Cambodia: Macroeconomic Prospects and Policies

Presentation by Mr. John Nelmes IMF Resident Representative in Cambodia to the Australian Business Association of Cambodia October 2, 2009
The views expressed in this presentation are those of the author, and not necessarily those of the IMF, its Executive Board or Management.

Outline
The World Economic Outlook Regional Developments Cambodia: Impact, Outlook and Risks Macroeconomic Policy Options

Following a deep plunge, a recovery is in the works but consumer confidence remains low, amid rising unemployment.
World Trade (annualized percent change of 3mma over previous 3mma)
30 20 10 0 -10 -20 -30 -40 -50 -60 -70
55 65

World Economic Outlook

PMI Index (index)
180 160 140 120

Consumer Confidence (index)

5

60

Emerging economies

Euro area (RHS)

0 -5 -10 -15 -20 -25 -30 -35

CPB trade volume index

50
100

45
80

40

Trade value
35

Advanced economies

60 40 20

United States (LHS) Japan (LHS) 2000 02 04 06

2000

02

04

06

Jun. 09

30

2000

02

04

06

Aug. 09

Aug. 09

Fiscal policy has played a major role, considering that conventional monetary policy has been constrained and less effective than usual, but fiscal support will diminish.
Fiscal Balance (percent of GDP)
2

World Economic Outlook

Public Debt (percent of GDP)

120

World Advanced economies

100

-2

80

-4

World Emerging and Developing economies Advanced economies

1970 80 90 2000 10 14 1970 80

60

-6

40

-8

Emerging and Developing economies

20

-10

90

2000

10

14

Public support to ease financial stress has been critical, but at a cost.
Evolution of Central Bank Balance Sheets (index, June 2007 = 100)
400

World Economic Outlook

Support for Financial and Other Sectors and Up-Front Financing Need

Sovereign CDS Spread (basis points)

(as of June 2009, in percent of 2008 GDP)

Up-front government financing

200
30

350

300

Jun. 2008 Oct. 2008 Latest

Liquidity provision and other support by central banks Guarantees Purchase of assets and lending by governments Capital injection by governments and other institutions

25

150

250

20

100
15

200

150

10

50
5

100

AUS CAN EUR JPN KOR NOR SWE CHE GBR USA

ARG BRA CHN HUN IND IDN POL RUS SAU TUR

50

Advanced economies

G20 emerging economies

2007

08

Aug. 09

Global growth is projected to pick up in 2010, but the recovery will be sluggish by past standards, with weak import growth in advanced economies
Real GDP Growth1 (percent change from a year earlier)
IMF World Economic Outlook
(annual percent change) 2008 World output Advanced economies United States Euro area Japan Australia Newly industrialized Asian economies (1) Emerging and developing economies China India Asean-5 (2) World trade volume Imports Advanced economies Emerging and developing economies 3.0 0.6 0.4 0.7 -0.7 2.4 1.5 9.0 7.3 4.8 3.0 0.5 9.4 36.4 7.5 Projection 2009 2010 -1.1 -3.4 -2.7 -4.2 -5.4 0.7 -2.4 8.5 5.4 0.7 -11.9 -13.7 -9.5 -36.6 -20.3 3.1 1.3 1.5 0.3 1.7 2.0 3.6 9.0 6.4 4.0 2.5 1.2 4.6 24.3 2.4

World Economic Outlook

12 10 8 6 4 2 0 -2 -4 -6

Emerging and Developing economies

World

Advanced economies
2000 02 04 06 08 10 12 14

Commodity prices Oil Non-fuel

(2) Indonesia, Malaysia, Philippines, Thailand and Vietnam

(1) Hong Kong SAR, Korea, Singapore, Taiwan Province of China.

1 Quarterly

data through 2010 and annual data afterwards.

World Economic Outlook

Risks are mainly on the downside Premature withdrawal of public support, because recovery seemingly selfsustaining. New financial disaster, oil price surge, swine flu: economys capacity to absorb new shock is very low. Fiscal credibility loss or questions about continued independence of central banks. Upside: we may underestimate effects of reduced uncertainty/greater confidence.
90% Confidence interval 70% Confidence interval 50% Confidence interval -4 2006 07 08 09 10

Prospects for World GDP Growth (percent change)

6

-2

Regional Developments
Asias recent performance has been better than expected, due to front-loaded fiscal stimulus, capital inflows and inventory rebuilding.

Regional Developments
However, caution on growth is warranted over the near term, as labor market weakness may hold back private consumption

R w esarou dselectedA bu ess eal ag n sian sin cy episodes cle (m , 1 0at peak edian 0 )
14 0 12 0 10 0 9 8 9 6 9 4 9 2 9 0
12 0 10 0 9 8

G Pa dE p y e ta n se cte A n D n mlo mn rou d le d sia bu e cy e iso e sinss cle p d s (md n 1 0a p a ) e ia , 0 t e k

Crren u t P iou rev s

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

9 6 9 4 9 2

E p y en mlo m t GP D
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

Impact on Cambodia
Narrow growth sources hit hard by global crisis Agriculture a bright spot, new investment in roads and irrigation should raise productivity and reduce operating costs Aftermath of falling property prices Slow bank lending constraining domestic demand

Impact on Cambodia
The U.S. remains the largest garment export market, but Cambodia has been unable to raise market share like other regional producers.
Cambodia: Garment Export Volumes Market Share (in percent)
100 90 80 70 60 50 40 30 20 10 0 F eb -0 7 D ec -0 6 A p r -0 7 100 90 80 70 60 50 40 30 20 10 0 A u g -0 8 A u g -0 9 F eb -0 8 Ju n -0 8 F eb -0 9 D ec -0 8 A p r -0 8 A p r -0 9 O ct- 0 8 Ju n -0 9

US Textile and Apparel Import Volumes Market Share (in percent) China (left), Cam, BLD, &VN (right)
50 45 40 35 30 25 20 15 10 5 0 Sep -0 7 Ju n -0 7 Sep -0 8 Ju n -0 8 M ar-0 7 Dec-0 6 M ar-0 8 Dec-0 7 M ar-0 9 Dec-0 8 Ju n -0 9 8 7 6 5 4 3 2 1 0

US sha re Othe rs sha re EU sha re

A u g -0 7

Ju n -0 7

D ec -0 7

O ct- 0 7

China

Cambodia

Bangladesh

Vietnam

Impact on Cambodia
The sharp drop in U.S. retail sales has dragged down Cambodias garment exports
Cambodia: Garment Exports and U.S. Retail Sales Growth, 200609
(Seasonally adjusted, 3-month moving average) 40 30 20 10 0 -10 -20 -30 -40 Jan-06 Apr-06 Oct-06 Jan-07 Jul-06 Apr-07 Oct-07 Jan-08 Jul-07 Apr-08 Oct-08 Jan-09 Jul-08 Apr-09 Jul-09 Garment exports (left scale) U.S. retail sales (two-month lead) 15 12 9 6 3 0 -3 -6 -9 -12 -15

Sources: Data provided by the Cambodian authorities; U.S. Federal Reserve Bank; and IMF staff estimates.

Impact on Cambodia
High value-added tourism is down with air arrivals, more than offsetting the boost from land arrivals. Angkor Wat revenues are lower than last year.
Cambodia: Total Tourist Arrivals and Angkor Wat Revenue, 200609
(Year-on-year growth, in percent) 40 30 20 10 0 -10 -20 A p r-0 6 A p r-0 7 A p r-0 8 O c t-0 6 O c t-0 7 J a n -0 6 J a n -0 7 J a n -0 8 O c t-0 8 J a n -0 9 A p r-0 9 J u l-0 6 J u l-0 7 J u l-0 8 J u l-0 9 Tourist arrivals (left scale) Angkor wat revenue (right scale) 1/ 80 60 40 20 0 -20 -40

50 40 30 20 10 0 -10 -20 -30

Cambodia Tourist Arrivals (year-on-year percent change, 3-month moving average)

Air arrivals Land and boat arrivals

2006M 10

2007M 10

2008M 10

2006M 1

2006M 4

2006M 7

2007M 1

2007M 4

2007M 7

2008M 1

2008M 4

2008M 7

2009M 1

2009M 4

Sources: Data provided by the Cambodian authorities; and IMF staff estimates. 1/ Revenue from ticket sales.

2009M 7

60 50 40 30 20 10 0 -10 -20 -30 -40

Cambodia Imports (y/y percent change in 12 month total)

Construction material Cement Steel

O c t- 0 6 D e c -0 6 F e b -0 7 A p r-0 7 J u n -0 7 A u g -0 7 O c t- 0 7 D e c -0 7 F e b -0 8 A p r-0 8 J u n -0 8 A u g -0 8 O c t- 0 8 D e c -0 8 F e b -0 9 A p r-0 9 J u n -0 9 140 120 100 80 60 40 20 0 -20 -40 -60

Impact on Cambodia

Construction and retail activity are extremely weak, as evidenced by sharply falling imports.

Cambodia Imports (y/y percent change in 12 month total)

Motorcycles Cars

O c t- 0 6 D e c -0 6 F e b -0 7 A p r-0 7 J u n -0 7 A u g -0 7 O c t- 0 7 D e c -0 7 F e b -0 8 A p r-0 8 J u n -0 8 A u g -0 8 O c t- 0 8 D e c -0 8 F e b -0 9 A p r-0 9 J u n -0 9

Impact on Cambodia
The real effective exchange rate has appreciated, possibly undermining competitiveness.
Cambodia: Effective Exchange Rates, 200409
(Index 2000=100) 120 Nominal effective exchange rate Real effective exchange rate Exchange rate Riel/U.S. dollar 120

110

110

100

100

90

90

80 2004

80 2005 2006 2007 2008 2009

Sources: National Bank of Cambodia; and IMF, Information Notice System.

Impact on Cambodia
Credit has become less supportive of growth.
Cambodia: Deposit and Credit Growth, 200609
120 100 80 60 80 40 20 0 (20) May-06 May-07 May-08 May-09 Mar-06 Jul-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Nov-06 Nov-07 Nov-08 Jan-09 Mar-09 Jan-06 Jan-07 Jan-08 Jul-07 Jul-08 40 60 Loan-to-deposit ratio (in percent, right axis) Deposit growth (y/y) Credit growth (y/y) 100 120

Sources: Data provided by the Cambodian authorities; and IMF staff estimates.

Cambodia Outlook
Real GDP growth is projected to be negative 2 percent in 2009, with a modest recovery to 4 percent in 2010.
Cambodia: Sources of Growth, 200410
(Contribution to growth, in percentage points) 15 Proj. 15

10

10

0
Agriculture Hotels & restaurants Others Real GDP growth (annual percentage change) Garments Construction

-5

-5

2004 2005 2006 2007 2008 2009 2010 Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Cambodia Outlook
Inflation has fallen sharply. However, prospects for higher oil prices and a highly expansionary fiscal stance pose upside risks.
Cambodia: Inflation Developments, 200409
(Year-on-year percent change) 60 50 40 30 20 10 0 -10 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
Source: Data provided by the Cambodian authorities; and IMF staff estimates. 1/ Excludes food, beverages, and tobacco; and transportation and communication components of the consumer price index.

Headline inflation Headline inflation (excluding food and transport) 1/ Food inflation

60 50 40 30 20 10 0 -10

Cambodia Outlook
The current account deficit will shrink in 2009, driven by lower oil prices and reduced import demand (more than offsetting falling exports), before widening in 2010 as a recovery begins to take hold.
Cambodia: Current Account Balance and Financing Flows, 200410
(In billions of U.S. dollars) 2.5 2.0 1.5 1.0 0.5 0.0 Proj. FDI Loans (net) Official transfers Current account deficit (in percent of GDP, right scale) 1/ 20 18 16 14 12 10 8 6

2004 2005 2006 2007 2008 2009 2010 Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections. 1/ Current account balance excluding official transfers.

Near-Term Risks
A weaker-than-expected recovery in the U.S. and/or loss in market share for garment exports Delay in the global recovery and global fears about H1N1, affecting tourism Excessively loose fiscal stance, possibly leading to exchange rate pressure and inflation

Policy Options: Fiscal

The overall fiscal deficit is expected to widen significantly in 2009, and further in 2010 absent adjustment measures. The size and composition of recurrent spending are a concern. The rise in domestic financing could undermine macroeconomic stability. A modest reduction in 2010 is recommended to help start path towards fiscal consolidation.

Cambodia: Fiscal Deficit and Financing, 200410

(In percent of GDP) 10 Grants Net external loans 8 Net domestic financing Fiscal deficit (excluding grants) 6 4 2 0 -2 -4 Proj. 10 8 6 4 2 0 -2 -4

2004 2005 2006 2007 2008 2009 2010 Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Policy Options: Fiscal

Spending growth should be contained, especially in the 2010 budget.
Cambodia: Government Expenditure, 200309
(In percent of GDP) 20 Wage expenditure Non wage current expenditure Capital expenditure 16 12 8 4 0 Proj. 20 16 12 8 4 0

2004 2005 2006 2007 2008 2009 2010 Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Policy Options: Fiscal

Commendable revenue performance in 2009 also needs to be maintained in 2010.
Cambodia: Government Revenue, 200309 1/
(In percent of GDP) 20 Domestic taxes Trade related taxes 16 Other revenue 12 8 4 0 2004 2005 2006 2007 2008 2009 2010 Proj. 20 16 12 8 4 0

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Policy Options: Monetary

With monetary conditions having eased, policies should focus on:
Maintaining the reserve requirement at the current level. Develop the interbank market. Ensuring foreign exchange market intervention is geared toward smoothing shortterm volatility
Cambodia: Monetary Developments, 200609
(Contribution to broad money growth, in percent) 120 Net domestic assets 100 Net foreign assets Private sector credit 1/ 80 Broad money growth 1/ 60 40 20 0 -20 May-06 May-07 May-08 May-09 Sep-06 Sep-07 Sep-08 Jan-06 Jan-07 Jan-08 Jan-09 120 100 80 60 40 20 0 -20

Source: Data provided by Cambodian authorities; and IMF staff estimates. 1/ Year-on-year percent change.

Policy Options: Banking

Banking system liquidity has improved, but high interest rates likely having adverse consequences on profitability. Strong supervision and enforcement of asset classification and provisioning required.
Cambodia: Six-Month Interest Rates, 200709
(In percent per annum) 8 7 6 5 4 3 2 1 0 -1 -2 May-07 May-08 May-09 Nov-07 Nov-08 Jan-07 Mar-07 Jul-07 Jan-08 Mar-08 Sep-07 Jul-08 Jan-09 Sep-08 Mar-09 Jul-09 U.S. dollar savings deposit SIBOR (half of)

Source: Data provided by the Cambodian authorities.

Thank you for your attention!

John Nelmes IMF Resident Representative in Cambodia The views expressed in this presentation are those of the author, and not necessarily those of the IMF, its Executive Board or Management.