Cambodia and the Greater Mekong Sub-region (GMS) have been given a positive outlook from ANZ Bank, despite concerns for fellow Asian economies if the US Federal Reserve increases interest rates in the near future.
Justin Fabo, senior economist at ANZ, presented the bank’s 2014 Global and Regional Outlook in Phnom Penh report on Thursday. Falling oil prices, a young population and manufacturing shifting away from China were all cited as the region’s biggest advantages.
“For Mekong region countries, clearly where it sits and very favourable demographics mean there is massive potential here for trade and foreign investment,” Fabo said, adding that GM governments need to continue improving legal frameworks to maintain attractiveness to private investors.
“And Asian nations, being big importers of oil, are big winners of the decline in oil prices, however that is likely to only be a temporary trend,” Fabo explained.
The Australian bank predicts that GMS nations are entering Asia’s “last wave of industrialization” with the 2015 ASEAN Economic Community promising to accelerate the process by combining the regions labour markets.
“The economic potential of the Greater Mekong is still largely untapped,” the ANZ outlook states. “The rapid emergence as a key manufacturing hub will be the most immediate [economic advantage].”
ANZ warned, however, that Asian economies remain vulnerable to interest rate increases by the US Federal Reserve.
“Higher US interest rates should weaken Asian currencies. A risk is that it [US interest rate increases] lifts market volatility and liquidity dries up, leading to less capital flowing to Asia,” ANZ’s December 4 outlook states.
The US Federal Reserve, in its continued effort to strengthen household spending since the 2007 global financial crisis, reaffirmed its 0-1/4 per cent interest rate target for the final quarter of 2014. ANZ,
however, is predicting a gradual increase in the near future.
But Cambodia could be immune to US interest rate hikes, ironically due to its immaturity in financial markets, according to Grant Knuckey, CEO of ANZ Royal. “The real point there, in terms of relative immunity, is that investment flows into Cambodia are all direct investment such as establishing companies and productive assets,” Knuckey said.
“There is no ‘portfolio investment’ flow here from overseas such as investment into stocks and bonds, because none exist to buy. In parts of Asia with large portfolio flows – for example Thailand and Indonesia – the impact of US interest rate changes can be significant, as this type of flow reverses easily.”
Local independent economist Srey Chanty however was not so convinced by ANZ’s suggestion that Cambodia would not be directly affected by the US Fed’s monetary policy measures.
He said US investment in Cambodian industries would almost certainly be impacted by the Feds decision to up interest rates.
“Surely, any increase US rates would have to impact on overall investment into Cambodia and especially slow down US interest in the Kingdom’s garment sector,” Chanty said.
“If interest rates are increased in the US, it could prompt businesses to keep their money in the banks instead of spending outwardly.”