Cambodia: Structural Reforms and Rebalancing Fiscal Expenditure Critical to Sustain Strong Growth

2018-12-17T03:01:00+00:00December 11, 2017|Press Release|

Cambodia: Structural Reforms and Rebalancing Fiscal Expenditure Critical to Sustain Strong Growth

SINGAPORE, December 11, 2017 – Cambodia’s economic growth is expected to remain strong in 2017 and 2018, but structural reforms and a rebalancing of the budget to capital expenditure is critical in the medium term to sustain its growth, according to the 2017 Annual Consultation Report on Cambodia published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country in June 2017 and data availability as of September 15, 2017.

Cambodia’s economy is expected to grow at 6.9 percent and 6.8 percent in 2017 and 2018, respectively, supported by tourism and construction activities amid a slowdown in the garment sector.

Headline inflation may increase further to 3.3 percent in 2017 from 3.0 percent last year, driven by increasing oil prices. It is expected to be stabilized at around 3.5 percent in 2018.

The overall external position is expected to remain strong this year. Reflecting the reduction in trade deficit, the current account deficit narrowed from 9.4 percent of GDP in 2015 to 8.9 percent in 2016. Financial inflows were supported by an increase in foreign direct investments (FDI), especially to the financial sector, due to the effects of a new regulation on capital requirements. The current account is expected to improve further in 2017 with a rebound in tourist arrivals.

While deposit growth has remained stable, credit growth has been slowing in 2017. Going forward, the overall credit growth is likely to remain soft with the implementation of tighter prudential regulations. While most financial indicators have remained sound, non-performing loan (NPL) ratios—especially those of Microfinance Institutions (MFIs)—increased moderately.

The overall fiscal position remains strong with continued high tax revenue collection. While tax revenue is expected to increase further in 2017, a larger fiscal deficit is planned in 2017 reflecting higher fiscal expenditure to support the economy.

Risks stem mainly from the rising labor cost, a strengthening of the U.S. Dollar, and loss of preferential treatment in trade and external financing. The domestic financial system is vulnerable to shocks from the global financial market with its heavy dependence on external funding.

While Cambodia’s wage increases should be in line with underlying productivity growth, Cambodia should continue to improve its competitiveness across other dimensions including trade facilitation, logistics improvement and reducing electricity cost. Improving public sector capacity and rebalancing budget allocation towards more capital investment are essential to enhance growth prospects. Strong revenue increase and fiscal prudence will help to build a fiscal buffer to support macroeconomic stability and growth. Authorities should also consider diversifying financing sources to sustain infrastructure spending and boost spending efficiency.

With monetary policy constrained by dollarization, a comprehensive framework of prudential measures should be adopted to manage risks in the financial system. Building sufficient foreign reserves as a buffer against external financial risks and domestic liquidity shocks is essential.

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About AMRO and AMRO Annual Consultation Report:

The ASEAN+3 Macroeconomic Research Office (AMRO) was established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 ASEAN countries and China (including Hong Kong), Japan, and Korea. AMRO fulfills its mandate by conducting macroeconomic surveillance, supporting the implementation of the regional financial arrangements, the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to the members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. 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.

Media Contact

Huong Lan Vu
Public Relations Officer

Tel: +65 6323 9844
Email: vu.lanhuong@amro-asia.org