Cambodia’s garment exports grew slower than expected by about 4 percent in the first half of the year compared with 9 percent in the same period last year while foreign investment in the sector fell by 30 percent, according to a report released by the National Bank of Cambodia on Saturday.
The NBC report said the slow growth was because of falling garment exports to the US, rising competition from Vietnam and Myanmar, and high production costs due to the increasing minimum wage.
The US and the EU are the top two destinations for Cambodia’s garment exports and the NBC report pointed out that in the first half of the year total US-EU garment exports represented 67 percent of the kingdom’s total exports, down from 75 percent in the same period last year.
The report also added that investment in the garment sector fell due to investors realising that Cambodia, in the next three years, would no longer enjoy preferential tax treatment from the EU as it moves up the ranks from a lower income country to a lower middle income nation.
“Cambodia will face tough competition in the global market in the short, medium and long term due to Vietnam, Cambodia’s main competitor in garment sector, getting preferential tax treatment in 2018 on its exports to the EU under the Free Trade Agreement,” said Chea Serey, NBC’s director-general.
“The increasing of minimum wages will also put pressure on Cambodia’s competitiveness,” she added.
The Asian Development Bank on Thursday, in its Asian Development Outlook 2017 report, cautioned that since Cambodia is a highly dollarised economy, it must be careful to align minimum wage adjustments with productivity increases to keep wage costs in check and stay competitive as a manufacturer for export markets.
In April, the World Bank in its Cambodia Economic Update report stated that rising labour costs, driven in part by the increasing cost of living, US dollar appreciation, and competition from other regional low-wage countries, in particular Myanmar, continue to exert downward pressure on prices of exported garment products.
“However, a further decline of foreign direct investment inflows into the sector does not bode well for future garment sector expansion, as the industry is currently moving towards higher value-added products and will need to become more capital intensive if it is to confront increasing labor costs by improving productivity,” added the bank.
Meanwhile, NBC governor Chea Chanto told a conference on Saturday that Cambodia’s GDP is estimated to grow 7 percent in 2017, thanks to the growth of the garment, construction, real estate and tourism sectors.
“The garment sector continues to be a major contributor to the GDP, despite its slower growth rate, while the construction and tourism sectors continue to grow,” said Mr Chanto.
Along with optimism, he said, Cambodia’s economy also faces a number of risks that could affect both internal and external growth.
“The rise in the US dollar will reduce the competitiveness of Cambodia’s exports and may affect the tourism industry,” said Mr Chanto.
“The uncertainty about the effect of British withdrawal from the EU on Cambodian exports to the UK is also a cause for concern,” he added.
Within the country, said Mr Chanto, increasing wages may make the cost of production higher –which could have an effect on the manufacturing sector.