World Bank Expecting Economic Slowdown to Persist

The World Bank is forecasting a continued slowdown of Cambodia’s economy over the next three years because of rising local production costs, sluggish global rice prices and other headwinds. The prediction is a gloomy counterpoint to the coming rebound the Asian Development Bank (ADB) forecast just last month.

In its East Asia and Pacific Economic Update, released Monday, the World Bank said the year-on-year growth rate of Cambodia’s gross domestic product (GDP) would drop to 6.9 percent in both 2015 and 2016 and to 6.8 percent in 2017. According to the Bank, GDP growth already fell from 7.4 percent to 7 percent between 2013 and 2014.

“Reduced competitiveness due to increased costs, dollar appreciation and new competitors will continue to affect garment export growth, while the return of a double-digit tourist arrival growth rate is yet uncertain,” the report said. “Agricultural growth will likely continue to be modest, affected by dampened agricultural commodity prices and slow crop yield improvements.”

According to the report, Cambodia’s garment exports, which alone contribute roughly a third of the country’s GDP, grew at only 9.2 percent in 2014, roughly half the pace of the year before.

A spate of garment sector strikes and protests over wages early last year saw some international brands cut back on their orders. The World Bank said renewed labor unrest this year, and a delayed economic recovery in Europe—one of Cambodia’s main markets—might continue to hurt the industry. A 28-percent hike to garment workers’ minimum wage, which took effect in January, is also expected to hurt.

The report said the “reentry” of Thailand and Burma into the rice market was also expected to keep revenues from Cambodia’s rice exports down.
Foreign direct investment, while still “healthy,” is expected to fall from $1.72 billion in 2014 to $1.66 billion this year, and to $1.59 billion by 2017.
The fiscal deficit is expected to nearly double between 2014 and 2016 as a share of GDP, to 4.9 percent, amid what the report said were dwindling grants. The trade deficit is predicted to grow this near and next.

And while falling global oil prices have helped to keep inflation down, the World Bank said, this is expected to do little for most families.

“The 20 percent fall in local prices will at most translate into a 1.5 percent consumption gain for the average household, and smaller for poor households,” which spend less of their income on fuel, the report said.

It said keeping the exchange rate pegged at roughly 4,000 riel to the dollar had helped keep prices stable, but also made Cambodia’s exports to Europe — where the riel has appreciated 17 percent against the euro since July — less competitive.

The World Bank’s predictions differ sharply from the forecast the ADB issued in March. In its 2015 outlook for Asia, the ADB said Cambodia’s 7 percent GDP growth rate in 2014 would rise this year and next to 7.3 percent and 7.5 percent, respectively, on the strength of a less tense political environment at home and rebounding economies in its main trading partners. It expected both factors to boost tourist arrivals and garment exports.

The World Bank and ADB, however, had many of the same recommendations for Cambodia. The World Bank urged the government to invest more in health and education, lower energy costs, improve roads, collect more taxes and keep a closer watch over a rapidly expanding financial sector, where deposits and loans both grew at more than 30 percent last year.

The World Bank report also updated its poverty and inequality rates for Cambodia, adding figures for 2012, the most recent year available. It said the poverty rate, which refers to the proportion of people who cannot afford a set amount of food and other goods, fell from 20.5 percent to 17.7 percent year on year, and that the gap between rich and poor also continued to shrink slowly.

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