The World Bank expects Cambodia’s economy to grow 7.2 percent this year, driven primarily by expansion of the country’s garment and tourism sectors, a slight slowdown from 2013, when growth reached a six-year high of 7.4 percent.
Next year, economic growth is to slow moderately, easing to seven percent, the Bank predicted Monday in its semi-annual East Asia and Pacific Economic Update.
The estimates for 2013 and 2014 represent slight increases from the Bank’s report in October that projected both years at seven percent.
Monday’s report says risks for 2014 and 2015 include political uncertainty, labor unrest, China’s economic slowdown and the price of commodities such as rice.
“But we remain optimistic,” World Bank chief country economist Enrique Aldaz-Carroll said Monday at a news conference announcing the report.
“Cambodia remains quite strong, on the back of the tourism and textile industries.”
In the report, the World Bank states that Cambodia’s economy in 2013 has “withstood domestic pressures and managed to sustain its high growth.”
“Although it suffered some losses due to labor unrest, the garment sector managed to grow its exports further, increasing 17.6 percent year-on-year in 2013,” it states.
The tourism sector witnessed sustained but slowed growth last year, with the number of tourists reaching 4.2 million in 2013, a 17.5 percent year-on-year increase, compared to a 24 percent jump in 2012.
The World Bank said rice production increased last year because of the use of fertilizer and more modern farming techniques, contributing 4.5 percent of last year’s overall gross domestic product growth.
The three sectors—garment, tourism and crops—combined to make up most of last year’s GDP growth and are expected to drive growth this year, Bank officials said.
Another factor this year is a shift by foreign companies—mostly garment factories—from coastal China to Cambodia due to rising costs.
“Cambodia’s growth will get support from this structural shift out of China, including jobs, particularly in textiles,” Bert Hofman, East Asia and Pacific director for the World Bank, said at Monday’s conference via videolink from Singapore.
The report urges caution around Cambodia’s expanding financial sector and increasing wages in the public sector.
It says that Cambodia’s rapid credit growth—at a 26.6 percent annual rate—and slow deposit growth—at a 14.2 percent annual rate—have reduced bank liquidity.
“This raises the risk of Cambodia experiencing a squeeze in bank liquidity as the loan-to-deposit ratio continues to rise, reaching 90 percent at the end of 2013 from 80 percent at the end of 2012,” the report states.
During the global financial crisis in December 2008, Cambodia’s loan-to-deposit ratio hit 100 percent.
According to the report, strengthening the National Bank of Cambodia’s “supervision, capacity, and early warning and resolution systems, including good governance, is of the essence.”
It goes on to say that some initial steps are being planned by the National Bank, including preparations to establish a crisis management committee, crisis simulation exercises and contingency plans.
Grant Knuckey, CEO of ANZ Royal bank, said Monday that an increase in the loan-to-deposit ratio is not necessarily a crisis and is controllable by implementing a cap, which Cambodia lacks.
“It is approaching 100 percent, which is when you start to question the sustainability of strong credit growth,” he said. “Many markets impose that cap as a way to restrain credit growth at the same level that you’re growing deposits.”
The report says Cambodia has space to increase public sector wages, but warns such a move would add pressure to reduce spending in such areas as infrastructure maintenance.
The World Bank report follows an Asian Development Bank report last week that predicted Cambodia’s GDP growth at seven percent for 2014, a dip from its prediction of 7.5 percent in October. The ADB report says the slight slowdown was due to labor unrest in the garment industry, incremental inflation and political tension following July’s disputed national election.