Structural weaknesses prevail
Level of economic development is weak. Gross nominal income per capita (estimated at USD 1,024 in 2013) is among the lowest in Asia. The poverty rate is around 18%. The economy structure remains inefficient for growth with a strong dependency on the agriculture sector (1/3 of GDP and 64% of employment) and on the garment industry (2/3 of exports). The country continues to suffer from poor infrastructure including electricity shortages which limit industrial performance, and weak business environment (Doing business rank is 135 out of 189).
But short term economic outlook is improving
However economic growth is performing well. After stagnation in 2009, the economy has recovered with growth averaging 7% per year between 2008 and 2013. In 2014, latest indicators point to a growth of 7.2% even while the economy was faced with domestic (political deadlock until July 2014) and external uncertainties (political risk in Thailand, global demand slow down). GDP growth was supported by improvement in the construction and the garment industries, and services.
In 2015, economic growth is projected to remain strong (7.3%). Under the assumption of further political stability, domestic demand is set to strengthen benefitting from: solid credit growth, large long-term Investment inflows (factories relocations related) and weak energy prices. External trade is projected to remain a key driver with exports amounting 60% GDP. In particular, improving demand in the USA, the Eurozone and ASEAN should give a boost to Cambodia’s exports.
Risks to the baseline scenario stems from domestic and external sources. For the first one it includes overheating risk due to too strong credit growth to real estate sector and renewed social-political risks. Regarding external risk, the main concern is related to the demand from Eurozone if economic recovery were to be delayed.
Inflationnary risks have receded but should remain on the radar
Inflationary pressures are decreasing and should stabilize at manageable levels. Headline inflation shows some volatility during the past reflecting volatility in food prices (food comprises 43% of the consumer price index). Weak energy prices should counterbalance further rise in food prices. Inflation will likely go below 5% in2015.
Rapid credit growth remains a risk to the undeveloped banking sector. Claims to private sector growth remain elevated (22% y/y mid 2014) even if some progress have been made (27% end 2013, 49% end 2012).
Fiscal deficit is set to stabilize
Fiscal management is improving. The overall fiscal balance (including grants) is set to stabilize around -2.7% GDP. Public expenditures are set to rise reflecting increasing wage bill in the public sector. Revenues are set to improve with broader tax collection. Gross public debt should remain relatively low at just below 30% of GDP.
Current account deficit is large but FDI inflows offset associated risks in the short run
The annual current account deficit remains large (around -11% GDP). Exports are set to increase in the medium term with Cambodia emerging as a manufacturing hub. However in the short run, goods imports growth will remain elevated reflecting rising domestic demand and rising demand of investment related imports (equipment material).
However, this large external deficit should not be a cause of concern in the short run. Since 2011 it has been almost completely financed by net FDI inflows – largely related to power sector projects – and this is likely to continue in the next years. FDI inflows have also boosted official foreign exchange reserves to about USD4.2bn, which is almost 3.5 months import cover mid-2014 (3.4 months end-2013).
External debt burden is manageable
External debt is relatively high as a proportion of GDP (34%), but moderate in relation to export earnings (60%). And as most of the debt is on concessional terms, external debt-servicing is very low.
Macro- financial risk remain an issue
The financial system is very fragile with a high sensitivity to confidence shocks and capital outflows. The first reason behind this fragility is the lack of effectiveness of the monetary policy due to high dollarization in the economy. Second, the banking supervision is poor with the current prudential framework underdeveloped. The banking system, saw a significant confidence shocks during the last election, the banking sector was subject to large withdrawal (-10% of total deposit in summer 2013). Third, the banking sector continues to be faced with high risks including rising foreign funding, strong exposure to the real estate sector and fast credit growth.