The Cambodian economy is set to prosper over the next several years because of stronger global fundamentals, lower labor costs than other countries in the region, an increasing amount of foreign investment, and a fall in oil prices, according to an annual report by the Asian Development Bank (ADB).
In the “Asian Development Outlook 2015” report, the ADB predicted that Cambodia’s GDP will grow by 7.3% in 2015 and 7.5% in 2016, compared to 7% in 2014.
Agricultural products, textiles, tourism and infrastructure projects continue to propel the Cambodian economy – however, the nation is becoming more adept in all of these industries and will continue to move up the value chain, says the report.
“With the stronger performance of the world economy and overall prudent macroeconomic management, the growth prospects for Cambodia over the next two years remain good,” explained Eric Sidgwick, the Asian Development Bank’s Country Director of Cambodia.
Strongest Industries in Cambodia
The textile industry is one of the most important parts of Cambodia’s economy, and is responsible for almost three fourths of the nation’s total exports, according to numbers from the ADB.
Export growth of clothing and shoes weakened to 10.7% in 2014 because of labor unrest and protests.
The ADB said the situation has since calmed down, but that there is still a risk of future tensions, which is a significant risk for Cambodia’s economic growth.
Cambodia’s agricultural industry, another large part of its economy, suffered in 2014 due to damage caused by flooding and drought. The sector grew by 1.8%, helped along by increasing demand from Chinese consumers.
According to Mr. Sidgwick, more Cambodians are growing and eating their own rice, which is “winning international awards for its quality,”
Growth in the trading, tourism and real estate sectors accounted for 7.9% of growth in Cambodia’s services last year.
Tourist arrivals grew by a moderate 7% to 4.5 million in 2014. The ADB’s report said that measures should be taken to help make sure that tourists spend more of their money locally instead of giving it to foreign hotels and airline companies.
Cheap Oil Helps Cambodia, Credit a Concern
Cambodia’s inflation rose during the first half of 2014, but a decline in oil prices brought it back down. Inflation averaged 3.9% for the year and the ADB’s report estimates that the inflation rate this year will be 1.6% because of cheaper oil.
Tax collection in Cambodia is notoriously inefficient, but has improved to lift tax revenue to 15.7% of GDP. The country’s deficit fell to 4.1% from about 9.3%, and the ADB added that the fiscal deficit is “broadly stable,”
It is now easier for SMEs (Small and Medium Enterprises) to receive credit, and the value of outstanding bank loans and money supply each grew by around 30% in 2014. The ratio of credit to GDP climbed to 54.6% last year, from 45% in 2013.
The report warned that more credit, along with increasing dollarization, could heighten macroeconomic risks and the government may need to impose regulations and provide a stronger oversight.
Cambodian Economy Needs Diversification
Despite an overall positive tone for the Cambodian economy, the ADB’s report said that the country needs to diversify its industry and exports.
“Cambodia needs to continue to broaden its economic base and diversify sources of growth to support more sustainable and inclusive growth,” said Mr. Sidgwick.
The report showed that more small items, such as car wiring and electronic components, are being manufactured. The ADB noted that while this activity is still done of too small of a scale to impact economic growth, it is likely to thrive and diversify itself if given enough time.
“Cambodia needs to worry less about where its export markets are, but needs to diversify its clients and also its products,”