Falling rice production and rising labor costs will continue to drag down the pace of economic growth in Cambodia over the next three years, the World Bank said Monday—a relatively gloomy counterpoint to the coming rebound the Asian Development Bank (ADB) predicted only last month.
In its East Asia and Pacific Economic Update released Monday, the World Bank said the growth rate of Cambodia’s gross domestic product (GDP) will drop from 7 percent in 2014 to 6.9 percent in 2015 and 2016, and to 6.8 percent the year after that. According to the Bank, the country’s economy has been slowing since 2013.
“[W]e have seen signs of deceleration emerging,” the World Bank’s senior country economist, Enrique Aldaz-Carroll, said at the report’s launch in Phnom Penh.
“In the agriculture sector, we have seen deceleration caused by slow yield improvement and also by the low prices. In the garments we have seen competition, and in tourism we have seen a regional slowdown. So all these are causing deceleration in these three sectors,” he said. “Cambodia continues to experience high growth, but at a slightly slower pace.”
The slowdown has hit the agriculture sector hardest.
According to the report, wet-season rice production fell by 2.5 percent last year. Yield during the wet season, measured in tons per hectare, fell 3 percent.
The Bank expects rice exports from Burma and Thailand to keep world rice prices down over the next few years, limiting Cambodia’s revenues from its own rice exports. Mr. Aldaz-Carroll said Cambodia’s ability to boost production by opening up new land was also running out, making it all the more important for the country’s farmers to use the land they have more efficiently.
“One might ask, ‘Why are you so focused on yield improvements?’” he said. “Well, the reason is that in the past the rice sector depended on land expansion and on productivity; it was 50-50. But as…land area constraints arise, the rise in production now is most dependent on the rice yields, the productivity.”
Garment exports, which account for roughly a third of the country’s GDP, are also slowing. According to the report, they grew at only 9.2 percent in 2014, roughly half the pace of the year before.
A spate of garment worker strikes and protests over wages early last year saw some international brands cut back on orders. A 28-percent hike to the sector’s minimum wage in January has helped to quell the unrest, but it also makes it harder for Cambodia to compete with other low-wage countries like Vietnam, Burma and Bangladesh.
Mr. Aldaz-Carroll said the appreciation of the U.S. dollar, to which Cambodia pegs its exchange rate at roughly 4,000 riel, against the euro would also continue to hurt the garment sector.
“Why? Because the E.U. [European Union] now is the main trading partner for Cambodia,” he said. “Before, when it was the U.S., dollar appreciation would not affect Cambodia. But now that the E.U. is the main trading partner, an appreciation of the U.S. dollar versus the euro means that Cambodian garments are less competitive in the European market.”
The tourist sector is cooling down, too. But the World Bank blames that mostly on a slowdown across the region.
Despite all the headwinds, Mr. Aldaz-Carroll said the World Bank’s forecast for Cambodia was on the whole strong.
“Our outlook is actually positive,” he said, placing an empty jerry can on the table in front of him for a prop. “The reason is fuel.”
Because Cambodia imports all its fuel, falling global oil prices are helping farms and companies that run on generators, leaving more money in the pockets of motorists, and improving the country’s trade balance. Without the low oil prices, the Bank says, Cambodia’s GDP this year would be half a percentage point lower.
“These effects help compensate for the slowdown of the [main economic] drivers,” Mr. Aldaz-Carroll said. “So as a result of that, the outlook for 2015 is of high growth.”
He said a “booming” real estate market and construction sector—which has now overtaken the garment industry as the country’s main economic engine—were also helping.
But Mr. Aldaz-Carroll warned that construction and real estate were also more risky, prone to regular ups and downs, and at the mercy of foreign direct investment, which the Bank expects to keep falling over the next three years.
Sodeth Ly, another economist for the World Bank’s country team, said rapid growth of the financial sector—deposits and loans both grew by more than 30 percent last year—also needed the government’s close attention. At 87 percent and rising, the value of those loans as a share of total deposits is approaching a critical benchmark.
“It’s very close to 100 percent,” Mr. Ly said. “This is the highest, reminds you of the [global financial] crisis, so not so good.”
The World Bank also updated its poverty and inequality rates for Cambodia on Monday, adding figures for 2012, the most recent year available. It said the country’s poverty rate—the proportion of the population that cannot afford a set amount of food and other goods—fell from 20.5 percent in 2011 to 17.7 percent while the gap between rich and poor was steady.
High rice prices during the global financial crisis are credited for much of the huge gains Cambodia made against poverty during those years. Now that those prices have fallen and are likely to stay low, Mr. Aldaz-Carroll said, both poverty and inequality are also expected to fall more modestly.
“Poverty will continue falling, but it will decelerate,” he said. “And the main reason is that most of the poor live in rural areas…so they depend on this sector.”
The World Bank’s predictions differ sharply from the forecast the ADB released in March.
In its 2015 outlook for Asia, the ADB said Cambodia’s GDP growth rate would accelerate from 7 percent in 2014 to 7.3 percent and 7.5 percent this year and next, respectively, on the strength of a calmer political environment at home and rebounding economies in its main trading partners. It expected both factors to boost tourist arrivals and garment exports.