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World Bank outlook remains bright despite political concern

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Employees work on a production line on the outskirts of Phnom Penh. Hong Menea

World Bank outlook remains bright despite political concern

Cambodia’s economy is predicted to remain strong and resilient for the next two years, fuelled by a shift to higher value-added manufacturing, despite lingering concerns over political stability and the slowed growth of both the construction and garment sectors, the World Bank said yesterday in its latest review of the Cambodian economy.

The Kingdom’s robust GDP growth is expected to reach 6.9 percent in 2018 and remain almost as high at 6.7 percent in 2019, thanks to increased export diversification of footwear, electrical machinery and auto parts as well as healthy inflows of foreign direct investment (FDI), the World Bank said in its Cambodia Economic Update for October 2017.

However, downside risks – including the possibility of a slowdown in the regional economy, especially from China and “potential election-related uncertainties” – still remain.

World Bank Country Manager for Cambodia Inguna Dobraja said that while the Kingdom “appears to be on the verge of climbing up the manufacturing value chains”, this change could bring new challenges to the economy.

“To succeed in boosting export diversification, Cambodia would need to undertake deeper structural reforms that address high electricity and logistics costs, as well as skills gaps,” she said.

The report noted that in 2012, the Kingdom had 46 factories dedicated to electrical machinery and auto parts, accounting for a 5.1 percent share of the manufacturing industry. As of August of this year, the number of factories had increased to 121 and accounted for 7.1 percent of manufacturing.

“Cambodia will not be able to rely on the same factors that drove strong growth and production over the last two decades,” Dobraja said.

The report said that despite the Kingdom’s pivotal garment sector still trending in positive territory, with exports for the first six months of this year valued at $3.3 billion, growth slipped to 5.4 percent compared to 8.4 percent in the first half of 2016.

The garment and footwear industry, which tallied over $7.3 billion in exports last year and provides jobs to about 700,000 workers, is currently the thickest pillar of Cambodia’s economy.

However, Miguel Eduardo Sanchez Martin, senior country economist for the World Bank in Cambodia, warned that increased competition, looming wage hikes and modest improvements in productivity could stifle FDI into the sector.

He added that while export diversification into higher value-added manufacturing could offset any potential future garment losses, Cambodia lagged far behind Vietnam and Thailand in industry diversification.

“Hopefully Cambodia can follow [these countries’] models in the future, but for that to happen it is important to overcome the challenge of high electricity costs,” he said. “Cambodia may be losing some potential investors that do energy-intense manufacturing processes because of the high cost of electricity.”

The report said that a lack of competitive bidding in energy generation, fragmentation in transmission and distribution as well as the government’s Industrial Development Policy 2015-2025 showed almost no planned reduction in electricity prices until 2020.

Stephen Higgins, managing partner of investment firm Mekong Strategic Partners, said that while electricity has been a long-term challenge in Cambodia, reliability has been less problematic of an issue than price.

“From an FDI point of view, while electricity prices are still high, the direction of prices is down, whereas in many other countries, pricing is likely to head upwards,” he said. “So that will give potential investors some comfort.”

He added that while renewables, like solar, could help alleviate the price problem, their use was likely far off.

Nevertheless, he agreed that with higher value-added manufacturing and export diversification taking place, there was a real opportunity for Cambodia to take part in regional supply chains.

“Companies like Minebea and Sumi Wiring are demonstrating that you can establish successful manufacturing operations in Cambodia,” he said.

While Sanchez Martin admitted that there were election-related stability concerns that could see potential investors taking a wait-and-see approach until the dust settles, the World Bank’s FDI projections showed no sign of a downturn.

“FDI will keep coming in because the overall environment is still okay, and with a dollarised economy, investors have less risk of asset depreciation,” he said. “The key now is for the government to push through reforms that increase the ease of doing business in order to bring the right kind of manufacturing in.”

Higgins also predicted that FDI projections will remain strong.

“Investors abhor uncertainty, and without commenting on the manner in which it has been achieved, there is now less uncertainty surrounding 2018,” he said. “We have been pleasantly surprised that the level of investor interest has remained as strong as it has.”

Updated: Thursday, 23 November 2017, 6:45am

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