ADB Forecasts a Moderation in Growth, Urges Stronger Private Sector Development

PHNOM PEHN, CAMBODIA – Growth in Cambodia is set to ease moderately in 2014, before picking up in 2015 on the back of buoyant exports and robust agriculture and service sectors, says a new Asian Development Bank (ADB) report released today.

ADB’s flagship annual economic publication, Asian Development Outlook 2014 (ADO 2014), says economic growth will moderate to 7.0% in 2014 from 7.2% in 2013, with a subsequent edging up to 7.3% in 2015.

“Despite political uncertainty and the risk of further labor market tension, Cambodia is expected to exhibit healthy economic growth over the next two years, reflecting stronger exports, growing services, and strengthening economic recovery in the major industrial economies,” said Eric Sidgwick, ADB Country Director for Cambodia.

The expected slowdown in 2014 reflects political tensions since national elections in July 2013 and strikes for higher wages by garment workers that dented investors’ confidence and disrupted some production of garments and footwear in late 2013 and early 2014. These uncertainties could dampen investment and weigh on tourism, construction and real estate activity this year.

ADO 2014 notes that net foreign direct investment inflows were buoyant at $1.3 billion in 2013, though that figure represents a slight decline from the previous year.

In 2014, growth in industry driven by exports of garments and footwear to the United States (US) and European Union (EU) is projected to ease to 8.7% from 10.5% the year before. Services sector growth is expected to moderate to 7.1% from 8.4%. Assuming favorable weather, agriculture is seen recovering from last year’s floods to grow by 4.7% from 1.8%. The prospect for higher growth looks brighter for 2015, supported by stronger economic recovery predicted for the EU and the US – Cambodia’s main export markets.

The fiscal deficit is targeted at 4.8% of GDP in 2014, down from 5.0% of GDP last year, supported by improved customs duty and tax revenue collections. Government expenditure is budgeted at 19.8% of GDP whereas revenue is budgeted at 15.0% of GDP. Due to some dampening of growth in merchandise exports, the current account deficit (excluding official transfers), is set to widen to 11.3% of GDP, from 10.8% in 2013, before narrowing in 2015. 

The tightening of customs duty collection will continue to exert some upward pressure on import prices into 2014. Average inflation is therefore anticipated to edge up to 3.5%, and remain around this rate in 2015 as economic growth picks up.

ADO 2014 highlights the need for spurring development of small and medium-sized enterprises (SMEs) for sustaining and diversifying economic growth. Cambodia’s private sector is dominated by informal and very small enterprises. Large enterprises – primarily in garments, light manufacturing, construction, tourism, and agribusiness – represent a fraction of a percent. Only 2.1% of enterprises fall into the category of SMEs.

The weakness of this SME segment in the structure of the private sector hinders development and diversification in the economy, the report stressed. This will require a concerted approach to strengthening the private sector, including development of sustainable business associations, promotion of inclusive businesses and social enterprises to serve the interests of farmers and small enterprises, and supporting the incubation of new businesses.