Introduction
During
this last couple of years, Cambodia has shown a rapid growth in retail sector.
The evolution of Cambodia’s retail sector is largely due to the increase of
middle and high income Cambodian households. The availability of internet and
cable television also contributed to the development of Cambodia retail sector
as they have tuned Cambodians into abroad lifestyles (Cambodia’s Retail
Evolution, 2013). There has been a surge
in demand for luxury products or at least mid-tier brands in Phnom Penh lately
and as a consequence, many new international brands have arrived to the capital
such as Land Rover, Costa Coffee, and AEON Mall. Similarly, many new local
investors also start-up their own businesses recently like Brown Coffee Shop
and Master Grill BBQ Shop as they see the potential of retail sector in
Cambodia. This has created a stiff competition between local and international
investors which in turn helps to produce efficiency for Cambodia’s retail
sector. Cambodian products need to increase quality and/or lower the price in
order to compete with imported products. The retail sector in Cambodia is
expected to continue its growth in the future as the GDP of Cambodia and the
population in this country keeps growing. Furthermore, Cambodian consumers
start to abandon traditional markets and move into supermarkets. As a result,
many new international retail stores and shopping centers are also expected to
open in Cambodia in coming years. Most of the transactions in retail sector and
as well as other sectors in Cambodia are settled in US dollars. This is because
Cambodia is a semi-officially dollarization county in which both US dollar and
Cambodian Riel are legal tenders. In Cambodia, US dollars are even used more
frequently and widely than Cambodian riels. According to The Phnom Penh Post
newspaper, about 85% of the currency in circulation within Cambodia is US
dollars (Morton, 2014). There were
several events in the past that transformed Cambodia into a dollarized country.
First of all, there had been an abolishment of Cambodian riels during the Pol
Pot regime. Secondly, Cambodians had suffered for several times because of the
hyperinflation in 1993 and 2008 which made them lost confidence in their own
currency. Lastly, there had been a high influx of US dollars into Cambodia
during UNTAC period. The highly use of
US dollars confers Cambodia’s retail sector both pros and cons. Some people
suggest that the Cambodian government should give up US dollars and force its
citizens to use Cambodian riels in all business transactions as they feel the
cons of using US dollars outweigh the benefits, while others think in vice
versa. In this report, we would like to analyze how the force of
de-dollarization and gradual market-based de-dollarization in three different
scenarios will influence retail sector in Cambodia.
Impacts of Force De-dollarization
To begin with, the first scenario is
concerning with the force de-dollarization and inflation targeting monetary
policy by maintaining fixed exchange rate. This scenario will foster several issues
for retail sector in Cambodia. If the Cambodian government bans the usage of US
dollars within Cambodia, there will be an increase in demand for Cambodian
riels. As shown in figure 1, the demand curve will shift to the right. The
increase in demand for Cambodian riels will make the riels to become
appreciated. Local suppliers will experience a huge suffer if the riels
appreciate too much as their products become relatively expensive to import
products. Under a fixed exchange rate regime, as the demand
curve increases, the supply curve also increases. The increase in supply is
occurred by the intervention from government. The
central bank of Cambodia can use monetary policy by printing more money in
order to cope with the increase in demand for Cambodian riels. However, this
action of the central bank can lead to inflation or hyperinflation. In
this case, in order to prevent inflation, government implements inflation
targeting monetary policy by supplying money to the economy only to a certain
level. Therefore, people will have less cash available in their pockets, so
they will spend lesser than they want. Whenever
there is inflation, the interest rate is likely to rise because nominal
exchange rate is equal to real exchange rate plus inflation. When the interest
rate increases, it encourages people to save more money and decrease their consumption
for goods and services in retail sector since they can earn a high return. The surge
in interest rate would also hamper investors from borrowing which in turn would
decrease the investment in Cambodia’s retail sector.
The force de-dollarization by maintaining fixed
exchange rate and implementing inflation targeting will cause some consequences
to the country such as liquidity problem, high interest rate, and transaction
cost. Since government implements inflation targeting monetary policy, they
will supply less riel to the economy, people will spend less due to the
limitation of money supply. Also, government will increase the interest rate
because government aims to encourage people to save more than spending in order
to prevent the occurrence of inflation in the country. Last, transaction cost
will also become a problem for a de-dollarized economy. Businesses have to
convert their revenues from riels to foreign currency in order to pay for
foreign suppliers. As the result, force de-dollarization in fixed exchange rate
regime with inflation targeting policy will increase the demand for Cambodian
riels, and cause liquidity issue to the country, high interest rate, and transaction
costs in Cambodia’s retail sector.
The
second scenario is regarding the force de-dollarization by conducting flexible
exchange rate and inflation targeting monetary policy. De-dollarization has its
costs and benefits to the retail sector. If Cambodia de-dollarizes the economy,
the citizens will demand more riel to buy goods and services in the country
since the usage of foreign currency is prohibited. When demand of riel
increases, the excessing use of riel makes riel becomes less available for
people, therefore lead riel to appreciate. Due to trade-based model, when riel
appreciates, it will increase trade deficit in which import will become
cheaper, and export will become less profitable. In this case, as import is
cheaper, consumers will gain from purchasing foreign goods, they will buy more
import goods, and domestic suppliers will suffer by earning fewer profits from
selling less domestic products. In the second scenario, government also allows
flexible exchange rate and implements inflation targeting monetary policy.
Under a flexible exchange rate regime, since the government will not intervene
the exchange rate flexibility, market will drive riel to appreciate. In
addition, when demand of riel increases, it might cause inflation because
government has to supply more riels to meet the demand. The situation will lead
the central (National Bank of Cambodia) and policymakers to implement inflation
targeting monetary policy in which the government will not having excess supply
of riel in order to encourage people to spend less and save more. Therefore, it
could help to stabilize the expose of inflation and lead to riel appreciation.
As
we can see from figure 2, when Cambodia de-dollarize, people will demand more
riel to buy goods and services which makes demand curve shift from D1
to D2. The shift of demand curve will drive the exchange rate to
appreciate from 1/4000 to 1/3500.
The
implementations of second scenario will cause some impacts to the country. First
is liquidity problem, in order to flight inflation, government will limit the supply
of riel within the country. People will have less money available to use,
therefore it will cause liquidity problem. Second is high exchange rate risk,
for example, if Cambodian want to buy a U.S bond, they will have to pay
principal and interest in dollars, so they will face exchange rate risk due to
de-dollarization. Last is transaction cost, as in first scenario stated, when
Cambodia de-dollarize, the businesses in Cambodia will face transaction cost
while trading with other countries, this could create a few difficulty to the
retail sector.
As
we can see from table 1, the growth rate of Cambodia trading with the world
along the year of 2000s is rapidly increasing. The import in 2012 has increased
by 31.4% and export has increased by 29.3%. If Cambodia is de-dollarized,
businesses will have difficulty in converting riel into foreign currency,
therefore it will reduce the amount of international trade, import and export
will decline respectively, retailers will not increase import and will reduce
export. Last, growth will decline and economy might become worse off.
Impacts of Gradual market-based
de-dollarization
Gradual
market-based de-dollarization in Cambodia can achieve through providing higher
interest rates for Riel denominated assets, implementing government fiscal
policy to lower the interest on loans denominated in Cambodian riels for
specific industries, and using only riels in public sector, including national
companies. By giving high interest rates for Riel denominated assets, people
will increase their demand for Riel denominated assets and save more. The
increase in saving will decrease the consumption of goods and services in
retail sector. The implementation of government fiscal policy to lower the
interest on loans denominated in Cambodian riels for specific industries will not
affect much on retail sector, but may benefits local producers. In this regards,
domestic producers will try to find ways in order to get access to low-cost
loans supported by the Cambodian government. As a result, this government
fiscal stimulus will helps local producers to reduce their cost of production. Some
local producers will use the funds they save from paying high interest loans to
increase their productions or invest in research and development. The use of only
Riels in public sector in order to increase the utility of Cambodian riels will
increase the transaction costs for businesses in retail sector. Businesses in
Cambodia receive most of their revenues in dollars and if the government entities
and state-owned enterprises in Cambodia accept only Cambodian riels, those
businesses need to exchange some of their US dollar revenues into Cambodian
riels in order to make payments for taxes, electricity charge, water charge,
etc. As a result, those private retail businesses will lose some of their
profits from exchanging their revenues. The pursuance of crawling bands exchange
rate arrangement will increase the confidence of people in Cambodian riels as
there is less fluctuation in Cambodian riels. More investors are likely to come
to invest in Cambodia as the exchange rate risk is low. As a consequence, Cambodia’s
retail sector will see more new start-up businesses sprawling around town if the
Cambodian government can maintain a minimum exchange rate fluctuation.
Conclusion
In conclusion, Cambodia’s retail sector
is one of the potential sectors in Cambodia and it keeps growing swiftly.
Nowadays, most of the business transactions in Cambodia are done using US
dollars. There have been some criticisms about the usage of dollars within
Cambodia and some suggest the Cambodian government should de-dollarize its
economy. In this writing, we have chosen to analyze how de-dollarization in
three different scenarios will affect Cambodia’s retail sector. Based on our
analysis, the third scenario which is regarding the implementation of gradual
market-based de-dollarization in conjunction with the usage of crawling
exchange rate arrangement scenario might work better for retail sector than the
first and second scenarios if the Cambodian government wishes to de-dollarize
her economy. The government inflation targeting policy in the first and second
scenarios can cause liquidity problem within the economy. There is no such
liquidity problem in the third scenario. Through the government fiscal policy
to lower interest on loans, it will indirectly benefit local producers as the
cost of capital decreases. Some local producers will use the fund they save
from paying high interest loans to increase their production capacity or
increase the quality of their products. The use of crawling band exchange rate
system can reduce the exchange rate risk which in turn can attract more
investors into Cambodia and build people’s trust in Cambodian riels. Even
though there will be an increase in interest rate for riel denominated assets
which causes people to save more, it will not much affect the consumption in
retail sector as Cambodians will not increase their savings very much.
Cambodians do not have much faith in riel denominated assets yet, so the
increase in interest rate for riel denominated assets can entice people to
increase their saving only for a small portion. Overall, the gradual market-based
de-dollarization and pursuance of crawling band exchange rate arrangement will
not affect Cambodia’s retail sector very much as forced de-dollarization.
Bibliography
Asia: Cambodia's retail revolution? (2013). HSBC
Global Connections. The Economist Intelligence Unit Ltd. Retrieved 04 28,
2014, from https://globalconnections.hsbc.com/global/en/articles/asia-cambodias-retail-revolution
Morton, E. (2014,
04 25). Riel trust needed for stability. The Phnom Penh Post. Retrieved
from http://www.phnompenhpost.com/business/riel-trust-needed-stability
