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Logo of Phnom Penh Post newspaper Phnom Penh Post - Cambodian economy buoyant, but challenges abound

Cambodian economy buoyant, but challenges abound

As China retools its economy and becomes more self-reliant, economists believe a pan-Asian trade slowdown that began in mid-2015 will deepen and Cambodia must work on shoring up its traditional industries while maintaining its attractiveness as a low-wage destination if it hopes to keep up its robust growth.

Noting key economic indicators like mass consumption and mass production by China, a global fall in commodities prices and overall double-digit contractions in exports from countries in Asia, Glenn Maguire, ANZ’s chief economist for South and Southeast Asia, said the current trade recession is not a cyclical phenomenon, but rather a systemic sign that globalisation is tapering off and with that foreign investment could dry up.

“The level of global and regional trade has peaked,” he said on Friday at a seminar on the global and regional economic outlook organised by ANZ Royal.

He said this means Mekong countries like Cambodia that are just beginning to develop their trade economies would face a “very difficult” time.

Maguire continued said economists are re-examining the prevalent belief that Southeast Asian countries stand to benefit from a southern migration of manufacturing from China. This shift could take decades to achieve.

With the exception of Vietnam, which is undertaking a “rapid industrial expansion and has the most open foreign direct investment policy of all the Asian countries,” ASEAN countries are performing weakly, he said.

“The problem is that countries are not reinvesting in manufacturing and industry capabilities,” he explained.

While he admitted Cambodia was currently “bucking” the regional trend, and will likely achieve GDP growth of 7.2 per cent in 2016 and 7.1 per cent in 2017, productivity is not keeping pace with climbing wages.

“If salaries continue to grow or tip up at a relatively low level then it is going to outpace productivity, which is basically an economist’s way of saying you need to move up the value added chain and produce higher-value-added goods at a faster pace to allow your salaries to grow if you want productivity in the economy to increase,” he said.

However, he was quick to note that wages need to find a balance, and that large increases threaten Cambodia’s symbolic status of a low-wage destination.

“Cambodia is in a reasonably buoyant position,” he said. “The outlook remains bright, but we wouldn’t say extremely bright.”

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners, said rapid rises in wages threaten the country’s progress into middle-income status.

“The extremely rapid wage growth we’ve seen in recent years is simply not sustainable into the future, unless the country is willing to accept much higher unemployment, and I don’t think anyone wants that,” he said.

While he said the Kingdom’s reliance on the garment sector was fine for trade, Cambodia should aspire to diversify its manufacturing industry in order to demonstrate “true economic progress” over the next five to 10 years, he said.

Addressing the conference, Leonie Lethbridge, CEO of ANZ Royal, said that of the Mekong frontier economies that include Cambodia, Laos and Myanmar, the real challenge will be in the competition to capture new investments into manufacturing that will allow it to climb up the value added chain.

“Cambodia has a young demographic and potentially a demographic dividend if that dividend can be captured,” she said, adding that the country needs to continue to implement reforms into skills training and education to create a positive growth trajectory.

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