National Bank makes the correct decisions

[PHNOM PENH POST]

The National Bank of Cambodia’s decision this week to keep banks’ reserve requirements steady at 12 percent was the right one, though questions remain as to what’s in store for the Kingdom’s economy over the coming year.

Despite rising prices across the board, the NBC tempered its inflation concerns with concern about economic volatility across the globe. By not boosting reserve requirements, the central bank wisely left itself an open door to growth should the US and Europe sink back into recession.

Peter Brimble, senior country economist at the Asian Development Bank in Cambodia, yesterday agreed, calling the NBC’s move “sensible”. He said that problems in Europe in particular could potentially ripple out to the Kingdom in the short term.

In fact, the strong growth Cambodia has seen so far this year “may be toned down a bit in the rest of the year,” he said, adding 2012 may see a possible slowdown in exports and tourism if Europe’s problems get worse. Of course, there is no guarantee this scenario awaits the Cambodian economy, but the NBC needed to be prepared nonetheless.

There is, however, the possibility that inflation will again become the central bank’s main priority. Certainly, it has been the main concern of late, as spiking food and fuel prices have led to public cries for government intervention.

ANZ Royal Bank CEO Stephen Higgins said yesterday: “Whenever they stop publishing Consumer Price Index numbers, that is when you start to get nervous about what the inflation number is.”

Hence his continued focus on the inflation threat. He said Cambodia has recovered from the global financial crisis of 2008 and 2009, and the problem now is keeping the economy from overheating.

The NBC will have to increase reserve requirements if the next few months show the West’s problems are less severe than expected, he said. That decreased liquidity would help to keep prices down, and banks from lending imprudently, both of which lead to unhealthy economic growth.

Some have complained that Cambodia’s fluctuating reserve requirements over the past few years – they’ve ranged between 8 percent and 16 percent depending on the economic situation – hurt smaller banks.

However, Higgins shrugged off that concern, saying flexible reserve and interest rates were in fact normal parts of a vibrant financial system. Therefore, they were good for the Cambodia’s economy.

What was most important, he said, was preemptive action from the NBC to curb dangerous levels of inflation at all cost. Otherwise Cambodia could end up like its neighbour, Vietnam, whose focus on growth without regard for rising costs has led to an inflation rate of over 20 percent.

“It’s far better to go early and possibly be a little harsh than to go too late and need to be very harsh,” Higgins said.

Higgins and Brimble both offered very similar targets for the Kingdom’s ideal inflation rate: between 3 percent and 5 percent, and 4 percent and 5 percent, respectively. While many developed economies aim for between 2 percent and 3 percent, Cambodia’s focus on growth allows it a higher rate.

As a result, the NBC’s expected inflation rate of 6.5 percent this year presents problems, which brings us back to reserve requirements. The central bank will need to put to use its only real tool to fight inflation should present pricing trends continue.

Brimble noted that even the NBC’s intention to use foreign exchange auctions to control the exchange rate would have little effect, as the economy is more than 90 percent dollarised. Only so much riel can be taken out of the economy to boost its value in that situation.

Of course, Cambodia may one day boast strong capital markets, and a central bank capable of buying and selling interest rate-based assets in order to impact rates as a whole. But the day is still some ways off, and until then, Cambodia’s bankers have done well with the tools they have available.