But breathing life back into a pandemic-ridden economy might need overhauling the old system to fit a new order

A semblance of normalcy is setting in Phnom Penh as the capital comes out of three weeks of lockdown and over a month of curfew to flatten the Covid-19 curve, which brought business activities to a standstill and incurring losses for many.

While it seemed fitting that it rained hard at the start of the business week, cleansing the city for the resumption of commerce, the real damage to the economy since the latest wave is probably visible now.

In the midst of the spread, mostly prevalent in the provinces now, and rising fatalities, Cambodia has vaccinated over two million people, coming in after Singapore in Southeast Asia as the second-highest country with total inoculation.

To date, about six million doses have been received with another 20 million expected over a period of time while the country prepares to raise the rate of vaccination to 50 per cent of the target population or around five million people by the end of 2021, and at least 10 million by June next year.

Fiscal and monetary measures extended, the economy now trundles to a start as key economic sectors remain under pressure, a recent report by Moody’s Investors Inc reflected.

Forecasting gross domestic product (GDP) growth to be modest at 2.9 per cent this year from a 3.1 per cent contraction in 2020, Moody’s said under its assumptions, economic activity will not fully recover to pre-pandemic levels until at least 2022.

Moreover, a growing risk of a second-wave of infections, as shown by pockets emerging within Cambodia and elsewhere in the Asia-Pacific, and the threat of more transmissible variants of the virus pose risks to the growth recovery.

Added to that, it said, while travel restrictions have largely shut down the country’s tourism and hospitality sector, economic slump in the EU and US – both large export markets for Cambodia – has weighed heavily on exports of garments, representing over 60 per cent of Cambodia’s total exports.

However, the global credit rating agency maintained its B2 stable outlook on Cambodia.

“The stable outlook balances vulnerability to shocks stemming from what we view as a temporary disruption in growth, high dollarisation and potential financial vulnerabilities against strong growth potential, robust government revenue generation and the concessional and long-term nature of government debt,” Moody’s said.

An upgrade in the rating would be considered if reforms that addressed institutional weaknesses and enhanced policy effectiveness were implemented.

“Structural reforms to boost competitiveness and reduce hurdles to doing business would also be credit positive because it would contribute to increases in economic diversification and incomes,” it noted.

The case for travel and tourism

The primary impact to growth, Moody’s observed, was from a contraction in tourism, although this had been partly offset by growth in manufacturing exports and domestic tourism.

Its baseline assumption is that in 2021, visitor arrivals would be about 80 per cent below 2019 levels, marking only a marginal recovery from 2020.

“Although we expect arrival numbers to slowly pick up over the second half of 2021, a steady recovery is unlikely until vaccine rollouts gather pace – both globally and within Cambodia – or travel agreements are struck, most likely starting with Cambodia’s fellow ASEAN members or China.

“This is in line with our global forecasts, which posit that a recovery to anywhere close to pre-pandemic levels is unlikely until consumers are comfortable travelling again en masse, which is likely after vaccines and treatments are widely available. We do not expect a return to pre-coronavirus volume until 2023 at the earliest for most sectors,” the report commented.

It is a notion shared by Thourn Sinan, chairman of Pacific Asia Travel Association Cambodia chapter, who does not think there has been an improvement to the sector although air traffic movement has inched up in the past month.

“I don’t see any chance [of an improvement happening] soon but we are hopeful because we see a strong commitment by the government to open [Cambodia] to vaccinated tourism in the fourth quarter this year, starting with Chinese nationals. This is an indication to start [with] other markets as well,” he said.

The marginal uptick in tourism recently, particularly domestic tourism, was evident as some 50,000 people travelled in the country during the long weekend commemorating King Norodom Sihamoni’s birthday in mid-May.

Still, it is a far cry from previous years’ tourism figures. For instance, 8.3 million locals and 7.9 million foreigners travelled internally in 2019 before the numbers slumped 27.5 per cent and 78.6 per cent, respectively, in 2020.

But with global travel expected to pick up in the second half, and preferred treatment for vaccinated travellers, there has to be some revisions to travel fees to lure visitors to Cambodia.

In which case, the government must consider revising visa fees and Covid-19 deposits for vaccinated travellers, said David Van, senior associate public-private partnership of Platform Impact Co Ltd.

Currently, visa exemptions and visas on arrival are suspended while travellers must have valid medical certificates, proof of insurance worth $50,000 and deposit $2,000 for Covid-19 tests and food and accommodation at quarantine centres.

Van said waiving quarantine measures for vaccinated arrivals, similar to Western countries, might be a good start as Cambodia “figures out how to properly contain the Covid-19 situation”.

“No country can assure a zero per cent or Covid-19-free situation because the virus is here to stay, just like the flu virus. The onus rests upon the medical sector to ensure adequate vaccination and medication,” he added.

It is feared that the continued fee structure would make Cambodia less competitive than its peers in the region.

When asked, Ministry of Economy and Finance undersecretary of state Phan Phalla said the main issue was not visa fees, rather how Cambodia could open the sector again with relatively safe conditions.

“It is really challenging for all countries to set the reopening date for the tourism sector,” he added.

A bit better, cash flow impacted

The coronavirus has also exacted a heavy toll on the garment industry, Moody’s said, echoing similar economic analyses lately.

“Textile exports, including garments and footwear exports, which comprised 74 per cent of Cambodia’s total exports in 2019, fell by 17 per cent in 2020, as ongoing pandemic-related weaknesses weighed on demand from the EU and the US, which account for almost a third of Cambodia’s total goods exports and almost half of its exports of garments and footwear.

“Exports to the EU were also weaker following the European Commission’s partial suspension of Cambodia’s preferential access to the EU market under its Everything but Arms agreement,” it wrote.

Moody’s opined that with a large number of factories being forced to shut down as global retailers paused or cancelled orders, it is likely that the domestic industry and supply chains will see a restructuring following a recovery in global demand in 2021.

It pointed out that Cambodia’s updated strategy for the garment sector recognised immediate constraints from slower demand, as well as structural shifts arising from a growing requirement for environmental sustainability in the garment industry, competition from neighbouring garment exporters, and changes in trade agreements.

It acknowledged that Cambodia had set up a working group to address the challenges primarily through strategies to improve productivity and enhance the composition of higher value-added products within the sector, while promoting both domestic and foreign investment.

“Although export growth will recover this year on the back of base effects and a revival in demand, it is likely to remain below pre-coronavirus levels. Stronger recoveries in China and the US, which accounted for five per cent and 21 per cent of Cambodia’s goods exports in 2019, respectively, are supportive of an expansion in growth.

“Moreover, other manufacturing exports, particularly bicycles and electrical parts, continued to grow. In 2020, these exports saw a collective 104 per cent increase, mitigating the contraction in garment exports,” it remarked.

However, the manufacturing segment remains a high-risk category as numerous Covid-19 clusters have formed in several provinces taking after Phnom Penh about two months ago.

Data from April 28, showed that over 200 factories were suspended after 1,673 workers tested positive for the coronavirus, resulting in the quarantine of more than 10,000 people.

In a related sector - the logistics industry, which suffered income losses when trucks and containers were grounded due to lack of staff and the inter-province travel ban during the lockdown, cash flow has come under stress as customers find difficulty settling payments.

“Right now, the logistics and transportation sector is better because nearly 90 per cent of the staff have returned to work after the lockdown was lifted but activities in some sectors, including garment factories and construction, are still suspended or not fully operational.

“Topping that, the import-export sector is slow due to low demand. The performance in the sector is only 60 to 70 per cent compared to pre-pandemic days.

“The resulting effect of their financial performance has led to a delay in payments, pushing up outstanding bills by almost 50 per cent, an effect that is starting to jeopardise staff salaries and the daily running of business,” said Sin Chanthy, president of Cambodia Logistics Association.

“Before this, we had an issue with the lockdown, now we are facing payment problems as many have not paid since last month,” he added.

Economic strategies

All things considered, Moody’s found that the government’s proactive management of the pandemic has been largely effective, “at least over the course of 2020”.

To date, $1.1 billion has been expended under the cash transfer programme for poor and vulnerable households, unemployed workers and food aid, with $800 million reserved for continued support.

The National Bank of Cambodia (NBC), on the other hand, focussed on liquidity enhancement via policy changes on lending rates and reserve requirements while instructing commercial banks and microfinance institutions to restructure loans of those affected by the pandemic.

While these measures have been extended to the end of 2021, the NBC asked that banks restructure the loans of customers in cordoned-off areas “as many times as needed”, and consider reducing or waiving fees and penalties on a case-by-case basis.

Nevertheless, risks remain and Moody’s is of the view that economic growth slowdown is associated with a reduction in employment and incomes, particularly in the garment and tourism sectors.

It cited the World Bank’s household survey last December, which showed that 28 per cent of the respondents were unemployed, and that the non-farm sector was particularly impacted and drove lower incomes.

Adding on, Moody’s felt that around half of all households were living on reduced incomes from 2019 levels.

“While cash transfers as part of the government’s fiscal relief package have mitigated the impact, the large size of the informal sector has limited the quantity of stimulus provided to this segment,” it said.

And flowing from that is the concern of unemployment and loss of income that has implications for food security while setting back poverty reduction goals.

Moody’s also flagged the risk from Cambodia’s exposure to high contact sectors such as tourism, low productivity growth and weak labour and goods market flexibility, suggesting that it is more vulnerable to long-term economic problems.

As such, it expects GDP levels to remain just below pre-pandemic levels until 2022.

“Moreover, comparing pre-pandemic growth forecasts against current forecasts suggest that the dent in output in 2020 will act as a setback to growth levels into the future as well,” it said.

The impact of the coronavirus has exacerbated on other long-standing constraints including competition from more labour-intensive economies, such as Bangladesh, comparatively higher minimum wage and risks from strained diplomatic relations with the EU have hindered productivity and growth.

Therefore, Cambodia’s longer-term growth potential will rest on the ability of the government’s outcomes of ongoing economic strategies, it said.

The Law on Investment, targeting growth in higher value-added industries, will play an important role, Moody’s opined.

“More specifically, the plan lays out goals for a revival of business and enterprises post-pandemic reforms.

“These reforms are intended to improve ease of doing business indicators and building resilience, particularly through enhancement of social protection and human capital systems,” it said.