The government yesterday slightly lowered its growth forecast for this year – from 7 to 6.9 percent – citing slowing growth in China and Europe as well as the appreciation of the US dollar as the reasons for the cut.
It remained, however, optimistic in its forecast for economic growth in the short and mid-term, according to the national budget bill approved by Prime Minister Hun Sen at a Cabinet meeting at the Peace Palace yesterday morning.
“Based on indicators, we can say that Cambodia will still continue to achieve economic growth of around 7 per cent annually in the short and medium term,” the bill says. “This optimistic view is based on an improving global economy, especially economic growth in the US, and declining prices of crude oil, which will be able to spur [our] growth by cutting operational costs,” it says.
Its forecast for gross domestic product (GDP) growth of 6.9 percent is in line with the projection made by the World Bank earlier this month. Both the Asian Development Bank and the International Monetary Fund project Cambodia’s GDP to expand about 7 per cent this year.
Despite its optimism, the budget bill does note that in both the short and medium term Cambodia will face internal and external risks that will affect economic growth. It said that the slow recovery of economies in Europe and the United States, along with slowing growth in China, would impact Cambodia’s growth.
“Europe, which is Cambodia’s bigges trading partner, still has a weak economy. This will impact Cambodia’s exports to Europe, especially garments, textiles and milled rice,” said the draft financial management bill 2016, which was approved by the Cabinet yesterday.
Weakness in Europe will also see fewer European tourists arriving in Cambodia and could see a reduction in financial aid and investment from the European Union and its member states to Cambodia, the document said.
It said that the slowing growth of China’s economy – the second largest in the world – will also have a “slight effect” on Cambodia. “China is not only one of the big financing partners but is also a major source for tourism and an agricultural market for Cambodia,” the document says. “Inflows of foreign direct investment have been surging in many sectors, including real estate, and this will also slow down,” it adds.
Slowing Growth in China “Not a Concern”
Hiroshi Suzuki, CEO and chief economist for the Business Research Institute for Cambodia, described the cut in the growth forecast as “moderate” and noted it was in line with those made by the ADB, IMF and World Bank.
Slowing growth in China will not be a concern, he said, citing analysis from the ADB, IMF and World Bank. All three have forecast that slowing growth in China will have little impact on Cambodia’s economy because trade between the two countries is low, Mr. Suzuki said.
According to the draft financial management bill, growth will have three key drivers. Industrial growth (which includes construction and manufacturing) will be 8.7 per cent next year, due primarily to greater garment and textile exports to Europe. Construction growth is, however, expected to slow. The service sector is expected to expand by 9 per cent, with most growth coming from trade, tourism and hospitality. Agriculture is expected to grow just 1 percent, however. This growth will be the result of crop diversification and an expansion of the livestock market.
Notes of Caution
Although the garment and textile industry is expanding here, competition in the global apparel and footwear market is intensifying, the bill notes. It says that rising competition from neighboring countries and a relatively lower productivity in Cambodia’s factories are a risk. The appreciation of the US dollar and slow growth in the US could also see export growth decline, it says. The US dollar is used more widely in Cambodia than the domestic currency. “The appreciation of the US dollar can affect Cambodia’s export competitiveness, especially to Europe,” the bill warns.
Mr. Suzuki suggested that the government should improve the investment climate here and increase productivity in order to compete with other export-dependent countries in the region. “First, the government’s continuous efforts to improve the investment environment are indispensable to attract FDI to Cambodia. Second, the effort to improve productivity is also very important to compete with rival countries such as Myanmar,” he said.
The recent launch of 2015-2025 Industrial Development Policy will also contribute to maintaining high growth that is both sustainable and inclusive by diversifying the economy, enhancing competitiveness and boosting production, the bill says.
The government has also projected that the annual inflation rate will be around 3 per cent this year and next year. Cambodia’s economy grew 7.1 per cent last year while the inflation rate was 3.9 per cent. Per capita GDP reached $1,138 from $1,043 in 2013, according to the most recent figures.