Early lifting of Covid-19 restrictions boosted domestic activity while strong external demand supported Cambodia’s recovery in the first half of 2022, according to preliminary assessment by the ASEAN Bureau of Macroeconomic Research +3 (AMRO).

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AMRO prepared the assessment after its annual consultation visit to the Kingdom from July 20 to August 3, 2022.

AMRO Group’s deputy chief and senior economist, Jinho Choi, led the team, while its chief economist, Hoe Ee Khor, participated in policy meetings.

Discussions focused on prospects for post-pandemic recovery and sustaining growth while rebuilding fiscal space and maintaining financial stability amid strong headwinds.

Speaking about the country’s economic outlook and challenges, Dr Choi said, “Cambodia’s economy is expected to grow by 5% in 2022, compared to 3% in 2021. In line with Cambodia’s strategy of living with Covid-19, We expect the national economy to continue to improve, supported by high vaccination rates and improved health protocols. He also warned that export prospects would be
hard.

“However, the export outlook will be difficult as the US and EU are expected to slow down sharply in the second half of this year, which could weigh heavily on the apparel sector,” Dr Choi said.

Calling Cambodia’s economy resilient, the report said the early lifting of Covid-19 restrictions boosted domestic activity while strong external demand supported its recovery in the first half of 2022.

“As the economy recovers and Covid-19 becomes rampant, it will be vital to refocus policy on structural reforms that will help improve the long-term growth potential of the economy,” he said. declared.

The report forecast consumer price index (CPI) inflation to reach 5.9% in 2022.

“CPI inflation soared in 2022, reflecting soaring global energy and food prices. consumption basket Average inflation for the first half of this year was 6.6%, compared to 2.9% last year Upward pressures on energy and food prices are expected to affect other goods, exerting broader inflationary pressures, with CPI inflation expected to hit 5.9% in 2022,” he noted.

The study indicates that the current account deficit has widened to an all-time high at 45% of GDP in 2021, largely due to an increase in gold imports.

Imports of consumer goods and intermediate goods also increased robustly in line with the economic recovery. Nonetheless, the overall balance of payments maintained a small surplus due to foreign direct investment (FDI) inflows, external borrowing and drawdowns on offshore deposits, he said.

The study also pointed to some downside risks to the country’s economy.

“Uncertainty stems primarily from the slowdown in key export markets. Headwinds from slowing global demand amid the Russia-Ukraine war and monetary tightening in the United States and Europe could impact Cambodian exports of manufactured goods. Given the high concentration of Cambodia’s garment exports to the United States and Europe, the export sector is vulnerable to demand shocks from these key markets,” he said. declared.

The report said a sharper-than-expected slowdown and tight and prolonged border controls in China could hurt the country’s growth prospects, given the heavy reliance on investment and intermediate goods imported from China.

This will also affect the scope of the revival of the tourism sector. “Prolonged border controls in China will also delay the recovery of the tourism industry because before the pandemic, more than a third of tourists came from China,” AMRO said.

Large current account deficits could be a source of growing external vulnerability, he warned.

“Cambodia’s current account deficits before the pandemic were well financed by strong FDI inflows. However, the current account deficit, excluding gold, has widened significantly since 2019. This reflects a number of factors, including large imports of construction materials since 2019, the collapse of tourism and the decline in remittances. since 2020, as well as imports of vaccines and medical supplies and the high price of oil since 2021.

However, some of these factors are transitory and the current account is expected to improve significantly in 2022 and 2023. International reserves of $20 billion also provide a strong buffer, he observed.

While announcing his policy recommendations, he said the government should reduce Covid-19 pandemic support programs alongside the recovery while providing targeted support to vulnerable groups most affected by high inflation.

“The recent rise in food prices is being keenly felt by the poor, reducing their budget for food and other essentials with possible long-term implications on health and productivity. In this regard, the efforts made by the government to transform the Covid-19 cash transfer into a broad social protection program are very commendable,” he underlined.

While praising the efforts of the National Bank of Cambodia (NBC), he said: “The normalization of the BNC’s liquidity measures should continue in line with the economic recovery, including gradually increasing reserve requirements to pre-existing levels. the pandemic. BNC’s efforts to review and classify restructured loans to ensure adequate provisioning are commendable.

AMRO experts said NBC should continue to monitor the quality of restructured loans, especially those still under the review period. Given the high level of dollarization, NBC should continue to maintain exchange rate stability to help ease inflationary pressures and maintain investor confidence.

She stressed that the authorities’ efforts to put in place a solid regulatory framework to supervise real estate developers who provide financing must continue.

AMRO said the launch of the Non-Banking Financial Services Authority is a welcome move for better control of such shadow banking activities. In this regard, close collaboration between the various government agencies involved in the non-banking sector should be pursued, in order to improve data collection, he noted.

“Strong emphasis should continue on structural reforms to maintain the growth momentum of the Cambodian economy. Given rising labor costs and the country’s goal of achieving upper-middle-income country status, strong political commitment, continuity and consistency will help ensure implementation of the reforms needed to improve competitiveness and move up the value chain,” the study says.

The enactment of the new investment law and the expansion of market access through recently concluded bilateral free trade agreements (FTAs) with China and Korea, and the regional Comprehensive Economic Partnership ( RCEP), will provide a strong impetus for investments that will help modernize and diversify Cambodia’s economy, he observed.

In this regard, well-coordinated policy supports across different ministries are essential to increase the supply of skilled labor, develop infrastructure and improve the institutional environment, the study adds.

AMRO is an international organization created to help ensure the macroeconomic and financial stability of the Asean+3 region, which includes 10 ASEAN members and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, multilateralization of the Chiang Mai Initiative, and provide technical assistance to members, according to the statement.