While Cambodia’s real growth is projected to remain strong, expanding at 6.9 percent in 2017 and 2018, the World Bank warned in a report released yesterday that the risks to this outlook include the fallout from further rises in US interest rates, a slower-than expected economic recovery in Europe, and uncertainties over global trade.
“US monetary policy tightening is expected to result in the US dollar appreciating vis-a-vis the Euro and other currencies, which would make Cambodia’s exports and tourism relatively more expensive for the rest of the world, and therefore less competitive,” said the World Bank’s Cambodia Economic Update 2017.
The report pointed out that continued interest rate hikes in the US may weaken prospects of further capital inflows to Cambodia. “Any disruption in global trade flows will have substantial negative impacts on Cambodia, given its high level of dependence on exports, particularly garments and footwear, as one of main drivers of economic growth,” it stated.
Without elaborating, the World Bank report also stated that uncertainty during and after the general election, which is scheduled to be held in mid-2018, could affect growth.
According to the World Bank, 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.
However the report stated that improving labour productivity would be fundamental for Cambodia to remain competitive, “given rising competition from other low-wage garment exporting countries”.
“Rising labour costs, driven in part by the increasing cost of living, US dollar appreciation, and competition from other regional low-wage countries, in particular Myanmar, continue to exert downward pressure on prices of exported garment products,” the report stated.
The World Bank pointed out that a result of competition from low-wage countries, year-on-year growth of garment exports from Cambodia fell to 8.4 percent, amounting to $6.6 billion in 2016, compared with 12.3 percent growth in 2015. “Growing competition slashed garment export prices to all major destinations. Exports prices to the US market were hardest hit, dropping by 7.2 percent in 2016.”
The World Bank urged Cambodia to stay competitive by enhancing labour productivity to compensate for rapidly rising real wages. “A top priority will be to improve the quality of basic education and promote vocational and technical skills,” the report stated.
“Investing now in further improvements in learning outcomes, coupled with increased secondary school attainment, will be essential for future success for diversification of the industry sector,” it added.
Mey Kalyan, senior adviser to the Supreme National Economic Council, said that Cambodia’s GDP growth was good at 6.9 to 7 percent. However he warned that the Kingdom should not just depend on the garment sector to “shore up the economy”.
“External factors beyond our control could affect the garment sector. Because of that, it is necessary to diversify to other sectors and go into the production of more value-added goods.”
Additional reporting by Sonny Inbaraj Krishnan. This article was originally published in the Khmer Times.