In its latest report, the World Bank has revised its forecast of the Kingdom’s real economic growth for 2017, lowering it by 0.1 percentage points to 6.8 percent.
In April this year, the World Bank reported that Cambodia’s outlook for growth remains favourable in the medium term, with growth projected to reach 6.9 percent in 2017 and 2018, driven mainly by the resilient construction and garment sectors.
According to the World Bank’s latest report, titled “East Asia and Pacific Economic Update October 2017”, Cambodia’s economy will grow at a rate of 6.8 percent this year and 6.9 percent in 2018. The report says the revision follows a rise in real wages in the country and a decline in export prices. Likewise, export growth for textiles decelerated during the first half of 2017, sinking to 5.4 percent year-on-year, compared with 8.4 percent in 2016.
“The growth outlook, however, is favourable because exports of electrical machinery, equipment and parts have picked up, partly offsetting the deceleration,” the report notes, adding that new exports – including machinery, appliances, boilers and sound recorders – accounted for 8.7 percent of total exports in 2016. In 2010, they made up less than two percent of total exports.
In addition, the agriculture and tourism sectors have experienced a recovery this year, the report notes. Tourist arrivals grew at a rate of 12.8 percent during the first six months of the year, compared with five percent in 2016.
World Bank senior economist Ly Sodeith attributed the slowdown in garment export growth to strong competition from low-cost labour economies like Myanmar and Bangladesh, which have begun taking advantages of opportunities in their garment and textile industries. “The slow growth of exports for the garment industry and the slowdown of construction activities have hindered the growth of Cambodia’s real economic growth this year,” he said.
Sodeith also noted that the garment industry will continue to experience slower growth rates due to the rising cost of labour in the country. According to the analyst, Cambodian labour is now more expensive than many other countries in the region.
Sodeith said the government should direct efforts towards developing skill intensive industries that create high value products, including electronics, assembling and machinery industries. “We have to increase the added value of our garment industry to make it stronger,” he said. “Likewise, we need to move higher in the value chain and into industries like assembling and electronics.
“We should foster the development of these industries by increasing the skill level of our labour, ensuring affordable and competitive power rates, and a stable and high-quality power supply to allow us to compete with neighbouring countries. We are moving to a lower middle-income economy, so we have to adopt high-value industries,” he added.
According to the report, the macro-financial stability of the country shows several signs of improvement, including a slowdown of the credit growth from 25.8 percent in 2016 to 18.2 percent in mid-2017, as well as a rise in foreign currency deposits.
Meanwhile, in 2016, the current account deficit waned to 10.2 percent of GDP, compared with 11.5 percent in 2015. Foreign currency reserves reached $7.8 billion, which is equivalent to six months of imports. “Cambodia has to keep improving its competitiveness in other sectors – especially when it comes to exports – by improving the power supply and lowering the cost of electricity,” the report states. “This will allow new industries, new clusters, to enter Cambodia and improve the business environment by lowering the cost of starting a business in the Kingdom, which is high at the moment.”
Sudhir Shetty, the World Bank’s chief economist for East Asia and the Pacific, said that Cambodia’s exports are based primarily on garments, which, given current wage levels and past volatility of the American dollar, puts the country’s competitiveness at risk. “The challenge for Cambodia is to continue to diversify to other sectors higher in the value chain. The textile industry also needs to climb the value chain and focus on more sophisticated products,” he added. “Now, there are a number of areas that the government needs to focus on, including infrastructure, power supply and cost electricity. We need to upgrade the garment industry and replicate that success in other sectors.”