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Recovery unabated amid ongoing uncertainty

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A bird’s eye view of Phnom Penh skyline in April. Hong Menea

Recovery unabated amid ongoing uncertainty

This year looks to be a challenging one for the global economy, with global growth decelerating owing to monetary tightening and Russia’s war in Ukraine continuing to weigh on activity.

Persistent inflation pressures, and now financial sector problems in the US and Europe, are injecting additional uncertainty into an already complex economic landscape.

Against this somber backdrop, Asia-Pacific remains a dynamic region. Despite weakening external demand – such as the downturn in demand for tech exports towards the end of 2022 – and monetary tightening, domestic demand has so far remained strong, with China’s reopening providing fresh impetus.

Growth in Asia and the Pacific is projected to increase this year to 4.6 per cent, up from 3.8 per cent in 2022, an upgrade of 0.3 per cent from the October 2022 World Economic Outlook.

This means the region would contribute around 70 per cent to global growth. Asia’s dynamism will be driven primarily by the recovery in China and resilient growth in India, while growth in the rest of Asia is expected to bottom out in 2023, in line with other regions.

In Cambodia, despite weaker external demand, the recovery is projected to continue with its growth expected at 5.8 per cent and 6.2 per cent in 2023 and 2024, respectively, supported by the continued recovery of tourism and ongoing policy support.

However, this dynamic outlook does not imply that policymakers in the region can afford to be complacent. The pressures from diminished global demand will weigh on the outlook. Headline inflation has been easing, but remains above targets in most countries, while core inflation has proven to be sticky.

Although spillovers from turmoil in the European and US banking sectors have been limited thus far, vulnerabilities to global financial tightening and volatile market conditions, especially in the corporate and household sectors, remain elevated.

Growth is expected to fall to 3.9 per cent five years out, the lowest medium-term forecast in recent history, thus contributing to one of the lowest medium-term global growth forecasts since 1990.

Risks to the outlook are to the downside, reflecting the possibility of stickier global and regional price pressures, the disconnect between markets’ anticipation of monetary policy paths and major central banks’ communications, additional turmoil in global financial markets, adverse spillovers to the region from China’s medium-term growth slowdown, and deeper geo-economic fragmentation.

Uncertainty around the outlook in Cambodia is also particularly high, with downside risks from slower external demand and tightening financial conditions and upside risks from a stronger than expected recovery in tourism.

Monetary policy should remain tight until inflation falls durably back within target. The exceptions are China and Japan, where output is below potential and inflation expectations have stayed muted.

Unless strains in financial markets increase and financial stability is at stake, central banks should separate monetary policy objectives from financial stability goals, using available tools aimed at addressing financial stability risks to allow them to continue to tighten policy to address inflationary pressures.

Elevated public debt and rising interest costs call for continued – and, in some cases accelerated – fiscal consolidation, which can also support the battle against inflation while protecting the vulnerable through targeted measures.

Monitoring pockets of vulnerability linked to elevated debt burdens in the corporate and household sectors, and market risks and corporate credit risk exposure in the financial sector, is essential for safeguarding financial stability.

In Cambodia the risk of public debt stress remains low, but like others emerging marker and developing economies, the high level of private debt raises concerns about potential debt overhand in the private sector.

To help rein in credit growth, normalising prudential and monetary conditions to pre-pandemic settings is warranted in Cambodia

Structural reforms are needed to improve growth potential, through innovation and digitalisation; accelerate the green energy transition; reduce risks from fragmentation; and ensure food security.

Yasuhisa Ojima is International Monetary Fund (IMF) Resident Representative in Cambodia.

The views expressed in this article are his own.

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