Cambodia remains at risk of spillover from global financial turmoil despite largely weathering such shocks thus far, a report released by the International Monetary Fund yesterday found.

Though the Kingdom had begun to diversify its economy, Cambodia’s narrow economic base continued to expose the country to the depending euro area crisis and global financial crisis.

“The outlook is subject to considerable risks, stemming from the fragility of the global economy and a range of domestic factors, including potential labor market instabilities and extreme weather,” the reported stated.

“Should the downside risks materialise, however, the policy space to cushion their impact would be limited,” the report found, adding the government needed to rebuild policy buffers to guard against external threats and high domestic credit growth.

But thanks to preferential trade terms, the Kingdom had largely been spared from the fallout of the deepening crisis in the eurozone – a significant and growing destination for Cambodian exports.

“Spillovers from a deepening euro area crisis and severe global financial turbulence could be significant,” the report stated.  

“But the impact so far has been relatively contained given Cambodia’s special zero-tariff access to the European Union and no signs of an adverse impact on the financial system.”

In October the European Parliament passed a motion touting the possibly of suspending Cambodia’s tariff-free access to EU markets through the “Everything but Arms” agreement for agricultural goods linked to endemic human rights abuses.  

Of particular focus was tariff-free access granted to the Cambodian sugar industry, which has been the target of sustained campaigns by human rights groups due to related land grabbing allegations.

Peter Brimble, Cambodia deputy country director of the Asian Development Bank, downplayed the threat of any such move, saying the EBA was just one of the factors that had helped mitigate effects in Cambodia from the sluggish performance of the EU and US economies.

 “What we saw last year was that tourism and other service sectors grew very well and kept the economy moving well in the light of slow movement in the garment sector,” Brimble said.

Government moves to tackle corruption and improve the business environment had helped spur nascent diversification of the economy and improve fiscal space, he added.

Hiroshi Suzuki, CEO and chief economist at the Business Research Institute for Cambodia, said Japanese manufacturing companies were becoming attracted to Cambodia because of rising labour costs in China and Vietnam as well as the floods that ravaged Thailand last year.

“This kind of Japanese investment helps the diversification of economy through the diversification of export items and [their] destination,” he said.

Ngoun Sokha, director general for the National Bank of Cambodia, said the Kingdom’s export destinations had broadened even further.

“Now, the economic diversification is visualised because we are now not only depending on the US or the EU but also to ASEAN, the Asia-Pacific, etc,” she said.

Despite IMF claims, rapid credit growth in Cambodia was of “no concern” because the NBC had increased the reserve requirement last year to prevent any blowout, Sokha said.

In the report, the IMF fingered rapid credit growth as one of the biggest risks to the economy noting that, at 37 per cent, the credit-to-GDP ratio is far above that of other low-income countries

The IMF report also found that while tax revenue collection had improved, the government should “fully leverage on simultaneous reforms in revenue administration, tax policies, and governance”.

Tax collection reached $740.5 million in 2012, a 25 per cent year-on-year increase, according to a General Department of Taxation press release.

Opposition Sam Rainsy Party whip Son Chhay said that though that figure could be accurate, increases would be due to stronger implementation last year of the 2011 property tax, but that corruption in tax collection remained unchecked.

“You have to know that the increase is not based on the ability to work more transparently but is more to do with the new taxes that have been created.

The IMF forecasted the real medium term GDP growth at 7.5 per cent with 6.7 per cent growth expected this year.

To contact the reporter on this story: May Kunmakara at [email protected]