Greek Crisis Holds Lessons for Cambodia

Ros Sothea, VOA Khmer
Phnom Penh Tuesday, 25 May 2010

“When debt repayment time comes, Cambodia will need to borrow more money and it could face recession, like Greece.”

While Cambodia may never experience an economic crisis like the one in Greece that rattled world markets, economists here say the experience holds valuable lessons in the importance of increased annual revenue and reduced debts and deficits.

Before a $146 billion monetary package from neighboring European countries and the International Monetary Fund last week, Greece was facing a particularly high budget deficit of 12.7 percent, in part because its national tax collection is weak and corruption there is rooted.

Greece borrowed from other countries to cover its annual government expenditures—something that almost all countries do. But by 2010, Greece’s debt had reached $400 billion, and its weak tax collection was exacerbated by the global economic crisis.

That put the country at risk of a default, worrying markets because the European Union has a number of weaker economies, especially Italy, Portugal and Spain. The stabilization package was meant to help Greece over the next three years, and in return, Greeks will face austerity measures to reduce government spending and increase revenue.

Cambodia has similar problems of debt, tax collection and corruption.

But Sam Genthy, a financial analyst who is on Cambodia’s Securities Commission, said Cambodia has been able to avoid harsh effects of the economic crisis because it does not rely on international debt for general spending. What debts it does have are long term and low interest.

“Greece uses the euro, which will be watched closely on their budget deficit,” he said. “Cambodia is not at that stage yet, despite the country’s use of the dollar.”

Still, Cambodia needs to increase revenues from taxes in order to reduce its budget deficit and debt, he said.

Cambodia’s budget deficit in 2009 stood at 6 percent, double the year before. It spent more than $600 million over its annual revenue, which depends also on international aid and loans, which in 2009 nearly reached $1 billion.

Meanwhile, Cambodia owes an estimated $4 billion to foreign countries, about 40 percent of its annual GDP. That debt has nearly doubled since 2004.

Some economists worry that debt will continue to increase if donor countries cut aid—thereby prompting a Greece-like crisis.

“Our economy depends on only four sectors, which are very fragile,” economist Chheng Kimlong said.

Garments, tourism and housing were all buffeted by the global economic crisis, he said. “And only agriculture is pretty strong.”

If that is hurt, government revenue will decline.

“When debt repayment time comes, Cambodia will need to borrow more money and it could face recession, like Greece,” he said.

And without a stable economy, investors can withdraw from a country, he said.

Din Virak, a member of the Cambodian Economic Association, said a huge reduction in donor support could indeed trigger a crisis, but the government would potentially use oil and gas revenue to fill the gap.

Cambodia could also see an upswing in tax revenues with increased economic growth, which would help it reduce debt, said Douglas Broderick, the UN’s resident coordinator for Cambodia.

And so while a debt crisis for Cambodia is not just around the corner, it is something that has to be watched.

“It’s one of the items on the watch list and we have to be careful,” said Amy Wong, an economist for the United Nations Economic and Social Commission for Asia and the Pacific. “To maintain the micro-economic stability is important, including low government deficit, so that the debt situation can reduce gradually. And to close the social gap, as well, because we should not [only] focus on economic growth, but to help the poor [and] address environmental issues.”

Hang Chuon Narun, director general of the Ministry of Economy and Finance, said the government has been careful to balance spending and revenue, which he said will ensure Cambodia doesn’t face a crisis like Greece.