Cambodia's economy continued its robust growth while inflation remained relatively low in 2018, according to the 2018 Annual Consultation Report on Cambodia published today by the ASEAN+3 Macroeconomic Research Office (AMRO).
Real GDP growth is estimated to accelerate to 7.2 percent in 2018 and remain strong at 7.1 in 2019 with continued support from robust construction activities, rebound in garment manufacturing and solid growth in tourism-related services. Inflation is expected to remain relatively stable at 2.6 percent in 2018, on account of better supply conditions despite pressures from rising energy prices.
The overall external position continued to strengthen, benefiting from sustained foreign direct investment (FDI) inflows. Although the current account deficit remained sizable, it had been more than offset by the surplus in the capital and financial account on the back of strong FDI inflows. As a result, the overall balance of payments had continued to be in surplus, leading to a further build-up in foreign reserves. Gross international reserves are estimated to be around US$10 billion by end-2018, sufficient to cover about six months of goods and services imports.
The financial sector remained sound, while banks' credit growth continued to moderate amidst the implementation of stricter prudential regulations, including higher minimum capital requirements and liquidity coverage ratio. The Capital Adequacy Ratios, of both commercial banks and micro finance institutions have continued to be above the regulatory minimums.
Faster increase in government spending widened the budget deficit despite strong revenue growth. Although the implementation of the Revenue Mobilisation Strategy 2014-2018 had improved government revenue collection substantially, government spending had increased even faster, due to the government's expansionary policy to support government priority policies and enhance public services. As a result, the overall budget deficit expanded from 2.4 percent of GDP in 2015 to 2.7 percent in 2017, and is projected to widen further to 3.6 percent of GDP in 2018.
The major downside risks stem from external factors. Given Cambodia's high reliance on the EU market under the Everything But Arms (EBA) preferential trade scheme, a suspension of the EBA status would substantially weaken its export competitiveness in the EU market. Another external risk arises from the escalation of the U.S. � China trade war, which might trigger weaker growth in these two economies and intensify the global trade protectionism sentiment.
From the domestic side, major risks stem from weakening external competitiveness due to a rapid increase in labour costs. On the financial sector, a growing credit concentration in the real estate and construction sectors and a rapid expansion of microfinance institutions may also heighten risks to financial stability.
Efforts to enhance the economy's competitiveness should be continued in order to sustain high growth momentum and resilience in the long-term. While wage increases should be in line with underlying productivity growth, efforts to improve competitiveness across other dimensions including trade facilitation, labor quality enhancement, and institutional improvement should be strengthened.
Improving infrastructure and human resources is also essential to promote economic diversification and enhance overall competitiveness. In this regard, rebalancing budget allocation to better address infrastructure and human development gap is critical. The authorities should also remain vigilant on financial risks and continue upgrading regulatory frameworks towards international standard to enhance financial stability.
The National Bank of Cambodia (NBC) has also forecast the country's economic growth of about 7 percent this year. According to the NBC's Macroeconomic and Banking Progress in 2018 and its Outlook for 2019, Cambodian economy would grow at a rate of 7 percent this year, while the inflation rate will continue to remain at a lower rate of 2.6 percent.
Source: Agency Kampuchea Press