THE ECONOMIC RECOVERY IS SET TO CONTINUE

Despite headwinds leading to slower global economic growth, Cambodia recovered in 2022, with real GDP exceeding its 2019 level. Still, in a gloomy global environment, the Cambodian economy should grow slightly faster in 2023. Domestic consumption will benefit from the government's 'treatment of COVID-19 as endemic' and international borders reopening as the country starts to welcome unvaccinated travelers with no on-arrival test requirement in October 2022. Demand for services, including catering and hospitality, will mainly be dynamic. Having said this, tourism (26% of 2019 GDP) will only reach pre-pandemic levels if the formerly first source of inbound arrivals, namely China, pursues its strict COVID-19 policy. Household consumption (73% of GDP in 2021) should also be supported by relatively robust remittances (5.6% of GDP in 2019), as most of them are from Thailand, where economic recovery is set to continue in 2023. Continued improvement in the business environment – with the new 2021 Law on Investment and the Anti-Corruption Institution's 5-year action plan running until 2025 – and recent regional free trade agreements will drive investment. The construction sector (15% GDP in 2019), which has been struggling since the pandemic, could see some relief from a 10-year infrastructure plan announced by the government in 2022.

Nevertheless, the economy will be weakened by the export growth slowdown, the country being highly dependent on exports of goods and services (65% of GDP in 2021), notably on garments and footwear (45% of total goods exports). Rising recession risks in the U.S. and the EU, the top export destinations, would severely affect overall export performance. As a double whammy, the preponderant textile industry would still face high energy and raw material prices.

After having markedly increased in 2022, inflation is expected to reduce but could remain higher than in past years due to pass-through effects, weighing on private consumption. With the economy being highly dollarized, the National Bank of Cambodia (NBC) may continue to intervene in the market to support the riel.

HIGH PRIVATE-SECTOR INDEBTEDNESS POSES A RISK

With a still expansionary fiscal policy, the public budget balance will remain in deficit. The 2023 budget will be dedicated to the standard of living improvement and social resiliency. While Cambodian public debt is entirely external and denominated in foreign currency, risks remain manageable. The public debt level is moderated; it is mainly composed of medium to long-term maturities and is highly concessional, with around 40% of it made of grants. Moreover, the debt is quasi-exclusively subject to fixed interest rates so that it won't be vulnerable to rising interest rates. More concerns come from private sector indebtedness, which was already high and increased further with the pandemic to reach 174% of GDP at the end of end-2021. With authorities having ended forbearance on restructuring in July 2022, this high indebtedness could threaten financial institutions. NPLs represented 4.5% of GDP as of June 2022.

Although it is expected to narrow with the rebound in tourism, the current account deficit will stay high. The trade balance will remain negative due to the export growth slowdown and high commodity prices impacting the import bill. That being said, project financing, FDI, as well as remittances, and external financial aid (for example, ADB granted USD 1.2 billion of concessional lending and USD 43.9 million in grants over 2022-2025), should cover the deficit. Despite a slight decline in capital inflows and NBC's intervention in the foreign exchange market to stabilize the riel, FX reserves remain adequate (about seven months of imports in June 2022).

POLITICAL CONTINUITY IS EXPECTED IN THE RUN-UP TO THE GENERAL ELECTIONS

The former military commander of the Khmer Rouge and current Prime Minister Hun Sen has led the country for over 35 years. His right-wing conservative Cambodian People's Party (CPP) has all the National Assembly (NA) seats and secured around 80% of local council seats in the 2022 commune elections. CPP is expected to conserve a large majority after the next general elections in July 2023. Although Hu Sen's next term is scheduled to be his last, he will likely retain broad control over the country's political life. After new constitutional amendments allowing the party with a majority of seats in the NA to designate a PM directly came into law in 2022, Hu Sen stated he would remain, President of the CPP, after he leaves the head of state. This would make it even easier for Hu Sen to bring his son to power.

Relations with Western countries, the EU, and the U.S. have worsened since the national elections in 2018. Concurrently, Cambodia has strengthened ties with China and relies on it to support the economy. On the investment side, Cambodia has already been depending massively on China, which accounted for nearly half of the FDI inflow in 2021 and represented the top creditor of the Cambodian government with 45% of the public debt owed to Beijing. Regarding the Ukraine-Russia conflict, Cambodia maintained a neutral stance but disapproved of annexing Ukrainian regions.