The Cambodian economy is expected to return to positive growth in 2021 after a contraction last year due to fast vaccination and continued fiscal policy support, pointed out a preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its virtual Annual Consultation with the Cambodian authorities from April 19 to May 4, 2021.

The recent surge in community cases and lockdown highlight the continuing challenges from the pandemic, as well as the need for faster vaccination and more targeted and flexible policy measures to support recovery, it added.

The mission was led by AMRO Lead Specialist, Dr. Seung Hyun Luke Hong. AMRO Director, Mr. Toshinori Doi and Chief Economist, Dr. Hoe Ee Khor participated in the policy meetings. The discussions focused on preserving fiscal strength and maintaining financial stability, as the government continues to provide strong support to households and firms amid a recent surge in local infections.

“Despite disruptions in domestic activity due to the recent lockdown, the Cambodian economy is projected to grow by 4.0 percent in 2021, led by a robust recovery in manufacturing and supported by continued fiscal stimulus,” said Dr. Hong. “The recent spike in community cases underscores the need for the government’s strong response to contain the pandemic and speed up the vaccination rollout to achieve herd immunity”.

In 2020, the report continued, growth is estimated to contract by 3.0 percent as containment measures in Cambodia and its major trading partners and tourist markets weakened the country’s key growth drivers. Lower demand from major export markets and supply disruptions led to a 9.9 percent drop in garment exports, the country’s main export product. Highly dependent on tourism, the more than 80 percent reduction in international arrivals led to business closures and job losses. Its construction sector also contracted amid subdued economic activities and investor sentiments. Agriculture was the main bright spot in 2020, supported by strong agriculture exports.

The current account deficit narrowed to 11.5 percent of GDP in 2020 from 15.0 percent of GDP in 2019, mainly due to the contraction of imports as the economy slowed down. Foreign direct investment (FDI) remained relatively steady, declining slightly by 1.8 percent in 2020. International reserves increased to US$21.3 billion as of end-December 2020, equivalent to about 11 months of imports of goods and services.

For Risks and vulnerabilities, AMRO said, despite Cambodia’s successful containment of the COVID-19 outbreak in 2020, the spike in community infections since February 2021 and the subsequent lockdown in April underscore the high downside risk to the economy. In particular, its high reliance on contact intensive services sector and a labour intensive manufacturing sector renders the economic recovery more vulnerable to new waves of infection, given a relatively weak public health system.

On the financial front, risks may stem from a possible deterioration of asset quality. Despite the active loan restructuring, a protracted and uneven economic recovery is likely to lead to a further deterioration of the financial institutions’ asset quality. However, the strong capital position and liquidity conditions of the banking system should provide a significant buffer.

According to the report, the pandemic may leave lasting scars on Cambodia’s economy, impeding a return to its long-term growth path. After growing around 7 percent on average in the past 10 years, the economic contraction in 2020 poses considerable structural challenges to the economy. Business closures and job losses due to the pandemic, if prolonged, may diminish the strength of the recovery in coming years and could leave lasting damage to the economy’s productive capacity.

 

Source: Agency Kampuchea Press

Related Post

Categories

Monthly Archives