Executive Summary: Growth in 2020 will turn negativeof -2.8%, while the growth in the medium to longer term should rebound to its annual rate of 6.0-7.0%
Cambodia: A Country Overview
Cambodia among ASEAN peers: It is one of the vibrant frontier markets in the region
Cambodia is currently classified as an lower-middle income country by the World Bank in July 2020 with the GNI per capita of USD1,480, slightly higher than that of Myanmar of USD1,390. Sustained high economic growth over the last two decades with the annual growth rate of around 7-8% leads to a continuous increase of GNI per capita for Khmer people. Cambodia’s higher growth momentum should continue in the long term driven by FDI-driven labor-intensive manufacturing sector and exports of garments as well as tourism sector.
Major milestone of Cambodia s’ developments
Growth in 2020 will turn negative of about -2.8% weighed on severely by the pandemic, but it should recover in line with the global economy in 2021
Covid-19 pandemic shocks are likely to impact Cambodia’s growth through different channels on the demand side*
The pandemic could pose a negative impact of 6.9% on Cambodia ’s growth in 2020 according to our model
Policy measures have been deployed to cushion the dire economic impact of the pandemic, but their sizes are small relative to those of regional peers
The first confirmed COVID-19 case in the country was reported on 27 January and, so far, there have been no deaths. Returning migrant workers are required to perform a self-isolation for 14 days. Domestic travel restrictions were lifted on 16 April. Since June, casinos, cinemas, museums and theatres have been reopened. And since July, entertainment venues (e.g. karaoke and clubs), restaurants and schools have been reopened. With the devastating impact of the pandemic on the Cambodian economy, particularly during the first half of 2020, through exports of garments and textiles and tourism, the authorities have introduced measures –fiscal and monetary policy- to alleviate the economic impact:
…And containment measures are relatively less stringent compared those imposed by reginal peers
Macro forecasts
Both cyclical and structural factors are likely to worsen less favorable fundamentals of Cambodia’ s economy and its medium-term prospects
Cambodia with its small open economy and narrow economic structure is severely hit by the pandemic
Substantial openness to trade should structurally expose the country to a weak global demand and shocks trigged by the pandemic
The concentration of export products and markets adds downside risks to Cambodia’s near-term growth prospects
Exports of garment, textile, and footwear (GTF) products have dominated Cambodia’s commodity exports
Intermediate products and final goods are mainly imported to support domestic industries and services
Cambodia is one of the key trading partner in ASEAN for Thailand
FDI inflows which has been financing investment-led growth over the past decade
The pandemic and the subdued global growth could delay FDI inflows into key sectors driving growth
…including the construction sector which has been booming for many years
…while Thai direct investment (TDI) in Cambodia remains small
Tourism sector, another key growth driver for Cambodia, should be the worst affected by the pandemic
Flows of cross-border remittances financing 9% of total households in Cambodia will be disrupted
Cross-border flows of remittances currently account for about 6% of Cambodia’s GDP in 2019 playing a crucial role as a main source of income for a number of households in the country around 9% of the total households, according to the figure provided by the ADB. We expect that inflows of remittances should resume strongly once the pandemic is effectively contained and the global economic activity starts to recover in the medium term.
Fading FDI inflows may not be sufficient to finance Cambodia’s persistent twin deficits
Losing the EU’s trade privileges un the EBA Scheme substantially affects Cambodia’s garment sector
External sector adjustments to correct imbalances are constrained by a high degree of dollarization
Closer interconnectedness to China is unlikely to help diversify Cambodia’s export structure both in terms of products and markets
High growth of credits fueled by MDIs and MFIs over the past decade adds downside risks to the financial stability
Credit growth may also be driven by rising number of financial institutions in the country
In the long term, Cambodia’ growth path of 6.0-7.0% p.a. is likely to be re-emerged should near-term vulnerabilities are well managed
…supported by its favorable fundamentals
Although the pandemic is expected to substantially affect Cambodia’s growth trajectory in the medium term, over the medium to long term, we view that the economy should be able to eventually return to its potential path of 6.0%-7.0%. There are 4 main drivers comprising (1) favorable demographic structure, (2)engaging in regional trade agreements, (3) open and liberal foreign investment, and (4) foreign direct investment (FDI) inflows. These factors will support Cambodia to remain one of the fastest growing economies regionally.
Youthful population will support labor-intensive and export-oriented manufacturing sector
Young workers with higher income are becoming sizeable middle-class consumers amid rising urbanization
Engaging in regional trade agreements should help diversify export markets for Cambodia
Open and liberal foreign investment regime should support attractiveness of Cambodia for FDI inflows
Wages which remain relatively lower than those of regional peers should also be conducive for foreign investment
Cost of production in Cambodia is among the lowest compared to that of regional peers
Foreign investment should continue driving growth, exports, and jobs in Cambodia in the post-pandemic era
Thailand is moving toward service-based economy and could shift some labor-intensive activities to the region
Thailand is in line with the world economy in moving toward a service-based economy, and this is depicted by a rising contribution of service sector to GDP from 50.3% in 2008 to 56.9% in 2017. Based on the recent data, we found that Thailand also has relatively high valued-added labor productivity in the services sector. Thai businesses may be able to reap the advantages to shift labour-intensive manufacturing activities as well as export services to countries in the region including Cambodia.
Growing domestic demand and growing wealthier middle-class consumers offer business opportunities for Thai investors
On the back of high economic growth over the past two decades, this has resulted in a growing and sizeable wealthier young consumers. Therefore, looking ahead, Cambodia should remain one of the most vibrant economies regionally and provide business opportunities for Thai firms seeking markets to grow their business in the region. And, some potential sectors that are on the top of our mind are (1) food and beverage, (2) Homewares, (3) healthcare and pharmaceuticals, and (4) Agribusiness.
Food and beverage: Growing young wealthier consumers and tourism sector will be major drivers in the long term
Over the medium to longer term, we view that demand for food and beverage in Cambodia will be supported by favorable demographics due to a large youthful population and rising disposable incomes as well as the recovery of the tourism sector in the post-pandemic era.
Healthcare and pharmaceutical sector: Large unmet demand and gaps in local supply offer business opportunities
Homewares: Growing investment in residential construction amid limited domestic supply should support the demand
Agriculture business: Domestic food production is not sufficient to meet domestic demand