Future of exports seems not so dim

via CAAI

Friday, 17 December 2010 15:00 Steve Finch

THE International Monetary Fund’s concerns over Cambodia’s persistently narrow export base are well founded, but thankfully the signs for primary markets the United States and Europe look better than expected for the New Year despite slow economic recoveries among these countries.

Noting that garment exports to the US and Europe account for 40 percent of the Kingdom’s total exports, the IMF warned of downside risks in the long-term on the back of a frail world economy. But all signs point to steady demand from these primary markets in early 2011 for Cambodia’s garment sector suggesting that revenues, at least, should continue rising.

From January 1, Cambodia will enjoy zero tariffs on almost all garment exports to the European Union following new legislation that reduces the onus on the exporting country to add value. The Garment Manufacturers Association of Cambodia has said the Kingdom will benefit hugely from this rule change given Cambodia’s reliance on imported raw materials, which under the existing rules meant zero-tariff status often did not apply.

That means regardless of the fiscal problems in Greece, Ireland, Spain and Portugal demand for Cambodian garments is expected to rise in these troubled economies as they will cost less and can better compete with other countries that already enjoy tax breaks.

Meanwhile, although the US has struggled to reduce unemployment, recent data suggests the all-important holiday shopping season this year will be better than expected despite the general economic malaise which in turn should add momentum going into next year.

The US National Retail Federation has forecast the holiday sales gain for November and December will be the largest since 2006, while November results for major clothing brands and retailers that import from Cambodia were generally solid.

Clothing brands including Abercrombie & Fitch as well as retailers such as Target, JC Penney Co and Macy’s – all of which import from Cambodia – posted better-than-expected retail figures last month in the US. In theory, this should deplete inventories and in turn create demand for Cambodian garments going into next year.

However, GMAC Secretary General Ken Loo said yesterday that this did not necessarily translate into a complete recovery for the sector or rising profits for garment factories in Cambodia given that this year’s recovery had not yet overtaken last year’s decline, while costs such as fabric were up 60 percent since January. Cotton costs had risen even faster, he added.

While the rebound in orders at the start of the year was misleading in its scope in that it represented the start of the turnaround in Cambodia’s garment sector, and orders may slow down, the outlook in terms of demand remains fairly robust given opportunities in the US and Europe. So even if market diversification does continue to be a challenge, the critical factor determining the fortunes of Cambodia’s main export industry next year remains costs such as cotton, fabric and electricity.

Demand is of course important but it won’t necessarily guarantee recovery and growth in real terms. The real test here is profit.