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Despite Risks, Cambodia Should See Strong Economic Growth Thanks to Apparel Exports

Buoyed by a rebound in textile and apparel exports, along with tourism and agriculture, economic growth in Cambodia remains strong and is projected to accelerate slightly to 6.9% in 2018 from 6.8% last year, a new World Bank report said.

The World Bank’s latest Cambodia Economic Update said rising government spending and favorable global conditions are expected to form a strong foundation for Cambodia’s high growth trajectory.

But risks remain, the report noted, including erosion of export competitiveness due to rapidly rising wages, vulnerabilities from a prolonged real estate and construction boom, potential election-related uncertainty, and “periodic jolts of protectionism and escalating trade disputes between the world’s largest trading nations.”

Textile and apparel exports to the European Union, including the U.K., grew 7.4% year-over-year in 2017, while those exports to the U.S. expanded 3.7% compared to a decline of 3.5% a year earlier. Despite rapidly rising wages, overall textile and apparel exports rose 7.7% in 2017, a slight deceleration from 8.4% growth in 2016, according to the report.

Last year, the country approved an 11 percent wage hike that took effect in January, bringing garment workers’ average wages to $170 a month.

The reported said the textile and apparel sector has adjusted rising competition through adding value to its products by becoming more vertical, and incorporating printing, embroidery and washing to its production capabilities. While the effort to climb to higher product prices continued in 2017, the growth in the exports of clothing and other textile products is reliant largely on volume increase due to intense regional competition, the study noted. In volume terms, exports of textile and apparel items grew 6.6%, compared to 12.3% in 2016.

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Cambodia’s footwear exports continued to expand, but average prices fell slightly. Attracted by “Everything but Arms” preferential treatment provided by the EU, footwear products have expanded and become the second-largest manufacturing export after clothing and other textile articles. Total footwear export value reached nearly $900 million in 2017, representing 14.4% growth. Unlike textile and apparel, average footwear export prices have been steadily declining during the last few years due to rising competition, dropping to $6.60 a pair in 2017, down from $7 a pair in 2016.

There has been ongoing concern from U.S. imports and global rights groups over labor and human rights in the country. In March, the United Nations Human Rights Council, endorsed by 45 nations including the U.S., issued a statement urging improvements in Cambodia’s rights situation ahead of a general election this July. The joint statement expressed “deep concern about the recent serious decline of civil and political rights in Cambodia,” adding “these backward steps include signs of escalating repression of the political opposition, civil society and media.”

Meanwhile, Inguna Dobraja, World Bank country manager for Cambodia, said in a statement accompanying release of the report, “To maintain strong growth, it is essential that Cambodia invests more in education and skills training, while addressing the constraints facing small and medium businesses. Investing in people is the best for a more prosperous future.”

Cambodia, the report noted, can diversify growth and create more jobs by reducing the costs of starting a business, operations and financing. The World Bank’s recommendation for the country is to closely monitor the construction and real estate boom by “developing policies that help reduce the scope for speculative activities.”

Large foreign direct investment inflows and rising public investment in infrastructure are expected to help economic expansion. Combined with structural reforms designed primarily to boost Cambodia’s external competitiveness, this should help speed up growth momentum in the longer term.