Cambodia has been riding a wave of strong growth recently on the back of robust exports and flourishing foreign investment, and, in the process, bucking the Asian downturn. However, economists say this is no time for complacency.

Former ANZ chief economist for South and Southeast Asia, Glenn Maguire, who has two decades of experience covering Asia Pacific economies, recently said that a weak global capex cycle and the collapse in commodity prices had contributed to a slowdown in Asian trade, with exports recording a second consecutive year of double-digit contractions.

“Asia is in what we refer to as a trade recession,” Maguire said.

“We’ve been seeing most of Asia experience deep contractions in export and import growth and this is quite an anomaly, and is in stark contrast to the ambitions and goals of the ASEAN Economic Community.”

However, Maguire noted that the current trade slowdown wasn’t affecting Asian economies evenly.

“The one economy that is clearly bucking the trend is Vietnam, which is experiencing a rapid expansion in exports and this is probably due to its foreign direct investment (FDI) policy as it’s running the most open FDI policy of all the Asian economies,” he said.

At the same time, China is re-engineering its economy to be a services economy, with Maguire noting that services were now accounting for 40 percent of China’s gross domestic product (GDP).

“We are very close to the point where the services sector of the Chinese economy is larger than the industrial sector.”

It is evident times are certainly changing, but for a frontier country like Cambodia, this presents opportunities.

Maguire said many organisations were interested in maintaining the volume of exports by lowering the cost of producing them.

“That means they are extending their production chains further into the Mekong,” Maguire said, adding that this would increasingly create opportunities for Cambodia to participate in the value-adding chain.

When it comes to Cambodia’s growth trajectory, ANZ predicted a bright outlook, forecasting a growth rate of 7.2 percent and 7.1 percent for 2016 and 2017 respectively.

“We see the Cambodian industrial sector growing between nine to ten percent this year and next year, so that will give an overall headline growth rate of seven percent,” Maguire said.

“[Cambodia] is clearly bucking the regional trend and will be one of the growth outperformers of the region.”

In the Asian Development Bank’s (ADB) 2016 outlook report, the bank highlighted Cambodia’s expanding industry and services sector as the basis for its solid economic growth in 2015. Merchandise exports increased by an estimated 14.1 percent to $8.5 billion in 2015, while shipments of garments and footwear, which comprise 70 percent of total exports, rose by an estimated 10.2 percent.

Notably, the ADB predicted steady growth for Cambodia in 2016, partly due to the diversification taking place in garments and footwear toward products with higher value added.

Maguire echoed ADB’s comments, saying that Cambodia’s strong underlying performance was being assisted by “diversification towards higher value added apparel”.

Jayant Menon, lead economist at the ADB’s office for trade and regional cooperation, said Cambodia was making headway on diversifying its economic base as it attempts to reduce reliance on garments, especially as the Kingdom moved into the light manufacturing space.

While Menon said Cambodia’s main investment attraction was the country’s low cost labor, he cautioned that nearby Myanmar, which is opening up to foreign investment, could threaten that advantage.

“If Myanmar opens up, [Cambodia] will need to improve the quality of the labour to compete. That will be the challenge; to compete on quality as well as cost,” he said.

Menon said while Cambodia had made progress on reducing red tape, a concerted effort on improving the skills of the labour force and improving government policy to provide certainty was needed to boost investor confidence.

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners said Cambodia was likely to have higher growth than most Asian economies moving forward, and would continue to benefit from a demographic dividend, as a young population becomes increasingly productive.

However, Higgins cautioned that there were some challenges ahead.

“There are certainly some headwinds coming up, including a slowdown in construction which will take a couple of points off GDP growth. Agriculture seems to be having a tough time, wage costs are becoming a little uncompetitive, and we’re not seeing the level of manufacturing investment that we previously expected,” he said.

Higgins added that Cambodia needed to be cautious about allowing wages to increase faster than productivity, which would lead to jobs moving to Vietnam and Myanmar.

“I think the government understands that this is a major risk,” he said.