September 8, 2011

Cambodia economy: Exposure to US economy is a concern


06 Sept 2011
As economic data coming out of the US continue to get worse, Cambodia's heavy exposure to the US economy represents a major risk to growth prospects. The US is Cambodia's most important export market by far—representing almost half of all receipts—and a US slowdown or descent into recession could substantially reduce Cambodian export revenue, with implications for the broader economy.

It is a cliché that when America sneezes the rest of the world catches cold, but in Cambodia's case the statement is apt. The US imports more Cambodian goods than any other country, making sales of key products such as garments vulnerable to fluctuations in American demand. In 2010 Cambodia's merchandise exports to the US amounted to US$2.2bn, equivalent to 47.1% of its total export earnings, according to IMF figures. Exports to the EU's 27 member states stood at US$1bn. Together these two markets accounted for 69.6% of Cambodia's exports in 2010. Although Cambodia's exports to mainland China rose by nearly 430% last year, they still stood at only US$86.1m, equivalent to 1.9% of total exports.

Cambodia is therefore substantially exposed, via the US and the EU, to the global economic cycle. It is little surprise that the 2008-09 global crisis took a heavy toll on Cambodia, which suggests that economic prospects could darken again if the US and/or the world head towards recession. The Cambodian government has tried to downplay the extent to which Cambodia was affected by the 2008-09 crisis—the Ministry of Economy and Finance maintains that the country escaped recession in 2009, stating that real GDP expanded by 0.1% in that year—but all other observers estimate that the economy contracted for the first time since records began in the early 1990s.

The Economist Intelligence Unit estimates that GDP shrank by at least 1.5% in 2009 as garment exports collapsed and factories fired workers. The Asian Development Bank, the IMF and the World Bank all estimate contractions of 2% in 2009. It is impossible to be certain about the actual figure, as Cambodia's National Institute of Statistics has not published any national accounts data since 2008. In any case, Cambodia should be concerned about the possibility that global economic growth may be weaker than previously expected.

Recent negative developments in the US are of particular relevance. After a tumultuous month for the world economy in August, in which Standard & Poor's, a ratings agency, stripped the US of its much-coveted AAA credit rating and stock indices fell sharply, we have substantially downgraded our forecasts for global growth in 2011-12. We have also revised down our US growth forecast to 1.7% for this year, from 2.4% previously, and to 2% in 2012, compared with 2.5% previously. In the coming weeks we are likely to reduce this forecast yet further in light of the latest downbeat US data. Furthermore, we believe that the risk of the world economy falling back into recession in 2011-12 has risen to more than 40%.

Cambodia's economy is holding up well for the time being. So far this year exports have recorded double-digit rates of growth. In the first six months of 2011 US imports from Cambodia (a proxy for Cambodian exports to the US in the absence of reliable figures from local sources) rose by 24.3% year on year to US$1.3bn, according to the US Census Bureau. But there is no cause for complacency: in June US imports of Cambodian goods rose by only 1.9% year on year—the slowest pace of growth in 15 months.

Exports to the EU have, admittedly, held up better so far this year. In January-May EU imports from Cambodia rose by 53.8% year on year to €432.5m (US$610m), according to the EU data office, Eurostat. Garment shipments have been boosted by relaxed rules of origin on preferential tariffs for imports from Cambodia and other least-developed economies that took effect on January 1st.

But with the world economy again experiencing difficulties, Cambodia's recent rapid rates of export growth are unlikely to continue.

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