AMRO Gives Some Recommendations to Maintain High Growth in Cambodia

AKP Phnom Penh, May 02, 2019 —  

The ASEAN+3 Macroeconomic Research Office (AMRO) said that Cambodia’s real GDP growth is projected to be 7.1 percent, with the inflation rate at 2.8 percent this year, and next year would reach only 7 percent while the inflation rate rose slightly to 3 percent. 

According to the AMRO’s report released recently, the growth has been solid for the developing economies, particularly Cambodia and Vietnam. Cambodia’s direct exposure to China and through the global value chains (GVCs) is relatively low.  

A small reduction in China’s apparel production would be reflected in higher production in Vietnam and Cambodia. In other sectors, chemicals production would decline across the region, while services production would decline in the United States, China, Singapore and Cambodia, possibly due to second-round effects from dampened demand in the United States and China, and consequently from the rest of the world.  

Public finances in the region remain generally prudent. Although the general government debt-to-GDP ratios for most regional economies have generally risen over the past several years, the debt-to-GDP levels are still moderate by international standards. Compared to the respective benchmarks for low-income and middle-income developing economies, Lao PDR’s and Vietnam’s debt-to-GDP levels are relatively high, suggesting that fiscal consolidation is needed. In contrast, Cambodia, Indonesia, Korea, the Philippines and Thailand have debt-to-GDP ratios that are lower than their comparators, pointing to some available fiscal space.  

Cambodia’s reform efforts in revenue mobilisation have yielded desired results, with sustained tax revenue growth via broad-based increases in both direct and indirect taxes, although continuing efforts are needed to improve spending efficiency. Lower-income ASEAN (“CLMV”) economies with the traditional developing country problems: investment needs exceeding what they can save for, and limitations in productive capacity (including labour, technology, institutions). Unlike earlier emerging economies, Cambodia, Laos, Myanmar, and Vietnam confront these development constraints at a time when globalisation and access to foreign capital can help close the gaps, or wreak economic damage if financing is excessive. 

Cambodia, Laos and Vietnam also have plans to construct new airports to facilitate international travel and highways to link the major cities. Almost unique among ASEAN countries, Singapore has a comfortable airport utilisation rate, but is already planning ahead for Terminal 5 at its Changi Airport, which will double the existing capacity. 

According to World Bank data, Cambodia’s and Myanmar’s experience with the textiles, clothing and footwear (TCF) sector is one example where high-skilled and technology-intensive manufactured goods account for very small shares of their manufactured exports (0.4 percent for Cambodia in 2016 and 6.1 percent for Myanmar in 2017). 

The gap in skilled labour is especially stark in the CLMV economies, which rank below the global-average in the World Economic Forum’s human capital development index. Particularly in Cambodia, Laos and Myanmar, low healthcare spending and chronic underinvestment in education, and the limited availability of skilled labour, are now impinging on these countries’ capacity for further growth catch-up and development. In response, efforts are now underway to ramp up investment in these areas significantly. In Cambodia for example, total expenditure on the social sector reached around 7.0 percent of GDP in 2018, up from 4.6 percent in 2013. Current expenditure on education increased from 1.6 percent of GDP in 2013 to 2.7 percent of GDP in 2017, and if capital expenditure is included, public spending on education sector increased to 3.1 percent of GDP. In contrast, Hong Kong, Korea, Japan, and Singapore have systematically upgraded and raised the quality of education throughout the past few decades. 

The infrastructure spending gap per year over the next two decades is large for the developing countries such as Cambodia and Vietnam, but is relatively small for high-income countries.  

Headwinds to the growth outlook are mainly from external factors. Given Cambodia’s high reliant on the EU market under the Everything But Arms (EBA) preferential trade arrangement, a suspension of the EBA scheme could substantially weaken its export competitiveness in that market. Another external risk arises from the possible escalation of the U.S.-China trade war—where it would result in weaker growth momentum in these two economies and intensify the global trade protectionism sentiment. In addition, given China’s increasing investment in Cambodia, FDI inflows—in particular into the real estate sector—have become more susceptible to any sudden policy change by China. 

In order to sustain a high growth potential in the medium-term, Cambodia needs to continue its efforts to enhance external competitiveness and economic diversification. Improving infrastructure and human resources, as well as trade facilitation, are critical to enhancing competitiveness and productivity. In addition, given a relatively narrow growth base, continuing efforts to diversify growth are also essential, and the tourism-related service sector shows great potential.  

By Khan Sophirom