Economy has its hot spots: World Bank

Economy has its hot spots: World Bank

Cambodia's economy has proved both strong and resilient, driven by the solid performance of its garments and construction sectors. But sustaining this growth is becoming increasingly difficult amid growing competition and shrinking global trade, the World Bank said yesterday in its latest review of the Cambodian economy.

The Kingdom’s robust economic growth will continue, “propelled by exports, construction and government consumption”, it said in its Cambodia Economic Update for October 2016.

However, it also warned of downside risks, including potential uncertainty related to upcoming elections, fallout from an expected rise in US interest rates and slower global growth.

Better-than-expected performance during the first half of the year prompted a slight revision to growth forecasts issued in April. In its revised outlook, the World Bank projects that Cambodia will maintain its 7 percent GDP growth rate this year, compared to 6.9 percent in its previous estimate. It also nudged up its growth forecasts for 2017 and 2018 to 6.9 percent, from 6.8 percent.

“We think the growth is going to be a little bit stronger thanks to the positive signs we are getting from the garment sector,” explained Miguel Eduardo Sanchez Martin, senior country economist for the World Bank in Cambodia.

The value of garment exports grew solidly during the first half of 2016, increasing 10.5 percent year-on-year compared to 7.8 percent during the same period last year, the update said. It attributed this growth to locally based manufacturers introducing more sophisticated processes such as printing and embroidery to add value to their garment products, and a sharp rise in exports to the European market.

The garment and footwear industry, which tallied over $6.3 billion in exports last year and provides jobs to about 700,000 workers, is currently the thickest pillar of Cambodia’s economy. In 2016, the industry is expected to contribute more than a quarter of the Kingdom’s projected 7 percent GDP growth.

However, Sanchez Martin warned that while the sector fares well in short-term models, it will face increasingly stiff competition down the road as manufacturers consider Myanmar’s lower labour costs and Vietnam’s benefits under the Trans-Pacific Partnership (TPP) agreement.

“The garments sector is doing very well, but now Cambodia needs to keep working to maintain its competitiveness in the mid to long term,” he said.

World Bank country economist Sodeth Ly warned that the high rate of foreign ownership of Cambodia’s garment and footwear factories – over 98.5 percent – amounts to significant exposure.

“The garment sector is characterised as a footloose industry, and footloose industries can move quickly from one country to another,” he said, stressing the importance of diversifying Cambodia’s industrial portfolio.

Turning to another pillar of economic growth, the World Bank update highlighted signs of increased construction activity. It noted that the total value of project approvals more than doubled since 2015, while imports of key construction materials grew markedly.

“Investor appetite in construction continues, with project approval value increasing to US$6.8 billion and imports of steel growing by 42.6 percent year-on-year by mid-2016,” it said.

Sanchez Martin said the strong growth of Cambodia’s garment and construction industries offset the weak performance of other sectors. Tourism, for instance, saw only modest growth rates in early 2016 due to declines of Vietnamese, Lao and South Korean arrivals.

Meanwhile, agriculture – once the backbone of Cambodia’s economy and a key driver of growth – has been marginalised by low commodity prices.

“Agriculture’s contribution to growth has stalled,” said Sanchez Martin.

The World Bank update underscored the importance of enhancing the competitiveness of Cambodian industry and diversifying beyond its core garment products to mitigate the potentially large negative impacts of the TPP and other threats to its favourable trade privileges.

It recommended addressing high energy costs that impede industrial expansion and diversification, as well as narrowing the skills gap and improving the connectivity to neighbouring countries.