The World Bank has revised up its 2023 economic growth projections for Cambodia to 5.5 percent from its initial 5.2 percent forecast in April, mainly due to the revival of the services sector and improvements in agricultural production.

In 2024, gross domestic product (GDP) growth may improve further, at 6.1 percent (revised from 5.7 percent in April) with exports possibly recovering and gradually diversifying.

In its October macro poverty outlook, the bank also foresees a likely increase in foreign direct investment (FDI) inflows in Cambodia on the back of its new Law on Investment.

“Given the relatively fast pace of growth, the pace of poverty reduction is expected to accelerate,” it said. But, downside risks such as weaker-than-expected global demand, a protracted period of tighter global financial conditions, and a possible renewed oil and food price shock could impact growth.

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“Over the medium term, the economy is expected to trend back to potential, growing at seven percent. The tourism and hospitality industries are likely to accelerate further, with a projected increase in international arrivals,” World Bank said.

“Exports and FDI inflows are expected to be strengthened by the newly-ratified free trade agreements, a substantial increase in private and public investment in key physical infrastructure, and structural and sectoral reforms.”

Subdued demand

So far, it noted that Cambodia’s post-pandemic economic recovery has continued to gain steam despite weaker external conditions, with international arrivals having risen strongly in 2023, which has led to a “broader recovery” in the services sector.

International tourists arrivals of three million between January and July, compared to 700,000 in the corresponding period last year, has reached 80 percent of the number recorded in the same period in 2019.

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In comparison, Thailand and Vietnam’s international visitors arrival in the first seven months this year has only touched 66.6 percent and 58.5 percent of the 2019 total in that period, respectively.

On agriculture, the World Bank said despite “less favourable weather conditions with erratic rainfall”, as of July 2023, agricultural cultivation improved, reaching 1.5 million hectares or 24.5 percent year-on-year increase.

However, merchandise exports weakened with increased volatility, it shared, noting that in the first seven months of 2023, exports shrank by 3.7 percent.

“While subdued external demand has dampened merchandise exports, goods imports have also moderated, driven largely by a decline in gold imports. Overall, the current account deficit has narrowed, easing pressure on the exchange rate and foreign exchange reserves,” the bank mentioned.

Gross international reserves were up at $18.4 billion as of June 30, 2023 from $17.7 billion as of December 31, 2022, covering seven months of imports.

Decline in poverty

The World Bank found that inflation has eased as food and oil prices moderated and that there are signs of “renewed appetite” for investment in the construction and real estate sector with the value of approved construction permits growing for the first time since mid-2020.

“But, tight global financial conditions and subdued external demand have dampened investment in the tradable sectors where the value of approved investment projects has declined,” it said.

“Moreover, the ongoing concentration of domestic credit in the construction, real estate, and mortgage sectors, which accounted for 35 percent of the total, remains an important risk to financial stability.”

To this end, the bank commented, the non-performing loan ratios for the banking and microfinance sectors, which marginally increased to four percent and 3.1 percent, respectively, in the second quarter of 2023 need “close monitoring”.

The baseline economic outlook remains positive, driven mainly by the recovery of the services sector, especially tourism and improvements in agricultural production.

“Relatively strong economic growth, in conjunction with a significant scale-up of social assistance programs, should translate into a decline in poverty, reversing part of the likely increase in 2020 and 2021,” it added.

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