The Asian Development Bank on Wednesday released figures forecasting Cambodia’s economic growth to reach 7 percent and 7.1 percent in 2016 and 2017, respectively, but warned that downside risks emanating from excessive credit growth and weak economic diversification could eventually lead to slower growth.
The ADB’s Asian Development Outlook report highlights how weak growth in China and a slower-than-expected global economic recovery are weighing down gross domestic product (GDP) growth across the continent—contributing to the bank’s decision to lower its GDP growth expectations for Cambodia in 2016 from 7.2 percent last year.
Despite the sluggish global economy, Cambodia is expected to outperform other developing Asian nations, including Thailand and Vietnam, and maintain its current growth rate at least until 2017, according to ADB figures.
“With continued expansion in industry and services, diversification in the garments and light-manufacturing sectors…Cambodia is expected to exhibit robust economic growth over the next two years” Mr. Tukuafu said.
“To sustain growth, Cambodia needs to further diversify its economy and provide further opportunity for employment by attracting new industries,” he added.
In the short term, however, rapid growth in loans, particularly for construction and real-estate activities, would threaten economic growth should that credit suddenly become unrepayable, warned Jan Hansen, the bank’s senior country economist.
“The ratio of private-sector credit-to-GDP almost doubled in four years to over 60 percent—much faster than peer Asian economies in their own economic take-off,” he said. “Banks’ average loan-to-deposit ratio also breached 100 in February 2015.”
(A loan-to-deposit ratio over 100 means that more money is being lent by banks than is being deposited.)
“Rapid expansion of the financial system and the large number of banks and microfinance institutions have stretched the supervisory capacity of regulators,” Mr. Hansen said.
He added that the National Bank of Cambodia’s decision to raise capital reserve requirements for all banks last week was an important step toward protecting the banking sector from external shocks and said the government should continue its policy of boosting revenue collection to build financial reserves for times of need.
The ADB report says Cambodia’s traditional pattern of generating economic growth through foreign direct investment—which accounted for 10 percent of GDP last year—may no longer be sustainable, as other countries in the region become more competitive by offering cheap and abundant labor.
“Pressures for higher wages, appreciation of the US dollar, and stagnating productivity may weigh on Cambodia’s competitiveness in particular with other low-cost garment producers such as [Burma],” it says.
“Generating more good jobs to sustain growth and raise incomes depends on diversifying the economy with new industries that will require a different and wider range of skills.”
Correction: In a previous version of this story, information about the predicted performance of Asian countries was incorrectly attributed ADB Country Director Samiuela Tukuafu. The information was based on ADB figures.