The World Bank on Thursday forecast a slight dip in the country’s economic growth rate by 2019 amid declining foreign investment, rising inflation and a slowdown in the expansion of garments manufacturing, and advised improvements to infrastructure and training to keep the economy on its current strong course.
The country’s GDP growth rate is projected to remain steady at 6.9 percent this year and next, but drop slightly to 6.7 percent by 2019, according to the bank’s report on East Asian and Pacific economies, released on Thursday.
Foreign direct investment (FDI) as a percentage of GDP is expected to decline over the next two years, from 9.4 percent to 6.5 percent, according to the six-monthly regional update, the first from the World Bank to offer economic forecasts through 2019.
For now, foreign direct investment in Cambodia—$1.7 billion in net inflows in 2015—remains “very large,” said Miguel Eduardo Sanchez Martin, a senior economist at the World Bank.
“Very few economies have an FDI of 9 or 10 percent of GDP,” Mr. Sanchez Martin said.
“Cambodia is relatively better positioned than other countries to…keep attracting FDI because Cambodia doesn’t have the exchange rate risk, because it is a dollarized economy,” he said, adding that FDI was shifting toward the country’s construction sector.
Total fixed FDI assets in the garment sector have declined from $370 million in 2014 to $140 million last year, according to the World Bank.
And garment export growth constricted from 12.3 percent to 8.4 percent from 2015 to last year, the report says.
“Soaring labor costs, driven in part by rising cost of living, and US dollar appreciation, and competition from other regional low-wage countries, in particular [Burma], continue to exert downward pressures on garment exports,” it says.
The construction and agricultural sectors grew in the same period, while tourist arrivals have slowed in recent years.
Although Cambodia’s GDP grew faster than those of its neighbors Thailand, Vietnam and Burma last year—and is forecast to lead or match the three nations’ growth this year—by 2019, the World Bank projects that Cambodia’s growth rate will decline slightly as its three neighbors’ growth remains steady or rises.
“There are some economies in the region…in which you see growth going up, but this is also because they were having sluggish growth in the past,” Mr. Sanchez Martin said.
“Growth always depends on your previous pace,” he added. “At some point, all the economies will end up slowing down, but Cambodia is still one of the best performers.”
Cambodia’s GDP growth is projected to top Vietnam and Thailand’s in 2019, but is forecast to take a backseat to Burma and Laos, which are expected to achieve growth rates above Cambodia’s coveted 7 percent that year, according to the World Bank.
Inflation is projected to rise to 3.7 percent this year and 4.2 percent next year, from 1.3 percent in 2015, the report says.
Food prices continue to drive inflation, according to Sodeth Ly, another senior economist at the World Bank.
As Cambodian incomes increase, foods demands are diversified from rice to other foodstuffs, like meat, fruits and vegetables, he said, which pushes up prices.
“Cambodia has among the highest inflation rates” in the region, Mr. Ly said.
In a report released last week, in contrast to the World Bank’s assessment, the Asian Development Bank said GDP growth is projected to increase slightly to 7.1 percent this year and next, up from an estimated 7 percent last year.
To improve prospects for economic growth, the World Bank recommends increasing investments in physical infrastructure and education, improving labor productivity to match rising private sector wages, and promoting vocational and technical skills, the report says.
“This, and effectively managing high vulnerability to shocks, is also key for promoting social economic mobility in Cambodia,” it says.
Accommodating the labor shift from the agriculture sector to manufacturing and services will remain a challenge to sustaining long-term growth, said Miguel Chanco, lead Southeast Asia analyst for the Economist Intelligence Unit, in an email.
“Policymakers need to ensure that these people have the right skills for a 21st century economy, wherein labor intensive industries are becoming a thing of the past,” he said.