In 2016, growth is expected to be around 6.9 percent, making Cambodia one of the fastest growing countries in East Asia.
The World Bank report said there are downside risks to this outlook that may include continued appreciation of the dollar, slower economic recovery in Europe, spillovers from a slowdown in the Chinese economy and potential labor market issues. Given the narrow production and export base and concentrated export markets in the European Union and U.S., the country is exposed to increased competition that gradually constrains growth.
“Scaling up public investments to address key infrastructure bottlenecks and further improving the business climate will be important for Cambodia to remain competitive,” said Alassane Sow, the World Bank’s country manager for Cambodia.
Following a slowdown in early 2015, garment exports rebounded in the second half of the year, ending at a nominal year-on-year growth rate of 12.3 percent, compared with 9.2 percent in 2014. Cambodia’s apparel imports to the U.S. surged 29.6 percent in February, according to the Commerce Department.
Cambodia’s growing economy has also felt the pain of labor disputes in recent years, amid efforts to improve the right to organize and raise the minimum wage. Last week, amid a violent clash between unions and district security forces that left at least two unionists injured, the National Assembly passed a controversial law that seeks to regulate the country’s numerous trade unions.
The law, which has undergone several drafts since 2008 and will apply to worker and employer organizations, has provisions on how individuals can form a union, how the government will track its financials and how it may be dissolved.
Manufacturers in Cambodia said the legislation is necessary given that the $6.2 billion apparel and footwear industry is plagued by frequent strikes. But in its current iteration, the law has been criticized by local unions and international rights groups that believe that it will restrict a worker’s freedom of association and right to strike.
In December, Cambodia increased its minimum wage to $140 a month from $128 a month, following a 28 percent hike at the beginning of 2015.
The construction industry also remained a main engine of growth in 2015, driven by sustained foreign direct investment into the sector.
Growth in the tourism sector remained moderate despite a recovery in tourism activities in neighboring countries, particularly in Thailand and Vietnam. The total tourist arrivals in 2015 grew 6.1 percent to 4.78 million visitors compared with 6.9 percent growth in 2014. Slow improvement in rice yields largely caused by less favorable weather conditions and depressed agriculture commodity prices constrained growth in the agriculture sector.
The Cambodia Economic Update highlights how the financial sector has supported economic growth in Cambodia over the past few years. Domestic credit accelerated 27 percent year-on-year in 2015. In the current context, the report said strengthening banking supervision would be advisable to safeguard financial stability and sustainability. Recent measures such as the increase in capital requirements for financial institutions are welcome developments.