Cambodia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Dynamic textile industry and tourism sector with strong potential
- Offshore hydrocarbon reserves (oil and gas)
- Financial support from bilateral and multilateral donors
- Integrated into a dynamic, regional network (ASEAN)
- Young population
- Considerable share of agriculture in GDP and vulnerability to weather hazards
- Underdeveloped electricity and transport networks
- Lack of skilled workforce
- Dependence on concessional finance due to weak fiscal resources
- Significant governance shortcomings
- Poverty rate still high; low levels of spending on health and education
- Growing reliance on construction, clothing exports and tourism
Growth is Expected to Remain Dynamic in 2018
Growth is expected to maintain a steady pace in 2018. The Cambodian economy is set to continue to benefit from lively domestic demand supported by moderate inflation, rapid wage growth (both in the private and public sectors) and increased public spending. Private consumption, which represents 75% of GDP, is expected to receive a boost from higher household disposable income, even if the agriculture sector, which employs two thirds of the workforce, is still likely to suffer from weak agricultural commodity prices. Public investment will be directed mainly towards education, vocational training, agriculture and infrastructure. Meanwhile, exports of textile products, mainly consisting in clothes and shoes, will continue to benefit from the country’s increasing integration in the regional value chain, as well as from the modest recovery in world trade. The construction sector is profiting from the booming property market and the development of tourism infrastructure. There has effectively been a rapid expansion in tourism, especially from Asia. Foreign direct investments are likely to remain high, especially in the textile sector, despite steadily rising wages and competition with neighboring countries (Bangladesh and Myanmar, in particular).
Substantial Deficits, Generating a Dependence on External Financing
In 2018, the country’s current account balance will continue to show a large deficit. The trade deficit will remain huge (17% of GDP), but will reduce due to strong exports associated with firmer global demand, even though the value of imports of capital goods and oil products will remain high. Tourism growth will help maintain the surplus in the balance of services. Moreover, high levels of international aid as well as remittances by expatriate workers will offset the repatriation of dividends by foreign companies, which dominate the textile sector. FDIs are rising steadily, especially those from China and Japan, and make it possible to finance the current account deficit. Foreign exchange reserves are, therefore, expected to continue to grow to reach almost eight months of imports.
With regard to the public accounts, the budget deficit is expected to widen slightly because of higher spending levels not offset by higher revenues associated with the dynamism of the economy. The government has introduced a fiscal consolidation policy aimed at improving tax collection. In this context, the public debt will remain stable. However, the public finances will continue to be highly dependent on external finance (in part concessional), mainly from China, Russia and the United States.
Meanwhile, credit is growing rapidly and the banking sector remains weak because of inadequate supervision and a concentration of risks in the property sector. At the same time, the economy is highly dollarized with foreign currency deposits accounting for almost all deposits, leaving very little space for the rial, the local currency, whose exchange rate is very tightly controlled. Accordingly, banks are heavily exposed to exchange rate risk.
Political and Social Tensions in the Run-Up to the Parliamentary Elections
Following the parliamentary elections, which were hotly contested by the opposition in 2013, the Cambodian People’s Party (CPP) led by Prime Minister Hun Sen lost a large number of seats. The opposition benefited from a weariness regarding Hun Sen’s reign (Prime Minister since 1998) and acute social tensions over wrongful expropriations and poor working conditions in the textile sector. The prime minister and his party (CPP) are, nonetheless, expected to remain in place after the parliamentary elections in July 2018, while the risk that they will hold onto power in the event of defeat appears increasingly likely. In the run-up to the elections, the ruling party seems to be intensifying its campaign of repression against its political opponents, the media and NGOs. The arrest in September 2017 of the leader of the opposition party (CNRP) on grounds of treason also seems to point to an authoritarian turn. Besides, the Supreme Court dissolved the CNRP in November 2017 saying it was conspiring with foreign governments to overturn the ruling party. As a result, 44 of the 55 parliamentarians have been replaced by members of the CPP. It is, therefore, unlikely that the upcoming elections will be free and fair and there may well be renewed mass protests.
The business climate is still marked by a lack of transparency and high levels of corruption. Political and social fragility prevent the economy from growing more quickly, while investments will remain constrained by the country’s infrastructure shortcomings, notably as regards energy, as well as by the deficiencies in the education system.