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Footwear a Growth Leader for Cambodia’s Exports, as Economy Expands

Increased exports of footwear, electrical machinery, equipment and auto parts has helped Cambodia’s economy remain strong, but growth is projected to ease slightly to 6.8% in 2017, compared with 7 percent last year, according to a new World Bank report.

While exports of clothing and other textile products have moderated, the medium-term outlook remains positive due to export diversification and healthy inflows of foreign direct investment, according to the World Bank’s latest “Cambodia Economic Update.”

“Cambodia appears to be on the verge of climbing up the manufacturing value chains—from garments to electronics and auto parts—and that is a very encouraging development,” said Inguna Dobraja, World Bank country manager for Cambodia. “With deeper structural reforms that address high electricity and logistics costs, as well as skills gaps, Cambodia can boost investment, export diversification and move closer to its development goals.”

Real growth is projected to remain strong, expanding at 6.9% in 2018. A possible slowdown of the regional economy, especially in China, and potential election-related uncertainties, however, pose downside risks to the outlook.

Economic growth will continue to be propelled by export diversification and underpinned by healthy inflows of foreign direct investment. Rising government spending, including public investment, is also expected to drive growth.

[Read more about Cambodia: Cambodia Apparel Exports Up, But Trade Relations Could Strain Sourcing]

There are promising signs of diversification in the manufacturing sector, with the entry of high-value-added manufacturers, especially for electrical appliances and components, and auto parts. Relatively high electricity and logistic costs, however, remain key bottlenecks.

Footwear exports continue to grow steadily. The exports of footwear products, largely destined for the EU market, are second after clothing and other textile articles. Total footwear export value reached almost $500 million during the first six months of 2017, up from 15.6% in 2016. Reflecting increased competition, average footwear export prices have been steadily declining since early 2016.

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In the textile industry, FDI inflows have declined. Facilitating structural reforms to accelerate Cambodia’s transition to higher value-added manufacturing products is, therefore, critical.

During the first six months of 2017, exports of clothing and other textile products reached $3.3 billion. These exports grew at 5.4% year over year during the first half of 2017, down from 8.4% in the year-ago period. In volume terms, exports have also eased, increasing by 3.6% year to year compared with 12.3% during the same period last year.

The report noted that exports are facing increased competition. Real wages are rising, while productivity improvement remains modest. As a result, the prices of exported apparel have been declining. The minimum wage for the garment and footwear sector is $153 a month and is expected to increase to $170 a month in 2018.

The European Union continues to be the most important market for Cambodia’s garment exports. The EU, together with the U.K., absorbs about 45 percent of the total exports of clothing and other textile products. The U.S. market is the second largest, accounting for 25 percent of Cambodia’s exports in the sector, while Japan accounts for 9 percent. Despite the challenges, Cambodia has been able to increase its share in the world’s exports of textile and apparel articles, reaching 1.7% in 2016, up from 1.1% in 2011, the report noted.

The tourism sector in Cambodia is recovering, largely due to ongoing efforts to attract international tourists—especially from China—with new regional direct flights and the “China Ready” initiative. Given Cambodia’s increased dependency on Chinese FDI and tourist arrivals, a sharp slowdown in the Chinese economy could negatively impact growth prospects. Cambodia’s external competitiveness is currently being threatened by rising real wages, a strong dollar and emerging cheap labor competitors such as Myanmar, the World Bank said.