Cambodia Investment Review
Cambodia’s economy experienced robust growth in 2023, expanding by 5 percent, driven by tourism, supporting service activities, and non-garment manufacturing industries. This growth persisted despite a decline in garment exports and challenges in the real estate sector. The economy is expected to continue recovering from the COVID-19 pandemic, with a projected growth rate of 5.6 percent in 2024.
However, this recovery is contingent on external risks and domestic vulnerabilities, notably prolonged weakness in the real estate sector and a decline in credit quality. To ensure resilient growth, the government must focus on restoring fiscal space, mitigating financial stability risks, and strengthening structural reforms.
This assessment was made by the Singapore-based ASEAN+3 Macroeconomic Research Office (AMRO) following its Annual Consultation Visit to Cambodia from May 2 to 13, 2024. The mission, led by AMRO Principal Economist Jinho Choi, involved discussions with key Cambodian officials, including AMRO Director Kouqing Li and Chief Economist Hoe Ee Khor. The talks centered on Cambodia’s recent macroeconomic developments, outlook, risks, and policy recommendations.
Economic Developments and Outlook
“The Cambodian economy is projected to grow by 5.6 percent in 2024 and 5.9 percent in 2025, up from 5.0 percent in 2023,” stated Dr. Choi. “A recovery in the garment sector, sustained expansion in other manufacturing exports, and a continued tourism rebound will support the ongoing economic recovery.”
Cambodia’s reliance on imports to meet domestic demand has caused fluctuations in consumer prices. The Consumer Price Index (CPI) inflation declined to 2.1 percent in 2023 from a peak of 7.8 percent in June 2022. CPI inflation is forecasted at 2.5 percent in 2024 and 2.6 percent in 2025, aligning with pre-pandemic trends.
The current account (CA) balance turned into a surplus of 1.3 percent of GDP in 2023, primarily due to a significant reduction in trade deficits. The CA is projected to register smaller surpluses of 0.6 percent of GDP in 2024 and 0.1 percent of GDP in 2025, in line with the recovery in demand for imported goods. Foreign direct investment (FDI) inflows remained robust at 9.3 percent of GDP in 2023.
Credit growth decelerated sharply to 4.7 percent year-on-year in February 2024 from 18.2 percent in December 2022, amid uncertain economic conditions and cautious lending attitudes by banks. Despite adequate capital buffers, the surge in non-performing loan (NPL) ratios and a narrowing interest margin have significantly reduced the profitability of financial institutions.
Cambodia faces short-term external risks and domestic vulnerabilities that could impede its post-pandemic recovery. The country is highly susceptible to a sharper-than-expected slowdown in major economies, with potential shifts in US and EU trade policies posing additional risks. Inflation is also vulnerable to spikes in global commodity prices.
“A gradual rise in NPLs may exert substantial pressure on banks’ profitability, thus steadily eroding capital buffers,” noted Choi. “Additionally, deepening financial distress among real estate developers could heighten credit risks in the banking sector.”
The scarring effects of the pandemic have reduced capital formation, potentially posing structural challenges to long-term growth. Failure to implement climate change adaptation and mitigation measures could also present a significant long-term economic risk.
Policy Recommendations
Given the widened fiscal deficit in 2023 due to a fall in revenue, the government should focus on fiscal consolidation and rebuilding fiscal space. “Increasing the efficiency of expenditure is crucial to enhance economic development outcomes and boost growth potential,” stated Choi. “Raising revenues to secure funds for development needs while enhancing fiscal sustainability is equally important. Streamlining tax incentives for investment is necessary to preserve fiscal space and limit forgone revenue.”
The National Bank of Cambodia (NBC) should resume its post-COVID normalization of forbearance policies next year. The NBC must closely monitor sectoral NPLs and ensure that banks maintain adequate provisions. Strengthening policy frameworks to foster interbank market development is also recommended.
The Non-Banking Financial Services Authority (NBFSA) should establish a comprehensive legal framework and strengthen regulatory oversight of under-regulated shadow banking activities in the real estate sector to mitigate hidden credit risks. Enhanced oversight and supervision of the real estate sector should be prioritized.
To secure long-term resilient growth, the government should ensure the timely implementation of the Pentagonal Strategy – Phase I, which aims to nurture human capital, promote FDI, accelerate physical and digital infrastructure development, diversify exports, and enhance Cambodia’s role in the global value chain.
The AMRO team expressed gratitude to Cambodian authorities and participating organizations for their cooperation and candid exchange of views during the mission. “We appreciate the strong support from the authorities and the excellent arrangements that made this mission possible,” Choi concluded.
