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SINGAPORE, September 5, 2024 – Cambodia’s economy is projected to grow by 5.6 percent in 2024¹ and 5.9 percent in 2025. The recovery momentum is driven by a rebound in the garment sector and sustained growth in the non-garment manufacturing sector.

Cambodia’s path toward a strong economic recovery is confronted with external short-term risks and domestic vulnerabilities such as declining asset quality in the banking sector and a potential weakening of the real estate sector. Rebuilding policy space, mitigating financial stability risks and strengthening the supervision of the real estate sector are key to post-pandemic growth.

These conclusions are highlighted in the 2024 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 May 2 to 13, 2024, including data and information available up to June 7, 2024.

Economic developments and outlook

Cambodia’s economy continued to recover in 2023, but at a slightly weaker pace of 5.0 percent. The recovery was backed by the services sector, especially a recovery in tourism, as well as the non-garment manufacturing sector, notably exports on solar panels, vehicle parts, and electrical parts. Garment exports and the real estate sector remained weak.

A rebound in the garment sector due to stronger demand in major advanced markets, and a robust tourism recovery will fuel Cambodia’s economic growth in 2024 and 2025. The non-garment manufacturing sector is expected to sustain its strong growth momentum, supported by stable foreign direct investment (FDI) inflows.

Consumer price index (CPI) inflation declined rapidly from its peak in 2022, averaging 2.1 percent in 2023, before turning to a modest deflation at the beginning of 2024. The volatility of CPI inflation is primarily driven by fluctuations in food and oil prices, which are prone to global trends. Gradually approaching pre-pandemic levels, CPI inflation is expected to rise to 2.2 percent in 2024 and 2.3 percent in 2025 due to higher domestic demand and a possible rebound in energy prices.

The current account balance turned into a surplus of 1.3 percent of GDP in 2023, reflecting a significant reduction in trade deficit. The services account turned into a surplus on the back of a robust recovery in tourism. The current account is projected to register a smaller surplus in 2024 and 2025, before returning to a deficit in the medium term, reflecting a recovery in demand for imported goods as the economy strengthens.

Risks, vulnerabilities, and challenges

Cambodia’s growth outlook is highly vulnerable to external risks. These include a slower growth in China, a sharp growth slowdown in the U.S. and Europe, potential shifts in U.S. and E.U. trade policies, and a spike in global commodity prices.

Domestically, the Cambodian banking sector faces a gradual rise in non-performing loans (NPLs). AMRO’s reverse stress test indicates that the banking sector remains resilient. But the capital adequacy ratio of a few banks could fall below the minimum requirement, particularly those with large exposure to sectors with high NPLs, such as hotels and restaurants, real estate, and wholesale and retail trade. A further weakening of the real estate sector could result in financial distress for some developers and heighten credit risks.

Cambodia’s long-term potential growth may struggle to rebound to pre-pandemic levels of around 8 percent due to the scarring effects of the COVID-19 pandemic caused by disruptions in education and impaired balance sheets of firms.

Policy recommendations

The government should prioritize its fiscal consolidation plan to rebuild policy space. Increasing the efficiency of expenditure and reallocating resources to government priorities are key to enhance development outcomes and boost growth potential. Raising revenue is crucial to secure funds for development and enhance fiscal sustainability. Streamlining tax incentives for investments is necessary to preserve fiscal space and limit forgone revenue. Cambodia needs to diversify its financing sources for public investment as rising per-capita income levels will reduce access to concessional loans.

The National Bank of Cambodia should resume its post-pandemic normalization of forbearance policies in 2025 and prepare to normalize the reserve requirement ratio for foreign currencies in a timely manner. Together with the capital adequacy framework, the capital conservation buffer should be fully implemented promptly. Developing a deposit insurance scheme and a bank resolution and crisis management framework are essential to strengthen financial stability.

The Non-Banking Financial Services Authority should establish a comprehensive legal framework and step up its supervision of the real estate sector. Tightening oversight on unregulated shadow banking activities remains critical in mitigating hidden credit risks. Introducing a new law for real estate development, improving audited financial reporting, and collecting more granular data on key risks are also essential to improve the resilience of the sector.

In the longer term, the authorities should reinforce efforts to mitigate the scarring effects of the pandemic. It is important for Cambodia to upgrade human capital, improve the investment climate, and advance in global value. The country’s growth potential can be enhanced through infrastructure development, digitalization, as well as lowering logistic costs. The authorities should ensure the timely implementation of structural reforms listed in the Pentagonal Strategy.

¹On July 2, 2024, Cambodia officially announced the rebasing of its GDP series, replacing the base year 2000 with 2014. This rebasing resulted in an increase of over 30 percent in the size of its economy, leading to changes in the share of sectoral components in GDP, with larger shares for manufacturing and services. All relevant data in this Press Release have been produced using the new GDP series with the base year of 2014. 

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. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.