Cambodia’s economy will prosper over the next several years. Lower labor costs than competitors, rising foreign investment, along with falling oil prices will help contribute according to the Asian Development Bank (ADB).
The “Asian Development Outlook” report predicted that Cambodia’s GDP will grow by 7.3% in 2015 and 7.5% in 2016. Compare this to “only” 7% in 2014.
Basic sectors like tourism, agriculture, textiles, and infrastructure projects continue to propel the Cambodia economy. However, the nation is becoming more adept in all of these industries and will continue moving up the value chain, says the report.
“With 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 sector is one of the most important parts of Cambodia’s economy. It’s 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 calmed down, but future tensions are still possible. They’ll remain a 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.
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 Cambodia should take measures to ensure tourists spend money locally instead of giving it to foreign hotels and airlines.
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 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’s also now easier for SMEs (Small and Medium Enterprises) to receive credit. 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. Further regulations and stronger oversight are needed in some industries.
Cambodian Economy Needs Diversification
The ADB had an overall positive tone for the Cambodia economy. But the report also said 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 ADB’s report showed that a greater number of small items, such as car wiring and electronic components, are being manufactured. They noted this activity is done on too small of a scale to impact economic growth.
However, the ADB also believes these sectors will eventually thrive and diversify if given enough time.
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