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publication November 22, 2017

Cambodia Economic Update, October 2017: Climbing Up the Manufacturing Value Chains

Key Findings

  • Growth remained strong, expanding at 7% in 2016 and is projected to ease slightly to 6.8% in 2017.
  • While exports of clothing and other textile products have moderated and the construction sector shows signs of easing,  the rising share of non-textile product exports, especially of electrical machinery, equipment and auto parts are helping Cambodia climb up the manufacturing value chains.
  • Efforts to attract international tourists by the authorities has paid off, with a marked recovery of foreign tourist arrivals.
  • Inflation has moderated, reflecting softer domestic demand as the construction boom slows down and domestic credit growth has eased.  
  • Meanwhile, Cambodia’s external position remains stable. The current account deficit is narrowing, and gross international reserves have reached six months of imports.
  • The overall fiscal deficit is estimated to have remained contained, thanks to continued good revenue collection. Rising public sector wage bill is largely offset by the decline in donor-financed capital spending.
  • The outlook remains positive. Growth is projected to remain strong, at 6.9% in 2018, boosted by export diversification and healthy inflows of foreign direct investment (FDI), and an improved global outlook.
  • A possible slowdown of the regional economy, especially China, and potential election-related uncertainties, however, pose downside risks to the outlook. 

Policy Options

Cambodia is on the verge of climbing up the manufacturing value chains. These further efforts can help facilitate higher growth.

  • Nurturing export diversification by adopting cost-effective and competitive electricity tariffs. Promoting and improving levels of skills and quality of graduates. Improving ease of doing business and the investment climate by eliminating regulatory impediments to bring down the costs of starting and operating businesses, as well as logistic costs.
  • Improving access by rural farmers, affected by low agricultural prices, to markets and to diversify their production. Measures to link rural households to tourism supply chains can also pay high dividends.
  • While poverty reduction continued, driven mainly by income diversification of rural households earnings from remittances, non-agricultural wages, and household businesses, the potential negative impacts of the slowdown of textile and construction sectors will need to be closely monitored.