Cambodia

Macroeconomic fragilities hamper the outlook

D3

SENSITIVE RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD20.0bn (World ranking 106, World Bank 2016)
Population 15.8mn (World ranking 70, World Bank 2016)
Form of state Multiparty democracy under a constitutional monarchy
Head of government Hun SEN (Prime Minister)
Next elections 2018, general elections
  • Large growth potential
  • Relatively young population
  • Competitive low-value manufacturing
  • Strong and steady FDI inflows since 2011
  • High degree of regional integration (ASEAN)
  • Benefits from Everything But Arms (EBA) scheme with the European Union (i.e. duty free access)
  • Important infrastructure shortcomings in various areas (energy, transportation, health, education e.g.)
  • High dollarization of the Cambodian economy, limiting an independent exchange rate and monetary policy
  • (Still) dependent on concessional financial assistance
  • High level of perceived corruption and bureaucracy
  • Institutional and regulatory weakness

Robust Economic Growth

The Cambodian economy is set to expand by +6.9% in 2017, following a robust growth trajectory. The main drivers of growth are strong private consumption and exports.

A slowdown in private investment is partly offset by higher public spending, strong construction momentum, and a pick up in the tourism sector. There has been a healthy rise in FDI inflows, notably to the real estate, construction, and banking sectors. Inflows to the textile sector (over 75% of exports) remain high. Yet, rising labor cost and competition from Bangladesh and Myanmar may undermine Cambodia’s advantage.

While strong regional integration has helped attract investment inflows, infrastructure shortcomings and regulatory weakness could stunt FDI growth in new sectors. Besides, the economy remains dollarized to a high degree. An appreciation of the USD would impinge on export competitiveness (in textiles).

Inflationary pressures have mounted since 2016 due to higher food and fuel prices. These should persist in the medium term due to higher public spending and rising wages.

Fragile public finances and elevated financial risks require close monitoring

Public debt is at acceptable level around 38% GDP. The fiscal deficit is set to widen in the medium-term owing to higher public wages and more spending for social programs and public infrastructure. Despite progress in tax collection, further tax reform will be a key to counter-balance the strong rise in expenditures. Fiscal discipline is all the more crucial since 80% of the public debt is external.

Financial risks remain elevated. Private credit growth has cooled off in response to macro-prudential measures (higher minimum capital requirement for banks, e.g.). Yet, a high concentration of credit in the real estate sector (+33% y/y growth in June 2017), a poor loan quality and a strong dependence on external funding weigh on the outlook.

External position is weak but improving

External debt is high but is on a declining trend (45.8% of GDP in 2017). Similarly, the current account deficit is sizeable but is reducing. It has narrowed markedly from -12.9% of GDP in 2013 to   -8.6% in 2017. The trade balance should improve due to greater product diversification amid stronger ties with ASEAN countries. Combined with steady FDI inflows, foreign exchange reserves will continue to grow (from USD10.6bn in September 2017). This should support policy buffers.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 18%
1
28% China
Germany 8%
2
24% Thailand
United Kingdom 8%
3
15% Vietnam
Japan 7%
4
5% China, Hong Kong SAR
Singapore 6%
5
5% Singapore

Trade structure by product

(% of total)

Exports Rank Imports
Articles of apparel & clothing accessories 62%
1
26% Textile yarn and related products
Footwear 9%
2
7% Road vehicles
Vegetables and fruits 3%
3
5% Petroleum, petroleum products and related materials
Road vehicles 3%
4
4% Specialised machinery
Crude fertilizers other than division 56, and crude minerals 2%
5
4% Miscellaneous manufactured articles, n.e.s.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Mahamoud Islam

Senior Economist for Asia

mahamoud.islam@eulerhermes.com 

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