Cambodia’s uncertain economic rebound in 2021

Asia World

Author: Heidi Dahles, University of Tasmania

Cambodia’s government has received global accolades for its handling of the COVID-19 pandemic. The country has recorded a total of 364 COVID-19 cases and no fatalities as of 30 December 2020. But the economic fallout from the severe public health crisis is looming large for Cambodia.

Street vendors wearing face mask in Cambodia (Photo: Reuters/Latin America News Agency).

Street vendors wearing face mask in Cambodia (Photo: Reuters/Latin America News Agency).

The global economic downturn triggered by the pandemic has hit Cambodia’s economy hard. The Kingdom’s main engines of growth — tourism, construction and the garment industry — contributed more than 70 per cent of GDP growth and 39 per cent of total employment in 2019. Due to travel restrictions and lockdowns, Cambodia’s tourism and hospitality sector has collapsed. International tourist arrivals declined by 74 per cent to 1.2 million between January and September 2020, from 4.8 million in the same period in 2019. An estimated 3000 tourism-related businesses have closed down and 45,400 jobs have been lost.

The construction and real estate boom that was fueled by foreign investment has come to a grinding halt. Cambodia’s manufacturing exports have significantly declined due to disruptions to global supply chains and the cancellation of orders from the European Union and the United States, Cambodia’s main export markets.

In the garment sector, at least 110 factories suspended production in the first nine months of 2020 and left more than 55,000 workers without jobs. Union leaders point out that the actual numbers could be much higher.

Large parts of Cambodia have also been hit by rain-induced floods that affected over 100,000 households across 19 provinces. The floods have devastated nearly 170,000 hectares of rice and 73,000 hectares of other cash crops. Roads have been damaged and flooding has forced more than 100 garment factories to close, affecting tens of thousands of workers.

Growth forecasts for 2020 are gloomy. After two decades of uninterrupted economic expansion at an average rate of 8 per cent and towering aspirations to attain upper middle-income status by 2030, the World Bank projected a growth rate of ­–2 per cent in 2020, the sharpest decline in Cambodia’s recent history. The Asian Development Bank (ADB) has anticipated that Cambodia’s economy may contract by as much as 5.5 per cent.

As the crisis unfolded, major global finance authorities, including the ADB, World Bank and the International Monetary Fund, have adjusted their forecasts to reflect a smaller contraction in 2020 followed by a sharp rebound in 2021. This was echoed by the Cambodian government maintaining that its economy would contract by around 1.9 per cent in 2020 and rebound to 3.5 per cent growth in 2021.

Some commentators find the new growth scenario out of touch with reality, yet there are indications that Cambodia’s success in containing COVID-19 and its economic diversification strategy may pay off. The government has handled the crisis with swift and bold actions to contain the spread of the virus and also supported the economy through wide-ranging stimulus measures introduced to drive economic recovery in the post-COVID-19 era.

Despite the worldwide economic downturn, Cambodia exported goods to the tune of more than US$7 billion in the first half of 2020, rising nearly 3 per cent year-on-year. This increase is largely due to Cambodia’s improved agricultural performance and an increase in volume in non-garment manufacturing exports such as bicycles and electronics. Total industrial output this year is projected to climb by 5.1 per cent if garment, footwear and travel goods exports remain on the recovery track.

At a time when Cambodia also faces the partial suspension of preferential access to the EU market under the ‘Everything but Arms’ agreement, new international trade and investment initiatives are being brokered in an effort to spur post-COVID-19 economic recovery. As concerns rise in Cambodia about the decline of exports to Japan — falling by nearly 6 per cent this year — the recently signed bilateral free trade agreement with China further consolidates the two countries’ close alignment.

China is also experiencing slow growth while major trade partners, including the United States, Japan and Germany, are relocating their production base to Southeast Asia, all of which may bolster Cambodia’s exports. The newly established Regional Comprehensive Economic Partnership (RCEP) is expected to offer a boost to regional economic confidence. Cambodia, a low-cost country in this partnership, can expect increased employment opportunities as the RCEP Agreement allows production to be shared among member states, avoiding red tape and reducing costs and time for companies.

Heidi Dahles is Adjunct Professor at the School of Social Sciences, University of Tasmania, and at the Griffith Business School, Griffith University. She is also Visiting Professor at the Cambodia Development Resource Institute (CDRI), Phnom Penh.

This article is part of an EAF special feature series on 2020 in review and the year ahead.