National Budget Risks High Deficits: World Bank

By Chun Sakada, VOA Khmer
Original report from Phnom Penh
04 November 2009

The economy fell from a nearly 7 percent growth rate in 2008 to a 2 percent contraction so far in 2009

Cambodia’s recently drafted 2010 budget could put pressure on the economy by running high deficits that exceed external financing, the World Bank said Wednesday.

The Council of Ministers this week green-lighted a $2 billion budget for next year, increasing money allotted for health services and decreasing that for security, in an overall increase of more than $100 million.

The government “is facing difficult choices in drafting the 2010 budget,” the World Bank said in a regional update. “Sustaining high deficits that exceed available external financing would put pressure on macroeconomic stability.”

“The government is trying to bring the fiscal deficit to a level that supports growth—which remains below potential—without compromising macroeconomic stability,” the World Bank said.

Cheam Yeap, a ruling party lawmaker and head of the National Assembly’s finance committee, said the budget suffered from the world economic crisis.

Next year’s budget “cannot avoid difficulty,” he said. “However, the government is prepared to strengthen its macroeconomics with clarity, fairness and goodness.”

Kem Sokha, president of the opposition Human Rights Party, said the government should avoid high deficits, which would require loans from foreign countries and increased taxes.

“The government can increase its expenditure,” he said. “But the government must prevent corruption and collect taxes to avoid the loss of income.”

In the proposed 2010 budget, which must be approved by the National Assembly, expenditure decreased in the ministries of Defense, Education and Interior, but slightly increased for the Ministry of Health.

Cambodia wants to see an annual economic growth rate of 7 percent, while reducing poverty by 1 percent, Council of Ministers spokesman Phay Siphan said.

The economy fell from a nearly 7 percent growth rate in 2008 to a 2 percent contraction so far in 2009, but the Bank said signs of recovery could see a 4 percent growth next year.

East Asian economies Under pressure

Apr 14th 2009
Economist.com

East Asia has been hard-hit by the global economic slowdown

EAST ASIA was once one of the world economy's brightest regions. Some even reckoned that “decoupling” might allow the region to ride out the storm that began in rich-country financial markets. But the global economic crisis is hitting the East Asia hard. The World Bank's forecasts for economic growth have been downgraded steeply. Excluding China, which will announce first quarter GDP figures later this week, the bank now expects developing countries in the region to grow by 1.2% in 2009, down from an estimate of 4.8% in 2008. Some economies will even contract this year. The bank predicts that the GDP of Malaysia and Cambodia will shrink by 1% and Thailand’s economy will shrivel by 2.7%.

This is a return to earth with an alarming bump. In 2007 Cambodia’s economy expanded by 10.2% and Malaysia’s by 6.3%. Other economies will grow, but at nothing like the pace of recent years. China's economy is likely to expand by 6.5% in 2009 compared with 13% in 2007. The Philippines will see growth of 1.9% this year, compared with 7.2% in 2007.

The World Bank points out that most countries in East Asia were relatively well placed to withstand the financial turmoil that has swept through developed countries. This is partly a result of learning the lessons of a financial crisis of 1997-98, which originated in the region. They have used the decade since then to build up reserves of foreign currency and strengthen external balances (which, in part, helped to finance the West’s spendthrift ways and hasten the crisis). They have also reduced government debt and strengthened bank regulation.

However, some of these changes were aided by a boost in exports, both within the region and to the rest of the world. But heightened integration with global markets through trade has exposed the region to the effects of the recession in rich countries. This has led to a dramatic fall in exports that has battered regional economies. In fact, the World Bank reckons that the effects of the crisis have been more severe in countries most open to trade and whose exports are concentrated in particular industries such as electronics, garments and textiles.

The drop-off in trade has been dramatic the world over, but parts of East Asia have felt the pain more than most. In January, Taiwan and the Philippines saw the value of exports plummet by over 40% compared with a year earlier. Electronics, which account for a quarter to two-thirds of exports from most of the larger economies in the region, have been hard hit.

Poorer countries in the region, whose export sectors are dominated by garments and commodities, have been hurt badly too. Cambodia, the country most dependent on garments, endured a 31% fall in exports in January compared with a year ago. As the World Bank puts it, the region, which prospered through exporting, is now suffering for the same reason.

The collapse in exports is leading to a jobs crisis, though this is not necessarily reflected in official figures. Less-developed countries in the region have a greater share of employment in the informal export sector. This makes it harder to obtain reliable data. But reports suggest huge job losses. In Cambodia 50,000 garment workers, 17% of the workforce in the industry, have been laid off since September. In Vietnam, 100,000 garment workers lost their jobs in January and February. And in China some 2.7m garment industry job may have gone.

Years of rapid growth have allowed the richer countries in the region the room to use monetary and fiscal policy to contain the crisis. Some countries, notably China, Malaysia and South Korea, have announced substantial stimulus packages, including big spending on infrastructure. However, Indonesia and the Philippines have to rely more on tax cuts than on public spending, partly because “shovel-ready” projects are lacking. Monetary policy has been eased in all the countries of the region.

Some good news exists. The bank's assessment is that China’s fiscal stimulus (amounting to spending worth around 12% of GDP spread over two years) is beginning to take effect. The bank predicts that the Chinese economy will bottom out by the middle of the year. The fortunes of other economies in the region are tied up with those of China. Many export parts and components that are then assembled in China for re-export. But the Chinese stimulus package cannot hope to fix the problem of contracting demand for the region's output in the rest of the world. The bank points out that a more complete bounce back from the economic crisis still depends on a broader worldwide recovery.

Cambodia to face worst increase in poverty in Asia-Pacific

Tuesday, 07 April 2009
Written by Steve Finch
The Phnom Penh Post

A newly-released World Bank report says Cambodia will be the hardest-hit country in the region as the global economic crisis continues to wreak havoc.

CAMBODIA is set to be the country hardest hit this year by the global economic crisis in the Asia-Pacific region, the World Bank said today, placing the Kingdom among only four countries projected "to experience absolute increases in poverty".

In a report released today, the bank said that Cambodia - along with Malaysia, Thailand and East Timor - would see contractions in per capita income and therefore increased poverty, noting that the Kingdom's weaker GDP growth, which the bank again revised downwards to -1 percent for 2009, would slow poverty reduction across the region.

"Cambodia is the country with the largest projected increase in the number of poor people," the World Bank said.

It projected 200,000 additional people in the Kingdom this year would be pushed below the poverty line - defined by the bank as US$1.25 a day - compared to East Timor, where a further 25,000 were forecast to sink into poverty.

The World Bank in February said that Cambodia had reduced poverty from 45 percent to 50 percent in 1993-1994 - a figure that improved to around 30 percent by 2007.

The report also said that Cambodia would see the greatest GDP growth reversal in the region.

"An expansion of 10.2 percent in 2007 stands in stark contrast to a contraction of 1 percent projected for 2009," it said.

"The difference (11.7 percent) over two years is the largest in the region, and arises from a sudden drop in garment exports and tourist arrivals."

Neighbouring Thailand is projected to see the next biggest reversal at -7.6 percent over the same period, followed by Malaysia with -7.3 percent. GDP growth in developing East Asia, as a region, will see a -6.1 percent reversal in the same period.

The World Bank's growth projection for Cambodia is among the lowest so far after the London-based Economist Intelligence Unit forecast a 3 percent contraction in 2009 in its March outlook.

The International Monetary Fund last month estimated -0.5 percent growth and the Asian Development Bank last week said Cambodia's growth would slow to 2.5 percent.

The World Bank blamed a narrow economic base and over-dependency on exports for the country's projected economic reversal.

"The economy is affected by simultaneous declines in export orders for garments (which account for almost four-fifths of exports, and most of the shipments are to the US), a drop in construction, a collapse in private capital inflows and a sharp slowdown in tourist arrivals," it said.

"Credit growth that helped fuel the earlier expansion, including in real estate, has slowed sharply."

The World Bank noted that Cambodia had taken a number of measures to fight the financial crisis, including tax holidays until 2012 for foreign direct investors and larger aid for food supplies. "Efforts are underway to support agricultural producers and provide trade financing to exporters," it added.