The World Bank, citing up-beat investor sentiment and a rise in exports, has revised the country’s economic growth upward, estimating it will be 7 percent in 2018, a 0.1 percent increase from an earlier prediction in April.
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Other international financial institutions have also issued similar forecasts for the Cambodian economy, with the Asian Development Bank (ADB) and the International Monetary Fund (IMF) putting national growth at 7 percent and 7.25 percent respectively this year.
The World Bank, according to its East Asia and Pacific report released yesterday, said economic growth is driven mainly by external demand, exports, rising government spending, and an up-beat investor sentiment.
The report added that garment, travel goods, and footwear exports increased 16.1 percent year-on-year during the first half 2018, up from 8.3 percent recorded at the end of 2017. Consistent with this trend, fabric imports, largely used as inputs for garment production, grew at 37.1 percent during the first six months of 2018.
It said tourist arrivals reached 3 million in the first half of the year, representing a 13.6 percent increase compared to 11.8 percent in 2017, adding that the rise is driven by a surge in tourist arrivals by air from China.
The report says capital inflows continue to increase, and the external position remains stable. The current account deficit slightly widened in the first half of 2018, but was entirely financed by foreign direct investment (FDI) inflows.
Speaking at a press conference, Miguel Eduardo Sanchez Martin, senior economist of the World Bank in Cambodia, said strong growth in garment, travel goods, and footwear exports was partly supported by the agreement between Cambodia and the United States on travel goods in 2016. Under the deal, Cambodia can export travel goods to the US duty-free.
He said 2018 saw a strong and stable foreign direct investment inflow, steady currency deposit movement and expects FDI to peak this year.
“Cambodia is an attractive destination for FDI from all countries because of the ‘dollarised’ economy. Chinese investors in Cambodia who are looking for opportunities in the real estate and manufacturing sectors are attracted by cheap labor force and the relative close proximity to China. The ties between the two countries have also encouraged more Chinese investors to come to Cambodia.
“As global demand peaks this year, growth in Cambodia is expected to remain robust, easing modestly to 6.8 percent in 2019 and 2020. Strong economic growth is expected to result in continued poverty reduction,” Mr Martin said.
The report said FDI rose 14.3 percent year-on-year during the first six months of 2018. More than half of the inflows originated from China, and are directed towards commercial and residential real estate, as well as, to a lesser extent, manufacturing and agriculture.
With the current construction boom, newly emerging hot spots include the seaside provincial town of Sihanoukville, where FDI approvals amounted to $126 million in June alone.
Confidence in the banking system remained strong, and private sector deposits, largely in US dollars, grew at 22.4 percent in June, it said.
The report also highlighted the main risks to Cambodia’s economy. Those stem from rising protectionism and a potential revision of Cambodia’s preferential access to advanced economies.
A tariff war escalation in major economies would affect Cambodia only indirectly. On one hand, there could be some potentially positive trade and investment diversion from China in the short-term. On the other hand, however, the trade war could disrupt global value chains and depress investors’ sentiment, adversely impacting Cambodia and other small export-oriented economies.
A sharp slowdown in the Chinese economy could substantially dampen Cambodia’s growth prospects. The impact through the trade channel would, on the other hand, be muted, due to low dependency on China as an export destination.