Moody's Investors Service Inc has maintained its forecast for Cambodia’s real gross domestic product growth for this year at a moderate 5.5 per cent, it said on Tuesday in a note.

This is underpinned by the European Commission’s (EC’s) recent decision to suspended one-fifth of the Everything But Arms (EBA) scheme awarded to the Kingdom, and the potential adverse effects on tourism and spending incurred from the outbreak of Covid-19 – the disease caused by a new strain of coronavirus, Moody’s said.

It also maintained Cambodia’s credit rating at B2 with stable outlook.

The global credit ratings agency’s 2020 projection is disparately conservative compared to the Kingdom’s 6.5 per cent forecast, Asian Development Bank’s 6.8 per cent and the World Bank’s “slightly below seven per cent” expansion.

All three revised their forecasts earlier this year with the EBA predicament in mind.

Coupled with the partial suspension, Cambodia’s growing minimum monthly wages will weigh against its competitiveness, which will diminish its attractiveness as a production base and will deter new foreign direct investment (FDI), Moody’s said.

“Sustained FDI inflows are necessary to at least partly fund a growing current account deficit. FDI and domestic investment in the garments and footwear sector have been a key driver of Cambodia’s recent economic growth.

“The EU is Cambodia’s largest export market and biggest customer for its garments and textiles, making the move credit negative,” it said.

The partial suspension, which has not been ratified by the European Parliament and Council, is due to take effect on August 12.

Beginning in February last year, the suspension process was based on the EC’s concerns over “deterioration of democracy, respect for human rights and the rule of law in Cambodia”.

Last Wednesday, the bloc decided instead to partially suspend tariff benefits, which balanced the EC’s advocacy of human rights against the livelihoods of Cambodians employed in the affected industries, and effects on female labour participation and poverty levels.

However, Moody’s said although the direct effect of the tariff suspension appeared limited, it is expected to create reputational damage among both potential and existing importers while weighing on the price competitiveness of the Kingdom’s exports.

“In addition, the cost of Cambodian garments will reflect higher production costs, largely after minimum wage hikes in response to domestic pressures.

In 2019, the government increased minimum monthly wages for garment and footwear workers to $182 from $170 in 2018 and $153 in 2017. It plans to raise wages to $250 by 2023,” it said.

In contrast, regional competitors such as Bangladesh and Vietnam benefit from greater economies of scale in garment production than Cambodia, and lower labour costs.

The textile and garment industry makes up 11 per cent of Cambodia’s GDP and is one of the economy’s key growth drivers.

About 45 per cent of its total exports in 2018 were to the EU where nearly 96 per cent benefitted from the EBA tariff preferences. Eighty seven per cent of the EU exports comprised garments and footwear.

The suspension of tariff benefits would apply to certain categories of Cambodian garments and footwear, and sugar and travel goods whereas higher value-added garments and footwear would continue enjoying preferential access.

Based on Moody’s calculations using standard EU tariffs averaging at 12 per cent for garments and 16 per cent for footwear, export receipts would reduce by $150 million, which is equivalent to 0.6 per cent of Cambodia’s expected 2019 GDP.

The direct economic impact is muted compared to its previous estimate of a hit to exports, equal to 2.5 per cent of GDP, based on the full withdrawal of EBA benefits for the textiles industry.

“Given these developments and likely adverse effects on tourism and consumption from the ongoing coronavirus outbreak, our growth forecasts assume a moderation in real GDP to 5.5 per cent in 2020 from seven per cent in 2019,” Moody’s said.