Debating Cambodia's growth: A tsunami in 2009?

The global slowdown is hurting Cambodia's tourism industry, with fewer visitors in late 2008 than in the same period of 2007. Image credit: flydime at Flickr under a Creative Commons license.

Cambodia was one of the few Asian countries saved from the December 2004 devastating tsunami. But, a few days ago, at the Cambodia Economic Forum, panelists suggested that the economic tsunami – or various synonyms – would not spare Cambodia.

It's been a couple of months since the World Bank prepared the "perfect storm" report on the recent economic developments in East Asia. Our view at the time was that the crisis would reveal some of Cambodia's economic vulnerabilities – i.e. its lack of export diversification and its extreme reliance on foreign investment for growth. I think that this is an important lesson from our recent analysis on growth in Cambodia (more on this later).

Our projections for 2009 at the time were just below 5 percent GDP growth. This is consistent with the projections of the Government, the IMF, the Asian Development Bank, and an International Labor Organization (ILO) report on the impact of the crisis released yesterday. The Economist Intelligence Unit has a more pessimistic projection of 1 percent.

So who is right? I have to say that the differences probably reflect the uncertainty of the environment and the lack of good statistics. Whether 1 or 5 percent, income per capita will grow between negative 1 percent and 3 percent in 2009, against 8 percent on average over 1998-2007. That's precious little for a country with some 250,000 young people entering the labor market each year.

To facilitate a debate, here are some recent observations, all pointing downward (You can also see my fellow blogger Jamie Seward's recent regional review):

• Tourist arrivals have slowed down, in part due to the disruptions that also affected tourism in Thailand (the airport closure). The global slowdown (for instance in Korea, one of the main source countries of tourists in Cambodia) is hurting the industry with fewer tourists in the last quarter of 2008 than in the last quarter of 2007.

• Exports of the garment industry (see my previous post) have already slowed down and orders are low at the moment, reflecting in large part the retail sales in the US (Cambodia's main export market). The industry has already had to lay off almost 10 percent of its workers, with less overtime – hence income – for those still employed.

• New foreign direct investment is becoming rare in Cambodia as in other countries. It is visible for us in Phnom Penh that large scale (and foreign-financed) construction activities have slowed down (although, I have to say, that other signs – such as traffic jams – do not point toward too much of a slowdown).

• These elements are largely driven by the external environment – demand for exports and supply of foreign capital. Unfortunately, here as well, the consensus is getting gloomier with a sense that economies will reach the bottom later than hoped (not before late 2009).

• As noted by the ILO report (pdf), all these points have a significant impact on employment and incomes.

• The recent IMF article IV (pdf) and our analysis on growth have stressed the fragility of the financial sector given its very recent rapid development.

• On the brighter side, agriculture has been doing well in 2008. But even there, the sector is vulnerably to poor weather and the fall in the price of some commodities (e.g. cassava and rubber) will have a negative impact on farmers.