July 15, 2022
PHNOM PENH – The National Bank of Cambodia (NBC) expects the country’s inflation to remain at “manageable” levels, guided by prudential monetary policy, despite recent sparks of geopolitical conflict that have spurred the rise of global oil and food prices.
In May, the central bank had projected that the annual inflation rate would increase to four per cent in 2022, citing geopolitical crises. This is in contrast with the Ministry of Economy and Finance’s prediction earlier in the year that inflation would be around three per cent in 2022.
In the March-April period, the global economy grew slower than predicted as the Russia-Ukraine conflict dragged on longer than expected, with inflation picking up pace in almost every country on the back of spiralling oil prices and a pick-up in demand, the NBC said in statement issued last week in conjunction with a monetary policy committee meeting chaired by the central bank’s governor, Chea Chantho.
NBC pointed out that in Cambodia, economic activity has been gradually recovering, primarily fuelled by rebounds in manufacturing and tourism, although it noted that growth in agriculture and construction is slowly decelerating.
The central bank said that the exchange rate between the local currency and US dollar “remains stable, which helps to boost purchasing power and reduce impact from increasing inflation”. The finance ministry early this year predicted that the USD/KHR exchange rate would average about 4,065 in 2022.
The NBC confirmed that foreign currency reserves are at “high” levels, which it said would “support the implementation of the exchange rate policy and maintain confidence in the macroeconomic stability of Cambodia.
“The Cambodian economy is expected to continue expanding, while inflation is anticipated to slow down gradually, especially in the second half due to the predicted drop in oil and food prices,” it added.
For reference, the World Bank (WB) has pegged economic growth for Cambodia this year at “about 4.5 per cent”, and according to the NBC’s Financial Sustainability Review (FSR) 2021 released in June, the central bank sold nearly $600 million in 2021 to banks and money changers through auctions to stabilise the exchange rate to sustain the macro-economic conditions following the Covid-19 pandemic.
Ly Sodeth, a Phnom Penh-based senior economist at the WB, told a press conference in late June that as a major food producer and exporter, Cambodia is well-positioned to weather fallout from the trifecta of the protracted Ukraine conflict, inflation and global food shortages.
“In short, our country has enough food, especially milled rice, which will make it possible to withstand the food crisis.
However, food exports have been confronted with challenges such as rising fuel prices, leading to higher transportation costs for domestic and international shipments, making it difficult to get them to their destinations,” he said.
The NBC stressed that it would leverage monetary policy to ensure macroeconomic stability and a stable USD/KHR exchange rate in the second half of 2022.
This, it noted, includes liquidity-providing collateralised operations (LPCO) – financial tools that allow the NBC to lend to financial institutions in the local currency – or its marginal lending facility (MLF), or riel-denominated overnight loans issued to address the short-term liquidity needs of banking and financial institutions in emergency situations.
At the same time, the central bank affirmed that it would maintain the current seven per cent reserve requirement ratio (RRR) in both foreign and domestic currencies, as well as promote the use of the riel.
RRRs are central bank regulations that set a minimum amount of cash that financial institutions must hold in reserve.
Mekong Strategic Partners (MSP) managing partner Stephen Higgins told The Post on July 13: “To some extent, being a heavily dollarised economy means that Cambodia’s monetary policy is heavily determined by the US Fed [Federal Reserve], which is clearly in a rapid tightening phase.
“Liquidity in the market is also being impacted by high oil prices, which are resulting in large dollar outflows out of Cambodia.
“That said, we agree with the steps the NBC is undertaking to support liquidity in the market through keeping reserve requirements where they are, while also trying to keep the exchange rate stable,” he added.
Speaking to The Post, Anthony Galliano, the group CEO of financial services firm Cambodian Investment Management Co Ltd, estimated the level of dollarisation in the Kingdom at 85 per cent, which he said “is the overriding factor shielding the domestic currency from volatile swings and greatly mitigating the risk of steep deflation of the riel.
“The USD dollar index, a measure of the value of the US dollar relative to a basket of foreign currencies, is a fair indication of the dollar’s value in global markets, and it is surging. Meaning the almighty dollar is king again. The index, now trading at 108, hasn’t hit this high since January 2002 – it is now at a two-decade peak, up 17 per cent over the last 12 months.
“The USD is accelerating due to concerns over the Federal Reserve’s ability to combat high inflation, it’s safe-haven appeal with geopolitical instability escalating, continuing strengthening against most of the major currencies since the Russian invasion of Ukraine, and the Covid-19 situation in China.
“Conversely ASEAN neighbours are grappling with the double whammy of rising commodity prices, which are priced in USD, and depreciating currencies. The Philippine Peso depreciated 12.4 per cent over the last year, Thai baht 11.25 per cent down, Indonesian rupiah down 3.54 per cent, and even the euro has lost 18.26 per cent.
“Conversely the pegged Hong Kong dollar has barely moved. In addition to dollarisation, the Kingdom is benefiting from the bilateral trade relationship with the United States which is itself surging – Cambodia exported $2.923 billion worth of goods to the United States in the January-April period in 2022, a 53 per cent increase over the same period last year.
“While the National Bank of Cambodia has monetary tools at its disposal, they are limited. The present trend of dollar strength will underpin the riel, however a reversal of the trend will have the adverse effect. That is not likely in the short-term as the USD is not losing steam,” he said.