Garments to Keep Economy Strong Through China Slowdown

The World Bank on Monday said it still predicted strong growth from the Cambodian economy—led by garment exports—and only a moderate cooling over the next few years despite a “faster than expected” slowdown in China, Cambodia’s biggest foreign investor.

Marking the release of its latest economic update for the region, the Bank said the year-on-year growth of Cambodia’s gross domestic product (GDP) would dip from 7 percent in 2015 to 6.9 percent this year and again to 6.8 percent in the two years after that, largely weathering China’s sharper downturn. But it warned of persistent struggles for Cambodia’s agriculture sector and the slowdown of a still-booming construction industry living increasingly off of credit.

“It’s still very high growth,” said Sodeth Ly, a country economist for the Bank. “So everything remains good in the mid-term outlook.”

Appearing at a press conference in Washington via video link, Sudhir Shetty, the Bank’s chief economist for East Asia and the Pacific, said China’s slowdown was likely to hurt Cambodia most in the tourism sector.

Although tourist arrivals from China are growing faster than from any other country, the year-on-year growth in total arrivals has dropped sharply, from 17.5 percent in 2013 to 6.1 percent last year.

Miguel Sanchez Martin, the Bank’s senior country economist, said the construction sector and stronger-than-expected garment exports—mostly to the U.S. and Europe—had been picking up the slack.

“It is also very interesting to see how Cambodian exporters have been able to deal with this more difficult situation, which is appreciation in the U.S. dollar,” he said. “You can observe already some diversification into higher value-added products and also intensification of the footwear industry.”

Mr. Sanchez Martin said he expected garment exports to keep growing over the next few years and tourism to pick up again.

“On the other hand,” he said, “we will need to monitor the possible deceleration [of] the construction sector and also how to respond to the weak sector in agriculture, which is the most concerning part.”

While the construction sector is expected to remain robust, he said, “a new trend that we observed is a deceleration in the number and amount of construction approvals. That means that growth in the construction sector could slow down a little bit in 2016.”

Mr. Ly blamed a “very sluggish” agriculture sector, expected to contribute virtually nothing to this year’s GDP growth, on bad weather and a shrinking supply of new land on which to expand production.

He said depressed international commodity prices were likely to keep the agriculture sector down for the next few years.

“Many commodity exporters [are] facing international prices falling down, so it [is] very difficult for agriculture, especially for export,” he said. “It’s very difficult to prosper during the depressed time, so it might take some time to boost agricultural production. It’s not going to be short-term; it’s going to be medium-term.”

Mr. Ly also raised alarms about the “large gap” between the rising value of bank loans and falling deposits and about a steady drop in public investment since 2011, as ever more donors have shied away from lending to a country approaching lower-middle-income status.

“So…the main message and policy option [is] that the government might have to spend a little bit more on public investment,” the economist said.

But he said government revenue was likely to stay stuck at about 17 percent of GDP through 2018 without new tax rates and incentives—unlikely until after the 2018 national election.

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