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SINGAPORE, December 21, 2023 – Cambodia’s economy is expected to continue its gradual recovery path. A robust tourism recovery, alongside pent-up domestic consumption, will sustain the ongoing improvement in the service sectors, although growth in the garment sector is projected to moderate due to persistently subdued global demand.

Cambodia’s path toward a strong economic recovery could be derailed by several near-term external risks and domestic vulnerabilities. Restoring monetary and fiscal buffers post-pandemic is essential to maintain a resilient and sustainable growth. The government should continue to strengthen its policy framework and focus on structural reforms.

These conclusions are highlighted in the 2023 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 September 4 to 14, 2023, including data and information available up to October 20, 2023.

Economic developments and outlook

Cambodia’s economy is projected to grow by 5.3 percent in 2023 and 6.2 percent in 2024, continuing its gradual recovery. The economy has remained resilient, supported by a robust tourism recovery, pent-up domestic consumption, expansion in the non-garment manufacturing sector, strong foreign direct investments (FDIs), and infrastructure investment. The garment industry remains weak due to persistently subdued US and EU demand, while the real estate sector is undergoing a cyclical downturn amid oversupply.

Headline CPI inflation continued its decline in the first half of 2023, averaging 1.2 percent, thanks to the easing of global oil and food prices. However, the headline inflation began to trend up from July 2023, reflecting the base effect, as well as an increase in global rice prices. For the whole of 2023, headline CPI inflation is estimated at 2.6 percent, before picking up to 3.1 percent in 2024, in tandem with stronger economic growth.

The current account turned into a surplus of 1.7 percent of GDP in the first half of 2023 from a deficit of 25.7 percent in 2022, on the back of a sudden stop in gold imports, stronger inflows in remittances and tourism recovery. Despite global financial tightening, FDI inflows remained resilient at 14.1 percent of GDP in the first half of 2023. The current account balance is projected to register a small deficit of 2.6 percent of GDP in 2023, as gold imports have resumed since July 2023, and the deficit is expected to widen to 5.1 percent of GDP in 2024, with the recovery in demand for imported goods.

Risks, vulnerabilities, and challenges

Cambodia’s path toward a strong economic recovery could be derailed by several near-term external risks and domestic vulnerabilities.

External short-term risks stem from a faltering of economic growth in China, which is the largest contributor to Cambodia’s FDI and a major source of tourism, as well as a sharper slowdown of its major economic partners such as the US and EU. As Cambodia’s inflation is highly correlated with global commodity prices, a spike in global oil prices, driven by heightened geopolitical tensions; or a surge in global food prices triggered by a severe El Nino, could cause Cambodia’s inflation rate to spike up.

A prolonged weakness in the real estate sector could lead to financial distress and put pressure on the financial sector and the broader economy, particularly through the unregulated shadow banking activities. Cambodia’s financial account faces potential reversal risk in short-term funds due to a growing reliance on short-term external debt and non-resident bank deposits.

Extreme weather events and climate change transition could weigh on potential growth unless effectively addressed.

Policy recommendations

Restoring fiscal space should remain a policy priority, involving a complete phasing out of pandemic-related stimulus as well as  the recent counter-inflationary measures. With the expected removal of short-term stimulus measures by the end of 2023, the focus in 2024 should be on fiscal consolidation and improving the long-term growth prospects of the economy by accelerating economic diversification and competitiveness, improving social protection, and enhancing infrastructure. Boosting revenue and augmenting spending effectiveness are vital to enhance fiscal space and medium-term fiscal sustainability. The newly adopted medium-term policy framework for implementing a personal income tax system is commendable, given the country’s relatively low collection of personal income tax.

The National Bank of Cambodia’s (NBC’s) gradual normalization of its monetary and macroprudential policy measures, including restoring the reserves requirement ratios for foreign currency deposits and the build-up of the capital conservation buffer is appropriate. The pace of adjustments should consider the tight global financial conditions. The NBC should intervene in the market judiciously to minimize excessive volatility while striking a balance between exchange rate stability and foreign reserve adequacy. The financial supervisory framework and domestic financial safety net could be further strengthened. The introduction of a well-defined deposit protection scheme for both local and foreign currencies would help to mitigate the risk of a bank run.

Tightening the regulatory oversight and supervision of the unregulated shadow banking activities is critical to mitigate risks stemming from a prolonged real estate downturn. Regulators should maintain a comprehensive and consistent approach when it comes to evaluating, granting, and managing licenses to real estate developers. Stringent regulations and vigilant monitoring, supported by a centralized and standardized data management system, are imperative to rein in lax lending practices between home buyers and developers.

Under the new government, a steadfast commitment to structural reforms remains crucial to sustain rapid economic growth. Cambodia’s firm commitment to implementing comprehensive climate change measures and embracing new technologies will help advance the transition to a green and digital economy.

Diversifying the economic structure can help enhance Cambodia’s resilience against external shocks and boost its global value chain participation. The tourism sector should be further strengthened  with various support measures to improve its attraction to foreign tourists.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and 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 regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.

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 timely formulation of policy recommendations to mitigate such risks.