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Financial Risks Challenge Cambodia’s Apparel Exports-Driven Economy

Cambodia’s economy, underscored by solid exports and strong domestic demand, remains strong, according to the latest edition of the World Bank’s “Cambodia Economic Update,” but challenges persist.

However, real growth is expected to slightly decelerate to 7 percent in 2019, down from 7.5 percent in 2018. Garment and footwear exports, accounting for about 70 percent of total merchandise exports, grew at 17.7 percent in 2018, but slipped to 15.3 percent by June. For the year through September, U.S. apparel imports from Cambodia increased 10.95 percent to a value of $2.93 billion.

To enhance Cambodia’s global competitiveness, the government recently introduced measures to facilitate trade by lowering logistics costs, cutting red tape and supporting businesses with a six-day reduction in the number of publicly observed holidays in 2020, the World Bank noted. In addition, a large fiscal stimulus package financed by government savings could be introduced in 2020 to mitigate the negative impacts of the potential withdrawal of the European Banking Authority.

The report also noted that Cambodia’s participation in the global economy through global value chains grew faster than other similar countries. Foreign direct investment inflows, a large pool of low-skill and low-wage labor and preferential access to key export markets were behind Cambodia’s rapid integration into limited manufacturing global value chains (GVCs).

“To move to the next stage of GVC participation, Cambodia will need a much more sophisticated policy mix,” Inguna Dobraja, World Bank country manager for Cambodia, said. “This would include expanding and deepening trade agreements, lowering barriers to imported inputs, [continuing] improving the education and skills of the labor force, and harnessing the digital economy to support the integration of firms into global value chains.”

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A sustained appetite for investment was reflected by strong construction activity, the report said. As a result, steel imports rose 63.5 percent in June, up from 27.7 percent in 2018.

On the downside, risks in the financial sector continue to grow, the World Bank said, with increased exposure to the construction and real estate sector rising alongside indebtedness, where combined bank and microfinance credit now account for more than 100 percent of gross domestic product. A possible withdrawal of the Everything But Arms (EBA) initiative, as well as a sharp slowdown in the Chinese economy, could substantially dampen Cambodia’s growth prospects.

The EBA is an initiative of the European Union (EU) under which all imports from Least Developed Countries are duty-free and quota-free, with the exception of armaments. The EU has been reviewing Cambodia’s trade privileges due to concerns about human rights issues in the country.