World Bank Says Cambodia Will Weather China Slowdown

The World Bank on Monday stuck to its prediction made in April that the country’s economy would continue to cool off slowly over the next few years and said China’s own slowdown would send only modest ripples through Cambodia.

In its six-month update of the economies of East Asia and the Pacific, the Bank said Cambodia’s gross domestic product (GDP) growth would dip from 7.1 percent in 2014 to 6.9 percent this year and next year, and to 6.8 percent by 2017, matching its forecast in April.

“We are looking at four main channels of growth in Cambodia, with construction in very good shape, very dynamic—and also real estate booming—while the garment and tourist sectors are losing a little bit of steam,” said Miguel Sanchez Martin, the Bank’s new senior country economist.

“Perhaps agriculture is the sector having most difficulties,” he said. “So with that in mind, we are projecting a 6.9 percent growth for 2015…. So this is still very strong growth.”

Low rice prices and sluggish growth in yield will keep agriculture output in Cambodia down, the Bank said, while a strengthening U.S. dollar, emerging low-wage competitors and the uncertainty surrounding minimum wage negotiations will limit the rise of garment exports.

World Bank country economist Sodeth Ly said the construction sector—now Cambodia’s main economic driver—could also start to cool as the 2018 national election approaches.

“We expect the construction boom is going to continue, but it’s likely to ease when Cambodia organizes the next general election. We don’t know whether business confidence [will] remain as strong as it is now, because by the time 2018—like the 2013 election—[there is] going to be some kind of stability issue, not a lot, but likely. So that’s what we expect, that construction might suffer by that time,” he said.

Since the World Bank’s last regional forecast, jitters over the indirect effects of China’s slowdown have picked up in the wake of a major currency devaluation and stock market crash there.

But the World Bank said Monday that Cambodia was insulated enough from the Chinese economy—despite Beijing’s major foreign direct investment (FDI) in the country—to avoid taking a heavy hit.

“It is true that one of the big changes in the region in the last five or six years is the rising importance of Chinese foreign direct investment, and Cambodia certainly is one of those” recipients, Sudhir Shetty, the Bank’s chief economist for East Asia and the Pacific, said from Singapore during a video-conference with reporters.

“It’s too early to know what impact a slowing Chinese economy might have on the flow of that investment because…the pace of slowing that we anticipate in China is not so dramatic that we think it will lead to quite significant pullbacks of Chinese investment from neighboring countries,” he said.

“Second, it’s clear that in terms of Cambodia, Laos, Myanmar, these are all obviously close to China and therefore these are in some sense likely to be the last places for Chinese investment to be retrenched.”

Mr. Sanchez Martin said China accounted for more than 50 percent of all FDI in Cambodia but that even a major pullback would take one or two years before it would be felt here.

He said Cambodia’s nascent capital markets would also spare it the effects of any major shift in China’s capital flows, and that its modest exports to China—about 3 percent of everything the country ships abroad—would help shield it, too.

On the other hand, about 40 percent of Cambodia’s imports come from China, and Mr. Sanchez Martin said a devalued yuan will be a boon.

“Imports, I would say, it’s even good for Cambodia because the Chinese currency has been depreciating, so that means that for Cambodian entrepreneurs, it’s easier today to buy inputs from China to produce garments,” he said.

China’s slowdown was likely to hit Cambodia hardest by way of falling tourist arrivals, he warned.

And while the World Bank expects Cambodia’s poverty rate to keep falling, it said the gap between rich and poor—which has been shrinking since 2007—was unlikely to fluctuate over the next few years.

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