Garment workers are at risk of temporary suspensions if factories decided to shutdown due to lack of raw material supply. Post staff
For nearly two decades, the Kingdom's gross domestic product recorded exceptional performance, buoyed by foreign investment, grant and robust exports. But Covid-19 and the partial loss of EBA could put an end to the good times.
The economic chills following the outbreak of Covid-19 has sent a shiver down the spines of Southeast Asian economies.
The effect of China’s overarching influence in the region is so profound that countries like Malaysia, Hong Kong, Indonesia and Singapore have drawn up stimulus plans to protect their economies from wider effects of the virus.
Quoting British-American economist Linda Yueh who once said, “when China sneezes, the whole world catches a cold”, seems apt when summing up the current global economic predicament.
Already affected by the announcement of a partial suspension of the EU’s Everything But Arms (EBA) scheme which takes effect in August, Cambodia is having to deal with the spillover effect of China’s economic slowdown.
Factory shutdowns as workers stay indoors to avoid infection and travel lockdowns in Chinese cities are affecting supply chains to Cambodia.
Recent logistics data showed a 10 per cent fall in import export activities between the two countries, including the shipment of rice (to China) and raw materials such as textile for garment manufacturing (in Cambodia).
This has resulted in temporary factory shutdowns, suspensions or layoffs due to a shortage of raw material.
About five per cent of factories in Cambodia could face fabric shortages by the second week of March and 10 per cent by the end of that month, said Ministry of Labour and Vocational Training spokesman Heng Sour, asserting that the phenomenon was not related to the EBA.
On Thursday, Sour said some 10 factories have filed for temporary suspension, which could effectively affect the livelihood of some 3,000 workers.
“Garment factories in Cambodia depend on China to supply raw materials. Once they place an order, it takes these factories about 40 days to receive the fabric.
“Before Chinese New Year, a lot of fabric was imported into the country, but then factories in China closed. They remain closed to this day,” he said.
China’s economy is experiencing a rare case of simultaneous demand and supply shocks, Nomura Research wrote in a note on February 17.
Because Covid-19 in China is far worse than Severe Acute Respiratory Syndrome (Sars) in terms of breadth and speed of infections, the fear factor among its population is palpable.
People are shunning crowded places like shopping malls and restaurants, crimping consumption which contributed nearly three-fifth of China’s gross domestic product in 2019, it said.
Moody’s expects a structural slowdown in Asia’s growth with heightened political risk and policy uncertainty that would constrain policy choices and limit the region’s ability to respond to shocks, which raises the likelihood of risks crystallising further.
Asia’s deepening integration with global financial systems increases the region’s susceptibility to such capital flow reversals that can occur due to sudden changes in investor sentiment, triggered by unexpected shocks such as the coronavirus’ outbreak.
Citing International Monetary Fund data, the global ratings agency showed that portfolio investment to 20 countries, including Cambodia, fell sharply in 2018, whereas foreign direct investment in 2017 and 2018 tapered off.
For a nation that relies heavily on foreign direct investment and concessional loans for public infrastructure development, the risk going forward is real, particularly for foreign bank lending as it increases the borrowers’ vulnerabilities if the US dollar currency risks are unhedged.
To give an example, in the first half of 2019, Cambodia’s concessional loan agreements with bilateral and multilateral development partners such as China, France, Japan, the Asian Development Bank and World Bank totalled $504.7 million, equivalent to special drawing rights of 361.22 million.
Nearly half of that was in US dollars.
Data by the Ministry of Economy and Finance also revealed growing year-on-year borrowings from China to $644.8 million as of December 31, 2018. The figure rose 97 per cent from $327.2 million in 2017.
By June 30, 2019, Chinese loans amounted to $90.9 million, albeit fractionally lower than South Korea’s $126.6 million loan.
Although Moody’s expects Covid-19 to have a temporary impact on China’s economy, there is still a high level of uncertainty around the duration and intensity of the outbreak. The risk of a contagion is tangible, with effects in economic activities and financial markets in Asia.
“China’s interconnectedness with global production chains means that a contagion will have a disruptive effect on supply chains due to production delays from factory closures and worker shortages, the severity of which is only gradually becoming clear,” it said.
Seemingly, the ill effects of the virus has extended to the Cambodia Securities Exchange which registered negative performance since the start of 2020, said its chief operating office Ha Jong-weon.
Year-to-date, the index fell 16.5 per cent to close at 637.97 points on February 27, 2020, amid sluggish trading.
“The trading value of Chinese investors has also dropped to 4.5 per cent on February 20 from 17.3 per cent in January this year,” he said.
It is learnt that companies with China-related business activities such as Grand Twins International (Cambodia) Plc, Phnom Penh Autonomous Port and Sihanoukville Autonomous Port sported a downward trend.
“It might not be a coincidence but the Covid-19 outbreak must be linked to impact on the local stock market and global exchanges. However, as big businesses in China have recently announced to resume operations, we hope it will restore trading activities and commerce,” Ha added.
Up to February 25, nearly 2,700 people had died due to Covid-19, a majority of them within China, with confirmed infections standing around 78,000 worldwide.
Contrary to the action by most governments which repatriated their citizens from China at the early stages, Cambodia showed compassion to that country via a visit by Prime Minister Hun Sen to Beijing to commiserate with President Xi Jinping.
He also advised the 23 Cambodian students in Wuhan to stay put and that they would be well cared for by the Chinese authorities and the Cambodian embassy in China.
Both countries have shared a good relationship for decades.
Data since 1994 showed that China has been the single largest investor in infrastructure and resource development including rubber, and tourism.
Last year, investment approval recorded $9.4 billion, of which China invested $2.8 billion, followed by $912.6 million by Hong Kong, and Japan $298.8 million.
Based on accumulated foreign direct investment stocks to date, Chinese investment has reached over $15 billion while two-way trade has surpassed $6 billion.
Trade-wise, EU takes the cup. Exports to the EU totalled €4.9 billion ($5.3 billion) or 45 per cent of overall exports in 2018, making it Cambodia’s main trading partner. This figure doubled from €2.5 billion worth of exports in 2013.
Ministry of Labour and Vocational Training spokesman Heng Sour.Heng Chivoan
Also, nearly 96 per cent of Cambodian exports that entered the EU in 2018 benefitted from the EBA scheme – the second largest after Bangladesh which also benefits from it.
But on February 12, the European Commission (EC) notified that the partial withdrawal of some 20 per cent tariff on Cambodian exports, valued at around $1.1 billion will likely commence in August, hitting more than 40 of its revenue generating products such as garments, travel bags, and sportswear.
The move might require Cambodia to absorb $100 million in tax on the items, ostensibly denting its savings.
Still, Hun Sen maintained that the Kingdom would not be cowed by it, adding that no appeal would be made against the EC’s decision in lieu of the country’s sovereignty.
But the unexpected economic storm is threatening to undo Cambodia’s nearly two-decades record of achieving an average seven per cent year-on-year gross domestic product growth, having beaten the Asian financial crisis twice.
In 2018, the World Bank called it the sixth fastest expanding economy globally at 7.6 per cent, mostly driven by its garment sector.
This year, however, the Kingdom expects a slight contraction to 6.5 per cent, underpinned by the loss of the EBA and the slowing Chinese economy.
Projections by the World Bank and the Asian Development Bank were not too far off.
To be fair, the forecasts were made before any knowledge relating to the debilitating effects of Covid-19.
Moody’s Investors Service Inc considered that, and forecast a 5.5 per cent growth due to the EBA shortfall and the adverse effects on tourism and consumption from Covid-19.
Economist Chheng Kimlong sees that the economy would be vulnerable to Covid-19 if its effects prolong and spread to its main sectors.
At the same time, he warns that the impact of a partial withdrawal of the EBA should not be ignored. “I won’t say it is an economic crisis. [However] it is a major economic slowdown,” he opined.
At the time of writing, government officials remain unclear of the impact of the virus to the economy.
In a recent event with a group of graduating teachers, Hun Sen conceded that the economy “will be hit hard by Covid-19”.
He expects a revision in the GDP growth this year, citing a 60 per cent drop in overall foreign tourists’ arrival to Cambodia, and up to 90 per cent fall in Chinese visitors.
The saying “with greater power comes greater responsibility”, best describes Cambodia’s current economic effects as all these comes with a price.
Its reclassification as a lower-middle-income nation with gross national income per capita of $1,070 in 2015 would affect the availability of external support.
Grant funding may be replaced by concessional loans while net overseas development assistance may fall as new disbursements are reduced or offset by loan amortisation, according to a 2017 draft report entitled Cambodia Development Finance Assessment.
This means is that Cambodia’s gradual economic maturity can no longer buck global economic trends, as is the case now.
On Monday, the government introduced a back-to-back fiscal stimulus plan to mitigate economic risks, on top of a $3 billion allocation to cope with the EBA loss.
The four-point strategy includes one to cover 20 per cent of factory workers’ monthly wages to reduce the burden on employers who need to only pay 40 per cent of the wage. Therefore, workers take home just 60 per cent of their wages or $120 instead of $190 if they are suspended.
The government is mulling a six to 12 months tax moratorium for worst-hit factories, and a four-month tax relief for hotels and guesthouses in Siem Reap.
The plan could result in an apparent dip in tax revenue and reserves this year compared to 2019 when the state collected $2.8 billion in tax revenue, which was up 23.2 per cent from 2018.
“There will likely be a modest fall year-on-year in tax collection, correlating to the anticipated dip in the GDP.
“Although the tax department had an incredible start to the year, with a spectacular collection level in January, deterioration in the economic performance is expected, not only in Cambodia but globally.
“It will result in a lower percentage gain but a higher nominal amount collected,” said tax expert Anthony Galliano.
On the impact of the four per cent stamp duty exemption on properties priced below $70,000 till January next year, he believes it would be small as it only affects the low to middle income group.
This is the smallest piece of the real estate pie, but, he said, it provides a tax stimulus for the largest population base of the market.
Galliano finds that the government’s measures to support the tourism, garment and property sectors are impactful and timely, but cautions that the longer-term local and global effect of the Covid-19 outbreak is relatively unknown as there is no cure yet and the spread has not been contained.
“If the spread is brought under control, expectations are that economic activity would return to normal. If not, the situation is unpredictable at this point,” he said.
