Cambodia: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Economy continuing to recover in 2011, but falling short of pre-crisis levels
The Cambodian economy began to grow again in 2010. After collapsing in 2009, textile exports (70% of sales abroad) surged in 2010. Although the construction industry has performed well, the cancellation of two large real estate projects suggests that the sector has not recovered its pre-crisis dynamism. Tourism, a main engine of growth, rebounded strongly with the number of visitors increasing by over 10%, particularly in the vicinity of Angkor.
In 2011, GDP growth is expected to accelerate. Provided the weather is good, agriculture is expected to benefit from gains in productivity resulting from implementation of the rice-growing modernization policy, which provides for agrarian reform and higher yields. Tourism will likely attract increasing numbers of visitors. Textile exports will continue to grow, but will remain very exposed to the volatility of the American market, which represents 50% of export earnings. Exporters are moreover likely to face increased competition from producers like Bangladesh and Vietnam.
A current account structurally in deficit and public finances dependent on official transfers
With the recovery, the government is expected to initiate a gradual tightening of fiscal policy that could enable a reduction in the public sector deficit in 2011. But public spending will remain high and fiscal revenues structurally low. The public deficit will consequently remain large. Public finances remain very dependent on official transfers (6.5% of GDP in 2010). But donors have appeared dissatisfied by Cambodia's lack of progress on improving the business environment and especially on combating corruption, which has reached disquieting levels in view of the concentration of power around the Prime Minister.
The current account deficit doubled in size in 2010 as a result of the stronger recovery expected for imports compared to exports. And it will likely remain substantially in deficit in 2011 due to Cambodia's structural dependence on capital goods. Strong demand for foreign services like freight and insurance also affect the external balance. Financing needs will, however, be mostly covered by FDI inflows. But weaknesses nonetheless persist. The very low level of foreign exchange reserves makes Cambodia vulnerable to sudden capital flight, and the banking system suffers from a lack of oversight.
Political stability
The domestic political situation has been stable. The CPP Cambodian People's Party, led by Prime Minister Hun Sen, won two-thirds of the seats in the National Assembly in the July 2008 elections and strengthened its position by winning 75% of the votes in the May 2009 regional elections. The centralization of power moreover contributes to keeping the CPP at the helm. The government's economic and social policy continuity thus appears likely to remain on track.
Relations with Thailand, meanwhile, have deteriorated over the demarcation of the border near the Preah Vihear Temple. Despite the presence of troops stationed at the border by the two countries, the risk of conflict remains nonetheless limited.
Strengths
- Flexible textile industry and high potential tourism sector
- Support of bilateral and multilateral donors
- Political stability since 1997
Weaknesses
- Narrow base of growth with the large role played by agriculture making consumption dependent on weather conditions
- Dependence on concessional loans as a result of the country’s limited fiscal revenues and high public foreign debt
- Major governance shortcomings