Cambodia is set to continue its 7-plus per cent expansion in 2015 and 2016, on the back of improving export and tourism numbers, although labour unrest in the garment industry and ballooning credit growth in the property sector pose risks to sustained future growth, the Asian Development Bank said yesterday.

In its annual Asian Development Outlook, the ADB said that while the Kingdom’s GDP grew 7 per cent in 2014, lower than the 7.2 per cent average over the three previous years, growth is estimated to reach 7.3 per cent in 2015 and 7.5 per cent in 2016.

“The general outlook for the Cambodian economy is good. Economic growth is expected to be driven by the gradual diversification into light manufacturing,” said Jan Hansen, senior country economist at the ADB.

An improving economic situation in the US and Thailand, and to a lesser extent the EU, should see a rise in exports, according to the ADB. The industrial sector – namely manufacturing and construction – is projected to grow 9.7 per cent, with services accelerating slightly to 8.1 per cent.

Owing to last year’s political uncertainty in Cambodia and a tourism slowdown in Thailand, visitor numbers in the Kingdom slowed in 2014 when compared with 2013, with tourist arrivals rising just 7 per cent to 4.5 million. But this is set to accelerate in 2015 as the political environments of both countries are calmer.

According to Eric Sidgwick, Cambodia country director at the ADB, service sector receipts, especially from tourism, play an important role in bridging the gap, left by the trade imbalance, in the current account deficit.

The ADB’s report outlined labour unrest, the economic health of export partners and natural disasters as the major challenges to maintaining strong growth.

While there was a consensus that current wage levels were reasonable, the recent pay hike in the garment sector should not necessarily set a precedent for future wage setting, Sidgwick said.

“You increase wages by 28 per cent in one go, some of that to compensate for past inflation. But you are also in a way increasing expectation of further wage increases in the future, and that is also something that needs to be monitored.”

Driven largely by construction and property development, private sector credit expanded by 31.3 per cent in 2014. The ADB said greater regulatory supervision was needed in the banking sector, particularly in real estate lending to forewarn against any future property bubble.

“This has often proved a tendency to create economic cycles and occasional financial vulnerability,” the ADB’s Hansen said. “So this will require increased attention from government supervision and regulators over the next years.”

Grant Knuckey, CEO of ANZ Royal Bank, said such a cycle wasn’t an issue now, but it needs to be monitored, as real estate is known to “create a debt issue for itself”.

The country’s 54.6 per cent credit-to-GDP ratio was relatively high given Cambodia’s development, Knuckey added.

If credit continued to grow exponentially the country would reach a 100 per cent credit-to-GDP within a decade, putting it in the realm of much more developed markets, he said.

“Even at a basic level, the high level of debt servicing – given high interest rates – would require continued high growth to support it. As soon as that growth slows, you have a problem,” said Knuckey.