Growth has held up well in Cambodia. It is expected to marginally expand this year, reaching 7.1 percent in 2018, driven by domestic consumption and exports.
The favorable longer-term outlook is boosted largely by rising FDI inflows to manufacturing and agriculture, and improved supply chain linkages between FDI and Cambodian firms.
Domestic demand has been boosted by higher wage growth and larger public investments with fiscal expansion serving as stimulus.
Strong external demand has boosted exports of garment and footwear products, which increased 16.1 percent (y/y) during the first half of 2018.
Efforts by the authorities to attract Chinese tourists have paid off. Tourist arrivals reached 3 million during the first six months of 2018 and the Chinese tourists are ranked first (followed by Vietnamese, Lao, and Republic of Korea visitors).
Cambodia’s external position, however, remains stable as healthy exports partly offset the surge in import demand and the current account deficit is expected to marginally widen but remains fully financed by FDI inflows.
Strong consumer confidence with rising wages has pushed up inflation.
Fiscal expansion has resulted in widening of the overall fiscal deficit which is targeted to increase to 4.2 percent of GDP in 2018, up from 1.6 percent in 2017. However, government deposits at the banking system continued to increase, thanks partly to continued strong revenue performance.
Risks in the financial sector continue to build up, with large exposure to the construction and real estate sector.
Externally, risks are associated with the potential temporary withdrawal of Everything But Arms (EBA) preferences for Cambodia and potential spill-over effects of US-China trade disputes.
A high priority is to safeguard the health of the financial sector, while building up reserves and strengthening competitiveness/preventing rapid real exchange rate appreciation, given the recent surge in imports.
To absorb rising FDI inflows in manufacturing & agroprocessing, further bridging of the infrastructure deficit is warranted.
Mobilizing domestic savings to boost investment in the medium term is paramount as Cambodia endeavors to become an upper middle-income economy.