Cambodia Investment Review
A new update to the Asian Development Bank’s (ADB) flagship economic report, the Asian Development Outlook (ADO) September 2023, has revised Cambodias economic growth forecast for 2023 downward to 5.3% from an earlier 5.5%. This revision comes mainly due to a slower-than-anticipated growth in the industrial sector during the first half of the year. However, the bank maintained its growth forecast for 2024 at 6.0%.
According to the ADB report, exports of garments, footwear, and travel goods experienced a sharp decline of 18.6% year-on-year in the first half of 2023. On the brighter side, this drop was partially mitigated by a robust 22.9% increase in exports of other manufactured goods, including automotive parts, solar panels, and furniture.
Services Sector Most Significant Contributor To Growth
ADB Country Director for Cambodia, Jyotsana Varma, emphasized the role of external and internal factors on Cambodia’s economic outlook. Better growth prospects in major advanced economies should boost Cambodian exports for the remainder of 2023 even as domestic industrial growth slowed earlier in the year, Varma said. She added, Services are the main contributor to growth as the sector exceeded expectations in the first half of the year, primarily fueled by robust tourism recovery.
In line with Varma’s comments, the ADB report has adjusted its growth projections for different sectors of the Cambodian economy. The service sectors growth forecast for 2023 is now set at 8.0%, up from the initial 7.3%. Conversely, the industry output growth projection has been revised downward from 5.8% to 4.8%. The agriculture sector also saw its growth estimates trimmed from 1.1% to 0.9%.
Inflation rates remain steady, with forecasts for 2023 and 2024 holding at 3.0% and 4.0%, respectively. The report suggests that improved merchandise trade and tourism recovery should continue to narrow Cambodias current account deficit.
Investments also saw a positive trend. Foreign direct investment inflows rose by a remarkable 41.6% year-on-year in the first half to $2.3 billion, boosting Cambodia’s gross international reserves from $17.8 billion at the end of 2022 to $18.4 billion at the end of June 2023.
Risks To Cambodia’s Economic Outlook Persist
However, the economic outlook is not without challenges. Risks include sluggish growth in advanced economies, reduced tourist arrivals, decreased foreign direct investment inflows, tightening global financial conditions, rising energy prices, and concerns over high levels of private debt and domestic financial stability. The report also mentioned that extreme weather conditions exacerbated by climate change could potentially affect the economy adversely.
In terms of fiscal policy, the Cambodian government has budgeted a $1.6 billion deficit for 2023, equivalent to 5.1% of GDP. Plans for fiscal consolidation are set to start from 2024. On the monetary policy front, the National Bank of Cambodia raised the reserve requirement ratio (RRR) for foreign currencies from 7.0% to 9.0% in January 2023, with plans to normalize it to 12.5% in 2024 while maintaining the RRR for Khmer riel at 7.0%.
The complexities of Cambodia’s economic landscape show a mix of robust growth in certain sectors coupled with challenges and downward revisions in others. Amid these developments, policy actions and global conditions in the coming months will be crucial in shaping the future of Cambodia’s economy.
