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Deficit a risky business during global crisis

Deficit a risky business during global crisis

Emerging markets expert Vanessa Rossi of Chatham House, the UK’s Royal Institute of International Affairs, warns Cambodia may require a bailout due to a rising accounts deficit

Cambodia's trade deficit has increased steadily in the past decade as imports have soared. In 1998, the country recorded a $364 million trade deficit that has grown each year since except in 2001 and 2003, years that saw a slight dip, National Bank of Cambodia figures show. In 2006, the deficit for the year

climbed to over $1 billion for the first time at $1.034 billion and since then has escalated at an

increasing rate. In 2007, the deficit was $1.331 billion jumping to

$1.852 billion last year, according to central bank estimates, as

imports reached $11.47 billion.
Steve Finch

Asian leaders maintain that the region is in better shape than other areas of the world. Do you believe that Asia will escape the worst effects of the crisis?
Asia has two major problems - current accounts deficits are rising and trade is in decline.... Over the next six months or so, countries with current accounts deficits will run into problems.... The second issue is trade. Trade is falling quickly, and Asia has a high percentage of exports to GDP - with Western demand falling, this is going to hit Asian countries hard.

The National Bank of Cambodia said the current accounts deficit may rise from 11.2 percent of GDP in 2008 to 12.1 percent in 2009.  Should that raise concerns?
That rings bells, and it shows that this is not a regional problem - it is a problem within certain pockets in Asia. Most Asian countries have [current accounts] surpluses and large foreign exchange reserves, so they are not as vulnerable to the problems that were seen during the Asian crisis. But there are some specific spots that are exposed, and Cambodia is one of them. Cambodia will find it very difficult to fund these kinds of deficits with private sector capital flows.

Its worrying, especially with the cambodian central bank coming out with those figures.

[Investment] has been buoyant in recent years but this year it is disappearing very fast. Neighbouring Vietnam had similar problems.... It's worrying, especially with the Cambodian central bank coming out with those figures ... and it might require an eventual IMF bailout.

Running a deficit

Cambodia's current account balance year-on-year:

  • 2007: -8.2 percent of GDP
  • 2008: -11.2 pc of GDP (E)
  • 2009: -12.1 pc of GDP (F)

E-estimate F-forecast

Source: National Bank of Cambodia

What are the options available to Cambodia?

Depending on the scale of the foreign-debt buildup, one of the options is to be discussing this with the IMF - a number of countries are already taking pre-emptive action in talking to the IMF about assistance, possibly the same with the World Bank, to try to be able to tide over these capital flows.

Other policies to be considered would cut back the import bill because you very rapidly need to reduce the trade deficit, so the government may have to impose some kind of trade restrictions, unpopular even if they are.

Cambodia has run a current accounts deficit for years. Why is it only a problem now?

Because if you have a deficit, you have to have a counterpart to pay for it, so you have to have capital inflows that cover this, otherwise the country runs out of foreign exchange reserves. And you have a balance of payments crisis. In recent years, there have been very buoyant capital flows, and investment coming into emerging economies. But unfortunately with this crisis, many of these flows have not just disappeared, but they have actually reversed. In this case, it will be very difficult to get those flows to match continuing trade and current accounts deficits. So the implications are quite severe.  

How long can Cambodia hold on before it needs an IMF bailout?

If you look at the foreign exchange reserves, you can see how many months of cover the country has.

I think most countries aim to have something like five or six months of cover to protect themselves, but if you start to run this down, you face an escalating problem of confidence in your economy.

The central banks need to be very attentive to how much reserves they have, and not just to use up these reserves but they need to take pre-emptive measures before they get down to two or three months.

Economist Niall Ferguson predicted that Asian economies could fare worse than the US. How do you respond to that?

Well, there are pockets in Asia that  will have to be extremely careful - Singapore is already announcing a very big loss of GDP and there are some very serious problems in northeast Asia with Taiwan, Korea and Japan likely to be far worse than the US. And, of course, there are pockets like Cambodia and Vietnam that may not be able to resist the financial problems, as well as the trade problems. In that sense, it's quite possible, and quite ironic, that the crisis originated in the US, but may hit hardest in other regions.

I think that many people realise that this wasn't just a US financial problem, there are genuinely difficulties with the debt situation that has built up in other areas of the world. Its not the housing market that's the biggest problem in Cambodia, but certainly this buildup of external debt and a dependence on capital flows is a huge risk.