Structural reform needed to mitigate damaging global economic slowdown

Gerald Flynn

Cambodia’s growth expected to fall back but will remain high for region only if reforms are enacted

Cambodia’s growth expected to fall back but will remain high for region only if reforms are enacted

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After what has been heralded as an exceptional year for Cambodia, the future of economic prosperity in the Kingdom seems somewhat murky.

The wind has changed, but Cambodia will not weather the storm alone – uncertainty appears the defining trait of global economics these days, according to last week’s economic update from the World Bank.

The US-China trade war rages on, with many of the economic casualties it is producing being located here, in Asia and the Pacific.

The tensions wrought by these two superpowers show little signs of abating as US president and former reality TV star Donald Trump continues a dangerous game of brinkmanship with Chinese leader Xi Jinping.

In Europe, the long-running calamity of Brexit continues to defy all predictions and further strains any notion of economic stability.


Slowing economies


This is all set against a backdrop of slowing economies in China, the US and across Europe – all of which are stagnating far faster than previously projected. Deceleration was also recorded in India, Brazil, Russia and Germany.

Cambodia, meanwhile, has troubles of its own. The words “Everything But Arms” (EBA) have been splashed liberally across newspaper pages on a daily basis since the European Union’s announcement that Cambodia’s preferential trading status was to be reviewed on account of human rights violations.


Cambodia exports


With some 250,000 jobs in garments manufacturing seemingly on the line, Hun Sen was in Europe this week to rally support for the retention of Cambodia’s preferential treatment.

The EU is the largest trading bloc in the world and the World Bank estimates Cambodia will lose $654 million should the EBA trading status be revoked. $510 million of that is accounted for by garments and footwear, while $144 million will be lost in milled rice exports.

The situation stateside looks less daunting for the Kingdom, where two pieces of legislation take aim at Cambodia’s human rights records amid international outcry against the Hun Sen administration’s handling of the 2018 elections.

The Cambodia Democracy Act, which targets senior Cambodian officials and their assets, passed the House of Representatives in July and currently has a 67 percent chance of being enacted according to political data analysis firm Skopos Labs. On the other hand, the Cambodia Accountability and Return on Investment Act – known as the CARI Act – would suspend Cambodia’s access to the US generalised system of preferences, which currently removes tariffs on some 5,000 products.

In 2017, Cambodia exports to the US were worth $3.8 billion, up 24.8 percent ($759 million) from 2017 and up 58.6 percent from 2008, according to United States Trade Representative, although Skopos Labs predict the CARI Act, that seeks to limit Chinese influence in Cambodia, has just a 2 percent chance of being sanctioned.

Putting all of this together, Cambodia’s nigh-on unstoppable growth spurt over the last few years is finally winding down. The World Bank recorded GDP growth at 7.0 percent for 2016 and 2017. This shot up to 7.5 in 2018, but is expected to drop to 7.0 percent this year, before slowing to 6.8 percent for 2020 and 2021.

“If you look at the overall picture in the whole region 7 percent growth is very high, but last year was an exceptional year because of the inflow of FDI [foreign direct income] and the growth in exports to the US,” explains Sodeth Ly, World Bank senior economist for Cambodia.

“So things were booming last year, but it doesn’t mean this year is so bad, actually, compared with the rest of the region – from 7.0 to 6.8 is a really small, small deceleration not a huge, sharp drop,” he argues, but admits that now is not the time for Cambodia to become complacent.

Systemic and structural reform is required if Cambodia is to weather the coming storm, he says.


Risks in construction


“It’s very, very important to manage the risk coming out of this large portfolio of the banking and financial sector in Cambodia because one of the risks that we mentioned is the construction boom.  Construction always has a cycle of boom and bust. We don’t expect the construction boom will continue forever so we actually tried to encourage these oversight devices to improve oversight capacity and the crisis preparedness.”

Claire Hollweg, another World Bank senior economist for Cambodia, highlights the need for more diverse revenue streams if Cambodia is to thrive in what she calls “a challenging external environment”.

“I think the focus on economic diversification is extremely important for Cambodia and it’s also very well recognised by the authorities in the country, not just regionally across different countries but also across products and export sectors as well,” she says, reinforcing the key message from the World Bank’s economic outlook that recommends continued trade openness, as well as structural reforms.

“In particular for Cambodia, moving up the value chain to more sophisticated, higher value-added products and tasks – it’s going to be extremely important for the country going forward and being able to make that transition is very much part of an agenda that focuses on skills and educational outcomes,” she says.

Once again, Cambodia’s dependence on China was cited as a potential threat to the Kingdom’s economic stability. With approximately 40 percent of all FDI coming from China (and the rest predominantly from Asia) both economies are intertwined. A slowdown for China will invariably mean a slowdown for Cambodia.


No slowdown yet


“We have not seen the slowdown yet in terms of tourist arrivals. This number actually increased during the first six months [of 2019] but it has been noted that there is an easing of the FDI coming to Cambodia. It is perhaps too early to say that FDI is coming more slowly across sectors, but there are some sectors that are receiving less FDI than before,” argues Sodeth.

The World Bank highlighted several areas that need addressing to minimise risk, including credit growth, the boom-bust nature of real estate and the potential loss of EBA and the GSP (the US Generalised System of Preferences).

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