Growth to be mainly driven by domestic activity
Cambodia’s economic growth was broadly stable in 2023. Despite external headwinds resulting in weak goods exports, dynamic private consumption and the recovery in tourism (26% of GDP in 2019 vs. 10% in 2022) drove activity. In 2024, growth is expected to moderately accelerate. Household consumption (66% of GDP) should remain robust amid moderate inflation and resilient remittances, which are mostly from Thailand. Services like transport and hospitality will benefit from the continued recovery of the tourism sector with the albeit gradual comeback of Chinese tourists. Before the pandemic, they were the top source of international tourism arrivals and accounted for 36% of the total. Exports of garments, footwear and travel accessories – representing 57% of Cambodian exports – fell by 19% year-on-year in the first half of 2023. They should remain sluggish in 2024 amid a durably gloomy global environment. More to the point, slower economic growth in the US, Cambodia’s primary export destination, will weigh on its clothing shipments. Having struggled following the pandemic due to high raw material costs and rising interest rates, the construction sector (15 % of GDP) has started to show some signs of recovery in 2023. Although cement and construction materials imports were still down in the first half of 2023, reflecting weak construction activity, the sector saw approved investment increase by 130% year-on-year in the second quarter of the year, which suggests upcoming improvement in building activity. Based on its aim to become a regional transport hub, construction benefits from the Cambodian government’s focus on infrastructure development. Funded by foreign investment, mainly from China, ongoing projects include the construction of the Techo Takhmao International airport, which is expected to be operational in 2025. Despite risks of reduced output owing to El Nino, the agricultural sector (22% of GDP and 39% of employment) is expected to remain robust thanks to improved access to regional markets and recent free trade agreements (China-Cambodia FTA and RCEP have been effective from January 2022, and the Korea-Cambodia FTA from December 2022).
As a highly dollarised economy, the National Bank of Cambodia (NBC) will remain pressured by the Fed’s monetary policy. With US interest rates expected to remain elevated throughout 2024, the NBC may continue to intervene in foreign exchange markets to support the managed peg of the riel to the USD.
Gradual reduction of twin deficits in 2024
The government has planned fiscal consolidation starting from 2024. In that context, the public deficit is expected to narrow, thanks to a reduction in spending. With an announced increase in capital spending, focusing on competitiveness, infrastructural expansion and the development of a digital economy, the reduction would likely stem from a cut in non-necessary current expenditure. Higher revenue will also contribute to a smaller public deficit thanks to greater economic growth and the introduction of a capital gains tax (at 20%). Despite public debt being quasi-exclusively external and denominated in foreign currency, risks remain manageable. The public debt level is moderate and mostly comprises medium to long-term maturities, in addition to being highly concessional, with around 45% of it comprised of grants. The situation of private sector debt – mainly in USD – is more worrisome (180% of GDP at end-2022). Authorities gradually lifted forbearance measures from 2022, making this high indebtedness a potential threat to financial institutions. NPLs accounted for 2.9% of the total in 2022, up from 1.8% in 2021, with this share expected to have risen since.
Along with the continued recovery in tourism, robust remittances and a collapse in gold imports (16% of total imports in 2022), the current account deficit narrowed in 2023 and is expected to keep on the downtrend in 2024. However, it will remain substantial due to the goods trade deficit and profit repatriation abroad. Project financing and FDI, as well external financial aid (notably from the ADB), should cover the deficit. Foreign exchange reserves remain adequate and stood at about 7 months of imports in June 2023.
A new PM, but with probably the same policies
During the national elections held in July 2023, the People's Party (CPP) led by the then Prime Minister (PM) Hun Sen, won an overwhelming majority of parliamentary seats in the National Assembly (120 out of 125). Condemned by the US, the European Union, and the United Nations, the election occurred after the opposition challenger, the Candlelight Party, was prohibited from running. Following constitutional amendments that came into law in 2022 allowing the party with a majority of seats to directly designate a PM, Hun Sen appointed his son Hun Manet as the new PM. The latter, who is 45, was in August officially sworn in for a five-year term after winning a vote of confidence in Parliament. This ended the almost four-decade rule under the former military commander of the Khmer Rouge. However, Hun Sen will continue to influence the national political scene. He stated that he could step back into the PM position to ensure the stability of the handover if needed. Above all, he remains the President of the CPP and was appointed President of the Supreme Privy Council to the King. He also announced that he will become the President of the Senate after elections scheduled for February 2024. No major changes are expected from Hu Manet’s accession into power, either domestically or in terms of foreign policies. In this regard, he plans to pursue a multilateral and balanced foreign policy, with a focus on the ASEAN region. Therefore, he should conserve close ties with China, on which Cambodia relies heavily. Beijing accounted for more than half of FDI inflows in 2022 (52%) and represents the top creditor of the Cambodian government with 37% of the public debt owed to China. The relationship with the US has been weakened by Washington’s condemnation of attacks on democracy and human rights abuses, as well as on the Cambodian garment industry’s use of cotton fabrics originating from the Chinese region of Xin Jiang.