GDP to Grow at 5.8% on Tourism Growth but Exports Dim

While tourism is expected to support economic growth this year, along with positive upticks in investment and personal consumption, BMI sees falling demand in the US impacting Cambodia’s overall exports this year. The outlook for next year is slightly less than encouraging amid lower domestic expenditure and a slow global economy
Tourists visit Angkor Wat in Siem Reap. Kiripost/Siv Channa
Tourists visit Angkor Wat in Siem Reap. Kiripost/Siv Channa

Strong recovery in tourism, which accounted for 12 percent of gross domestic product (GDP) in 2019, is expected to support economic growth for Cambodia, which is forecast to rise to 5.8 percent in 2023.

The incline, which is slightly higher than the National Bank of Cambodia’s 5.5 percent projection this year, is an expansion from 5.2 percent in 2022, with growth likely to ease to 4.8 percent in 2024.

According to BMI, a Fitch Solutions Company, Cambodia’s accelerating GDP growth is likely to be “one of the fastest rates among Southeast Asian markets” this year.

Citing the Ministry of Tourism’s first half-year visitor arrival statistics, where 409 percent year-on-year (YoY) growth was achieved with 2.6 million visitors, BMI said the “fast growth” was in part due to “some Covid-19 entry requirements in force” in the corresponding period in 2022, and the “one-off boost” from the Southeast Asian Games in May.

However, it expects the tailwinds from “these extraordinary base effects” to fade in the second half.

Nevertheless, the sector's robust recovery is expected to continue on the back of a renewed influx of tourists from mainland China, Cambodia’s main source market in 2019, which eased its zero-Covid policy in early-2023.

“As such, we believe tourism will remain a key pillar of growth in 2023 and 2024 as arrivals gradually return to the 2019 peak, with positive follow-through effects for jobs and investment into related services,” it said in its note to investors today.

Reduced exports

However, exports are likely to slow in 2023 and 2024 amid weaker external demand for merchandise goods.

Preliminary estimates show the exports of apparel items and clothing accessories, which are Cambodia's main export products, declined by 20.5 percent YoY over the first seven months of 2023.

BMI said this partly reflects statistical base effects following a strong post-pandemic rebound in exports in 2022, but also due to slowing economic activity in key export markets, such as the US. The US market accounted for 43.6 percent of total goods exports in 2022.

“With this in mind, while it is positive that we have recently revised up our forecast for US GDP growth in 2023 to 2.1 percent from 1.6 percent, our base case remains that the US is likely to fall into recession in mid-2024, implying softer demand for Cambodian exports over the coming quarters.

“We note that this will be partially offset by the positive impact of China's economic re-opening and moderately stronger growth in Japan, which is Cambodia's second and third largest export markets, respectively, as well as Cambodia’s free trade agreement with South Korea, signed in 2022,” it added.

Trending up

On private consumption and investment, BMI projects continued growth amid easing inflationary pressures and a supportive fiscal policy, as shown by the 0.1 percent dip in June’s headline inflation from a year ago.

“This, combined with public sector wage increases and resilient remittance inflows, would be favourable for household incomes and purchasing power during the second half of 2023,” it said.

Investment growth would be supported by an expansionary 2023 budget, which earmarked a 17.5 percent increase in public investment spending compared to last year.

“In May 2023, the government approved the $1.7 billion Funan Techo Canal project, which would establish a direct waterway link between Phnom Penh and the country's coastal regions,” BMI said.

“This and other infrastructure projects are expected to sustain robust growth in the construction sector over the coming years.”

Weak Chinese growth

Sharing its outlook, the research house flagged a few risks that it found to be “more balanced now than in previous quarters”.

This, it said, is due to upside risks from further resilience in the US labour market and growth, which could see the latter “avoid a recession entirely” and would be positive for Cambodia's goods export outlook.

On the other hand, if China's economic recovery is weaker than expected this would likely have a negative impact on tourism and investment in Cambodia.

Added to that is the risk ensuing from the European Parliament’s ratification of the EU-Vietnam Free Trade Agreement (EVFTA) and EU-Vietnam Investor Protection Agreement on February 12.

“This could encourage manufacturers of the impacted goods to relocate to Vietnam, denting growth in Cambodia's export industry,” it remarked.

Growth in 2023 vs 2024

While all might look promising this year, BMI projects a less than favourable outlook for 2024, with GDP growth moderating to 4.8 percent and robust growth momentum in 2023 fading amid less favourable base effects and sluggish external demand.

Similarly, private consumption, predicted at 5.2 percent this year, is expected to contract to 4.5 percent in 2024, BMI showed, noting that household spending growth would be supported by lower inflation and positive real wage growth.

Government spending would slow to two percent in 2024 from 5.2 percent this year, following additional election spending in 2023.

However, rising public investment and foreign direct investment (FDI) inflows would support accelerating gross fixed capital formation growth to 7.5 percent in 2024 from 6.5 percent in 2023.

Goods exports, unfortunately, are projected to slow down to 3.5 percent in 2024 from 7.5 percent this year amid weaker demand in key trading partners such as the US, partially offset by strong tourism earnings.

Import growth will ease to 3.5 percent in 2024 from 6.7 percent this year, in line with moderating domestic demand.