World Bank: Cambodian Economy Expected to Grow at 7.0 Percent

AKP Phnom Penh, October 05, 2018 —

Cambodia would achieve an economic growth of 7.0 percent in 2018, up from 6.9 percent in 2017, according to the World Bank’s new forecast.

During the first half of 2018, Cambodia’s economy continues to grow robustly, with garment exports reaching a two-year high. Foreign direct investment and private sector deposits have increased by 14.3 and 22.4 percent (y/y), respectively. The Cambodian economy is expected to grow at 7.0 percent in 2018, compared to 6.9 percent in 2017, underpinned by upbeat investor sentiment and rising government spending. This will contribute to continued reduction in poverty. But rising fiscal deficit and collateral damage from a global trade war pose risks to Cambodia’s outlook.

Large foreign direct investment inflows continue to underpin construction activity. Foreign direct investment is estimated to have increased by 14.3 percent (y/y) during the first six months of 2018. More than half of the inflows originated from China, and are directed towards commercial and residential real estate, as well as, to a lesser extent, manufacturing and agriculture. Newly emerging hot spots of the current construction boom include the seaside provincial town of Sihanoukville, whose FDI approvals amounted US$126 million in June 2018 alone.

Credit growth slightly eased, while domestic demand surged, fueling economic activity. While domestic credit growth moderated further to 17.4 percent y/y in June 2018, thanks in part to the interest rate cap, domestic demand surged. Motor vehicles and steel imports, which gauge domestic consumption and construction demand, rapidly increased, rising by 81.4 percent and 50.0 percent in June 2018, respectively. Rising prices of food and utilities have pushed up inflation, which rose to 2.9 percent y/y in June 2018, from 2.2 percent in December 2017.

Recovering agricultural production seems to have helped contain outward migration. Depressed commodity prices and adverse meteorological conditions (el Nino) during 2014 and 2015 resulted in a pickup in migration. The recovery in agricultural production in 2016 and 2017, coupled with improving economic prospects, is believed to have contributed to a return of migrants from Thailand, as proxied by a recent fall in remittances.

Against a backdrop of better than expected export performance, rising consumption and upbeat investor sentiment, growth outlook has been revised up. Underpinned by exports and government spending, the Cambodia’s growth is expected to marginally accelerate to 7.0 percent in 2018, compared to 6.9 percent in 2017 (revised official figure). As global demand peaks this year, growth in Cambodia is expected to remain robust, easing modestly to 6.8 percent in 2019 and 2020. Strong economic growth is expected to result in continued poverty reduction.

Expansionary fiscal policy has underpinned consumption. Driven by both wages and public investment, public outlays are budgeted to increase significantly in 2018, reaching 24.6 percent of GDP, up from 22.7 percent in 2017. The overall fiscal deficit (including grants) is therefore expected to widen to 4.2 percent in 2018, up from 1.6 percent in 2017. Fiscal buffers in the form of government deposit remain substantial, accounting for about 13 percent of GDP by mid-2018. Cambodia’s debt distress level remained low as per the 2017 WB/IMF Debt Sustainability Analysis.

Beside World Bank, the International Monetary Fund, Asian Development Bank, and ASEAN+3 Macroeconomic Research Office also projected the strong Cambodia’s economic growth this year.

By Khan Sophirom