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Mekong Strategic Capital Expects More Challenging Outcome for Cambodia’s Economy in 2023, Before Rebounding in 2024

Harrison White

Speaking before the Australian Chamber of Commerce at Rosewood Hotel, Stephen Higgins, a Partner at Mekong Strategic Capital, delivered remarks on the current position of Cambodia’s economy. The Phnom Penh based investment and advisory firm, Mekong Strategic Capital, offered a significantly tempered prediction for Cambodia’s 2023 economic growth in comparison to the estimates given by larger international financial institutions earlier this year.

Mekong Strategic Capital forecasts a subdued growth rate of 2.5% for Cambodia in 2023. This prediction is contrasted with the much more optimistic estimates earlier in the year from the World Bank and the Asian Development Bank (ADB), both predicting a growth rate of 5.5%, and the International Monetary Fund’s (IMF) slightly higher forecast of 5.8%.

Higgins shed light on the underlying reasons for this marked discrepancy. He remarked, “The downside risks to growth this year, which were flagged by the likes of World Bank and IMF, have unfortunately materialized.”

Downside risks have unfortunately materialized

The World Bank’s report, “Cambodia Economic Update: Post-COVID-19 Economic Recovery, noted “the outlook is, however, subject to downside risks. An extended slowdown in external demand could weaken Cambodia’s export-oriented manufacturing, which generates about 40 percent of total employment in the industrial sector. Continued global financial tightening could affect the highly leveraged financial sector, which has been partly behind the recent construction boom.”

Read more: World Bank Predicts Accelerated Economic Growth of 5.5% for Cambodia in 2023

IMF’s forecast also noted the uncertainty and downside risks, singling out credit growth and conditions in large economies as the most immediate risks.

Higgins called out the slow recovery of the tourism sector, particularly from the crucial Chinese market, a faltering start to the year for goods exports, as well as cash-strapped developers impacting the real-estate and construction market.

“Low passenger arrivals, still considerably below pre-COVID levels, suggest that tourism is struggling to rebound. This is especially true for the Chinese market, which is a crucial driver for tourism growth,” said Higgins, pointing to air arrivals from other various regions being well below pre-COVID levels.

The property sector, another cornerstone of Cambodia’s economy, is also grappling with setbacks, stated Higgins. Drawing on Q1 data from CBRE, which noted, “The first quarter of 2023 witnessed the slowest pace of project launches in the past five years. There were only four new launches and seven completions, indicating early signs of cooling after a period of aggressive selling activities. While the condo sector has been ugly for some time, we’re now seeing the borey sector come under real pressure.”

Liquidity concerns impact the market

The banking sector’s outlook is not faring much better. Higgins noted that loan growth in the first four months of the year was just 1.4%, or 4.3% on an annualized basis, which is well below the 12.5% estimated by the World Bank and the 15% predicted by IMF. A sharp increase in loan arrears from 3% in December to 4.5% at the end of April is likely to impact bank profitability this year, but the sector overall remains well capitalised and able to absorb higher loss rates.

Read more: Stephen Higgins on Cambodia’s post-COVID financial sector outlook

Despite the challenges in 2023, Higgins remained optimistic about the medium-term outlook, with growth expected to pick up in 2024. “With airline capacity returning to normal, tourism should see a revival. The interest rate cycle is set to peak, and improvements in US and European economies will provide a significant boost to Cambodia’s export growth,” he stated. Higgins also mentioned the continuation of manufacturing diversification, favorable demographics, and ongoing infrastructure investments by the government as additional reasons for his optimistic outlook.

Looking towards 2024, Higgins presents a more upbeat forecast of 6% growth, aligning with the predictions made by the World Bank, IMF, and ADB.

“Businesses will typically make big investment decisions based on the long-term outlook, not what happens over just the next six months. If your investment horizon is only six months, then you’d be pretty cautious right now. But if you’re investing for the long term, then you’re going to benefit from the fact that the longer term outlook for Cambodia remains one of the best of any country globally” he concluded. 

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