As the global economy grapples with the aftershocks of the pandemic, rising geopolitical tensions, and market volatility, Cambodia finds itself at a crossroads. 

With an economy heavily reliant on external factors such as foreign direct investment from major global players like China, the US, and the EU, as well as a burgeoning but vulnerable real estate sector, Cambodia's economic landscape is fraught with challenges that require strategic navigation.

The challenges facing Cambodia and the ASEAN+3 region, as detailed during a May 13 seminar on the “2024 ASEAN + 3 Regional Economic Outlook (AREO) Cambodia Outreach Seminar: Navigating Tomorrow” report by Marthe Hinojales, senior economist at the ASEAN+3 Macroeconomic Research Office (AMRO), highlight a range of internal and external risks and vulnerabilities.

The workshop, held at the Rosewood in Phnom Penh, served as a platform for economists and policymakers to exchange views on the challenges that lie ahead for Cambodia and the ASEAN+3 region.

Cambodia's economic landscape is fraught with both external and domestic risks that could impede its ongoing recovery efforts. 

Externally, the nation's economic health is closely tied to the performance of major global economies, which are crucial sources of foreign direct investment and tourism. 

“Cambodia is vulnerable to global price fluctuations, especially spikes in oil and food prices triggered by geopolitical tensions or climatic anomalies such as El Niño, which can lead to heightened inflationary pressures,” warned Hinojales, during her presentation. 

“Domestically, Cambodia's real estate sector presents a major vulnerability. Despite its rapid growth, the sector is plagued by unregulated shadow banking activities that could potentially destabilise the financial system and, by extension, the broader economy,” she added.

Moreover, she was concerned that the financial sector is increasingly susceptible to liquidity crises due to its growing reliance on short-term external debt and non-resident bank deposits. 

“Such conditions could lead to sudden reversals of capital, threatening financial stability and economic security,” according to the 196-page report. 

Eng Netra, executive director of the Cambodia Development Resource Institute (CDRI), believed the report showcased an additional dimension which could make it difficult to move forward in terms of both development and growth.

Khou Vouthy, director-general of the National Bank of Cambodia’s General Directorate of Policy and International Cooperation, said global growth this year is considered quite resilient, but must withstand several risks, especially the Asian countries.

He noted that Cambodia was severely affected by the pandemic, as its economy is reliant on external sectors, including the export of textiles and travel wares, tourism and construction, all of which are affected by significantly contracted European trade.

Vouthy identified three main issues. 

First, Cambodia has a young population, an issue in the short term. 

Managing a young population is a challenge, as job creation needs to be sufficient to sustain long-term economic growth. 

At the same time, he said, education and vocational training are vital to ensure increased productivity.

“Second, the fact that commodities export markets for China products are the US and EU, while our large imports of raw materials, especially from China, may introduce uncertainties and shocks and risks,” added Vuthy.

Because of this, he explained, political tensions may induce down-time risks to the economy.  

Ung Luyna, director-general of the Ministry of Economy and Finance’s General Department of Policy, also addressed potential risks to economic growth.

He noted that US interest rates remain a concern.

“This is having a very direct effect on the economy because we are a polarised economy,” he told the audience during a panel discussion. 

He cautioned that interest rates and the strength of the US currency may affect the Kingdom’s competitiveness.

Luyna suggested that the second risk involved policy tensions between the US and China.

“I mean, international relations over foreign policy are very important. In terms of navigation, there's a lot of tension,” he said.

The third risk had to be examined from a macro perspective. The Kingdom’s private credit to GDP ratio is one of the highest in the region, a real concern.

“After the pandemic, it kind of blew up,” he noted.

According to the report data, Cambodia's GDP growth appears resilient, showing signs of recovery post-pandemic with an upward trend projected to continue into the near future. 

The report noted that this growth is supported by a gradual increase in both domestic consumption and foreign direct investment inflows, which have been buoyed by improved business confidence, as well as government incentives aimed at stimulating economic activity.

In 2023, Cambodia's real GDP growth was estimated at 5.3%, slightly up from 5.2%.

Headline inflation, which soared to 5.3% in the previous year, dropped to 2.1% in 2023, thanks to the easing of global oil and food prices.

The external sector also showed remarkable improvement, with the current account balance shifting from a deficit of 25.7% of GDP in 2022 to a small surplus of 1.0% of GDP in 2023. 

This turnaround was largely attributed to a reduction in gold imports, bolstered remittances, and a recovery in tourism, which helped stabilise the external financial landscape.

However, fiscal health remains a concern, with the government fiscal balance expected to worsen to -6.9% of GDP due to slowed revenue collection and increased spending on social programmes and infrastructure aimed at economic recovery and resilience.

Hoe Ee Khor, AMRO chief economist, said most countries grow as fast as possible, but there is a limit to the speed you can grow at.

“We can boost the economy by spending more, including higher credit growth and higher business spending, but that kind of growth is not sustainable,” he explained.

“I think the main thing is to improve the fundamentals, like legal forms and infrastructure. If you look at the growth, we think that it may be 8% a year, and that's fantastic,” he added. 

He noted the importance of strong fiscal policy, adding that many countries in the region have discovered their social protections were insufficient.

“One example of infrastructure is the new expressway. It really opened up to tourism between Sihanoukville and Phnom Penh. We now see a lot of tourists on the beach. The growth of domestic tourism is sustainable,” said Khor. 

He also highlighted how Cambodia is now attracting a lot of investment from China and the rest of the world, for example in garment and bicycle manufacture. 

They are taking advantage of the fact that labour costs here are cheaper than many other nations.

Khor warned that if labour costs go up, Cambodia may lose some of its competitiveness.

“That's why I think it's important to focus on the fundamentals, trying to get the skill level, improve your infrastructure, so that you can add value and attract higher value investment,” he said.

He added that Asia needs to build resilience against the possibility of inflation-driven interest rate spikes.

Luyna said that while GDP growth is important, it must be sustainable, with a multi-dimensional kind of development. 

He noted that the Kingdom has done also very well with its public financial management reform programmes.  

During the pandemic, he said, Cambodia emerged with a very stable debt-to-GDP ratio, while many other nations were unable to do so.

Vouthy said current government policy has obviously enhanced economic demarcation by promoting the region's economic development.

“The government is steadfast in its commitment to implementing and enhancing its national digital policy agenda by crafting several policy frameworks and is navigating Cambodia towards the formation of a digital economy and society. This will be a new source of economic growth and an ecosystem that increases productivity and economic efficiency,” he added.