Economies are trending upward in Cambodia and Southeast Asia, but creating sustainable growth will depend on careful management of the financial sector, diversification of the economy, and a steady scaling down of pandemic-era benefits, says the Asia Development Bank (ADB).
In addition, ensuring an even recovery that benefits those most affected by the pandemic will be one of the biggest hurdles for the government to overcome. ADB’s recently released Southeast Asia: Rising from the Pandemic report stated that 4.7 million people in the region fell below the extreme poverty line in 2021.
In Cambodia, workers in the tourism and garment industries suffered widespread job losses and wage cuts, with the government offering cash handouts and loan restructures as remedies.
These remedies will eventually have to be phased out and in its report, the ADB advocated for improved healthcare and social services as long-term support options for lower-income households.
The report also focused on three key sectors that could drive the economy forward: tourism, agriculture, and the manufacturing of non-garment, travel goods, and footwear products.
To read more about the Cambodia Chamber of Commerce 2022 economic outlook click here.
Cambodia removed PCR test requirements and resumed visas on arrival shortly after the report was published, but even before these changes, ADB forecasted an opportunity for Cambodia to capitalize on a potential return of tourism.
New infrastructure, a focus on eco-tourism, and a diversification of the entire industry were seen as key factors that could attract international tourists to Cambodia in the near future.
Hannah Pearson, the president of Pear Anderson, a tourism industry consulting firm based in Malaysia, agreed that Cambodia has a chance to be a frontrunner in the race to win back tourists, but only if it focuses on selling itself as a one-stop destination.
Before the pandemic, tourists would combine Cambodia on their trips to Thailand or Vietnam, but since inter-country travel has become restrictive in the age of the pandemic, this would need to change.
“The opportunity here is to educate the international market that there is so much more to Cambodia than Angkor Wat,” she said.
She said the increase in domestic travel has provided some consolation, but it cannot replace international tourism.
International travelers spend more and often travel on weekdays, while domestic travelers have different demands and typically travel on weekends.
Pearson added that the road back won’t be easy, as staff have migrated from the industry and many tour operators and hotels have closed down. Convincing people to come back to an industry that has proven to be fragile or persuading students to jump into the industry could prove difficult.
Cambodia has relied more on tourism than neighboring countries before the pandemic, with the sector employing 15.2 percent of the population in 2020.
Pushing agriculture and manufacturing
The agriculture sector picked up steam in the absence of tourism with new free trade agreements and continued support from the public and private sector helping boost exports.
According to the Ministry of Agriculture, Forestry, and Fisheries, agriculture exports increased by 22 percent during the first three months of this year compared to last year, reaching 2.82 million tons.
Continued expansion and diversification of the sector will rely on upgraded infrastructure and processing facilities to help push more value-added products to the market, per ADB’s report.
On a more microeconomic level, e-commerce platforms have yet to make a major impact on the industry, but they can offer farmers alternate pathways to sell their goods other than the local market, helping to increase their salary.
The garment sector, heavily affected by supply chain disruptions, Covid outbreaks, and decreased orders during the pandemic, has started to rebound as well. A new emphasis has been placed on transforming the industry to offer higher-value-added goods and provide a more stable environment for workers.
To read more about the increasing ESG requirements for garment exports to the European Union click here.
However, in its report, ADB views the manufacturing of non-garment, travel, and footwear (GTF) goods such as electronics, pharmaceuticals, solar technology, and vehicle parts as a key pillar for the economy moving forward.
The sector is set to expand due to Cambodia’s free trade agreement (FTA) with China and could capitalize on China-based manufacturers moving to Cambodia to counter increasing domestic costs, per the report.
The construction sector represents a wildcard. A main driver of the economic growth before the pandemic, supported by domestic demand, expanding urban centers, and foreign direct investment led by China, the sector has slowed since the pandemic.
There is a backlog of projects to work on, but decreased demand and decreased investment from China could point to a slower rate of recovery for the sector, per the report.
Balancing social and fiscal concerns
The ADB report lauded the government for its efforts in mitigating the impacts of the pandemic, from highly effective vaccine rollouts to public spending that kept the economy afloat.
The cash-handout program provided a $40 check for laid-off garment workers during the pandemic and cost the government $306 million in 2020. The budget increased in 2021 to $335 million and the program is planned to continue in 2022, with a potential budget of $200 million, according to the report.
ADB said this support will likely need to continue to keep supporting low-income households but in the near future, the unconditional cash transfer program may need to be modified to offer some limits to the handouts as well as a “graduation package for households transitioning out of poverty.”
As ADB noted, more needs to be done to strengthen social services, as 52 percent of households in October last year reported reductions in wages. Furthermore, although 84 percent of surveyed households exceeded the recommended level of diversity in their diets, only 56 percent of women in these households met this threshold.
“The quality of children’s diets is also a persistent concern, with only 35 percent of children under the age of 5 consuming a minimum acceptable diet in July 2021,” the report said.
Among other policy recommendations, ADB suggested implementing unemployment insurance and social safety nets for workers in the informal sector. It also recommended reviewing debt among poor households to consider debt restructuring or debt cancellation.
To read more about the World Bank’s three pillars of economic diversification for Cambodia click here.
A rebalancing of the financial sector and strengthening of regulations is also key to sustained growth, according to ADB.
“The size of Cambodia’s financial sector relative to the real economy, the rapid growth in lending in recent years, and the high level of dollarization all give some cause for caution,” the report said.
Chief among ADB’s concerns were the amount of loan restructures offered by banks and microfinance institutions (MFIs) and the amount of lending tied up in certain sectors such as construction and real estate.
The report also cited “the potential increase in ‘evergreening’ of loans, masking an underlying deterioration in the quality of bank and MFI assets”, and “cross-shareholding and related party dealings between local banks and other businesses, including property developers”.
The first steps to be taken to remedy the situation, according to ADB, should be slowly phasing out loan restructuring programs and regulatory forbearances.