SINGAPORE, January 29, 2020 – Amid stronger external headwinds, Cambodia’s economy is projected to remain robust in 2019 and 2020 with relatively low inflation rate, according to the 2019 Annual Consultation Report on Cambodia published today by the ASEAN+3 Macroeconomic Research Office (AMRO). The report was prepared based on AMRO’s Annual Consultation Visit to Cambodia in September 2019 and data available up to October 31, 2019.
Real GDP growth is forecast to moderate to a more sustainable rate of 7.1 percent in 2019 and 2020, supported by robust construction activities, strong domestic credit growth, and buoyant domestic demand. Inflation is expected to moderate to 2.1 percent in 2019 amid falling energy prices and remain subdued in 2020.
The current account deficit has widened but is fully covered by a larger surplus in the capital and financial accounts, in particular foreign direct investment (FDI) inflows. As a result, the overall balance of payments has continued to record a surplus, leading to a further accumulation of international reserves amounting to around USD12 billion by end-2019, sufficient to cover about 5.5 months of goods and services imports.
The financial sector indicators have remained broadly sound with strong capital buffers and stable asset quality despite the recent strong rebound in domestic credit led by higher FDI inflows and robust economic activities. The Capital Adequacy Ratios, in both commercial banks and micro finance institutions (MFIs) continued to be above the regulatory minimum level, with rising trend in bank’s profitability and relatively stable non-performing loan ratio.
The fiscal position has strengthened further on the back of persistently strong revenue collection. With the successful implementation of the Revenue Mobilization Strategy 2014-2018, domestic revenue reached a record high at 21.4 percent of GDP in 2018. On the spending side, the rapid increase in public sector wages has abated, while slow disbursement has held down public investment spending. As a result, the overall fiscal deficit narrowed and the current budget surplus rose, leading to stronger fiscal buffers.
Cambodia’s major external vulnerabilities stem from its high reliance on a few markets such as the E.U. and China. The suspension of Everything But Arms (EBA) status offered by the E.U. would have a significant impact on Cambodia’s exports. China’s dominant share in FDI and tourist arrivals implies that Cambodia’s economy could be adversely affected should China experience a sharper-than-expected growth slowdown or sudden policy changes.
On the domestic side, rapidly rising minimum wages amid relatively high non-labor production cost such as logistics and electricity, could erode the cost competitiveness of Cambodia’s labor-intensive garment industry. On the financial side, steadily rising credit exposure to the real estate sector along with continued strong credit growth has raised concerns about financial sector stability.
Moving forward, enhancing competitiveness and diversifying the economic base are critical to maintaining its strong growth potential. Cambodia must address key structural challenges, such as the relatively poor infrastructure, limited supply of skilled labor, and institutional weaknesses. Amid strong revenue performance, proactive use of fiscal policy to address these structural weaknesses is encouraged.
The authorities have made commendable progress in upgrading regulatory standards, which have enhanced the soundness and resilience of the financial system. However, further macroprudential measures, such as an introduction of debt service-to-income ratio ceiling and stricter credit control of concentration risks, should be considered to better contain risks associated with a rising credit concentration in the real estate sector. In addition, relevant government agencies should coordinate to introduce additional policy measures to curb speculations in the real estate sector.
About AMRO and AMRO Annual Consultation Report:
The ASEAN+3 Macroeconomic Research Office (AMRO) was established to contribute to securing the economic and financial stability of the ASEAN+3 region, which include 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangements, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.
The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and provides policy recommendations to mitigate such risks.
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