banks have stuck to the letter of the law, rather than the spirit of the law.... If a loan looks like it is in default, they grant a new loan."

These weaknesses could have wider economic implications if the property crisis worsens, said the source.

Opposition lawmaker Mu Sochua said that the report's criticisms are no surprise.

"We face a crisis that will take the country deep into a well, and the financial institutions have a closed-door meeting.... We've known about this for 10 years.... There is nothing new here," she said.

Guimbert said the World Bank may downgrade its November prediction of 4.8 percent growth for the Cambodian economy.