Trade deficit to rise

via CAAI

Tuesday, 09 November 2010 20:16 May Kunmakara

Cambodia’s trade deficit stands to widen together with a weakening United States dollar, experts have told The Post.

The Kingdom’s trade imbalance stood at US$904 million for the first nine months of the year, according to Ministry of Commerce figures.

Economists said a depreciating American greenback would make imports denominated in other currencies more expensive, increasing the gap between imports and exports.

Cambodia’s largest export market for garments – the largest domestic export industry – is the United States, which pays for its orders in dollars.

Imports, in contrast, are more diverse and are bought in a number of different currencies, many of which are appreciating against the greenback, experts said.

“Although the export price does not change, the import price in dollars is increasing,” Suzuki Hiroshi, chief executive officer of Business Research Institute for Cambodia said.

“In other words … the trade deficit is widening,” he said.

The value of the dollar has declined against most international currencies since the US Federal Reserve announced a plan last week to spend US$600 billion on government bonds over the next year as part of a second round of quantitative easing, dubbed QE22.

Suzuki pointed out that Cambodia was a highly dollarised economy, with more than 90 percent of cash denominated in US dollars, along with 97 percent of bank deposits.

On Tuesday, a US dollar traded at 4,100 riel, a 2.73 percent decrease from rates of 4,212 riel per greenback seen last week, according to a report on commodity prices from the Ministry of Commerce.

Tatsufumi Yamagata, professor at the Institute of Developing Economies (IDE)-JETRO in Japan, added that the value of Cambodian exports would only improve if sales abroad were conducted in riel instead of the dollar.

“This could be a timely opportunity for Cambodia to diversify destinations of garments to non-US markets,” he said.

If the riel was more widely used, he claimed it would be “beneficial to Cambodian consumers who can import goods at the cost of a smaller amount of riel”.

Kang Chandararot, president and independent economist at the Cambodia Institute for Development Study agreed that the US dollar decline would not address Cambodia’s trade imbalance.

He said the National Bank of Cambodia should intervene to stop fluctuations in the exchange rate to boost confidence in the riel. “Don’t let the dollar depreciate sharply,” he advised the central bank.

He added the NBC should consider policies to push domestic banks to offer more loans at a “suitable interest rate”, to assist the production of goods for export.

An NBC official played down concerns yesterday, claiming that exchange rates fluctuations had little immediate impact on the Kingdom’s trade balance.

NBC secretary general Sum Saniseth pointed to increased confidence in the Kingdom stemming from the value of the riel.

“Appreciation of the riel shows our economy is strong,” he said.

Though daily exchange rate between the two currencies is set by the open market, the central bank does step in to stop the exchange rate from fluctuating too widely, according to Sum Saniseth.

“Our target is exchange rate stability. We don’t want it to depreciate or appreciate excessively,” he said, adding the central bank aimed at keeping the riel at around 4,100 against the American greenback.

Despite concerns about the increased price of imports affecting the trade imbalance, some experts said the depreciating dollar would prove a boon for exports.

Late last week, Asian Development Bank economist Jayant Menon said the weakening dollar could help Cambodian exports become more competitive, compared with countries where a strengthening local currency is used to pay production costs.

ADDITIONAL REPORTING AFP