The Asia Development Bank (ADB) has just released its “Outlook for 2018” and says Cambodia’s economic outlook is positive and is marked by robust export growth, strong foreign investment, sustained growth in tourism arrivals and strong domestic demand, the ADB projects Cambodia’s economic growth in 2018 and 2019 to grow at an annual rate 7%, following solid growth in the country’s main drivers of economic growth – the construction sector, the garment and footwear industry, tourism and domestic trade.
The banks report says that there is a projection of a slowdown in the garment and footwear industries in the coming years but that the slowdown in these industries will be offset by an emergence of new, non-traditional industries including auto parts, bicycle manufacturing and electronics manufacturing, as well as growth in more familiar industries such as milled rice and rubber production.
All in all, the ADB forecasts that the service sector will continue to expand in 2018 at 7.1%, the same rate as 2017, propelled by a vibrant tourism industry, while the agricultural sector is expected to grow by just 1.8%.
The bank also projects that fiscal policy will to be more expansionary in 2018 than last year, with enhanced revenue growth leading to a higher level of public spending. The report predicts that the current account deficit will widen as the cost of oil and other imported products rises.
Jan Hansen, the ADB’s senior Cambodian economist said that, “Cambodia’s strong economic growth in the short term is supported by robust exports, as well as higher foreign direct investment inflows, tourism activity and domestic demand. However, rising wages, difficulty in doing business, and intensifying competition can undermine the country’s competitiveness.”
The ADB report points out that the kingdom’s economic growth could be adversely affected by the national elections in July, with investors afraid they might usher in political instability. External risks to the country’s 2018 growth include the possibility that the US might tighten interest rates faster than anticipated, heightened volatility in international financial markets and hikes in the price of crude oil.
In order to create a stronger economy, the ADB states that Cambodia should focus on developing more technologically advanced industries as well as investing in its human capital by training its labor force. Currently 80% of total industrial activity takes place in the garment and footwear sector and expansion into other industries is seen as a business imperative.
The ADB report also pointed out that while nominal wages have increased significantly in the garment industry during the past five years, that growth has not been matched by a proportional rise in productivity. According to the ADB, “If Cambodia wants to become a middle income country, it needs to focus on skills and on moving up the regional value chain.”
Another challenge that Cambodia must overcome is the perceived difficulty of doing business in the country. In 2018, the World Bank ranked the kingdom 135 out of 190 countries in its Ease of Doing Business Index. The kingdom’s performs particularly poorly in three categories – starting a business, getting construction permits, and enforcing contracts.
The ADB notes that, “On one side, Cambodia is very open and enjoys a favorable climate for foreign direct investment. On the other side, bureaucratic procedures in terms of opening and operating a company are extremely high and cumbersome.”
The Cambodian government is keenly aware of problems with business and company registration. It is estimated that Cambodia has more than 510,000 MSMEs, but only 20,000 are registered with government, which means more than 95% of businesses are unregistered.
In order to solve this problem, the Cambodian government had decided that the most pro-active way to encourage businesses and companies to register and be in legal compliance is to give those companies who register before December 2018 a two-year break on their taxes and to provide them variety of business incentives to support their businesses.