The Cambodian Economy: Outlook, Risks and Reforms

IMF News, June 7, 2017

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Speaker: IMF Deputy Managing Director Mitsuhiro Furusawa at Royal University of Law and Economics, Phnom Penh, Cambodia, June 7, 2017.
Cambodia has made “profoundly impressive economic and social progress” since the end of tyranny and genocide.
Demographics: “65 percent of the population is 30 years of age or younger.”
Poverty reduction: from “50 percent of the population in 2005 to 13.5 percent in 2014.”
World Bank classification: Cambodia is a “lower-middle income economy, and no longer low income.”
Short-term growth projection: “real GDP will expand about 7 percent this year” driven by garment exports and real estate and construction activity.
Medium-term concern: “growth likely will decline (to about 6.25 percent a year), if the economy does not become more diversified.”

IMF global growth projections: “3.5 percent” in 2017 and “3.6 percent” in 2018; last year’s growth was “3.4 percent.”
Asia growth projections: “5.5 percent” in 2017 and “5.4 percent” in 2018.
Country outlook revisions: “China at 6.6 percent; Japan at 1.2 percent.”
Implication: As a highly open economy with a young population, Cambodia “will benefit from the better global and regional prospects.”

Structural concentration: growth has been built on “a few industries, especially low value-added clothing.”
Competitive pressure: global garment industry relocates to lowest-cost countries; Cambodia’s advantage can erode as wages rise.
Key identified challenges:
- Infrastructure: “high energy costs, insufficient supply of electricity, and shortcomings in its transportation network.”
- Business environment: Cambodia “ranks low among the Southeast Asian countries in terms of ease of doing business and in competitiveness”; “cost of doing business also is high because of sometimes burdensome government procedures.”
- Governance: “Good governance is essential” to compete and move up the development ladder.
Industrial policy response: Government launched an “Industrial Development Policy” aiming to “upgrade Cambodia’s industrial structure from labor intensive production to one driven by skills by 2025.”
Financial sector vulnerabilities:
- Rapid credit growth with large exposure to the real estate sector.
- Over-reliance on foreign borrowing.
- Rapid expansion of microfinance institutions.
- Dollarization “limits the policy options to respond to the situation.”
Risk framing: These vulnerabilities “may appear to pose less risk at this moment of strong growth, but they can become more critical if circumstances change.”

Human capital and inclusion:
- Many Cambodians “live just above the poverty line.”
- Education and health standards “need more progress”; schools must provide “up-to-date training” to compete globally.
Financial inclusion statistics and issues:
- “Only 13 percent of your countrymen have bank accounts.”
- Most small businesses “do not have access to financial services.”
- Small and medium-sized enterprises face “high transaction costs, limited services, and poor financial literacy.”
Policy and institutional measures:
- National Bank of Cambodia has launched programs to promote financial literacy.
- Financial inclusion plus financial development can “increase growth and strengthen a country’s resilience.”
- Stability condition: inclusion must be accompanied by “appropriate regulation and supervision” to avoid “too much risk-taking and too much lending.”

Opportunities for the next generation: diversification, financial inclusion, labor force skill upgrades, and stronger government regulation.
Fintech potential:
- For Cambodia, Fintech often means “mobile banking.”
- Existing mobile account use for remittances and payments is growing.
- Market potential indicators: “around 7 million internet users and 20 million mobile subscriptions.”
- Possible fintech expansions: “online lending and accounting services.”
Call to action: young people can be “reformers and innovators” who generate ideas and businesses; “Silicon Valley or Bangalore do not have a monopoly on innovation.”

Balanced outlook: speaker is “not naive about the obstacles” but is “an optimist.”
Required responses: reforms to “stimulate diversification and improved governance,” and business solutions to “create good jobs.”
Final appeal: “What is required is the commitment that your generation can bring.” Speaker looks forward “to returning to Cambodia to see the economic progress” and witnessing future contributions.

Speech by IMF Deputy Managing Director Mitsuhiro Furusawa, Royal University of Law and Economics, Phnom Penh, Cambodia, June 7, 2017.