With Cambodia heavily reliant on the dollar, it’s important to watch its recent rise and fall
HERE we go again. What’s happening to the value of the US dollar? At the end of 2008 and earlier this year the dollar saw strong gains compared to the currencies of most trading partners of the United States. Against the euro, the greenback has risen and then fallen significantly against major global currencies – the yen, Singapore dollar and Australian dollar in particular. So what?
Well in September, the International Monetary Fund (IMF) released its annual Article 4 assessment of the Cambodian economy. After more than five years of expansion, the economy this year is expected to contract, with GDP forecast to drop 2.75 percent compared to 2008.
The economy has been hit on several fronts, and the IMF reported that in real terms, which considers the purchasing power of the currency, the riel has depreciated 20 percent over the past 12 to 24 months.
Cambodia relies heavily on importing essential business and personal goods, and many of these items are paid for in dollars. Therefore, if the dollar is buying less yen, euro or Australian dollars, imports will become more expensive and importers will need more dollars to buy the same quantity of goods.
Furthermore, our spending power when travelling abroad is also diminished. Holiday spending in Europe, school fees in Singapore, an investment property in Australia will all cost more as the dollar loses value.
There can be a positive flip side though. Anything the country exports should be more competitive in export markets, as foreign buyers need less of their local currency to buy items priced in dollars. This should offer a boost to the Cambodian export sector, which would subsequently appear better value than those of say Thailand or Vietnam – dollar for dollar – as these neighbouring countries rely less on the greenback. Similarly, foreign holidaymakers will be able to make their budgets stretch further, as their foreign currency will buy more in Cambodia, thus making Cambodia a more attractive holiday destination.
Meanwhile, analysts suggest the dollar may continue to lose value as the US economy struggles to recover from the financial crisis. The US government has injected substantial liquidity into the market to provide a foundation for market confidence, money it could ill afford to provide, but which has been imperative for economic activity.
Locally, it is imperative to be aware of the impact of currency movements against the dollar, given how much we rely on this currency in our day-to-day business and personal lives. Traders should review whether import costs could be reduced through the use of an alternative currency, particularly that of the source country.
Exporters should seek to increase penetration into target markets, as their product may be cheaper compared to other exporting countries.
Understanding what the risks are and how to manage them should provide a level of protection against adverse movements in the dollar. At the very least, keeping an eye on what is happening to the value of the dollar is absolutely essential, especially in a highly dollarised economy.