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SINGAPORE, December 21, 2022 – Cambodia has navigated the COVID-19 pandemic well. Apart from the quick roll-out of vaccines, the government support measures have mitigated economic scarring and prevented households from falling into poverty. However, fresh challenges are testing the resilience of the economy, particularly tighter global financial conditions, high inflationary pressures and slower global growth. To manage the multiple headwinds, Cambodia will need to continue providing targeted fiscal support amid thinner policy buffers, while unwinding regulatory forbearance and maintaining financial stability. Sustained and stronger focus on structural reforms is needed for the Cambodian economy to move up the global value chain.

These conclusions are highlighted in the 2022 Annual Consultation Report on Cambodia published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on AMRO’s Annual Consultation Visit to Cambodia from July 20 to August 3, 2022, including data and information available up to September 15, 2022.

Economic developments and outlook

Cambodia’s economy is projected to continue its gradual recovery by growing 5.0 percent in 2022 and 5.4 percent in 2023. The economy is seen to remain resilient, supported by the resumption of tourism and normalization of domestic activity, despite the challenging outlook for the manufacturing sector due to the expected slowdown in the US and EU in the second half of 2022.

Soaring global energy prices in the first half of 2022, reflecting to a large extent the effects of the war in Ukraine, have resulted in the spike in inflation in Cambodia, peaking at 7.8 percent in June. Inflation fell to 4.9 percent in August as the fall in oil prices due to a gloomy global outlook helped ease overall price pressures in Cambodia. With global oil prices expected to continue to decline, inflation is forecast to fall from 5.3 percent in 2022 to 3.0 percent in 2023.

On the external front, the current account deficit widened to an unprecedented 45.7 percent of GDP in 2021 (or 24.1 percent excluding gold) but is expected to narrow to 35.1 percent of GDP in 2022 (or 21.9 percent of GDP excluding gold), reflecting a recovery in exports and tourism. FDI inflows into Cambodia are expected to remain stable. International reserves plateaued at USD19.5 billion as of June 2022 but remained ample at 9.3 months of imports of goods (excluding gold) and services.

Risks, vulnerabilities and challenges

The economy’s recovery faces rising external and domestic risks. Headwinds from weakening global demand amid the monetary tightening of the U.S. Federal Reserve and other central banks could impact on Cambodia’s exports of manufacturing products. Prolonged strict border controls in China could also adversely affect investments to Cambodia, while dampening prospects for a fuller recovery of its tourism sector.

Meanwhile, higher oil prices have exerted strong inflationary pressures, increasing the prices of goods and weighing down household consumption. Despite the recent easing of inflationary pressures in Cambodia, continued vigilance is needed as there are still significant upside risks to oil prices arising from geopolitical tensions and supply constraints. Although inflation has slowed, the overall price level remains elevated compared to a year ago, that could spur calls for higher wages in the future.

From a longer-term perspective, Cambodia’s large current account deficits are a potential source of external vulnerability. Although most of the external liabilities are funded from FDI inflows and concessional loans from multilateral and donor agencies, which are relatively stable, capital inflows from external private debt and banks’ non-resident deposits, which are more short-term, have become more substantial in the past five years. If a shock were to reverse these short-term flows, the external position could come under pressure.

Another source of longer-term risk could come from the country’s high credit growth. Cambodia’s credit-to-GDP ratio reached 177 percent in the first half of 2022, which has given rise to concerns of financial distress in some segments of the economy such as real estate-related sectors and shadow banking. In particular, risks may have shifted away from banks toward shadow-banking activities with the emergence of property developers that provide their own long-term financing with lax loan screening.

Policy recommendations

Fiscal support has been vital in protecting lives and supporting the vulnerable groups during the pandemic. With the pandemic subsiding in Cambodia, the government should rebuild fiscal buffers while continuing to provide targeted support. It is appropriate that the COVID-19 cash transfer program be redirected toward shielding the poor from the impact of high inflation. However, such support program should be temporary with a clear sunset clause to avoid becoming entrenched. A further strengthening of the social safety nets is highly encouraged.

The normalization of the National Bank of Cambodia’s (NBC’s) liquidity measures and banks’ provisioning for restructured loans should continue. Raising reserve requirements back to pre-pandemic levels should be done in a calibrated manner in line with the economic recovery. With the end of regulatory forbearance on restructured loans, the NBC should continue monitoring the quality of remaining restructured loans, especially for those still under the assessment period, to ensure that banks allocate adequate provisions.

Sustained and stronger focus on structural reforms is needed to maintain the growth momentum of the Cambodian economy. Boosting skilled labor supply to enhance productivity, augmenting infrastructure to reduce non-labor costs, and improving the institutional environment, will all be critical in making Cambodia’s business environment more competitive and attract more FDIs. As the economy develops, greater efforts should be exerted to champion domestic suppliers that feed into manufacturing industries and encourage them to diversify and move up the production value chains. Fulfilling commitments to achieve carbon neutrality will also support the long-term sustainability of the economy.

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About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timelyformulation of policy recommendations to mitigate such risks.