November 2023 FROM RECOVERY TO REFORM SPECIAL FOCUS Accelerating structural reforms to boost productivity and competitiveness C mbodi Economic Upd t November 2023 FROM RECOVERY TO REFORM SPECIAL FOCUS ACCELERATING STRUCTURAL REFORMS TO BOOST PRODUCTIVITY AND COMPETITIVENESS TABLE OF CONTENTS ACKNOWLEDGMENTS.................................iii Pressure on domestic interest rates intensified..... 21 ABBREVIATIONS............................................. iv Credit growth sharply eased, but concentration of credit in real estate continued............................... 21 Domestic revenue collection slowed .................... 22 Part 1. Recent Economic Developments and Outlook................................................................ 1 Budget expenditures continued to increase ......... 22 EXECUTIVE SUMMARY..................................... 1 Cash transfer programs continued ....................... 22 Recent developments .............................................. 1 The overall fiscal deficit has widened.................... 23 Outlook....................................................................... 2 Public debt stock reached 33.1 percent of GDP . 24 Challenges and risks................................................. 2 Outlook..................................................................... 25 Policy options............................................................. 3 Challenges and risks............................................... 25 Recent developments Economic activity is slower Policy options........................................................... 27 than previously anticipated .................................... 6 International arrival numbers accelerated ............. 7 Part 2. Special focus Goods exports weakened as garment, travel goods, Accelerating structural reforms to boost and footwear exports eased...................................... 9 productivity and competitiveness.................... 29 The number of manufacturing jobs shrank as Introduction........................................................... 30 garment, travel goods, and footwear employment declined................................................................... 10 There have been limited contributions to economic growth from productivity and only modest Approved FDI slowed............................................ 11 improvements in international competitiveness .31 Approved property development permit value Despite recent progress, the business environment continued to expand ............................................. 13 for firms in Cambodia remains challenging ........ 33 Crop production accelarated................................. 15 Similarly, despite recent progress, major infrastructure gaps persist..................................... 35 Agricultural export performance is mixed........... 16 Finally, progress on building human assets has Private consumption eased as pent-up domestic been modest and mixed, with significantly more demand is running out of steam........................... 17 reform needed to move the needle ....................... 37 Inflation edged up, due to the recent uptick in oil and food prices ...................................................... 18 Recommendations............................................. 40 The current account balance improved as imports Annex. Cambodia – Selected Indicators.......... 43 moderated............................................................... 19 Bibliography....................................................... 45 The exchange rate remained under pressure........ 19 Broad money growth continued to decelerate..... 20 i Cambodia Economic Update November 2023 BOXES TABLES Box 1. Global economic developments Table ES1. Macro outlook .....................................10 and outlook ..............................................................19 Table 2. The macro outlook indicates continued Box 2. The Pentagonal Strategy Phase 1.................21 economic recovery.....................................................34 Box 3. Summary of Incentives in Implementing Table S.1. Summary of the challenges and the Sub-decree of the 2021 Investment Law............23 recommendations .....................................................49 FIGURES FIGURE ES.1. CAMBODIA’S RECENT Figure 17. Broad money growth eased.................. 26 DEVELOPMENTS AT A GLANCE.................... 13 Figure 18. U.S. interest rates increased.................. 26 Figure 1. Economic recovery continued Figure 19. Domestic interest rates were under Contribution to real GDP growth.......................... 14 increased pressure .................................................... 28 Figure 2. Eight-month arrival and tourism Figure 20. Concentration of credit in real estate .... 28 receipts ..................................................................... 14 Figure 21. Central government domestic revenue.... 29 Figure 3. Air arrivals remained relatively subduedArrivals by mode of transport................... 15 Figure 22. Central government expenditure......... 29 Figure 4. Accommodation supply......................... 15 Figure 23. General government operations........... 31 Figure 5. Contribution to export growth by Figure 24. General government surplus/deficit market....................................................................... 16 and financing............................................................ 31 Figure 6. Contribution to export growth by Figure S.1. Overview of economic growth and products.................................................................... 16 poverty reduction over the past decade................... 38 Figure 7. Manufacturing sector’s jobs and Figure S.2. Contributions to economic growth factories..................................................................... 17 over the past decade ................................................ 39 Figure 8. Garment, travel goods, and footwear Figure S.3. Structural changes in the Cambodian jobs ........................................................................... 17 economy ................................................................... 40 Figure B.1.1. Purchasing Managers’ Indexes........ 19 Figure S.4. Progress on global competitiveness over the past decade.................................................. 41 Figure B.1.2. Global growth and trade................. 19 Figure S.5. Progress on reducing firm costs .......... 41 Figure 9. Tradable sector investment projects....... 20 Figure S.6. Private sector perceptions ................... 42 Figure 10. Approved FDI-financed project by sector......................................................................... 20 Figure S.7. Provision of government online services...................................................................... 42 Figure 11. Approved property project permits..... 22 Figure S.8. Progress on boosting investment in, Figure 12. Approved permit area by property and provision of, infrastructure .............................. 43 type........................................................................... 22 Figure S.9. Progress on building human capital Figure 13. Imports of consumer and durable over the past decade ................................................. 45 goods ........................................................................ 24 Figure S.10. Progress on access to education and Figure 14. Inflation edged up................................ 24 learning outcomes.................................................... 46 Figure 15. The current account improved............ 25 Figure S.11. Overall progress on upskilling Figure 16. The riel appreciated against regional Cambodia’s workforce ............................................ 47 currencies.................................................................. 25 Cambodia Economic Update November 2023 ii ACKNOWLEDGMENTS The November 2023 Cambodia Economic Update (CEU) was prepared by Sodeth Ly, Faya Hayati, Tim L. De Vaan, Sagita Muco, and Kim Alan Edwards, with contributions from Samuel Christopher Hill and Kimsun Tong. Chankesey Heav served as a research assistant. Seakheang Heng provided administrative support. Saroeun Bou helped with the press release, web display, and dissemination events. The team worked under the overall guidance of Sebastian Eckardt. The team is grateful for the advice and comments provided by Lalita M. Moorty, Mariam Sherman, and Maryam Salim. Several colleagues, including Aaditya Mattoo and Ergys Islamaj, provided comments on the draft version. The team is grateful to the Cambodian authorities, particularly the Ministry of Economy and Finance and the National Bank of Cambodia, for their cooperation and support. The report also benefited from the advice, comments, and views of various stakeholders in Cambodia, including its enthusiastic readers and critics. The CEU, produced biannually, provides up-to-date information on macroeconomic developments in Cambodia. It is distributed and discussed widely, including among Cambodian authorities, development partners, the private sector, think tanks, civil society organizations, and academia. For information about the World Bank and its activities in Cambodia, please visit our website at www.worldbank. org/cambodia. To be included in the email distribution list of the CEU and related publications, please contact Seakheang Heng (sheng4@worldbank.org). For questions on the contents of this publication, please contact Saroeun Bou (sbou@ worldbank.org). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. iii Cambodia Economic Update November 2023 ABBREVIATIONS ASEAN Association of Southeast Asian Nations CEU Cambodia Economic Update COVID-19 coronavirus disease 2019 CPI Consumer Price Index CSES Cambodia Socio-economic Survey EAP East Asia and Pacific region EU European Union FDI foreign direct investment GDP gross domestic product GTF garment, travel goods, and footwear HDI Human Development Index ICT information and communication technologies MEF Ministry of Economy and Finance NBC National Bank of Cambodia QIP qualified investment project SCD Systematic Country Diagnostic SMEs small and medium-sized enterprises TFP total factor productivity UN United Nations U.S. United States US$ United States dollar VAT value-added tax y/y year on year Cambodia Economic Update November 2023 iv Photo: kim-eang-eng @unsplash PART 1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Cambodian riel per U.S. dollar. As food and oil prices EXECUTIVE SUMMARY inched up, inflation marginally increased, reaching 3.2 percent y/y in August 2023, up from 2.8 percent Recent developments at end-2022. Gross international reserves improved This year’s economic activity has been slower to US$18.5 billion in August 2023, up from US$17.7 than previously anticipated due to emerging billion at the end of 2022, covering about seven structural bottlenecks and continued external months of imports. headwinds. This has prompted a sense of urgency Credit growth declined to 7.7 percent y/y in to address the rising economic challenges to August 2023 – a 20-year low, and a pronounced sustain growth in the short to medium term. While slowing from 22.7 percent during the same Cambodia’s structural slowdown started well period in 2022 – further constraining domestic before the pandemic, it had been masked for several consumption. Since the economy is highly dollarized, years by rapid capital inflows, mainly from China, Cambodia “imports” U.S. monetary policy. Global fueling a construction boom until COVID-19 hit. financial conditions have become restrictive as a The structural challenges are now exposed, hurting consequence of the fastest global monetary policy economic activity, which is also being impacted tightening cycle since the 1980s. Consequently, the by global headwinds. Despite a rapid expansion central bank has also started to tighten its monetary of public investment in physical infrastructure, policy by raising the reserve requirement, one of a few shortcomings in Cambodia’s transportation network monetary policy instruments available to influence the and logistics performance remain, and the country money supply, given the economy is highly dollarized. continues to face high costs and low reliability of The reserve requirement ratio for foreign currency of energy supply. The country is ranked low among East banks and financial institutions was raised to 9 percent Asian countries in terms of ease of doing business, in January 2023, up from 7 percent, reportedly to investment climate, and competitiveness, due in part maintain the resilience of the banking and financial to its difficulties in promoting good governance. sector. Broad money eased, growing at 11.0 percent The slowdown was broad-based. Despite a in August 2023, down from 12.0 percent during relatively strong rebound in international arrivals, the same period in 2022, as foreign currency deposit tourism activity and receipts have proven to be growth slowed. Private sector deposit growth also sluggish. Construction and real estate activity also decelerated, growing at 11.1 percent, down from 14.2 remained subdued, as reflected in weak imports percent during the same period in 2022. According of basic construction materials used in property to the midyear 2023 report of the National Bank of development as the housing market correction Cambodia, the reported nonperforming loan ratios continued, due to a significant increase in supply and for the banking and microfinance sectors were 4.0 persistent macroeconomic headwinds. However, as percent and 3.1 percent, respectively, by mid-2023, an initial signs of renewed investor appetite, the value up from 3.2 percent and 2.6 percent, respectively, by of approved property development permits increased the end of 2022. sharply, almost doubling from a year ago. In contrast, After a strong recovery in 2022, government the value of approved investment (outside special revenue collection has slowed this year. As gains economic zones) under the qualified investment from revenue administration improvements may project (QIP) scheme, which receives fiscal incentives have already peaked and cyclical slowdown amid for investing in the tradable sectors, remained slower economic activity continued, direct revenue subdued, reaching US$1.16 billion or a 7.3 percent collection moderated. Similarly, taxes on goods and y/y decline as the negative impacts of the external services, especially excises and duties on imports, demand slowdown continued. declined as goods imports and consumption shrank. Cambodia’s merchandise exports have weakened. Taxes on international trade also eased amid weakening During the first eight months of 2023, goods exports trade. During the first eight months of 2023, central shrank by 2.0 percent. Merchandise imports have also government domestic revenue plateaued, growing moderated as gold imports plummeted, narrowing at 0.4 percent y/y, down from 23.8 percent during the current account deficit, despite weaker exports. the same period in 2022. Central government This helped ease pressure on the exchange rate, expenditure growth, however, accelerated to 12.7 which remained broadly stable, hovering at 4,100 percent y/y, due mainly to rising operating expenses Cambodia Economic Update November 2023 1 that include an across-the-board public sector wage inflation are expected to continue to affect the increase, an increase in goods and services expenses, economy. In this context, the economy is projected general election-related spending, and the hosting of to continue to grow at a slower pace than earlier the Southeast Asian Games and the Association of projected, expanding at 5.8 percent and 6.1 percent Southeast Asian Nations (ASEAN) Para Games, as in 2024 and 2025, respectively. Despite this year’s well as a capital spending boost. Government deposits improvement in approved property development (fiscal reserves) marginally declined to 21.3 trillion riel permit value, prospects of the real estate sector (US$5.1 billion) or 16.0 percent of GDP in August continue to remain uncertain, given high debt and 2023, down from 21.9 billion riel (US$5.3 billion) or tighter financing conditions. Although economic 17.8 percent of GDP in 2022. growth is forecast to be lower than previously expected, the pace of poverty reduction is projected The labor market has been affected by subdued to accelerate, but it is highly unlikely to reach the pre- goods exports. As a result, jobs in the (formal) pandemic level. manufacturing sector, an important source of paid employment, accounting for 18 percent of nonfarm In the medium to longer term, real growth is payroll, shrank from 1.05 million in July 2022 to 1.0 expected to trend back to potential, reaching 6 million in May 2023, before partly recovering to 1.02 to 7 percent, driven by stronger exports and FDI million in August 2023. This represents a 5 percent inflows facilitated by the newly ratified free trade decline in manufacturing sector jobs, prompting the agreements, a substantial increase in private and authorities to provide financial support to laid-off public investment in key physical infrastructure, and workers. Similar financial support in the form of a structural reforms. “wage subsidy”, one of several assistance measures, was provided during the time of COVID-19. Among Table ES1. Macro outlook all social assistance programs, the COVID-19 cash (percent of GDP unless otherwise indicated) transfer program has been the largest. Since its launch in June 2020, the program has disbursed Change from May Projections US$1.2 billion as of September 2023. Moreover, the 2023 government has doubled its conditional cash transfer   2023 2024 2025 2023 2024 2025 program to approximately US$380 for each pregnant woman bearing one child up to the age of two with Real growth 5.4 5.8 6.1 -0.1 -0.3 -0.2 IDPoor cards from August 2023. This assistance (percent) program has also expanded its coverage to include CPI (period female workers who are members of the National average, percent) 3.0 2.8 2.7 0.5 0.3 0.7 Social Security Fund, female civil servants, and intern and contract government officials. The increase in Current accounts -13.4 -11.5 -9.6 5.9 4.6 3.6 cash aid and their coverage expansion serves to further alleviate the negative impacts experienced by poor Overall fiscal -6.9 -4.8 -3.2 -0.5 0.1 1.0 and vulnerable households. deficit Public external 36.9 36.3 35.6 1.8 0.7 -0.3 Outlook debt Cambodia’s real GDP growth is projected to reach 5.4 percent in 2023, marginally lower than Challenges and risks 5.5 percent projected in May 2023 (see table The outlook is, however, subject to substantial ES1) as domestic demand eased and the external downside risks. Major downside risks pertain demand slowdown continued. This year’s fiscal to weaker-than-expected global demand further deficit is expected to widen to 6.9 percent of GDP, up constraining the country’s goods exports, tighter from 4.8 percent of GDP in 2022. global financial conditions affecting the highly In the short term, the overlapping negative leveraged financial sector, and renewed oil and shocks of the pandemic, Russia’s invasion of food price shocks negatively impacting domestic Ukraine, and the sharp tightening of monetary consumption. Domestically, rising household policy in major economies to contain high debt and the continued concentration of domestic 2 Cambodia Economic Update November 2023 credit in the real estate sector remain key risks to reducing international competitiveness and inhibiting financial stability. In addition, fiscal-monetary policy innovation and shifts into higher value-added activities. coordination in Cambodia remains a challenge. To help support increased private sector investment, While countercyclical fiscal policy continued, Cambodia needs to strengthen the predictability of tightening monetary policy has already begun. A the regulatory environment and expand SME access growth shock originating in the region’s largest to finance. Further efforts to streamline complex and trading partners, China, and the U.S. would impact restrictive business entry requirements, together with economic performance in the East-Asia and Pacific improvements to the functioning of the insolvency (EAP) countries including Cambodia through framework, would help reduce costs of firm entry and bilateral trade and financial flows, including foreign exit. Simplifying and digitalizing business services, direct investment (FDI). especially the issuance of licenses and permits, would reduce the associated costs. More competition would Further tightening of global financial conditions, foster cost reductions and innovation and promote especially surging global interest rates, could productivity growth by shifting market share toward worsen investment in the tradable sectors and more efficient producers and incentivizing firms to severely affect the highly leveraged banking become more efficient. To support the tourism sector, system. Global growth, especially global trade, a reduction of costs and fees (visa, accommodation, could be even weaker than anticipated, worsening food, transport, and entrance fees) – including manufacturing exports, currently providing about 1 elimination of unofficial fees – would help attract million jobs (18 percent of nonfarm employment) international arrivals. in the event of widespread financial sector stress or if more persistent inflation pressures prompt Upgrading Cambodia’s infrastructure is also tighter-than-expected monetary policy. Worsening an important foundation for productivity geopolitical tensions, conflict and social unrest, and and international competitiveness. Cambodia natural disasters stemming from climate change, continues to have a large infrastructure financing continue to present downside risks in many emerging gap, resulting in inadequate infrastructure services and developing economies, including Cambodia. that are struggling to keep up with rapidly growing demand. Large investments are needed in the energy sector to address the dual challenge of meeting rapid Policy options growth in electricity demand while meeting the An acceleration of the key structural reforms country’s climate change commitments. Investments envisaged under the 2023–28 Pentagonal are also needed to upgrade basic urban services such Strategy is needed to ensure sustainable growth as piped water, sanitation, solid waste management, over time. As discussed in the Special Focus section, telecommunications, and transport, in conjunction Cambodia’s strong economic growth over the past with strengthened urban planning. decade was largely driven by factor accumulation, Moreover, gaps in regional connectivity with limited contributions from productivity. impact the efficiency and cost of cross-border Structural transformation has slowed since 2016, and trade and need to be addressed. Investments are recent years have seen only modest improvements needed to address specific infrastructure gaps in in the economy’s international competitiveness. To domestic and regional transport connectivity: to avoid a future slowdown in economic growth and improve the East-West corridor across Thailand, poverty reduction, Cambodia needs to transition Cambodia, and Vietnam (and the only road to a more sustainable pattern of growth through corridor connecting Cambodia with Lao PDR); further structural reform. In particular, lifting the to improve the inland waterway connection with contributions to growth from productivity and Vietnam; and to improve the existing railway human capital will require reforms to the business operations and infrastructure links with Thailand. environment and larger, higher quality investments It is also important to improve trade facilitation in infrastructure and in education and skills. and logistics performance. Further efforts must Furtherimprovementstothebusinessenvironment be made to reduce transport and logistics costs by are critical for boosting the productivity and monitoring the efficiency of main trade gateways competitiveness of Cambodian firms. The cost of such as ports and border checkpoints. doing business remains relatively high in Cambodia, Cambodia Economic Update November 2023 3 Raising learning outcomes is crucial to It is also critical to safeguard financial stability, address skills shortages, develop a “future- given Cambodia’s highly leveraged banking ready” workforce, and drive Cambodia’s sector. To safeguard financial stability, the immediate future productivity growth. Firms are reporting focus should be on intensified bank supervision: growing skills shortages, and labor productivity stress testing of individual institutions, systematic growth has declined sharply over the past five onsite inspections, further alignment of the years. Few young Cambodian children are being regulatory framework with international standards, enrolled in early childhood education, which is and thorough assessments of the quality of loan undermining early development and hindering portfolios, among others. To prepare for increasing mothers from returning to work. Primary schools levels of nonperforming loans, it is crucial to ensure are experiencing a decline in learning outcomes that resolution options are now ready to be deployed despite improved access. Few students are as needed, and to strengthen the country’s insolvency progressing to secondary school and those that do regime. Efforts to prepare legislation on deposit are often inadequately prepared and experience insurance and bank resolution must continue. high dropout rates. Options for post-secondary learning are limited and are of low quality. Finally, Finally, improving public sector performance is the dynamism of the labor market is limited by necessary to create an institutional environment insufficient supply and demand information. which strengthens service delivery and supports rather than hinders the development of the In addition to these structural reforms to private sector. Key public administration reforms promote sustainable growth, maintaining include: (i) strengthening the quality and effectiveness macro-fiscal stability continues to be a priority. of public service delivery, including the development Further effort is needed to restore fiscal space, of organizational performance indicators and a system including through reforms to curb tax holidays and for regular high-level reporting and monitoring of exemptions, and to broaden the corporate income performance; (ii) optimizing organizational structures tax base and strengthen compliance. Tax and customs and reforming back-office and support functions administration systems can be modernized to make it across government; and (iii) strengthening the easier to pay taxes and duties. meritocratic approach to civil service employment, and reforming pay and compensation, including by linking worker performance with pay increases. Photo: Silver Ringvee @unsplash 4 Cambodia Economic Update November 2023 FIGURE FIGURE CAMBODIA’S ES.1. ES.1. CAMBODIA’S RECENT DEVELOPMENTS RECENT AT A GLANCE DEVELOPMENTS AT A GLANCE Economic Economic growth FIGURE growth slower FIGURE ES.1. slower than CAMBODIA’S CAMBODIA’S ES.1. earlier than anticipated earlier RECENT … RECENT … DEVELOPMENTS anticipated DEVELOPMENTS … supported AT … supportedby AT Arecovery A recovery GLANCE by GLANCE of services of services … … FIGURE FIGURE ES.1.ES.1. CAMBODIA’S CAMBODIA’S RECENT RECENT DEVELOPMENTS DEVELOPMENTS AT A AT A GLANCE GLANCE FIGURE ES.1. CAMBODIA’S Real growth Real growth (percent) RECENT (percent) DEVELOPMENTS AT A GLANCE International International arrivals arrivals (million ) (million) Economic Economic growth growth slower than than slower anticipated earlierearlier anticipated … … … supported … supported by recovery by recovery of services … of services … Economic Economic growth growth slowerslower than than earlier earlier anticipated … … …Supported anticipated … supported … supported by by recovery recovery of services of services … Economic Pre-COVIDgrowth Real Pre-COVID wasReal growthslower average historical historical (percent) growth average (5 than years) anticipated… (percent) (5 years) Arrivalsby recovery International (million) Arrivals of International (million) services… (million arrivalsarrivals (million ) )… Real growth Real growth (percent) (percent) International International arrivals arrivals (million (million ) ) Real GDPgrowth growth GDP (percent) growth International Pre-COVIDarrivals Pre-COVID (million) historical historical average average (5 years)(5 years) 10.0 10.0 Pre-COVID Pre-COVID historical historical average average (5 years) (5 years) (million) ArrivalsArrivals (million) Pre-COVID Pre-COVID historical historical average average (5 years) (5 years) 0.8 0.8 Arrivals (million) GDP GDP growth growth Arrivals (million) Pre-COVID Pre-COVID historical average average historical (5 years) (5 years) 8.0 10.0 8.0 10.0 GDP growth 6.1 6.1 0.7 Pre-COVID 0.7 Pre-COVID historical average (5 years) 10.0 10.0 GDP growth 5.8 5.8 0.8 0.8 historical average (5 years) 6.0 6.0 5.4 5.4 0.6 0.8 0.8 0.6 8.0 8.0 6.1 6.1 0.7 0.7 8.0 5.8 5.8 6.1 0.5 0.7 0.5 8.0 6.1 5.8 0.7 4.0 4.0 5.4 5.8 5.4 0.6 0.6 6.0 6.0 0.4 0.6 0.4 6.0 6.0 5.4 5.4 0.6 0.5 0.5 2.0 4.0 2.0 4.0 0.3 0.5 0.5 0.3 4.0 0.4 0.4 4.0 0.2 0.4 0.2 0.0 0.0 0.4 0.3 0.3 2.0 2.0 2.0 0.1 0.3 0.3 0.1 2.0 0.2 0.2 -2.0 0.0 -2.0 0.0 0.0 0.2 0.0 0.0 0.2 0.1 0.1 0.0 -0.1 0.1 -0.1 -4.0 -2.0 -4.0 -2.0 0.1 0.0 0.0 -2.0 0.0 20212023p 20222024p 2023p 2025p2025p 2024p2024p 2025p2025p 2010 2010 2011 2011 2010 2012 2010 2011 2011 2013 2012 2012 2014 2013 2013 2015 2014 2014 2016 2015 2015 2017 2016 2016 2018 2017 2017 2019 2018 2018 2020 2019 2019 2021 2020 2020 2022 2021 2022 Jan-19 Jan-19 Jul-19 Jul-19 Jul-19 Jan-19 Jan-20 Jul-19 Oct-19Oct-19 Apr-20 Oct-19 Jul-19 Jan-20 Oct-19Apr-20 Jul-20 Jul-20 Jul-20 Jan-20 Oct-20Oct-20 Oct-20 Apr-20 Jul-20 Jan-21 Jan-21 Jul-20 Oct-20Apr-21 Apr-21 Oct-20 Jul-21 Jul-21 Jul-21 Jan-21 Oct-21Oct-21 Oct-21 Apr-21 Jul-21 Jan-22 Jan-22 Jul-21 Oct-21Apr-22 Apr-22 Oct-21 Jul-22 Jul-22 Jul-22 Jan-22 Oct-22Oct-22 Oct-22 Apr-22 Jul-22 Jan-23 Jan-23 Jul-22 Oct-22Apr-23 Apr-23 Oct-22 Jul-23 Jul-23 Jul-23 Jan-23 Apr-23Apr-23 Jul-23 Jul-23 Apr-19Apr-19 Oct-19 Apr-19 -2.0 0.0 -4.0 -4.0 -0.1 -0.1 -4.0 -0.1 -0.1 -4.0 2023p 2024p 2023p 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-19 Jan-20 Apr-20 Jan-20 Apr-20 Jan-21 Apr-21 Jan-21 Apr-21 Jan-22 Apr-22 Jan-22 Apr-22 Jan-23 Apr-23 Jan-23 Apr-19 2023p 2024p 2025p 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Apr-19 2023p 2024p 2025p 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Jan-19 Apr-19 … despite … despite the decline the decline in goods in exports goods exports continued… continued… …inflation…inflationedged up…edged up… exports GoodsGoods (YTD,(YTD, exports y/y percent y/y percent change) change) (y/y percent (y/y percent change) change) … despite … despite the decline …Despite the decline continued in goodsin goods declineexportsexports in goods continued… continued… exports … …Inflation edged …in up… …inflation flation edged edged up… up… … despite … despite the the decline decline in in goods goods exports exports continued… continued… …in …in flationfl ation edged up… Pre-COVID Goods Goods exports Goods Pre-COVID exports historical (year exports historical to(YTD, average date, y/y (YTD, (5 average y/y percent years)y/y percent percent change) (5 years) change) change) Headline Headline (y/y percent infl change) (y/y ation (y/yedged percent infl (y/y) ation change) percent (y/y) up…change) Exports Goods Goods exports exports Exports (YTD, (YTD, y/y percent y/y percent change) change) Pre-COVID Pre-COVID historical (y/y (y/yhistorical percentpercent average (10 average change) change) (10 years) years) Pre-COVID Pre-COVID historical historical (5 years) average average (5 years) 9 9Headline inflation Headline (y/y) infl ation (y/y) 50 50 Pre-COVID Pre-COVID historical average (5 years) Headline inflation (y/y) ExportsExportshistorical average (5 years) 8 8 Headline Pre-COVID infl historical Pre-COVID ation (y/y) (10 years) average average historical (10 years) 40 Exports 40 Exports Pre-COVID historical average (10 years) 9 9 Pre-COVID historical average (10 years) 50 50 7 97 3050 50 30 8 9 8 40 40 6 86 40 7 8 7 2040 20 5 30 30 7 75 1030 30 10 6 6 4 64 20 20 5 6 5 0 200 3 53 1020 10 4 5 4 -1010 10 -10 2 42 0 0 3 4 3 -20 0 0 -20 1 31 2 3 2 -10 -10 0 -30 -10 -30 2 20 -10 1 1 May-15 May-15 May-22 Jul-23 May-22 Mar-14 Mar-14 Jun-19 Aug-20 Jun-19 Mar-21 Mar-21 Jul-16 Sep-17 Jul-16 Jul-23 Jul-23 Jul-23 Aug-13 Oct-14 Aug-13 Aug-20 Aug-20 Apr-18 Jun-19 Apr-18 Jan-13Jan-13 Mar-14 Jan-13 Jan-20 Mar-21 Jan-20 Oct-14 Dec-15 Oct-14 Oct-21 Dec-22 Oct-21 -20 -20 Nov-18 Jan-20 Nov-18 Sep-17 Nov-18 Sep-17 Dec-15 Feb-17 Dec-15 Dec-22 Dec-22 Feb-17 Apr-18 Feb-17 1 Jul-23 Jul-23 Jul-23 Jul-23 Jul-22 Jul-22 Jul-22 Jul-22 Jul-20 Jul-20 Jul-20 Jul-20 Jul-21 Jul-21 Jul-21 Jul-21 Apr-22 Apr-22 Apr-23 Apr-23 Apr-20 Apr-20 Apr-21 Apr-21 Jan-22Jan-22 Jan-22Jan-22 Jan-23Jan-23 Jan-23Jan-23 Jan-20Jan-20 Jan-20Jan-20 Jan-21Jan-21 Jan-21Jan-21 Oct-22 Oct-22 Oct-20 Oct-20 Oct-21 Oct-21 -20 -20 0 1 0 -30 -30 0 0 May-15 May-15 May-22 May-22 Mar-14 Mar-14 Jun-19 Jun-19 Mar-21 Mar-21 Jul-16 Jul-16 Jul-23 Aug-13 Aug-13 Aug-20 Aug-20 Apr-18 Apr-18 Jan-13 Jan-20 Jan-20 Oct-14 Oct-14 Oct-21 Oct-21 -30 Nov-18 Nov-18 Sep-17 Sep-17 Dec-15 Dec-15 Dec-22 Dec-22 Feb-17 Feb-17 -30 Apr-22 Apr-22 Apr-23 Apr-23 Apr-20 Apr-20 Apr-21 Apr-21 Oct-22 Oct-22 Oct-20 Oct-20 Oct-21 Oct-21 May-15 May-22 Mar-14 Jun-19 Mar-21 Jul-16 Jul-23 Aug-13 Aug-20 Apr-18 Jan-13 Jan-20 Oct-14 Oct-21 Nov-18 Sep-17 Dec-15 Dec-22 Feb-17 May-15 May-22 Jul-16 Aug-13 Jan-13 Oct-21 Jul-23 Jul-22 Jul-20 Jul-21 Apr-22 Apr-23 Apr-20 Apr-21 Jan-22 Jan-23 Jan-20 Jan-21 Oct-22 Oct-20 Oct-21 Jul-23 Jul-22 Jul-20 Jul-21 Apr-22 Apr-23 Apr-20 Apr-21 Jan-22 Jan-23 Jan-20 Jan-21 Oct-22 Oct-20 Oct-21 …Broad … broad … money (M2) growth broad money growth decelerated… (M2) growth decelerated … decelerated … …Domestic revenue slowed … domestic … r evenue domestic slowedslowed r evenue Broad money Broad money Broad money liabilities (y/y liabilities percent (y/y percent liabilities change) (y/y percent change)change) Central government Central Centraldomestic government governmentrevenue domestic revenue domestic revenue … broad money … broad (M2) growth money (M2) growth decelerated decelerated … … … domestic … domestic (y/y percent change) r (y/y (y/y r change) evenue percent evenue percentslowed slowed change) … broad money … broad (M2) growth decelerated … … domestic r evenue slowed Broadmoney money Broad (M2) money growth liabilities liabilities (y/y percent decelerated (y/y percent … change) change) … Central Central domestic government r evenue government domestic slowed revenue domestic revenue Broad M2 y/y, M2 Broad percent money money y/y, change percent liabilities (y/y percent change) liabilities (y/y percent change) change Central Central government government Domestic domestic domestic revenue revenue (y/yDomestic revenue percent revenue change) (y/y percent change) Pre-COVID historical Pre-COVID average (5 historical average years)(5 years) 30 30 (y/y percent change) (y/y percent change) years)(5 years) Pre-COVID-19 Pre-COVID-19 historical historical aveage (5aveage 50 50 y/y, M2 M2 y/y, percent percent change change Domestic Domestic revenuerevenue M2percent M2 y/y, y/y, percent changechange 25 25 Domestic Domestic revenue revenue Pre-COVID Pre-COVID historical historical average average (5 years)(5 years) 30 30 Pre-COVID-19 Pre-COVID-19 historical historical aveage (5 aveage years) (5 years) Pre-COVID historical Pre-COVID historical average average (5 years) (5 years) 30 Pre-COVID-19 historical Pre-COVID-19 historical aveageaveage (5 years) (5 years) 50 40 50 40 2030 20 50 25 25 50 25 1525 15 40 40 20 20 30 30 40 20 40 1020 10 15 15 30 30 515 155 20 20 30 10 10 30 100 010 20 20 5 5 10 10 20 5 20 -5 5 -5 0 0 -10 0 0 -10 10 0 10 0 10 -5 -5 10 -5 -15-5 Apr-15 Apr-15 Apr-18 Apr-18 Apr-21 Apr-21 -15 Jul-20 Jul-20 Jul-20 Jul-20 Jul-23 Jul-23 Jul-23 Jul-23 Jul-14 Jul-14 Jul-14 Jul-14 Jul-17 Jul-17 Jul-17 Jul-17 Jan-22Jan-22 Jan-22Jan-22 Jan-13Jan-13 Jan-13Jan-13 Jan-16Jan-16 Jan-16Jan-16 Jan-19Jan-19 Jan-19Jan-19 Oct-13 Oct-13 Oct-16 Oct-16 Oct-19 Oct-19 Oct-22 Oct-22 0 0 -10 -10 -10 2019 8-m 2019 8-m 8-m 2020 2020 8-m 8-m 2021 2021 8-m 8-m 2022 2022 8-m 8-m 20238-m 2023 0 0 -10 Apr-15 Apr-15 Apr-18 Apr-18 Apr-21 Apr-21 -15 -15 Oct-13 Oct-13 Oct-16 Oct-16 Oct-19 Oct-19 Oct-22 Oct-22 Apr-15 Apr-18 Apr-21 -15 2019 Jul-20 Jul-23 Jul-14 Jul-17 Jan-22 Jan-13 Jan-16 Jan-19 Oct-13 Oct-16 Oct-19 Oct-22 Apr-15 Apr-18 Apr-21 -15 8-m 8-m 2020 8-m 2019 8-m 2020 8-m 2021 8-m 2021 8-m 2022 8-m 2023 8-m 2022 8-m 2023 Jul-20 Jul-23 Jul-14 Jul-17 Jan-22 Jan-13 Jan-16 Jan-19 Oct-13 Oct-16 Oct-19 Oct-22 Sources: Cambodian authorities; World Bank staff projections. 8-m 2019 8-m 2019 8-m 2020 8-m 2020 8-m 2021 8-m 2021 8-m 2022 8-m 2022 8-m 2023 8-m 2023 Note: p = projection; y/y = year on year. Cambodia Economic Update November 2023 5 levels in 2020 and is now about 20 percent higher. RECENT DEVELOPMENTS The recovery has also been uneven across sectors. ECONOMIC ACTIVITY Information and communication technology and finance have experienced relatively strong growth. IS SLOWER THAN Regionally, the service sector started to recover after PREVIOUSLY the economic reopening in several of the region’s economies, benefitting from the release of pent-up ANTICIPATED demand. However, output in the transportation, The global economy remains in a precarious state accommodation, and catering sectors in the amid the protracted effects of the overlapping Philippines and Thailand, and construction and real negative shocks of the pandemic, Russia’s estate in Malaysia, the Philippines, and Thailand, are invasion of Ukraine, and the sharp tightening of still well below pre-pandemic levels. Other emerging monetary policy to contain high inflation.1 Global market and developing economies have seen even growth is projected to slow significantly in the second weaker recoveries, especially low-income countries. half of this year, with weakness continuing in 2024. Higher interest rates and depreciated currencies have Inflation pressures persist, and tight monetary policy exacerbated the difficulties of low-income countries, is expected to weigh substantially on activity. Recent placing them at high risk of distress or already in banking sector stress in advanced economies will distress.3 also likely dampen activity through more restrictive Signs of weakening economic activity continued credit conditions (see box 1 on global economic across the EAP region. In most major EAP developments and outlook). economies, private consumption, which bounced Economic activity in much of developing East back from COVID-19 and inflation-induced Asia and Pacific (EAP), other than several austerity, sustained growth in the first half of 2023, Pacific Island countries, has recovered from but is running out of steam unexpectedly early in the succession of shocks since 2020 but is now China. Meanwhile, exports of both manufactured slowing (figure 1).2 While output has surpassed pre- goods and commodities have contracted. Public and pandemic levels in most of the larger EAP economies, private investment also remains low in much of the recovery has been uneven across the region. Output in region. Fiscal policy is now less expansionary in most China and Vietnam already exceeded pre-pandemic countries. The key external factors are slowing global Figure 1. 1. Figure Figure Economic Economic 1. Economic recovery recovery recovery continued continued continued Contribution Figure Figure Figure 2. 2. 8-month 8-month arrivals 2.Eight-month arrivals arrivalandand tourism and tourism receipt receipt tourism receipts Contribution growth to real Contribution to real GDP to real GDP GDP growth growth (percent, (percent, 2019 = 100)(percent, 2019 2019 = 100 = 100 ) ) (percent) (percent) (percent) Indus-garment Indus-garment & footwear & footwear Serv-others Serv-others Tourism Tourism receipt receipt (entrance (entrance fee revenue) fee revenue) Indus-construction Indus-construction Taxes Taxes less subsidies less subsidies Arrivals Arrivals Indus-others Indus-others Agriculture Agriculture 2019 2019 Serv-hotels Serv-hotels & rests & rests GDP GDP growth growth 80.380.3 10 10 8 7.0 7.0 7.07.5 7.5 7.1 7.1 8 7.0 6.9 6.9 6.1 6.1 5.8 5.8 5.4 5.4 6 6 5.2 5.2 4 3.0 3.0 4 2 2 33.233.2 26.4 28.1 26.4 28.1 0 0 22.922.9 -2 -2 -3.1 -3.1 6.3 -4 -4 2.8 2.8 6.3 0.3 0.3 2023p 2024p 2025p 2023p 2024p 2025p 2019 -6 -6 2015 2016 2017 2018 2020 2021 2022 2019 2015 2016 2017 2018 2020 2021 2022 2020 2020 2021 2021 2022 2022 2023 2023 Sources: Cambodian authorities and World Bank staff projections. Source: Cambodian authorities. Note: p = projections. 1 World Bank. 2023c. 2 World Bank. 2023a. 3 3. 3. Figure Figure IMF 2023a. Air Air a rrivals a rrivals remained remained relatively subdued relatively subdued Figure Figure 4. 4. Accommodation Accommodation supply supply Arrivals Arrivals by mode by mode of transport of transport (number (number of rooms of rooms of guesthouses of guesthouses andand hotels hotels ) ) (million (million of visitors of visitors the the during during fi8 first rst 8 months ) ) months 6 Cambodia Economic 2,820 November 2023 Update 2,820 8-month 8-month 2019 8-month 2019 8-month 2023 2023 2022 2019 2022 2019 3.5 3.5 2,419 2,419 llions lions 3.0 3.0 2,142 2,142 growth, still tight financial conditions, and an increase creating jobs, ensuring equity, increasing efficiency, in trade protection, combined with industrial policies. and maintaining sustainability. The Pentagonal Among the domestic factors in EAP economies, the Strategy is designed to improve the country’s most important are the COVID-19 legacy of amplified competitiveness by addressing Cambodia’s high public and private debt and the policy stance, especially transport and logistics costs and poor performance fiscal and monetary. on ease of doing business and the investment climate, among others. In this regard, the first post-pandemic The Chinese economy has also slowed,4 and high-level public-private sector forum was organized this does not bode well for Cambodia, given in November 2023. that China is one of Cambodia’s major trading partners, especially for imports of intermediate goods used in the production of garments, travel goods, and footwear products for export. China INTERNATIONAL ARRIVAL is also Figure the main source of 1. Economic (FDI), accounting for about half of FDI inflows in Contribution to foreign recovery real GDP direct investment continued growth NUMBERS ACCELERATED Figure 2. 8-month arrivals and tourism receipt (percent, 2019 = 100 ) Cambodia. During the(percent)pre-pandemic period, Chinese During the first eight months of 2023, tourists ranked top, accounting for more than a international arrivals Tourism reachedfee3.5 receipt (entrance million, up revenue) Indus-garment & footwear Serv-others third Taxes less China’s of total international arrivals. Indus-construction subsidies growth from 1 million during the same period in 2022. Arrivals slowed substantially sinceAgriculture hasIndus-others April 2023. Domestic relatively rapid recovery of international Indicating a2019 demand has Serv-hotels &weakened, rests reflecting GDP subdued growth consumer arrivals, during the first eight months of 2023, tourist 80.3 10 and business confidence, 7.5 7.1 an incomplete labor market arrivals have recovered to about 80 percent of the 8 7.0 6.9 7.0 recovery, and persistent property5.2 market 5.4 5.8 turmoil. 6.1 arrival number recorded during the same period in 6 While 4 travel has broadly recovered, 3.0 spending has not. 2019 (figure 2), compared to 67.1 percent and 60.5 The 2 Chinese economy has been impacted by slowing percent for Thailand and Vietnam, respectively. 33.2 global 0 growth, which has tempered external demand. However, 28.1 structure and composition of arrivals 26.4 the 22.9 -2 have changed, indicating a slow recovery of tourism Like many countries in -3.1the region, economic receipts. During the pre-pandemic 6.3 period, air arrivals, -4 activity in Cambodia is slower than previously 0.3 2.8 which are often associated with relatively high 2023p 2024p 2025p 2019 -6 2015 2016 2017 2018 2020 2021 2022 anticipated. The newly elected Government of expenditure,2021 tourist 2020 accounted 2022 for two-thirds 2023and Cambodia understands the need to address structural land arrivals for one-third. The opposite has been challenges, which are weighing on growth. In this true in the post-COVID-19 period. During the first regard, the 2023–28 Pentagonal Strategy (box 2) was eight months of 2023, international arrivals by land introduced in August 2023, aimed at boosting growth, accounted for 2.3 million, while air arrivals accounted Figure Figure 3. Air 3. Air a rrivals arrivals remained remained relativelysubdued relatively subdued Figure 4. Figure 4. Accommodation supply supply Accommodation Arrivals by mode of transport (number of rooms of guesthouses and hotels ) Arrivals by mode of transport (number of rooms of guesthouses and hotels) (million of visitors during the first 8 months ) (millions of visitors during the first 8 months) 8-month 2019 8-month 2023 2022 2019 2,820 3.5 2,419 Millions 3.0 2,142 1,976 2.5 2.0 1.5 1.0 0.5 0.0 Air (Total) Phnom Penh Siem Reap SHV airport Land and airport airport waterways (Total) Total Siem Reap 4 World Bank 2023b. Figure 5. Contribution to export growth by market Figure 6. Contribution to export growth by products (percentage point) (percentage point) Cambodia Economic ASEAN EU 2023 Update November USA 7 80.0 50 Non-GTF GTF China RoW Total 40 60.0 Indus-garment& Indus-garment &footwear footwear Serv-others Serv-others Tourism receipt Tourism receipt (entrance (entrance fee fee revenue) revenue) Indus-construction Indus-construction Taxesless Taxes subsidies lesssubsidies Arrivals Arrivals Indus-others Indus-others Agriculture Agriculture 2019 2019 Serv-hotels Serv-hotels & rests & rests GDP growth GDPgrowth 80.3 80.3 10 10 8 7.0 8 7.0 6.9 6.9 7.0 7.5 7.0 7.5 7.1 7.1 6.1 5.8 6.1 5.4 5.8 6 1.2 million (figure 3). In addition, for 6 5.2 while 5.2 5.4 the share Keng International Airport at Sihanoukville, a 3.0 3.0 4 Chinese tourists was the largest, accounting for of 4 Chinese investment hotspot (receiving the approved almost 2 2 40 percent of total arrivals during the pre- property development permit value of 33.2US$4.3 33.2 28.1 26.4 28.1 26.4 pandemic 0 0 period, it accounted for only 10.5 percent billion in 2019) during the pre-pandemic 22.9 22.9 period in 2023. The share of Thai tourists is now the largest, -2 -2 has been worse, declining to 10,000 (0.3 percent of -3.1 -3.1 6.3 6.3 accounting for 34 percent of the total, up from 5.2 -4 -4 total) during the 0.3first 2.8 0.3 eight months 2.8 of 2023, down 2023p 2024p 2025p 2019 percent in 2019. Rising land arrivals and Thai tourists from 0.5 million (11.2 percent of the total) during -6 -6 2015 2016 2017 2018 2020 2021 2022 reflect increased foreign tourists with relatively short the same2020 2020 2021 period in 2021 2019. 2022 2022 2023 2023 length of stays and low daily expenditures, mainly Thai, crossing from Aranyaprathet (Thailand) to visit Similarly, revenue collection from Angkor mostly Poi Pet (Cambodia), where there are casinos temple entrance fees was relatively weak, catering to foreign tourists. reaching only US$20.3 million or a third of what was collected during the same period While the Figure Figure 3. share 3. Air Air a of total a rrivals rrivals international remained remained relatively arrivals relatively subdued subdued in 2019.FigureAlthough Figure 4. supply numbers international arrival Accommodation 4. Accommodation supply reached 80 percent Arrivals Arrivals by byof theof mode mode of transport recorded number transport quickly recovered, (number (number of of roomstourism rooms of receipts and of guesthouses guesthouses collected and hotels ))from hotels the same during (million (million of period of visitors visitors in 2019, during during the the fi first rstthe 8 share 8 months months )) of international arrivals by land are likely to be lower than arrivals to Siem Reap reached only one-tenth those from air arrivals. In this regard, 2,820 2,820tourism receipts 8-month 2019 8-month 2019 8-month 8-month 2023 2023 2022 2022 2019 2019 of the pre-pandemic level. During the first eight collected during the post-pandemic period remained 3.5 3.5 2,419 2,419 months of 2023, international arrivals to Siem Reap relatively slow. In 2022, Cambodia’s tourism receipts Millions 3.0 3.0 reached 0.38 million, accounting for 11.0 percent of 2,142 2,142 were estimated by the Cambodian authorities to 1,976 1,976 the total, compared to 1.3 million or 38.4 percent 2.5 2.5 have reached only 28 percent (US$1.4 billion) of the total during the same period in 2019. As of 2.0 2.0 what was collected in 2019 (US$4.9 billion).5 This 1.5 Reap is the largest tourist attraction site in the Siem 1.5 indicates that the recent increase in international country, 1.0 1.0 the revival of the tourism sector is not being arrivals may be driven by short-stay border-crossing felt by many travel, tourism, and hospitality industries tourists arriving by land to Cambodia’s border town 0.5 0.5 there. With the pre-COVID-19 construction boom of Poi Pet, Bantey Meanchey province, mainly from 0.0 0.0 boosting the supply of guesthouse and hotel rooms Thailand, with relatively low spending per tourist. Air (Total) Air PhnomPenh (Total) Phnom Penh Siem SiemReap Reap SHV airport Land SHVairport Landandand (figure 4), Siem Reap airport is increasingly airport airport airport experiencing waterways waterways In addition, the number of domestic tourists, which a mismatch between tourism supply and tourism (Total) (Total) surged, reachingTotal13 million, due mainly Total Siem to the Khmer Reap SiemReap demand, amplifying the negative impact of slow New Year celebration during the first half of 2023, tourism receipts. The arrival number to Kong boosted by one-off pent-up demand after the country Figure Figure 5. Figure 5. Contribution Contribution Contribution to toto export export export growth growth growth byby by market market market Figure Figure Figure 6. 6.6.Contribution Contribution Contribution toto to export export export growth growth growth by byby products products products (percentage point) (percentage point) (percentage point) (percentage point) (percentage point) (percentage point) 80.0 80.0 ASEAN ASEAN EU EU USA USA 50 50 Non-GTF Non-GTF GTF GTF China China RoW RoW Total Total 40 40 60.0 60.0 30 30 40.0 40.0 20 20 20.0 20.0 10 10 0 0 0.0 0.0 -10 -10 -20.0 -20.0 -20 -20 -30 -30 -40.0 -40.0 Jul-20 Jul-21 Jul-22 Jul-23 Apr-20 Apr-21 Apr-22 Apr-23 Jan-20 Jan-21 Jan-22 Jan-23 Oct-20 Oct-21 Oct-22 Jul-22 Jul-23 Jul-20 Jul-21 Apr-20 Apr-21 Apr-22 Apr-23 Jan-22 Jan-23 Jan-20 Jan-21 Oct-20 Oct-21 Oct-22 Source: Cambodian authorities. Source: Cambodian authorities. Note: RoW = rest of the world. Note: GTF = garment, travel goods, and footwear. 5 Ministry of Tourism 2023. 8 Cambodia Economic Update November 2023 completely relaxed mobility restrictions, may have and footwear (GTF) exports remained pronounced also eased. (figure 6), indicating a relatively elastic demand for GTF products with respect to incomes of Cambodia’s Cambodia’s neighbors, especially Thailand and main export markets, especially the United States and Vietnam, have been more successful in attracting European Union. However, exports of non-GTF Chinese tourists. By August 2023, Chinese tourists products accelerated.6 accounted for 12.3 percent and 14.2 percent for Thailand and Vietnam, respectively, compared to Goods exports to the United States, Cambodia’s 10.5 percent for Cambodia. largest export market, accounting for 43.7 percent of total exports, reached US$6.4 billion, or a 4.8 percent y/y decline during the first eight months of 2023. However, reflecting GOODS EXPORTS moderation of the decline, exports expanded by 28.8 WEAKENED AS GARMENT, percent y/y in August 2023, after contracting by 10.1 percent in July 2023. The increase in goods exports TRAVEL GOODS, AND to the U.S. market in August 2023 was driven by FOOTWEAR EXPORTS “other products,” electrical parts, and vehicle parts, contributing 131 percentage points, 121.4 percentage EASED points, and 42.3 percentage points, respectively. Cambodia’s merchandise exports weakened, Similarly, goods exports to the EU, Cambodia’s due to the continued negative impact of the second-largest export market, accounting for 17.7 slowdown in external demand. During the first percent of total exports, also shrank, contracting at eight months of 2023, goods exports (including gold) 11.2 percent during the first eight months of 2023. shrank by 2.0 percent, reaching US$13.9 billion. The ASEAN, China, Japan, United Kingdom, and Nevertheless, year on year (y/y) data indicate that rest of the world markets accounted for 10 percent, goods exports appear to have gradually stabilized 6.7 percent, 5.5 percent, 3.8 percent, and 12.5 percent (figure 5). The deterioration of garment, travel goods, of total exports, respectively. Figure7. 7. Figure Manufacturing Manufacturing sector’s sector’s jobs jobs and and factories factories Figure Figure 8. 8. Garment, Garment, travel travel good good and and footwear footwear jobs jobs Figure 7. Manufacturing sector’s jobs and factories Figure 8. Garment, travel goods, and footwear jobs Total workers Total workers Total Total factories factories (RHS) (RHS) Garment Garment Travel Travel goods goods & footwear & footwear (RHS) (RHS) 1,070 1,070 2,100 2,100 700 700 280 280 272 272 Thousands Thousands Thousands Thousands Thousands Thousands 1,044 1,044 680 680 270 270 1,050 1,050 2,000 2,000 660 660 260 260 1,022 1,022 640 640 1,030 1,030 1,900 1,900 256 256 250 250 620 620 614 614 1,010 1,010 1,800 1,800 600 600 240 240 580 580 590 230 590 230 990 990 1,005 1,700 1,005 1,700 560 560 220 220 540 540 970 970 1,600 1,600 210 210 520 520 950 950 1,500 1,500 500 500 200 200 Jun-22 Jun-22 Jun-23 Jun-23 Jun-20 Jun-20 Jun-21 Jun-21 Aug-22 Aug-22 Aug-23 Aug-23 Aug-20 Aug-20 Aug-21 Aug-21 Apr-22 Apr-22 Apr-23 Apr-23 Apr-20 Apr-20 Apr-21 Apr-21 Oct-22 Oct-22 Oct-20 Oct-20 Oct-21 Oct-21 Dec-20 Dec-20 Dec-21 Dec-21 Dec-22 Dec-22 Feb-23 Feb-23 Feb-21 Feb-21 Feb-22 Feb-22 Mar-20 Jun-20 Mar-20 Jun-20 Mar-21 Jun-21 Mar-21 Jun-21 Mar-22 Jun-22 Mar-22 Jun-22 Mar-23 Jun-23 Mar-23 Jun-23 Sep-19 Sep-19 Sep-20 Sep-20 Sep-21 Sep-21 Sep-22 Sep-22 Dec-19 Dec-19 Dec-20 Dec-20 Dec-21 Dec-21 Dec-22 Dec-22 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. Note: RHS = right-hand scale. Figure9. 9. Figure Tradeable Tradeable sector sector investment projects investment projects Figure10. Figure 10. Approved Approved FDI FDI nanced - fi- financed project project sector byby sector Approved Approved QIP QIP value value (US$ (US$ billion, 8-month billion, 8-month 2023) 2023) (US$ (US$ billion, billion, 6-month 6-month moving moving average, average, eded fixfix asset) asset) 1.20 1.20 Wholesale Wholesale & retail; & retail; 14.0; 14.0; 1.5%1.5% 6 1.00 Domestic Domestic (6mma) Unfortunately, (6mma) further FDI analysis FDI (6mma) (6mma) cannot be conducted, as a large part of non-GTF exports is classified as “others” exports under Cambodia’s goods export data. 1.00 Agriculture Agriculture && 0.80 0.80 food food processing; processing; Cambodia Economic Update November 2023 147,8; 147,8; 16% 16% 9 0.60 0.60 Non-garment Non-garment industries; industries; 0.40 0.40 Garment; Garment; 471,0; 471,0; 51,9% 51,9% 274,9; 274,9; 30,3% 30,3% percent or 40,000, to 0.84 million, down from 0.88 THE NUMBER OF million. This decline accounted for 90 percent of the MANUFACTURING total employment decline during the period (figure 8). Given that these formal industries are receiving JOBS SHRANK AS the minimum wage of about US$200 a month, GARMENT, TRAVEL the economic effect created by the loss of 40,000 employed people could be estimated to reach at least GOODS, AND FOOTWEAR US$100 million in wages and allowances alone. EMPLOYMENT DECLINED Despite the decline in net employment, the number Consistent with subdued goods exports, of factories in the manufacturing sector continued employment in the manufacturing sector also to grow, reflecting some gains in industrial declined. Manufacturing jobs declined by 44,000, diversification, likely to be less labor-intensive to 1 million in May 2023, as goods exports were hit and possibly higher value-added manufacturing hardest by the decline in external demand, from sectors. Factory statistics showed a relatively large net its post-COVID-19 peak in July 2022. However, gain in 200 factories during 2020–23, reaching a total employment has since recovered, reaching 1.022 2,026 factories by August 2023. Of the increase in the million in August 2023 (figure 7). The relatively number of factories, the metal, paper, furniture, plastic, sharp decline in net employment during July 2022 and chemical industries accounted for about two-thirds. to May 2023, largely reflected the impacts of the However, these industries combined are responsible global demand slowdown on Cambodia’s main for only 10 percent of total employment in the manufacturing sector, which includes the garment, manufacturing sector. The expansion of Cambodia’s travel goods, footwear, and textile industries. These food, beverage, and tobacco industry, which has been industries provide as much as 83 percent of total known as a relatively large employment generation employment in the manufacturing sector. As a result, manufacturing sector, may have already peaked, with during the 10 months covering July 2022–May 2023, relatively unchanged factory and employment numbers net employment in these industries declined by 5 of 165,000 and 27,000, respectively, since 2022. Box 1. Global economic developments and outlook Despite some pockets of resilience, particularly in the United States, global activity continues to moderate, with recent Purchasing Managers’ Indexes (PMIs) suggesting weakness in manufacturing is broadening to the services sector (figure B1.1). The U.S. economy continued to expand steadily in the first three quarters of the year, as near record-low levels of unemployment bolstered consumption. However, in the euro area, growth was largely stagnant early in the year and turned negative in the third quarter, while inflation remains stubbornly high and above the European Central Bank target. In Japan, while services activity remains solid, leading indicators of manufacturing activity have been weak, while inflation has been high by historical standards. Global goods trade continued to contract into the second half of 2023, while global industrial production growth has been soft. Leading indicators point to further global trade weakness, with PMIs for new export orders recently in contractionary territory. In addition, while a recovery in global tourism has helped lift services trade, there are signs the recovery is fading. The latest conflict in the Middle East has raised geopolitical risks for commodity markets, though so far its impact on prices has been small. Nevertheless, even before the conflict, commodity prices were relatively high, about 45 percent above the 2015–19 average in nominal terms.1 Global financial conditions have also tightened substantially recently, with advanced-economy government bond yields increasing sharply, particularly in the United States, while the U.S. dollar has strengthened, and equity volatility has increased. With overall activity expected to continue softening toward the end of the year, global growth is projected to fall in 2023 to 2.1 percent, from 3.1 percent last year.2 Next year, growth is expected to pick up only moderately, to 2.4 percent (figure B1.2). The weak outlook reflects the lagged effects of substantial monetary policy tightening in both advanced economies and emerging market and developing economies in response to high inflation. Since the start of the U.S. monetary policy tightening cycle in early 2022, the Federal Reserve has raised policy interest rates by around 5 percentage points, one of the largest increases in the past four decades. In addition, growth in China is expected to slow next year, amid continued strains in the local property market, weak external demand, and subdued sentiment. 10 Cambodia Economic Update November 2023 Global trade growth is forecast to slow to 1.7 percent in 2023. As global consumption returns to its pre- pandemic mix between goods and services, trade is expected to recover modestly, to 2.8 percent in 2024, only slightly stronger than GDP growth. Moreover, longer-term global growth prospects remain lackluster, with world potential growth expected to slow over the remainder of the decade, reflecting both a weaker demographic outlook and weaker productivity growth. Risks to the global outlook remain tilted to the downside, and stem from intensified geopolitical tensions, trade fragmentation, weaker-than-expected growth in China, and tighter-than-expected global financial conditions. Geopolitical risks have risen markedly in the wake of the conflict in the Middle East, with potentially significant implications for commodity markets if the conflict escalates. History suggests that depending on the duration and scale of an escalation of a conflict, substantial oil supply disruptions could lead to soaring energy prices.3 This could have significant knock-on effects for inflation around the world, and potentially require central banks to tighten monetary policy, which would weigh on growth. Figure Figure B.1.1. Figure B.1.1. Purchasing Purchasing B.1.1. Managers’ Managers’ Indexes Indexes Purchasing Managers’ Indexes Figure Figure Figure B.1.2. B.1.2. B.1.2. Global growth Global growth and trade Global growth and trade and trade 50+ =50+ Index,Index, = expansion expansion Percent Percent GDP GDPTradeTrade 7 7 60 60 Services Services Manufacturing Manufacturing 6 6 5 5 55 55 4 4 50 50 3 3 2 2 45 45 1 1 0 0 2022 2022 2023f2023f 2024f2024f Sources: 1. World Bank 2023d. 2. World Bank 2023c. 3. World Bank 2023d. Note: This box was prepared by Samuel Christopher Hill, DECPG. 30 percent of the total (figure 10). The share of FDI- APPROVED FDI SLOWED financed agriculture and agroprocessing also increased, Approved FDI project value classified as a qualified reaching 16 percent or US$147 million, indicating a investment project (QIP) eligible to receive renewed appetite for investing in the sector. Targeting investment incentives under the Investment Law, QIP investment projects, the Cambodian authorities reached US$908 million, a contraction of 7.3 issued in June 2023 the sub-decree to implement the percent y/y during the first eight months of 2023 new Investment Law, which was adopted in late 2021 (figure 9)7. This is well below the approved FDI- (see box 3). financed project value during the same period in 2019, This year’s decline follows a significant increase which was US$1.5 billion. Of the total US$908 million, in approved FDI-financed QIP project value last the non-garment industry is the largest, accounting for year. Total investment reached US$1.15 billion in US$471 million or 52 percent of total. The largest share 2022, or a 75.4 percent increase. In 2022, approved of non-garment projects includes cement processing FDI projects were diversified well beyond garments, (US$141.8 million), footwear (US$80 million), and covering the logistics, energy, and hospitality sectors, travel goods (US$60 million). Despite the decline in which received US$1.3 billion, US$389 million, garment exports, foreign investor appetite to finance and US$129 million, respectively. During the past the garment industry continued, accounting for the decade, most of the approved FDI-financed projects in second-largest investment of US$274.9 million or 7 The data covers only newly approved qualified investment projects located outside special economic zones. A comprehensive data from the Council for the Development of Cambodia showed that approved QIP value reached US$4.0 billion or 14.1 percent increase during the first 10 months. However, they are at the aggregate level and can’t be broken down. Cambodia Economic Update November 2023 11 Figure 7. Manufacturing sector’s jobs and factories Figure 8. Garment, travel good and footwear jobs Figure 7. Manufacturing sector’s jobs and factories Figure 8. Garment, travel good and footwear jobs Total workers Total factories (RHS) Garment Travel goods & footwear (RHS) Cambodia came from China Total workers (including Total factories (RHS) Hong Kong hit the Garment economy in Travel2020, construction goods and real & footwear (RHS) 1,070 2,100 700 280 SAR, 1,070 China). The share of approved Chinese 2,100 FDI- estate 700 activity stalled, and the share of approved 272 280 QIP Thousands Thousands Thousands 1,044 680 272 financed projects rose to 90 percent in 2023, up from investment project value investing in the construction 270 Thousands Thousands Thousands 1,050 1,044 2,000 680 660 270 55 percent in 2014. 1,050 2,000 and real 660 estate sector plummeted, declining to 14.9 260 1,022 640 260 1,030 1,022 1,900 percent 640 620 in 2022. During the pandemic,614 while 256 250the There 1,030 are notable shifts in the composition 1,900 share 620 of QIPs investing in the 256 250 614 construction and 1,010 1,800 600 240 of FDI 1,010 projects, compared to the pre-COVID 1,800 real 600estate sector shrank, investment in the 240non- 580 590 230 period, with a rising share of non-Garment 1,005 1,700 garment560 sector expanded, rising from 6.7 590 230 of percent 990 580 manufacturing 990 and a decline in 1,005 real estate 1,700 220 560approved QIP value in 2019 to 70.7 percent total 540 220 in investments. 970 During the pre-COVID-19 period, 1,600 540 2022,520as diversification continued. The non-garment 210 970 1,600 210 the largest share of approved QIP (domestic and FDI- 520 manufacturing 500 sector included the metal, paper, 200 950 1,500 financed) 1,500 and project value went to the construction 500 200 Jun-22 Jun-23 Jun-20 Jun-21 Aug-22 Aug-23 Aug-20 Aug-21 Apr-20 Apr-21 Apr-22 Apr-23 Oct-22 Oct-20 Oct-21 950 Dec-20 Dec-21 Dec-22 Feb-22 Feb-23 Feb-21 furniture, plastic, and chemical industries, as well Mar-20 Jun-20 Mar-21 Jun-21 Mar-22 Jun-22 Mar-23 Jun-23 Sep-19 Sep-20 Sep-21 Sep-22 Dec-19 Dec-20 Dec-21 Dec-22 Jun-21 Jun-22 Jun-23 Jun-20 Aug-21 Aug-22 Aug-23 Aug-20 Apr-22 Apr-23 Apr-20 Apr-21 Oct-21 Oct-22 Oct-20 Dec-21 Dec-22 Dec-20 Feb-21 Feb-22 Feb-23 real estate sector. The share of project investment Mar-20 Jun-20 Mar-21 Jun-21 Mar-22 Jun-22 Mar-23 Jun-23 Sep-19 Sep-20 Sep-21 Sep-22 Dec-19 Dec-20 Dec-21 Dec-22 as the logistics, energy, and hospitality industries. If value going to the construction and real estate sector these newly emerging manufacturing industries are in total QIP investment rose to 90 percent in 2019, properly nurtured, product diversification will follow. up from 35 percent in 2014. When the pandemic Figure 9. Tradeable sector investment projects Figure 10. Approved FDI - financed project by sector Figure9. Figure 9.Tradeable Tradable sectorinvestment sector Approved QIP value projects investment projects Figure Figure 10. 10. Approved Approved (US$FDI FDI-financed - financed billion, project 8-month project 2023) by sector by sector Approved QIP (US$ billion, value 6-month QIP Approved value moving average, fixed asset) 8-month (US$ billion, (US$ 2023) billion, 8-month 2023) (US$ billion, 6-month average,fixed movingaverage, 6-month moving asset) fixedasset) 1.20 Wholesale & retail; 1.20 Wholesale & retail; 14.0; 1.5% Domestic (6mma) FDI (6mma) 14.0; 1.5% 1.00 Domestic (6mma) FDI (6mma) 1.00 Agriculture & 0.80 Agriculture & 0.80 food processing; food processing; 147,8; 16% 0.60 147,8; 16% 0.60 Non-garment Non-garment industries; 0.40 industries; Garment; 0.40 471,0; 51,9% 471,0; 51,9% Garment; 274,9; 30,3% 0.20 274,9; 30,3% 0.20 - - Apr-19 Apr-20 Apr-21 Apr-22 Apr-23 Aug-18 Aug-19 Aug-20 Aug-21 Aug-22 Aug-23 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Oct-18 Feb-19 Oct-19 Feb-20 Oct-20 Feb-21 Oct-21 Feb-22 Oct-22 Feb-23 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Apr-19 Apr-20 Apr-21 Apr-22 Apr-23 Aug-18 Aug-19 Aug-20 Aug-21 Aug-22 Aug-23 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Oct-18 Feb-19 Oct-19 Feb-20 Oct-20 Feb-21 Oct-21 Feb-22 Oct-22 Feb-23 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Source: Cambodian authorities. Source: Cambodian authorities. Note: QIP = qualified investment project; 6 mma = 6-month moving average. 2. The11. BoxFigure propertyPhase ApprovedStrategy Pentagonal 1 permit s project Figure 1 2. Approved permit area by property type property Figure 11. Approved(US$ project permit s million) Figure 1 2. Approved permit (million area by square property type meters) (US$ million) (million square meters) Approved value o/w value for SHV Residential Industrial Comercial Touristic Others Approved value o/w value for SHV Approved The value (y/y,Pentagonal RHS) new 2023–28 Strategy Phase 1 was introduced Residential Industrial 14.0 growth, to boost jobs, ensureTouristic createComercial Others equity, increase 14.0 Millions 3500 Approved value (y/y, RHS) 800 3500 efficiency, and maintain sustainability. It is designed 800 to strengthen and expand the achievements from the previous Millions 700 12.0 3000mandates, institutional and governance reform, 700 developing 12.0 capital, and enhancing economic diversification human 3000 and competitiveness. Its mission is to safeguard peace 600 and strengthen the foundations needed to accelerate national 600 10.0 2500 500 2500 development, in order to achieve the milestone of becoming an upper 10.0 middle-income country by 2030 and a high- 500 2000income country by 2050, under Cambodia’s 2050 vision. 400 8.0 400 8.0 2.9 2000 300 1.5 2.9 To this end, the Pentagonal Strategy introduces 300 five strategic objectives: 6.0 (i) 2.0 ensuring crisis-resilient annual 1500 2.0 1.5 1.4 200 6.0 1.4 1500 economic growth of around 7 percent on average, 200 creating more jobs; (ii) achieving the poverty reduction target 1000 100 4.0 1000 of below 10 percent; (iii) strengthening governance 100 capacity and improving 4.0 0.7 the quality of public institutions; (iv) 0 0.7 5.9 6.0 ensuring 500 sustainable socioeconomic development; 0 and (v) building resilience to climate 5.4 5.9 change. 5.3 five1.1 The sides 6.0of 2.0 3.5 5.4 5.3 -100 development; Pentagon 2: economic diversification and 1.1 500 the Pentagonal Strategy are Pentagon 1: human capital 2.0 -100 3.5 2.1 competitiveness enhancement; Pentagon 3: developing 0 -200 the private sector and employment; Pentagon 2.1 0.0 4: adopting 0 -200 May-22 Jun-19 Mar-23 Jul-21 Aug-23 Apr-20 Jan-19 Oct-22 Nov-19 Sep-20 Dec-21 Feb-21 a resilient, sustainable, and inclusive development approach to0.0 socioeconomic transformation, while optimizing 8 9 0 1 2 3 May-22 Jun-19 Mar-23 Jul-21 Aug-23 Apr-20 01 01 02 02 02 02 Jan-19 Oct-22 Nov-19 Sep-20 Dec-21 Feb-21 8 9 0 1 2 3 demographic dividends, among others; and Pentagon 5: developing a digital economy and society. -2 -2 -2 -2 -2 -2 01 01 02 02 02 02 8m 8m 8m 8m 8m 8m -2 -2 -2 -2 -2 -2 8m 8m 8m 8m 8m 8m 12 Cambodia Economic Update November 2023 Six priority programs will be implemented, which include healthcare services toward universal health coverage; providing vocational and technical training for youths from poor and vulnerable households; institutionalizing the national social assistance programs; formulating and accelerating the implementation of the Informal Economy Development Strategy to enable the informal sector to participate in the formal economy; and introducing coordinating mechanisms and financing programs that enhance agricultural production, market access, and price stability, while deploying agricultural technical officers to all communes that have agricultural activities across the nation and forming farmers associations in the rural areas. Strengthening the capabilities of public administration, improving the quality of education, enhancing health services, and strengthening the quality and efficiency of the justice system to address challenges. Pentagon 2 targets economic diversification and competitiveness enhancement. Side 1 of Pentagon 2 aims at developing key sectors and new sources of growth, implementing an Automotive and Electronics Sectors Development Roadmap, and a 2020–27 Garment, Footwear and Travel Goods Sector Development Strategy, while accelerating Sihanoukville development as a multipurpose special economic zone. Side 2 targets the connectivity, transport, logistics, energy, and digital sectors by enhancing connectivity and efficiency in the transport and logistics sectors aiming at (i) implementing the Interim Masterplan on Intermodal Transport Connectivity and Logistics System 2021–30 and the Comprehensive Masterplan on Cambodia Intermodal Transport and Logistics System 2023–30; (ii) increasing capital investment to develop key infrastructure projects, which include the Poipet-Siem Reap-Phnom Penh new railway network; and (iii) carrying out a study on roads and amending the law on roads to adjust the maximum weight level, and preparation of laws on land transport, water transport, seaports, and railways. Side 3 of Pentagon 2 improves the business and investment environment, including the introduction and amendment of laws on commercial regulation and commercial registration; the law on commercial enterprises, bankruptcy law, and the finalization of trade secrets to ensure sound management of intellectual property. It also aims at accelerating the enactment of the framework agreement on cross-border paperless trade, and targets establishing monitoring and evaluation mechanisms and improving business based on the assessment of the ease of doing business and investment. Effective implementation of the Pentagonal Strategy is underpinned by coordination, monitoring, and evaluation mechanisms led by the Council of Ministers (CoM). The CoM is delegated to formulate regulations that outline in detail the methodologies and procedures to coordinate, monitor, and evaluate implementation of the Pentagonal Strategy. Source: The Pentagonal Strategy Phase 1, the Royal Government of Cambodia; https://mfaic.gov.kh/files/uploads/1XK1LW4MCTK9/EN%20 PENTAGONAL%20STRATEGY%20-%20PHASE%20I.pdf. and touristic buildings, rose to US$1.5 billion, or a APPROVED PROPERTY 186 percent y/y increase during the first eight months DEVELOPMENT PERMIT of 2023 (figure 11). Of this, approved property development permits for projects in Sihanoukville VALUE CONTINUED TO province, which experienced the most rapid EXPAND construction boom during the pre-pandemic period, accounted for US$656.5 million, or a 152 percent y/y Approved permit value for real estate increase. The number of approved square meters of development projects continued to expand property development permits also rose significantly, during the first eight months of 2023. While it is reaching 11.5 million, or a 183.6 percent y/y increase. too early to draw conclusions as to why, this possibly reflects renewed investor appetite8 to invest in the real Approved residential property area continues estate sector, especially the housing market, after the to be the largest segment, accounting for more sector was hit by the pandemic in 2020. Approved than half of the total. Approved industrial building permit value for all types of property developments, area, which was the smallest segment, accounting for which include residential, industrial, commercial, 0.7 million square meters (7.9 percent of the total) 8 The approved construction permit data do not indicate investor nationalities. Cambodia Economic Update November 2023 13 (US$ (US$ billion, billion, 6-month 6-month moving moving average, average, fix fix ed asset) ed asset) 1.20 1.20 Wholesale Wholesale retail; && retail; 14.0; 14.0; 1.5% 1.5% Domestic Domestic (6mma) (6mma) FDI FDI (6mma) (6mma) 1.00 1.00 Agriculture Agriculture && 0.80 0.80 during the first eight months of 2018, is the second respectively. The surge in thefood approved foodprocessing;industrial processing; 147,8; 147,8; 16% 16% largest, 0.60 0.60 accounting for 2.8 million square meters (25.0 building areaNon-garment at the expense Non-garment of that of tourism may percent of the total) (figure 12) during the first eight reflect a shift in investor industries; industries; appetite to production 0.40 0.40 months of 2023. In contrast, during the same period, and manufacturing 471,0; 51,9% 471,0; activity fromGarment; Garment; 51,9% tourism 274,9; 274,9; 30,3% 30,3% activity, approved 0.20 0.20 tourism and commercial building areas as tourism supply in the form of accommodations declined, accounting for 0.2 million square meters may have already outstripped tourism demand in -- (2.1 percent of the total) and 1.8 million square Cambodia’s major urban centers such as the capital Apr-19 Apr-19 Apr-20 Apr-20 Apr-21 Apr-21 Apr-22 Apr-22 Apr-23 Apr-23 Aug-18 Aug-18 Aug-19 Aug-19 Aug-20 Aug-20 Aug-21 Aug-21 Aug-22 Aug-22 Aug-23 Aug-23 Jun-18 Jun-18 Jun-19 Jun-19 Jun-20 Jun-20 Jun-21 Jun-21 Jun-22 Jun-22 Jun-23 Jun-23 Oct-18 Oct-18 Feb-19 Feb-19 Oct-19 Oct-19 Feb-20 Feb-20 Oct-20 Oct-20 Feb-21 Feb-21 Oct-21 Oct-21 Feb-22 Feb-22 Oct-22 Oct-22 Feb-23 Feb-23 Dec-18 Dec-18 Dec-19 Dec-19 Dec-20 Dec-20 Dec-21 Dec-21 Dec-22 Dec-22 meters (15.3 percent of the total), down from 2.5 city of Phnom Penh, the tourist attraction site of million square meters (27.5 percent of the total) and Siem Reap, the seaside town of Sihanoukville, and 2.2 million square meters (24.6 percent of the total), the border towns of Poi Pet and Bavet. Figure Figure Figure 11.11. Approved 11.Approved Approved property property property project project project permit permit permits ss Figure Figure Figure 112. 12. Approved 2.Approved Approved permit permit permit area area area by by property property byproperty type type type (US$ million) (US$ (US$ million) million) (million (million (million square meters) square square meters) meters) Approved Approvedvalue value o/w value o/w for value SHV for SHV Residential Industrial Residential Industrial Comercial Comercial Touristic Others Touristic Others Approved Approvedvalue value(y/y, RHS) (y/y, RHS) 14.0 14.0 Millions Millions 3500 3500 800 800 700 700 12.0 12.0 3000 3000 600 600 10.0 10.0 2500 2500 500 500 2000 2000 400 400 8.0 8.0 2.9 2.9 300 300 1.5 1.5 6.0 6.0 2.0 2.0 1500 1500 1.4 1.4 200 200 1000 1000 100 100 4.0 4.0 0.7 0.7 00 5.4 5.4 5.9 5.9 5.3 5.3 1.1 1.1 6.0 6.0 500 500 2.0 2.0 -100 -100 3.5 3.5 2.1 2.1 00 -200 -200 0.0 0.0 May-22 May-22 Jun-19 Jun-19 Mar-23 Mar-23 Jul-21 Jul-21 Aug-23 Aug-23 Apr-20 Apr-20 Jan-19 Jan-19 Oct-22 Oct-22 Nov-19 Nov-19 Sep-20 Sep-20 Dec-21 Dec-21 Feb-21 Feb-21 8 18 9 19 0 20 1 21 2 22 3 23 01 01 02 02 02 02 20 20 20 20 20 20 -2 -2 -2 -2 -2 -2 8m- 8m- 8m- 8m- 8m- 8m- 8m 8m 8m 8m 8m 8m Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale; SHV = Sihanoukville province. Box 3. Summary of Incentives in Implementing the Sub-decree of the 2021 Investment Law The Cambodian authorities adopted Sub-Decree No. 139 on the Implementation of 2021 Investment Law dated 26 June 2023. Incentives listed in the sub-decree are provided to qualified investment projects (QIPs). To obtain QIP status, investors need to register their investment projects (which are not on the negative list) with the Council for the Development of Cambodia for investment capital of US$5 million or more, and with the Provincial/Municipal Investment Subcommittee for investment capital of less than US$5 million. Basic tax incentives. A QIP registered under the (2021) Investment Law is eligible for basic tax incentives consisting of two options. Option 1: QIPs are eligible for a corporate income tax exemption period of 3 to 9 years. After the expiration of the CIT exemption period, QIPs shall be eligible to pay a progressive CIT proportion relative to the total amount of CIT payable as follows: (a) 25 percent for the first 2 years; (b) 50 percent for the next 2 years; and (c) 75 percent for the last 2 years. Option 2: QIP is eligible to (i) deduct capital expenditure through special depreciation, and (ii) up to 200 percent deductible on other specific expenses for 3 to 9 years. Under both options 1 and 2, QIPs are eligible for exemption of prepayment of corporate income tax for 3 to 9 years. Additional incentives include: • A zero value-added tax (VAT) rate on locally produced production inputs to implement the QIP. 14 Cambodia Economic Update November 2023 • Permission to deduct 150 percent of the following expenses: (i) research and development (R&D) and innovation costs; (ii) human resource development costs for vocational training to Cambodian workers; (iii) construction costs for accommodation, canteens, food courts, nurseries, and other facilities for workers; (iv) costs to modernize production line machinery; (v) welfare support (transportation, food court, and nursery) costs for Cambodian workers; and (vi) investment in all kinds of waste treatment. • Exemption from customs duty, special taxes, and VAT on imports of construction materials and equipment for construction of accommodation, nurseries, emergency rooms, and food courts where food is provided free of charge or sold at a reasonable price exclusively for workers of the QIP projects. Specific incentives eligible for vehicle assembly firms: QIPs assembling new vehicles are eligible to receive a 50 percent to 90 percent tax reduction on customs duties, excises, and the VAT. To be eligible to receive a 50 percent tax reduction on the customs duties, excises, and VAT, QIP vehicle assembly firms must assemble vehicles with at least 3 percent local content and meet 2 of the 3 following criteria: (1) use 400 or more spare parts pieces for a vehicle, (2) have capital investment of US$5 million or more, and (3) employ 150 workers or more. To be eligible to receive a 90 percent tax reduction on customs duties, excises, and the VAT, QIP vehicle assembly firms must assemble vehicles using spare parts not yet pressed, bent, welded, and painted with at least 40 percent local content, and meet 2 of the 3 following criteria: (1) use 700 or more spare parts pieces in a vehicle, (2) have a capital investment of US$45 million or above, and (3) employ 600 workers or more. Separate criteria for eligibility to receive above a 50 percent and below a 90 percent tax reduction on customs duties, excises, and the VAT are also specifically provided. Additional customs duty incentives. QIPs are entitled to the following exemptions on import duties and taxes as applicable: • Exemption from customs duties, specific taxes, and the VAT on imports of construction materials, construction equipment, and production equipment for use in their production line • Exemption from customs duties, specific taxes, and the VAT on imports of production inputs for export QIPs and supporting industry QIPs to serve their production line • Exemption from customs duties, specific taxes, and the VAT on imports of production inputs for specific domestic QIPs to serve their production line. Investment expansion by QIPs to increase existing production, downstream diversification, and technology upgrades that improve productivity and protect the environment, will receive a corporate income tax exemption of from 3 to 9 years. The investment incentives introduced will likely increase the tax system’s complexity and curtail the tax base, resulting in increased tax expenditures. Incentives would ideally be granted only when not redundant. To identify these cases, an omniscient and incorruptible tax administration would be needed. In practice, it is therefore preferable to have clear criteria for granting tax incentives. For transparency, it is also advised to keep all incentives in the tax law.1 Source: Council for the Development of Cambodia; https://cdc.gov.kh/laws-and-regulations/. 1/ IMF Working Paper “Tax Incentives in Cambodia”. 2018. See https://www.imf.org/-/media/Files/Publications/WP/2018/wp1871.ashx Performance of imports of basic construction that the real estate and property market has started materials mainly steel, cement, and construction to recover. The housing market boom during the equipment, remained subdued. During the first pre-pandemic period already created excess supply, eight months of 2023, imports of steel used mainly given the country’s relatively small domestic market. for property development projects and other construction industries recovered, growing at 4 percent in value terms. In volume terms, steel imports CROP PRODUCTION rose 15.4 percent. However, imports of construction equipment and cement contracted at 4.2 percent and ACCELARATED 38.8 percent, respectively, in value terms. In volume Despite less favorable weather conditions with terms, while imports of cement grew at 6.7 percent, erratic rainfall, as of mid-July 2023, rice crop imports of construction equipment contracted by cultivation improved, reaching 2.1 million 25.9 percent. Therefore, it is too early to conclude Cambodia Economic Update November 2023 15 hectares or an 18.0 percent y/y increase.9 Cultivation mainly non-aromatic paddy, mango, banana, and of horticulture and industrial crops reached 0.7 million coconut. The agriculture sector therefore continues hectares, a contraction of 0.9 percent y/y. 10 In 2023, dry to play a strategic role in maintaining the availability season rice production reached 2.7 million metric tons of food and achieving food security, although the or a 4.5 percent y/y decline. However, this year’s dry share of agriculture in GDP declined to 22 percent in season rice yield improved, rising to 4.6 metric tons per 2022, down from 33.5 percent a decade ago, due to hectare or a 2.5 percent increase. Rubber production the country’s structural transformation. reached 60,000 metric tons or a 21 percent y/y increase during the first two months of 2023. According to the 2020 Cambodia Agriculture AGRICULTURAL EXPORT Survey, 2.04 million household agricultural holdings or 57 percent of all households PERFORMANCE IS MIXED in Cambodia, are involved in agricultural Cambodia’s milled rice exports reached US$278 production.11 This indicates that despite efforts to million or an 11.7 percent y/y increase during move toward export-oriented commercial agriculture, the first eight months of 2023. Rubber exports the country’s agriculture sector remains subsistence. amounted to US$232.7 million or a 5.1 percent decline, More than half of Cambodian households continued while banana exports reached US$122.4 million or to depend on subsistence agriculture for their a 12.6 percent decline. According to the Cambodia livelihoods. Home consumption was reported as the Rice Federation, during the first seven months of main agricultural product destination by 61 percent 2023, estimated earnings from agricultural product of the household holdings in Cambodia, while exports were US$2,629 million or 22.3 percent of total percent the other 39 8-month 8-month mentioned that agricultural 2020 2020 goods (excluding gold) exports, of which (paddy and production was 8-month mostly2021 for sale. The survey estimated 8-month 2021 milled) rice exports and non-rice exports accounted for 2022 8-month2022 that approximately 8-month 2023percent of the 2,038,000 94 8-month2023 US$817 million and US$1,811 million, respectively.12 8-month household agricultural holdings were growing crops, In August 2023, domestic prices of paddy and milled Figure13. Figure 13. Imports Importsof consumer anddurable ofconsumer goods durable goods Figure 14. Inflation edged up Figure 13. Imports of consumer andand durable goods Figure 14. edged Figure 14. Inflation Inflation edged up up Contribution to (YTD,y/y (YTD, y/ypercent change) percentchange) Contributionto Contribution 12-monthin to12-month flfl in ation ation (year to date, y/y percent change) 12-month inflation (percentage points) 8-month2020 2020 8-month 8-month2021 8-month 2022 2021 8-month 8-month 2023 (percentage points) (percentage points) 8-month 2022 8-month 2023 10 Others 10 Others 140,0 140,0 sub-index Transportsub-index Transport Housing utilitiessub-index &utilities sub-index 120,0 120,0 88 Housing & Food sub-index Food sub-index 100,0 100,0 infl Headlineinfl ation (y/y) Headline ation (y/y) 80,0 66 Aug-23, Aug-23, 80,0 3.2 3.2 60,0 60,0 44 40,0 40,0 20,0 22 20,0 0,0 0,0 00 -20,0 -20,0 -40,0 -2 -2 -40,0 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Oct-21 May-22 Dec-22 Jul-23 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Oct-21 May-22 Dec-22 Jul-23 -60,0 -60,0 oko l el sas CC niene trd e s t cle rar DD e GG kck GG uff oto enetn nsk tt lien CC esies ee negn e gag ac utff urcu ik yccy tt l in ic rm recr oslo rer in dt s r ce SoS a T nign cr MM m ed i eg Tr ig PaP tro asa os ara iga ede ik t fd od MM fo Fo ss se oo Fo sa Source: Cambodian authorities. Source: Cambodian authorities. Note: y/y = year on year. Note: y/y = year on year. Figure15. Figure 15. The currentaccount Thecurrent accountimproved improved Figure16. Figure 16. The Therriel appreciatedagainst iel appreciated regional againstregional (percent of GDP) (percent of GDP) currencies currencies 9 July 2023 Agriculture Production, the Agricultural Marketing Office, Department of Planning and Statistics, the Ministry of Agriculture, Forestry & 6.0 6.0 4.5 Fisheries; https://amis.maff.gov.kh/en/article/171 and https://elibrary.maff.gov.kh/book/64546bc5126ad. 4.5 Riel per baht Rielper Yuan perYuan (RHS) (RHS) FDI(RHS) FDI CAB CAB 140 Riel per baht 140 Riel (RHS) 650 650 10 4.0 4.0Ministry of Agriculture, Forestry and Fisheries 2023a. 130 640 640 11 2.0 2.0National Institute of Statistics, Ministry of Planning 2020. 4.0 130 4.0 630 Cambodia Rice Confederation 2023. 12 0.0 120 630 0.0 120 620 -2.0 620 -2.0 3.5 110 110 610 3.5 610 -4.0 -4.0 100 100 600 600 16 -6.0 Cambodia Economic Update November 2023 -6.0 590 3.0 3.0 90 590 -8.0 90 -8.0 580 -10.0 80 580 -10.0 80 570 570 rice surged, rising at 30 percent and 10 percent, especially tourism receipts, remained relatively weak, respectively as global rice prices skyrocketed to 12-year despite the revival of international arrivals. Given highs. The price of Thai rice 5 percent broken reached that domestic consumption accounts for about two- US$635 per metric ton, a 12-year high since the last thirds of GDP, its moderation produced noticeable global oil and food price shock, when the price peaked negative impacts. The easing of private consumption at US$907 per metric ton in April 2008.13 The price has already resulted in a marked slowdown in retail 2020 8-month 2020 of fragrant rice and soft 8-month 2021 8-month 2021 white rice was US$780 and and wholesale activities as reflected by the decline in 8-month US$520 per metric ton, 8-month 8-month respectively. 2022 2022 consumer and durable goods imports. 2023 8-month 2023 8-month Imports of consumer and durable goods slowed. During the first eight months of 2023, imports of PRIVATE Figure 13. 13. Imports CONSUMPTION Imports of of consumer consumer and durable goods and durable goods main consumer goods Figure 14. such flation Infl as soft ation drinks, up medicine, edged Figure Figure 14. In edged up EASED (YTD, (YTD,PENT-UP AS y/y percent y/y change) percent change) gasoline, and diesel Contribution to Contribution percent, 5.2 percent, contracted and 12-month in to 12-month 14.3 by percent 7.5 infl percent, 6.6 flation ation y/y, respectively (percentage (percentage points)points) DOMESTIC 8-month 2020 8-month 2020 8-month DEMAND 8-month 2021 2021 8-month 2022 8-month IS 2023 2022 8-month 8-month 2023 (figure 10 13). Similarly, 10 Others Others imports of durable goods such cars, motorcycles, as passenger Transport and trucks contracted RUNNING 140,0 140,0 120,0 OUT OF STEAM by 8 8 Transport 20.4 percent, Housing43.7 Housing & sub-index sub-index percent, & utilities utilities sub-indexand 43.0 percent, sub-index 120,0 sub-index Food sub-index Private 100,0 100,0 consumption, which surged in 2022, respectively.Food Households Headline iinfl nflation face slow wage growth, (y/y) ation (y/y) 6 Headline driven 80,0 80,0 by one-off pent-up demand after a with only a 3 percent increase in the minimum wage 6 Aug-23, Aug-23, 3.2 complete 60,0 removal of COVID-19-related mobility of the 4 formal sector and slack growth in the labor 3.2 60,0 4 restrictions, 40,0 is running out of steam. As discussed, market, cutting back on consumption, which has 40,0 the country’s manufacturing exports weakened 2 been squeezed by higher borrowing costs and partly 2 20,0 20,0 during the fourth quarter of 2022 to the second prices. Although high-frequency import data can 0,0 0,0 quarter of 2023, impacting wages and earnings. The serve0 as a proxy for private consumption on durable 0 -20,0 -20,0 manufacturing sector alone shed a net 40,000 jobs and nondurable goods, an in-depth analysis cannot -2 -40,0 -40,0 or 5 percent of total manufacturing employment. be -2conducted due to the nonavailability of actual Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Oct-21 May-22 Dec-22 Jul-23 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Oct-21 May-22 Dec-22 Jul-23 -60,0 This -60,0 does not bode well for consumer spending. In private consumption expenditure data, especially ee te ss tt lele rr ee ll ss kk ffff se nn aa kk aa ftft te in in cc se c tu g rrcc in liln n M ee ru e c e yy su t ggg rirn cc rm ru e retail sales data, to gauge consumer demand for i i re so r c ee t rm D addition, market liquidity continues to be constrained ee i aa T so in rc dds r dd D dd gg T ig in to aa aa ee ig nn oo kk to G G C M G oo se oo oo G C M oo sse oo FF finished goods. SS M by interest rate hikes (see more discussion under the C aa C PP monetary section below), while the services exports, Figure Figure Figure 15. current 15. 15. The The current The current account account account improved improved improved Figure Figure Figure 16.The 16. 16. The The r iel r iel riel against regional appreciatedagainst appreciated appreciated against regional regional of GDP) (percent of (percent GDP) currencies currencies (percent of GDP) currencies 6.0 6.0 4.5 4.5 per baht Riel per Riel baht Riel per Riel Yuan (RHS) per Yuan (RHS) (RHS) FDI (RHS) FDI CAB CAB 140 140 650 650 4.0 4.0 130 640 640 2.0 2.0 4.0 130 4.0 630 0.0 630 0.0 120 120 620 620 -2.0 -2.0 110 3.5 3.5 110 610 610 -4.0 -4.0 100 100 600 600 -6.0 -6.0 3.0 3.0 90 590 590 -8.0 90 -8.0 580 580 -10.0 -10.0 80 80 570 570 -12.0 2.5 2.5 -12.0 70 70 560 560 -14.0 -14.0 60 60 550 550 -16.0 2.0 May-19 May-20 May-21 May-22 May-23 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 -16.0 2.0 May-19 May-20 May-21 May-22 May-23 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 16Q1 16Q3 17Q1 17Q3 18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3 23Q1 16Q1 16Q3 17Q1 17Q3 18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 21Q1 21Q3 22Q1 22Q3 23Q1 Sources: Cambodian authorities and World Bank staff estimates. Source: Cambodian authorities. Note: CAB = current accounts balance; FDI = foreign direct investment; Q = Note: RHS= right-hand scale. quarter; RHS = right-hand scale. Figure 17. Figure 17. Broad money growth Broad money growth eased eased Figure 18. Figure 18. U.S. U.S. interest rates increased interest rates increased to broad Contribution to Contribution money growth broad money growth per year) (percent per (percent year) points) (percentage points) (percentage 13 60 9 9 Fed Funds Funds Rate Rate 60 World Bank Pink Sheet (commodity price data); https://www.worldbank.org/en/research/commodity-markets Fed . Prime Rate Prime Rate currency deposits Foreign currency Foreign (other deposits) deposits (other deposits) Transferable deposits Transferable deposits 8 8 50 50 Currency in Currency circulation in circulation 7 7 y/y, percent M2 y/y, M2 change percent change 40 Cambodia 40 Economic Update November 2023 6 6 17 historical average Pre-pandemic historical Pre-pandemic (5 years) average (5 years) 30 30 5 5 4 4 20 Figure Figure 13. Imports 13. Importsof of consumer and consumer durable and durable goods goods Figure Figure 14. In 14. Inflation flation edged edged upup (YTD, (YTD, y/y y/y percent percent change) change) Contribution Contribution toto 12-month 12-month in flation in flation (percentage (percentage points) points) 8-month 8-month 2020 8-month 2020 8-month 2021 2021 8-month 8-month 2022 8-month 2022 2023 8-month 2023 10 10 Others Others 140,0 140,0 Transport Transport sub-index sub-index 120,0 120,0 88 Housing Housing && utilities sub-index utilities sub-index rice prices remained stable as Cambodia is a net rice INFLATION 100,0 100,0 EDGED UP, exporter. Food Food sub-index sub-index Similarly, Headline Headline global infl infl ation ation oil prices recently picked (y/y) (y/y) 66 DUE80,0 80,0 TO THE RECENT up, but retail prices of gasoline and diesel remained 3.2 3.2 Aug-23, Aug-23, relatively stable. This helps contain inflation. UPTICK 60,0 60,0 40,0 40,0 IN OIL AND FOOD 44 Subdued inflation in Cambodia’s main import PRICES 20,0 20,0 22 partners, Thailand, Vietnam, and China, which 0,0 0,0 As food prices edged up, Cambodia’s Consumer reached 00 0.8 percent, 2.9 percent, and 0.1 percent -20,0 -20,0 Price Index (CPI) accelerated to 3.2 percent y/y y/y in August 2023, helped contain domestic -2-2 -40,0 in-40,0 August 2023 (figure 14), up from its trough price pressures. Among other ASEAN members, Jan-13 Jan-13 Aug-13 Aug-13 Mar-14 Mar-14 Oct-14 Oct-14 May-15 May-15 Dec-15 Dec-15 Jul-16 Jul-16 Feb-17 Feb-17 Sep-17 Sep-17 Apr-18 Apr-18 Nov-18 Nov-18 Jun-19 Jun-19 Jan-20 Jan-20 Aug-20 Aug-20 Mar-21 Mar-21 Oct-21 Oct-21 May-22 May-22 Dec-22 Dec-22 Jul-23 Jul-23 -60,0 -60,0 of 0.7 percent y/y in March during the post- only Lao PDR experienced high inflation of 25.9 eie Ciga ne te ft dri te Food nks od st s Mot ent rc t sseng yclle nger e cr Tr ar ol ne D ne Coo esel ooki l gas s G uck Gaso k G stuff Garm ff C Diiese M armen ng ga d k er ca C cin Soft ett Truc c u Fo rin as li i So gare Passe orcy edec king percent in August 2023. Inflation rates in Malaysia i r pandemic period. Inflation peaked at 7.8 percent, a Med Pa oto M 13-year high in June 2022, caused largely by rapidly and Singapore were 2.0 percent and 4.0 percent y/y, rising prices of food and petroleum products resulting respectively, in August 2023. In addition, the relatively from the global food and oil price shock. The recent stable Cambodian riel compared to the U.S. dollar upticks in food Figure Figure 15. 15. prices, The The particularly current currentaccountof account meat, fish, fresh improved improved exchange Figure Figure rate 16. 16. The closely The r iel maintained r iel appreciated appreciated by theregional against against regionalbank central (percent (percent of ofGDP) GDP) fruits, and vegetables, pushed up inflation, given the helps promote overall price stability. This protects currencies currencies fact 6.0 6.0 that the food component (subindex) captures 4.5a 4.5 the valueRiel Riel and per per purchasing baht baht power Riel Riel per per Yuan of Yuan riel-denominated (RHS) (RHS) 43 percent 4.0 4.0 FDI FDI (RHS) (RHS) weight of the CAB CAB basket. inflation assets 140 (those who earn income in riel) – one of the 140 650 650 2.0 2.0 main 130 130 objectives of pegging the riel to the dollar. The 640 640 The contribution of the food subindex 4.0 to 4.0 economy is highly dollarized. So, devaluation of local 630 630 0.0 0.0 120 120 inflation rose to 2.3 percentage points in August currency, which often causes inflation to rise, is not 620 620 -2.0 -2.0 2023, up from 2.1 percentage points in December 3.5 3.5 110 110 feasible in any circumstances in Cambodia as it will 610 610 -4.0 During the same period, the contribution of the -4.0 2022. 100 the economy to full dollarization. drive 100 600 600 -6.0 -6.0 housing and utilities subindex rose to 0.2 percentage 3.0 3.0 90 90 590 590 points, -8.0 -8.0 up from 0.1 percentage points, thanks to Although the global economy is in a much better 580 580 -10.0 costs of maintenance and repairs of dwellings. rising -10.0 position 8080 than it was in the 1970s to cope with570 a 570 The -12.0 contribution of the transport subindex shrank2.5 -12.0 2.5 to major 7070 oil-price shock, an escalation of the latest 560 560 zero, -14.0 down from 0.1 percentage points. Cambodia’s -14.0 conflict 6060 in the Middle East—which comes on top550 550 CPI, -16.0 excluding food, remained largely unchanged -16.0 2.0 2.0 of disruptions caused by the Russian invasion of May-19 May-19 May-20 May-20 May-21 May-21 May-22 May-22 May-23 May-23 Jan-19 Jan-19 Jan-20 Jan-20 Jan-21 Jan-21 Jan-22 Jan-22 Jan-23 Jan-23 Sep-19 Sep-19 Sep-20 Sep-20 Sep-21 Sep-21 Sep-22 Sep-22 Sep-23 Sep-23 Ukraine—could push global commodity markets 16Q1 16Q1 16Q3 16Q3 17Q1 17Q1 17Q3 17Q3 18Q1 18Q1 18Q3 18Q3 19Q1 19Q1 19Q3 19Q3 20Q1 20Q1 20Q3 20Q3 21Q1 21Q1 21Q3 21Q3 22Q1 22Q1 22Q3 22Q3 23Q1 23Q1 at 2.0 percent y/y during the period. Although global rice prices have recently inched up, domestic into uncharted waters, according to the World Figure Figure Figure 17. Broad 17. 17. Broad Broad money money money growth growthgrowth easedeased eased Figure Figure Figure 18. 18. U.S. 18. U.S. U.S. interest interest interest rates rates increased increased rates increased Contribution Contribution Contribution to broadto to broad broad money money money growth growth growth (percent per year) (percent (percent per peryear) year) (percentage (percentage points)(percentage points) points) 6060 99 Fed Fed Funds Funds Rate Rate Prime Prime Rate Rate Foreign Foreign currency currency deposits deposits (other deposits) (other deposits) Transferable Transferable deposits deposits 88 5050 Currency Currency circulation inin circulation 77 4040 M2 M2 y/y, percent y/y, percent change change Pre-pandemic Pre-pandemic historical historical average average (5(5 years) years) 66 3030 55 44 2020 33 1010 22 00 11 00 -10 -10 Apr-10 Apr-10 Apr-17 Apr-17 Aug-05 Aug-05 Aug-12 Aug-12 Aug-19 Aug-19 Nov-10 Nov-10 Nov-17 Nov-17 Jun-11 Jun-11 Jun-18 Jun-18 Jul-08 Jul-08 Jul-15 Jul-15 Jul-22 Jul-22 Jan-05 Jan-05 Jan-12 Jan-12 Jan-19 Jan-19 Mar-06 Mar-06 Mar-13 Mar-13 Mar-20 Mar-20 May-07 May-07 Feb-09 Feb-09 May-14 May-14 May-21 May-21 Oct-06 Oct-06 Sep-09 Sep-09 Oct-13 Oct-13 Feb-16 Feb-16 Sep-16 Sep-16 Oct-20 Oct-20 Feb-23 Feb-23 Sep-23 Sep-23 Dec-07 Dec-07 Dec-14 Dec-14 Dec-21 Dec-21 Apr-15 Apr-15 Apr-18 Apr-18 Apr-21 Apr-21 Jul-14 Jul-14 Jul-17 Jul-17 Jul-20 Jul-20 Jul-23 Jul-23 Jan-13 Jan-13 Jan-16 Jan-16 Jan-19 Jan-19 Jan-22 Jan-22 Oct-13 Oct-13 Oct-16 Oct-16 Oct-19 Oct-19 Oct-22 Oct-22 Source: Cambodian authorities. Source: United States Federal Reserve. 18 Cambodia Economic Update November 2023 Bank’s latest Commodity Markets Outlook.14 A As a result, Cambodia’s balance of payments major oil-price shock could quickly drive inflationary showed a surplus of 1.4 percent of GDP (US$0.5 pressures in Cambodia, while complicating efforts by billion) from a deficit of 8.8 percent of GDP the U.S. Federal Reserve and other central banks to (US$2.6 billion) during the same period. Net tame inflation. Last year, Cambodia’s CPI surged, led FDI is estimated to have risen to 3.3 percent of GDP by rising food and oil prices triggered by the Russia- (US$1.07 billion) in the second quarter of 2023, up Ukraine war. In June 2022, headline inflation rose to from 2.7 percent of GDP (US$0.8 billion) during the 7.8 percent, a 13-year high, caused largely by rapidly same period in 2022. During the first half of 2023, rising prices of food and petroleum products. The net FDI accounted for 6.9 percent of GDP (US$2.24 spillover effects of the food and oil price shock caused billion), up from 5.2 percent of GDP (US$1.57 rising costs of other goods, labor, and fees. billion) during the same period in 2022. Continued FDI inflows and concessional financing largely cover external financing needs (see more discussion on concessional financing-debt disbursement under the THE CURRENT ACCOUNT fiscal section, below). BALANCE IMPROVED AS IMPORTS MODERATED THE EXCHANGE RATE Despite weakening goods export performance, the current account balance improved, thanks REMAINED UNDER largely to moderate import growth. Based on the PRESSURE central bank’s quarterly balance of payments data,15 the current account recorded a surplus of 1.3 percent The riel-U.S. dollar exchange rate was under of GDP (US$0.4 billion) in the second quarter of increased pressure as exports eased and foreign 2023, compared to a deficit of 8.9 percent of GDP currency deposits slowed. The current account (US$2.7 billion) during the same period in 2022 balance deteriorated in the third quarter of 2023, (figure 15). The quarterly current account surplus of following a current account surplus recorded in 1.3 percent of GDP occurred for the first time since the second quarter. However, the exchange rate the second quarter of 2022, when the current account continued to be broadly stable, reaching 4,122 riel per surplus was 0.3 percent of GDP (US$0.1 billion), U.S. dollar in September 2023, thanks to intervention which indicates an improvement of Cambodia’s by the central bank under its open market operation.16 external sector performance after the current account During September–October 2023, through its open deficit is estimated to have hit rock bottom at 42.6 market operation, the central bank injected US$70 percent of GDP in 2021. The current account surplus million into the market to maintain the riel-U.S. recorded in the second quarter of 2023 is due largely dollar exchange rate at 4,000 riel per U.S. dollar to a reduction in the deficit of the balance on goods. within the targeted range of ±2 percent.17 Since the The trade deficit narrowed to US$0.48 billion in the start of the U.S. Federal Reserve’s interest rate hikes second quarter of 2023, down from US$0.51 billion to keep rapid inflation from becoming entrenched during the same period in 2022. In addition, the (see the monetary section, below, for more discussion services account also registered a surplus of US$0.37 on rising interest rates), the riel-U.S. dollar exchange billion, up from a deficit of US$0.24 billion during rate has been under increased pressure. Given that the the same period, thanks mainly to accelerated growth economy is highly dollarized, maintaining exchange in services exports, especially tourism receipts, as the rate stability helps maintain the purchasing power of pandemic is now behind us. those who earn income in riel, while preventing full dollarization. 14 Press Release October 30, 2023 Conflict in Middle East Could Bring ‘Dual Shock’ to Global Commodity Markets. See https://www.worldbank.org/ en/news/press-release/2023/10/26/commodity-markets-outlook-october-2023-press-release 15 National Bank of Cambodia 2023a. 16 National Bank of Cambodia 2023b. 17 Announcement dated September 18, 2023. See https://www.nbc.gov.kh/download_files/news_and_events/announ_kh/Announcement_ ExchangRate180923.pdf Cambodia Economic Update November 2023 19 However, pegging the riel to the strong dollar conditions driven largely by the U.S. Federal resulted in the appreciation of the local currency Reserve’s interest rate hike to a 22-year high to against many regional country currencies, rein in high inflation, broad money (M2) growth especially the Chinese yuan, the Thai baht, and slowed. Although Cambodia’s highly dollarized the Vietnamese dong. In August 2023, the riel- economy limits the ability of the country’s central yuan and riel-baht exchange rates appreciated to 568 bank, the National Bank of Cambodia, to influence riel per Chinese yuan and 112.5 riel per Thai baht, money aggregate, the recent increase in the reserve up from 608 riel per Chinese yuan and 125 riel per requirement ratio, one of a few monetary policy Thai baht (figure 16), respectively, at the end of instruments available to influence the money supply, 2022. Similarly, the riel-dong exchange appreciated may partially affect market liquidity. The reserve to 0.17 riel per Vietnamese dong, up from 0.175 riel requirement ratio for foreign currency of banks per Vietnamese dong. The riel-Canadian dollar, riel- and financial institutions was raised to 9 percent in euro, and riel-pound exchange rates also appreciated, January 2023, from 7 percent, reportedly to maintain reaching 3,068 riel per Canadian dollar, 4,358 riel per resilience of the banking and financial sector, although euro, and 5,040 riel per British pound, respectively, the 2022 Financial Stability Review indicated that the in September 2023, up from 3,077 riel per Canadian banking system remained sound and resilient. dollar, 4,468 riel per euro, and 5,083 riel per British pound, respectively, at the end of 2022. This does not Broad money growth expanded at 11.0 percent bode well for Cambodia’s external competitiveness for in August 2023, down from 12.0 percent both goods and services exports, especially tourism. during the same period in 2022, as foreign currency deposit growth slowed (figure 17). The contributions of foreign currency deposits (and other deposits), transferrable deposits, and currency BROAD MONEY GROWTH in circulation accounted for 10.8 percentage points, CONTINUED TO negative 0.5 percentage points, and 0.8 percentage points, respectively, in August 2023, down from DECELERATE 11.6 percentage points, 1.1 percentage points, and negative 0.8 percentage points, respectively, during Broad money growth slowed, likely reflecting the same period in 2022. The positive growth rate global financial tightening possibly together of currency in circulation reflected injection of local with the central bank’s reserve requirement currency by the central bank to the market during the hike. Amid the sharp tightening of global financial first half of 2023. Figure Figure 19. Figure1 9. 1Domestic Domestic 9. Domesticinterest interest interest rates rates rates were werewere increased Figure under under under 20. Figure Figure 20. 20. Concentration Concentration Concentration ofcredit of c c of inin redit redit in real real real estate estate estate pressure increased increased pressure pressure Contribution ContributionContributionto to to domesticdomestic domestic credit credit credit growth growth growth (percent) (percent) (percent) (percentage (percentage points) (percentage points) points) U.S. dollar U.S. denominated dollar term denominated deposit term rate deposit rate Agriculture Agriculture CRM CRM 12.0 12.0 U.S. dollar U.S. denominated dollar term denominated lending term rate lending rate Manufacturing Manufacturing Wholesale & retail Wholesale & retail 11.0 11.0 Hotels Hotels and and restaurants restaurants Other Other Total Total 10.0 10.0 36 36 9.09.0 31 31 8.08.0 26 26 7.07.0 21 21 6.06.0 16 16 5.05.0 11 11 4.04.0 6 6 3.03.0 1 1 Jan-19 Apr-19 Jan-19 Jul-19 Apr-19 Oct-19 Jul-19 Oct-19 Jan-20 Apr-20 Jan-20 Jul-20 Apr-20 Oct-20 Jul-20 Oct-20 Jan-21 Apr-21 Jan-21 Jul-21 Apr-21 Oct-21 Jul-21 Oct-21 Jan-22 Apr-22 Jan-22 Jul-22 Apr-22 Oct-22 Jul-22 Oct-22 Jan-23 Apr-23 Jan-23 Jul-23 Apr-23 Jul-23 -4 -4 Jan-15 Jul-15 Jan-15 Jan-16 Jul-15 Jul-16 Jan-16 Jan-17 Jul-16 Jul-17 Jan-17 Jan-18 Jul-17 Jul-18 Jan-18 Jan-19 Jul-18 Jul-19 Jan-19 Jan-20 Jul-19 Jul-20 Jan-20 Jan-21 Jul-20 Jul-21 Jan-21 Jan-22 Jul-21 Jul-22 Jan-22 Jan-23 Jul-22 Jul-123 Jan-23 Jul-123 Source: Cambodian authorities. Source: Cambodian authorities. Note: CRM = construction, real estate, and mortgage. Figure 21. Figure Central 21. Central government government domestic revenue domestic revenue Figure Figure 22. Central Central 22. government government expenditure expenditure Contribution Contribution to to growth growth Contribution Contribution to to growth growth 20 (percentage (percentage point) point) (percentage (percentage Cambodia point) point) Economic Update November 2023 Non-tax Non-tax (and (and other) other) revenues revenues 25 25 Capital Capital expenditures expenditures Taxes Taxes international on on international trade trade Goods Goods and Services and Services 30 30 Taxes Taxes on on goods goods and services and services Wages Wages and Compensation and Compensation PRESSURE ON DOMESTIC CREDIT GROWTH INTEREST RATES SHARPLY EASED, BUT INTENSIFIED CONCENTRATION OF Upward pressure on domestic interest rates CREDIT IN REAL ESTATE continued, due to tightening global financial conditions. Cambodia’s interest rates increase CONTINUED further as the country imports the U.S. monetary Despite a significant slowdown in credit growth, policy tightening, due to the Federal Reserve’s concentration of credit in real estate remained. aggressive action to tame inflation. There have been Credit growth sharply decelerated to 7.7 percent y/y, a rising funding costs for banks and microfinance 13-year low in August 2023, down from 22.7 percent institutions Figure 1 9. in Cambodia, Domestic as rates they need interest were to increase under during the Figure same 20. period in 2022. Concentration c c of of The domestic redit real in in credit estate Figure interest 1 9. rates on Domestic deposits interest to ratesdepositors. attract were under This Figure 20. Concentration redit real estate increased pressure growth rate is now Contribution broadly domestic to to in line credit with growth nominal increased pressure Contribution domestic credit growth has pushed up their operating (percent) (percent) costs, squeezing their GDP growth. However, the (percentage share points)of (percentage points) domestic credit profit margins. In August 2023, the weighted average financing the construction, real estate, and mortgage U.S. dollar denominated term deposit rate interest 12.0 12.0 rates U.S. U.S. ofdenominated U.S. dollar dollar dollar-denominated denominated term term deposit lending rate rate term Agriculture sector CRM combined in total outstanding Agriculture CRM domestic credit U.S. dollar denominated term lending rate Manufacturing Wholesale & retail deposits 11.0 11.0 almost doubled, rising to 5.71 percent per remained Hotels andthe Manufacturing largest and restaurants continued Wholesale & to Total retail increase, Hotels and restaurants Other year, 10.0 10.0 up from 3.0 percent per year in January 2021 Other accounting for 35.2 percent of total outstanding Total (figure 36 36 9.09.0 19). High interest rates reduce the overall level domestic credit, which stood at US$47.0 billion by of domestic demand, while encouraging domestic 31 31 8.08.0 August 2023, up from 33.8 percent during the same 26 26 7.07.0 as consumers can receive higher returns on saving period in 2022, according to the data on credit granted 21 21 their 6.06.0 savings. The negative impact on economic by deposit money banks classified by industry. This 16 16 activity of the current monetary policy tightening contributed 4.4 percentage points to the 8.5 percent 5.05.0 11 11 cycle has started to materialize. Investment and of the total domestic credit increase in August 4.04.0 6 6 consumer spending are being harmed by the current 2023 (figure 20). In 2023, possibly pointing to an 3.03.0 1 1 monetary policy tightening cycle. increase in real estate speculation activity, rising and Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 -4 -4 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-123 concentrating domestic credit in the construction and Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-123 real estate sector continued, despite rising borrowing costs and the easing of construction activity after the construction boom stalled amid the pandemic. Figure Figure 21. 21. Figure 21.Central Central Centralgovernment government government domesticrevenue domestic domestic revenue revenue Figure 22.22. Figure Central Figure 22. Central government government Central expenditure expenditure government expenditure ContributionContribution to growth to to Contribution growth growth Contribution to Contribution growth to to Contribution growth growth (percentage point) (percentage point) (percentage point) (percentage point) (percentage point) (percentage point) Non-tax Non-tax(and other) (and revenues other) revenues 25 25 Capital expenditures Taxes on international trade Capital expenditures Taxes on international trade Goods Goodsand Services and Services 30 30 Taxes on on Taxes goods and goods services and services 20 20 19.9 Wages and Compensation Wages and Compensation 24.3 Direct revenues Direct revenues 19.9 24.3 23.8 Expenditures Domestic Domestic revenues revenues 23.8 Expenditures 20 20 15 15 12.7 12.7 10 10 10 10 8.58.5 9.09.0 5 5 0 0 0.40.4 -2.6 -2.6 0 0 -10-10 -3.6 -11.7 -11.7 -5 -5 -3.6 -20-20 -10-10 8-m 2019 8-m 2019 2020 8-m 2020 2021 2021 8-m 2022 8-m 2022 2023 8-m 2019 8-m 8-m 8-m 8-m 8-m 2023 8-m 2019 8-m 2020 8-m 2020 8-m 2021 8-m 2021 8-m 2022 8-m 2022 8-m 2023 8-m 2023 Source: Cambodian authorities. Source: Cambodian authorities. Figure 23. Figure General 23. government operations government General operations Figure 24. Figure General 24. government General government surplus/de ficit surplus/de and ficit and (percent GDP) of of (percent GDP) financing financing (percent GDP) of of (percent GDP) Total revenue (and grants) Total expenditure 10.0 Foreign financing Debt amortization Total Cambodia Overall revenue Economic balance (and grants)November Update Total expenditure 2023 10.0 Foreign financing Debt amortization 21 Overall balance Domestic Domesticfinancing financing Financing Financing 35 35 8.08.0 30 30 6.0 Credit growth is increasingly constrained as this year, mainly due to the slowdown in domestic banks face rising borrowing costs, due to sharp consumption. During the first eight months of 2023, rises in global interest rates. The risk of financial central government domestic revenue plateaued, stress in emerging market and developing economies growing at 0.4 percent y/y, down from 23.8 percent is intensifying amid elevated global interest rates, during the same period in 2022 (figure 21). Taxes according to the World Bank’s June 2023 Global on goods and services hit hardest as domestic Economic Prospects report.18 The credit-to-GDP consumption eased. Excises and duties on imports ratio marginally declined to 174.0 percent in August declined with softening imports. International 2023, down from 183.7 percent in December 2022. trade taxes also eased. While continuing to perform, The credit-to-GDP ratio was as low as 37.0 percent a the contribution of profit tax collection to central decade ago. However, a rapid expansion of domestic government revenue growth shrank. Thanks to a credit, growing at an average rate of about 30 percent recovery of the service sector, in particular tourism a year that Cambodia experienced for almost a decade activity, non-tax revenues marginally improved. during the pre-COVID-19 period boosted the credit- to-GDP ratio to 116.7 percent in December 2019. Despite negative impacts of COVID-19, the credit- to-GDP ratio increased further during the pandemic, BUDGET EXPENDITURES to 183.7 percent in 2022. According to the midyear CONTINUED TO INCREASE 2023 report of the National Bank of Cambodia, the reported nonperforming loan ratios for the banking Budget expenditures increased. Central and microfinance sectors were 4.0 percent and 3.1 government expenditure accelerated, rising at 12.7 percent, respectively, by mid-2023, up from 3.2 percent y/y during the first eight months of 2023 percent and 2.6 percent, respectively, by the end of (figure 22), driven by civil servant wage increases, 2022.19 election-related spending, and a continued capital spending boost. A temporary public spending boost In addition, Cambodia’s high private debt may financing the social sector, especially the health sector, become a drag on the economy if borrowers has been withdrawn as COVID-19-related health struggle to meet repayments. This is due to the expenditures have been phased out. The increase in discontinuation of the loan rescheduling. Private budgeted current spending reflects the reintroduction sector deposit growth also decelerated to 9.3 percent, of the across-the-board public sector wage increase. down from 15.1 percent during the same period. This The public sector wage increase was frozen during likely indicates that the ability of households and 2021–22 to save budgetary resources to finance rising businesses to save and place their funds with banks spending demand to mitigate impacts of COVID-19. has declined, despite rising deposit interest rates. The In addition, the government has increased social slowdown in both credit and deposit growth helped security benefits for former civil servants and veterans. maintain the loan-to-deposit ratio, which stood at The increases have been introduced for former civil 135.0 percent in August 2023, down from 139.3 servants who received lower salaries when they were percent during the same period in 2022. working than current civil servants. The increase in current expenditure is also needed to finance the hosting of the 32nd Southeast Asian Games and general election-related spending. DOMESTIC REVENUE COLLECTION SLOWED After a rapid recovery in 2022, in part CASH TRANSFER reflecting gains from revenue administration improvements, growth in government revenue PROGRAMS CONTINUED collection has slowed. An across-the-board The authorities continued to provide cash improvement in domestic revenue collection during transfers for poor and vulnerable households. the post-pandemic period proved to be short- In this regard, Cambodian authorities have extended lived as domestic economic activity decelerates the COVID-19 cash transfer program, with an 18 World Bank 2023c. 19 National Bank of Cambodia 2023c. 22 Cambodia Economic Update November 2023 Figure11 9. Figure Domesticinterest 9. Domestic interestrates rates wereunder were under Figure20. Figure Concentrationof 20. Concentration redit in ofcc redit realestate inreal estate increasedpressure increased pressure Contribution to domestic credit growth Contribution to domestic credit growth (percent) (percent) (percentagepoints) (percentage points) U.S.dollar U.S. dollardenominated denominatedterm termdeposit depositrate rate Agriculture CRM 12.0 12.0 Agriculture CRM U.S.dollar U.S. denominatedterm dollardenominated lendingrate termlending rate Manufacturing Manufacturing Wholesale& Wholesale &retail retail 11.0 11.0 Hotelsand Hotels andrestaurants restaurants Other Other Total Total additional 10.0 10.0 budget of roughly US$400 million. The to further alleviate the negative impacts experienced program 9.0 9.0 has benefited nearly 2.8 million people (16 by36 poor households and households at risk. The 36 percent 8.0 8.0 of the population) or 701,452 households. incidence 31 31 of poverty under the national poverty line Of these, 110,000 are children under five years of age; 26 26 17.8 percent in 2019/20, but poverty is expected was 7.0 7.0 387,000 are people over age 60; 60,000 are people 21 to21 have worsened in 2021 due to the economic 6.0 6.0 with disabilities, and 2,000 are people living with 16 impacts 16 of the pandemic and associated lockdowns. 5.0 5.0 11 HIV/AIDS. As of September 2023, the COVID-19 Furthermore, 11 the energy and food price hikes in 2022 4.0 4.0 66 cash transfer program, which emerged as the largest due to the Russia-Ukraine conflict could exacerbate 3.0 3.0 11 component of the government’s fiscal intervention, the poverty level. However, poverty is anticipated to Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 -4 -4 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-123 has disbursed US$1.2 billion since its launch in decline because of the projected economic recovery Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-123 June 2020. In December 2022, the government also and a decrease in inflation in 2023. launched a new cash transfer program for households at risk due to inflationary pressure and severe flooding. The cash transfer program under the inflationary pressure scheme was completed by July 2023 with THE OVERALL FISCAL Figure the 21. Central disbursement Figure 21. government of Central domestic US$44 million government revenue and benefited revenue 1.8 domestic DEFICIT Figure 22. Central Figure22. HAS WIDENED Centralgovernment governmentexpenditure expenditure million peopleContribution Contribution to togrowth growth or 495,307 households. Contributionto Contribution togrowth growth (percentage (percentagepoint) point) (percentage Thanks to the (percentage point) domestic revenue easing ofpoint) Moreover, the Non-tax government Non-tax other)revenues (andother) (and has doubled revenues and25 rising expenditure, the 25 fiscal Capital Capital deficit has expenditures expenditures Taxes Taxes oninternational on international trade trade its conditional cash Taxes transfer program to widened. During the first eight Goods Goods andServices and months of 2023, Services 30 30 ongoods Taxeson andservices goodsand services Wages and Compensation approximately 24.3 US$380 Direct revenues for each pregnant the gap between total 20 20 19.9revenues 19.9 Wages and Compensation (including grants) 24.3 Direct revenues 23.8 Expenditures Domestic revenues 23.8 Expenditures woman bearing one child up to age two with Domestic revenues and expenditures under the general government 20 20 15 15 IDPoor cards from August 2023. This assistance operations is estimated to have reached 4.0 percent 12.7 12.7 program has also expanded its coverage to include of10GDP, 10 compared to 3.2 percent during the same 10 10 8.5 9.0 9.0 female workers who are members of the National period in 2022.8.5 Revenue including grants is estimated Social Security Fund, female civil servants, and intern to 5have 5 amounted to 15.0 percent of GDP, down 00 0.4 0.4 and contract government officials. -2.6 In October 2023, -2.6 from 15.5 percent collected during the same period 00 the government announced the expansion of the in 2022, while expenditures rose to 19.0 percent of -10 -10 health equity fund, which was originally restricted -11.7 -11.7 GDP, -5 -5 up from 18.5 percent of GDP. -3.6 Government -3.6 to households with an equity card to households at deposits (fiscal reserves), which stood at 16.0 percent -20 -20 with access risk,8-m to free8-m health services. The increase -10 of GDP (riel 21.3 trillion) by August 2023, down -10 2019 8-m 8-m2019 2020 8-m2021 8-m2020 2021 8-m 2022 8-m 8-m2022 8-m2023 2023 8-m 8-m2019 2019 8-m 2020 8-m 8-m2020 2021 8-m 8-m2021 2022 8-m 8-m2022 8-m2023 2023 in cash aid and coverage expansion of programs serves from 17.8 percent at the end of 2022. Figure Figure Figure 23.23. 23. General General General government government government operations operations operations Figure Figure24. Figure 24. GG governmentsurplus/de eneral eneralgovernment 24. General government fi surplus/de cit ficitand surplus/deficit and and (percentof (percent of GDP) (percent ofGDP) GDP) financing financing financing (percent of GDP) (percentof (percent ofGDP) GDP) Totalrevenue Total (andgrants) revenue(and grants) Total Totalexpenditure expenditure 10.0 10.0 Foreignfifi Foreign nancing nancing Debt Debtamortization amortization Overallbalance Overall balance Domestic Domesticfifinancing nancing Financing Financing 35 35 8.0 8.0 30 30 6.0 6.0 25 25 20 4.0 4.0 20 15 15 2.0 2.0 10 10 0.0 0.0 55 -2.0 -2.0 00 -5 -4.0 -4.0 -5 -10 -10 -6.0 -6.0 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023p 2023p 2018 2018 2019 2019 2020 2020 2021 2021 2022 2022 2023p 2023p Sources: Budget Settlement Laws; World Bank staff projections. Sources: Budget Settlement Laws; World Bank staff projections. Note: p = projections. Note: p = projections. Cambodia Economic Update November 2023 23 of the priority sectors financed by the World Bank PUBLIC DEBT STOCK include policy development financing, general and REACHED 33.1 PERCENT higher education, social and economic land allocation, agricultural diversification, health equity and OF GDP quality improvement, road connectivity, livelihood By mid-2023, Cambodia’s public debt-to-GDP enhancement, water supply, disaster management, ratio reached 33.1 percent or US$10.7 billion and more.21 As of June 2023, total outstanding debt in outstanding debt, of which 99.5 percent owed to the World Bank accounted for US$1.3 billion or US$10.6 billion is public external debt, or 11.9 percent of total. Cambodia’s fourth- and fifth- while public domestic debt accounted for the largest creditors are Japan and the Republic of Korea, remaining 0.5 percent or US$46.5 million.20 Of accounting for 10.6 percent and 4.9 percent of total the total US$10.6 billion public external debt, 64.3 outstanding debt, respectively. Old debt accounted percent and 35.6 percent is owed to bilateral creditors for 5.9 percent of the total. and multilateral creditors, respectively, compared Since the pandemic hit in 2020, the authorities to 67.5 percent and 32.4 percent, respectively in have been filling the pandemic-induced widening 2022. Triggered by the pandemic, Cambodia’s financing gap primarily with rising proceeds debt accumulation picked up amid slow revenue from loan disbursements, supplemented by collection and rising demand for health and social drawdowns of government deposits (fiscal assistance spending, resulting in a widening financing reserves). Loan disbursements rose from US$829 gap. To finance the gap, the country’s public debt, million (2019) to US$1,213 million (2020), US$1,168 which consists almost solely of external debt, rose by million (2021), and US$1,345 million (2022). Of the 5 percent of GDP, to 33.1 percent of GDP by mid- total disbursement of US$913.7 million in the first 2023, up from 28.2 percent of GDP in 2019. External half of 2023, 53.0 percent financed the country’s borrowing remained highly concessional, with a public infrastructure sector (transport, irrigation, weighted grant element of 44.7 percent in 2023. The energy, water supply and others) and 47.0 percent weighted average interest rate of contracted loans was financed non-infrastructure priority sectors (health, 0.42 percent per year in the first half of 2023, down education, agriculture, and others), compared to 64.1 from 1.18 percent during the same period in 2022, percent and 35.9 percent, respectively, in 2022. U.S. while weighted average maturity was 21.22 years, dollar-denominated outstanding debt remained the down from 22.55 years. largest, rising to 46.0 percent of total debt stock in China continued to be Cambodia’s largest mid-2023, up from 44.0 percent in 2022, followed official creditor. Total debt owed to China by Special Drawing Rights (SDR)-denominated reached US$4.01 billion. As a share of total debt, at 20.0 percent. Although China is Cambodia’s outstanding public external debt, Chinese top creditor, the country’s public external debt outstanding debt declined to 37.5 percent in mid- denominated in Chinese yuan accounted for only 2023, down from 40.1 percent in 2022, due to 12.0 percent of total debt stock. Public external rising multilateral debt. Cambodia’s second-largest debt denominated in Japanese yen, euro, and other creditor is the Asian Development Bank, to which currencies, accounted for 10 percent, 7 percent, and it owed US$2.2 billion, or 20.8 percent of total 5 percent, respectively. public external debt. The joint World Bank/International Monetary The World Bank has now become Cambodia’s Fund Debt Sustainability Analysis conducted in third-largest creditor, overtaking Japan, due to 2022 indicated that Cambodia remained at low accelerated disbursements, which quickly rose risk of external and overall debt distress under from US$15.8 million a year in 2017 to US$268.9 the Low-Income Countries Debt Sustainability million in 2022 (and US$338 million during the Framework.22 The total public and publicly first half of 2023) to meet rising demand for guaranteed debt-to-GDP ratio is projected to rise by financing priority sectors. A wide-ranging area around 4 percentage points during the next decade. The present value of the external debt-to-GDP ratio 20 Ministry of Economy and Finance 2023a. 21 For detailed sectors and projects, see https://projects.worldbank.org/en/projects-operations/projects-list?lang=en&countrycode_exact=KH&os=0. 22 International Monetary Fund 2022a. 24 Cambodia Economic Update November 2023 breaches its threshold in the exports stress test, which Challenges and risks would imply a moderate risk rating. However, the breaches are small, short-lived, and driven by the The outlook is, however, subject to substantial exceptional volatility of exports in 2020 that has downside risks. Major downside risks pertain increased the sample volatility for the standardized to weaker-than-expected global demand further shock. Moreover, other debt burden indicators are constraining the country’s goods exports, tighter projected to remain well below their thresholds under global financial conditions affecting the highly the baseline and the shock scenarios. leveraged financial sector, and renewed oil and food price shocks negatively impacting domestic consumption. Domestically, rising household debt Outlook and the continued concentration of domestic credit Cambodia’s real GDP growth is projected to in the real estate sector remain key risks to financial reach 5.4 percent in 2023, marginally lower than stability. Cambodia’s gross external debt position 5.5 percent projected in May 2023 (see table 2) rose to 76.1 percent of GDP in 2022, up from 41.3 as domestic demand eased and external demand percent of GDP a decade ago, as the total external slowdown continued. This year’s fiscal deficit is debt that Cambodia owes to foreign creditors rose. expected to widen to 6.9 percent of GDP, up from In addition, fiscal-monetary policy coordination in 4.8 percent of GDP in 2022 (figure 23). To finance Cambodia remains a challenge. While countercyclical the 6.9 percent of GDP overall fiscal deficit, external fiscal policy continued, tightening monetary policy financing, which includes project and budget support has already begun. A growth shock originating in the (loan disbursement), is expected to account for 3.6 region’s largest trading partners, China, and the U.S. percent of GDP (or one-third) (figure 24), while the would impact economic performance in the EAP remaining two-thirds is to be financed by a drawdown countries including Cambodia through bilateral of government deposits (fiscal reserves). trade and financial flows, including FDI. In the short term, the overlapping negative Further tightening of global financial conditions, shocks of the pandemic, Russia’s invasion of especially surging global interest rates, could Ukraine, and the sharp tightening of monetary worsen investment in the tradable sectors and policy in major economies to contain high severely affect the highly leveraged banking inflation are expected to continue to affect the system. Global growth, especially global trade, economy. In this context, the economy is expected could be even weaker than anticipated, worsening to continue to grow at a slower pace than earlier manufacturing exports, currently providing about 1 projected, expanding at 5.8 percent and 6.1 percent million jobs (18 percent of nonfarm employment) in 2024 and 2025, respectively. Despite this year’s in the event of widespread financial sector stress improvement in approved property development or if more persistent inflation pressures prompt permit value, prospects of the real estate sector tighter-than-expected monetary policy. Worsening continue to remain uncertain, given high debt and geopolitical tensions, conflict and social unrest, and tighter financing conditions. Although economic natural disasters stemming from climate change, growth is forecast to be lower than previously continue to present downside risks in many emerging expected, the pace of poverty reduction is projected and developing economies, including Cambodia. to accelerate, but it is highly unlikely to reach the pre- pandemic level. In the medium to longer term, real growth is expected to trend back to potential, reaching 6 to 7 percent, driven by stronger exports and FDI inflows facilitated by the newly ratified free trade agreements, a substantial increase in private and public investment in key physical infrastructure, and structural reforms. Cambodia Economic Update November 2023 25 Table 2. The macro outlook indicates continued economic recovery   2018 2019 2020 2021 2022 2023p 2024p 2025p National Accounts and Prices  GDP at constant market prices 7.5 7.1 -3.1 3.0 5.2 5.4 5.8 6.1 (% change) Agriculture 1.1 -0.5 0.6 1.2 0.7 1.4 1.4 1.4 Industry 11.6 11.3 -1.4 9.4 8.3 4.8 7.4 7.7 Services 6.8 6.2 -6.3 -2.7 3.5 8.0 6.1 6.3 Consumer Price Index 2.5 1.9 2.9 2.8 5.5 3.0 2.8 2.7 General Government (% of GDP)  Revenue and grants 23.8 27.0 23.8 22.0 23.2 21.4 22.7 22.9 Expenditure and net lending 23.4 25.5 28.8 29.2 28.0 28.3 27.5 26.1 Overall balance (including 0.4 1.5 -4.9 -7.2 -4.8 -6.9 -4.8 -3.2 grants) Foreign financing 3.9 4.2 5.5 4.7 5.1 3.4 3.9 3.0 Net domestic financing (from -3.6 -4.9 0.5 3.5 0.9 4.8 2.2 1.7 current savings) Amortization -0.7 -0.8 -1.0 -1.1 -1.2 -1.3 -1.4 -1.4 Money and Credit Broad money (% change) 26.6 18.2 15.3 20.0 8.2 10.7 13.0 15.1 Credit to the private sector (% 27.4 27.0 17.7 23.2 18.9 9.8 12.6 15.8 change) External Sector (US$m unless otherwise)  Exports (goods and services) 15,076 16,351 16,692 18,565.9 24,494.7 29,149.5 35,679.0 45,186.1 Imports (goods and services) 15,494 18,198 19,243 28,120.6 38,177.8 34,971.4 38,856.1 46,761.5 Foreign Direct Investment, net 3,089 3,561 3,498 3,391 3,737 3,689 4,316 4,871 inflows Gross official reserves 14,598 18,733 16,237 17,675.3 17,764.8 16,006.7 16,295.0 18,123.8 (months of imports) 6.3 9.7 10.4 8.1 7.0 6.0 5.5 5.0 Current account (percent of -8.9 -15.2 -12.4 -42.6 -24.4 -13.4 -11.5 -9.6 GDP) Exchange rate (riel per US$ 4,067.0 4,070 4,077 4,100.0 4,150.0 4,110.0 4,100.0 4,090.0 average) Total public debt (% of GDP) 28.3 28.1 36.1 36.3 36.7 36.8 36.5 36.4                   Memorandum items:                 Nominal GDP, USD million 24,476 27,030 25,970 26,953 29,602 32,413 35,321 38,589 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: p = projections. 26 Cambodia Economic Update November 2023 Policy options Regular consultations through the government- private sector working groups and public-private An acceleration of key structural reforms sector forums will help on all these fronts. envisaged under the 2023–28 Pentagonal Strategy is needed to boost economic activity. As Upgrading Cambodia’s infrastructure is also discussed in the Special Focus section, Cambodia’s an important foundation for productivity strong economic growth over the past decade and international competitiveness. Cambodia was largely driven by factor accumulation, with continues to have a large infrastructure financing gap, limited contributions from productivity. Structural resulting in inadequate infrastructure services that are transformation has slowed since 2016, and recent struggling to keep up with rapidly growing demand. years have seen only modest improvements in Large investments are needed in the energy sector to the economy’s international competitiveness. To address the dual challenge of meeting rapid growth avoid a future slowdown in economic growth and in electricity demand while meeting the country’s poverty reduction, Cambodia needs to transition climate change commitments. Investments are also to a more sustainable pattern of growth through needed in upgrading basic urban services such as further structural reform. In particular, lifting the piped water, sanitation, solid waste management, contributions to growth from productivity and telecommunications, and transport, as well as human capital will require reforms to the business strengthened urban planning to ensure its cities environment and larger, higher quality investments develop in an inclusive, efficient, and environmentally in infrastructure and in education and skills. sustainable manner. Further improvements to the business Moreover, gaps in domestic and regional environment are critical for boosting the transport connectivity impact the efficiency productivity and competitiveness of Cambodian and resilience of supply chains and raise the firms. The cost of doing business remains cost of trade. Investments are needed to address relatively high in Cambodia, reducing international specific infrastructure gaps in regional connectivity: competitiveness and inhibiting innovation and shifts to improve the East-West corridor across Thailand, into higher value-added activities. To help support Cambodia, and Vietnam (and the only road corridor increased private sector investment, Cambodia needs connecting Cambodia with Lao PDR); to improve to strengthen the predictability of the regulatory the inland waterway connection with Vietnam; environment and expand SME access to finance. and to improve the existing railway operations Further efforts to streamline complex and restrictive and infrastructure links with Thailand. It is also business entry requirements (including minimum important to improve trade facilitation and logistics capital requirements), together with improvements to performance. Further efforts must be made to reduce the functioning of the insolvency framework, would transport and logistics costs by monitoring the help reduce costs of firm entry and exit. Simplifying efficiency of main trade gateways such as ports and and digitalizing business services, especially the border checkpoints. In many countries with high issuance of licenses and permits, would reduce the logistics costs, such as Cambodia, the unreliability of associated costs. An important starting point is to the supply chain is the most important contributor establish a complete inventory of operating licenses to those costs. Studies have found that it takes three and permits, and then to implement full automation, times as many days, nearly twice as many documents, transparency, and a risk-based approach to licensing. and six times as many signatures to import goods More competition would foster cost reductions and in developing countries than it does in developed innovation and promote productivity growth by countries.23 The risk of corruption may be mitigated shifting market share toward more efficient producers by promoting full automation and transparency and incentivizing firms to become more efficient. in customs clearance and smart logistics (applying To support the tourism sector, a reduction of costs artificial intelligence, automation, the industrial and fees (visa, accommodation, food, transport, and internet of things technologies), while regularly entrance fees) – including elimination of unofficial collecting reports on irregularities from traders and fees – would help attract international arrivals. logistics service providers.24 23 World Bank 2011. 24 See World Bank (2022) for more details. Cambodia Economic Update November 2023 27 Raising learning outcomes is crucial to address • The immediate focus should be on intensified skills shortages, develop a “future-ready” bank supervision: stress testing of individual workforce, and drive Cambodia’s future institutions, systematic onsite inspections, further productivity growth. Firms are reporting growing alignment of the regulatory framework with skills shortages, and labor productivity growth has international standards, and thorough assessments declined sharply over the past five years. Few young of the quality of loan portfolios, among others. To Cambodian children are being enrolled in early prepare for increasing levels of nonperforming childhood education, which is undermining early loans, it is crucial to ensure that resolution options development and hindering mothers from returning are now ready to be deployed as needed, and to to work. Primary schools are experiencing a decline strengthen the country’s insolvency regime. in learning outcomes despite improved access. Few students are progressing to secondary school and • In the short term, efforts to prepare legislation those that do are often inadequately prepared and on deposit insurance and bank resolution must experience high dropout rates. Options for post- continue. Given concerns around shadow banking secondary learning are limited and are of low quality. activities, such as credit issued by construction or Finally, the dynamism of the labor market is limited real estate developers to buyers of residential real by insufficient supply and demand information. estate, it will be of critical importance to collect the data necessary to monitor and assess the legality of In addition to these structural reforms to these activities. promote sustainable growth, maintaining macro-fiscal stability continues to be a priority. • In the longer term, it is important to regain the It is critically important to ensure coordination of country’s monetary policy by gradually promoting fiscal and monetary policies. More efforts are needed the use of local currency – with an introduction of to restore fiscal space, including through tax reform: a clear and reliable roadmap for de-dollarization.25 • Increasingly generous tax holidays and exemptions, Finally, improving public sector performance is which often fail to attract investment, increase necessary to create an institutional environment the tax system’s complexity, and curtail the tax which supports rather than hinders the base, should be reviewed. While indirect taxes development of the private sector. The authorities such as the value-added tax and excises continue recognize the link between the quality of governing to provide a big chunk of domestic revenue, institutions and economic growth, and place reforming the corporate income tax to broaden reform and modernization of public institutions the tax base and strengthen compliance is a must. at the core of the Pentagonal Strategy. Key public The introduction of a progressive personal income administration reforms include: (i) strengthening tax should be a longer-term objective. the quality and effectiveness of public service delivery, including the development of organizational • Reform is also needed to simplify and reduce the performance indicators and a system for regular costs of tax administration. Tax and customs high-level reporting and monitoring of performance; administration systems can be modernized, while (ii) optimizing organizational structures and improving system interoperability. The main goal reforming back-office and support functions across is to make it easier to pay taxes and duties by fully government; and (iii) strengthening the meritocratic implementing measures such as electronic tax filing approach to civil service employment, and reforming and customs clearance systems: technology can pay and compensation, including by linking worker both improve efficiency and reduce opportunities performance with pay increases. Determining public for corruption. sector wage policy must be an integral part of overall civil service reform and should be done within a It is also critical to safeguard financial stability, consistent medium term fiscal framework to ensure given Cambodia’s highly leveraged banking affordability.26 sector. The recent credit boom has resulted in relatively high levels of private sector debt which is concentrated in real-estate related exposures. To safeguard financial stability: 25 International Monetary Fund 2022c. 26 World Bank 2020. 28 Cambodia Economic Update November 2023 Photo: paul-szewczyk @unsplash PART 2. SPECIAL FOCUS ACCELERATING STRUCTURAL REFORMS TO BOOST PRODUCTIVITY AND COMPETITIVENESS27 27 This Special Focus was written by Faya Hayati. However, Cambodia’s strong economic growth INTRODUCTION was largely driven by factor accumulation, This special focus section of the Cambodia with limited contributions from productivity, Economic Update reflects on the country’s which is not sustainable over the long term. development over the past decade and explores Recent growth was largely driven by high levels of the structural reforms needed to boost investment (capital accumulation) and growing productivity and competitiveness over the next numbers of Cambodians entering the workforce five years. It is based on recent work by the World (labor accumulation). There were, however, limited Bank conducted as part of its forthcoming report, contributions to growth from labor productivity Cambodia Systemic Country Diagnostic Update. (labor quality) and total factor productivity (TFP). There were also modest improvements in the Cambodia’s economic growth was impressive economy’s international competitiveness. To avoid over the past decade and supported rapid poverty a future slowdown in economic growth and poverty reduction. Prior to the onset of the COVID-19 reduction, Cambodia needs to transition to a more pandemic, Cambodia’s economic growth averaged sustainable pattern of growth. This transition will around 7 percent over much of the past ten years require further structural reform over the next (figure S.1, panel A), ranking its growth rate as the five years to better enable productivity growth 11th fastest in the world and the fifth among middle- and competitiveness. Lifting the contributions to income countries during that period. Moreover, growth from TFP and human capital will require Cambodia’s growth model continued to deliver reforms to the business environment and larger, sustained and broad-based progress toward ending quality investments in infrastructure as well as extreme poverty, with the poverty rate falling by education and skills. about half from 33.8 percent in 2019 to 17.8 percent in 2019/20. The COVID-19 pandemic triggered the first economic contraction in 25 years and a rise in poverty in 2020 (figure S.1., panel B), however, the economy has since rebounded and is forecast to return to robust growth over the next five years. Figure S.1. Overview of economic growth and poverty reduction over the past decade Figure 1: Growth and poverty reduction over the past decade Panel A Panel B Real GDP growth Poverty rate Percent (period average) Percent of population 7.1% 7.2% 33.8% -22% 26.3% -32% 17.8% 1.6% 2012-16 2017-19 2020-22 2009 2014 2019/20 (pre-COVID) (COVID) Sources: World Bank 2023e and Cambodia Socio-Economic Surveys 2009, 2014 and 2019/20. Figure 2: Contributions to growth over the past decade Contributions to growth, by sector Contributions to growth, by source Share of total growth (period average) Share of total growth (period average) 30 Cambodia Economic Update November 2023 Statistical 5% 7% 12% 20% 8% discrepancy 4% 1% 6% Agriculture TFP declining. However, this progress was derailed by THERE HAVE BEEN the onset of the COVID-19 pandemic, with growth LIMITED CONTRIBUTIONS becoming even more dependent on physical capital accumulation. TFP again became a major drag on TO ECONOMIC GROWTH growth, despite Cambodia’s high inflows of foreign FROM PRODUCTIVITY direct investment (FDI), which has traditionally supported technology transfer. Low TFP is in part AND ONLY MODEST due to most investment going into low-productivity IMPROVEMENTS Figure Figure 1:1:Growth Growth and and poverty poverty IN reduction reductionover overthe thepast past sectors such as real estate and construction. In decade there continued to be small and declining decade addition, INTERNATIONAL Real GDP Real GDPgrowth growth contributions Poverty Povertyrate rate from human capital accumulation COMPETITIVENESS Percent Percent (period (period average) average) (labor Percent Percentquality) of of populationboth pre- and post-pandemic (figure population 7.2% 7.2% S.2, panel B), which is linked to limited progress on 7.1% 7.1% There have been limited contributions to building human 33.8% 33.8% capital -22% -22% and skills. economic growth from productivity over the past decade, which increases the risk of a future Moreover, Cambodia’s broad structural shift 26.3% 26.3% -32% -32% slowdown in growth. Over the past ten years, from employment in agriculture to industry Cambodia’s growth model has largely depended on and services stalled in the second half of the past factor (especially capital) accumulation (Figure S.2, decade, also increasing risks to future growth. 17.8% 17.8% panel A), with low contributions from labor quality Between 2012-2016, a major shift of workers from and total factor productivity.28 Previous analysis has lower-productivity agriculture to higher-productivity traced this poor productivity performance 1.6%to: (1) low 1.6% industry and services was a big driver of economic human capital; (2) resource misallocation stemming and productivity growth in Cambodia. Agriculture’s from a lack of competition and market signals; and (3) share of employment dropped by 20 percentage points low within-firm productivity growth stemming from from 56 percent in 2011 to 36 percent in 2016 (figure 2012-16 2012-16 a disabling business 2017-19 2017-19 environment. This 2020-22 2020-22 growth model S.3, panel 2009 2009 A). This large 2014 2014intersectoral 2019/20 reallocation 2019/20 (pre-COVID) (pre-COVID) (COVID) (COVID) was showing some signs of improvement between of labor also helped compensate for sub-optimal 2017 and 2019, with the negative contribution from productivity growth within the manufacturing and service sectors.29 Between 2017-19, growth remained Figure Figure S.2. 2: 2: Contributions Contributions Contributions toto to economic growth growth growth over over the the over past pastthe past decade decade decade Panel A Panel B Contributions Contributions toto growth, growth, byby sector sector Contributions Contributions toto growth, growth, byby source source Share Share of of total total growth growth (period (period average) average) Share Share of of total total growth growth (period (period average) average) Statistical Statistical 5%5% 7%7% 12% 12% 20% 8% 20% 8% discrepancy discrepancy 4%4% 1%1% 6%6% Agriculture Agriculture 956 956 Labor Labor 39% 39% Services Services 47% 47% quality quality 324% 324% Labor Labor 19% 5% 19% 5% 15% 15% quantity quantity 104% 104% 9090 Other Other Capital Capital industry industry 33% 33% -28% -28% 0% -5% 0% -5% 24% 24% TFP TFP (including (including 61% 61% construction) construction) -251% -251% Manufacturing Manufacturing 20% 20% 19% 19% -3% -3% 2012-16 2012-16 2017-19 2017-19 2020-22 2020-22 2012-16 2012-16 2017-19 2017-19 2020-22 2020-22 (pre-COVID) (pre-COVID) (COVID) (COVID) (pre-COVID) (pre-COVID) (COVID) (COVID) Sources: World Bank staff calculations using data from and Total Economy Database (TED); The Conference Board (2022); and World Development Indicators (WDI) 2021. Figure Figure Structural 3:3: changes Structural changes in the in Cambodian the economy Cambodian economy 28 World Bank 2021. GDP 29 by GDP sector by sector Resilient Workers Workers Development: A Strategy to Diversify Cambodia’s by sector by sector Growth Labor Labor Model; Cambodia Country Economic productivity(World Bank, 2021). productivity Memorandum Share Share total, of of total, Percent Percent Share Share total of of total employment, employment, Percent Percent Output Output per per worker, worker, 2021 2021 PPP PPP $ $ Statistical Statistical 6%6% 6% 6% 6% 6% Thailand Thailand 35.683 35.683 discrepancy discrepancy Cambodia Economic Update November 25%25% 23% 2023 23% 36% 36% 36% 36% 23.886 23.886 31 Guatemala Guatemala Agriculture 35% Agriculture 35% 56% Agriculture56% Agriculture Philippines Philippines 23.728 23.728 26.3% -32% 17.8% strong despite little evidence of further structural outcomes), a shift to higher value added activities 1.6% transformation at the sectoral level. The agriculture in manufacturing (requires better human capital, sector, for example, shed almost no labor after 2016, improved business environment), and perhaps a trend that is largely consistent both pre- and post- a cooling of private construction activity which pandemic. 2012-16 The lack of in agriculture, labor shedding 2020-22 2017-19 2009 (coupled with carries risks 2014a shift toward public 2019/20 combined with the growth (COVID) sector, of the construction (pre-COVID) infrastructure). means fewer workers shifting into higher-productivity sectors such as manufacturing and services (figure S.3, Cambodia also made only modest progress panel B). These trends – combined with ongoing sub- on improving its international economic optimal productivity growth within manufacturing competitiveness over the past decade, and Figure and 2: Contributions services – led to a sharp growth over toslowdown in aggregate off a low base. Cambodia improved its global the past decade labor productivity growth over the past five years ranking on the global competitiveness index by Contributions to growth, by sector from an average of 5.5 percent per year between four positions to Contributions since 2009 growth, (figure S.4, panel A). The by source Share of total growth (period average) 2011 and 2016 to 2.4 percent between 2016 and modest improvement Share of total in competitiveness reflects growth (period average) 2021. Cambodia’s 5% aggregate 7% labor productivity mixed progress at the sub-index level, with big relative Statistical 12% 20% 8% level remains the discrepancy 4% lowest among 1% its structural peers, improvements on macroeconomic and technological 6% well behind Myanmar and Bangladesh and about Agriculture indicators, but big relative declines business and a third of Vietnam’s, with 39% limited convergence 956 Labor market dynamism as well as on institutions. product Services 47% quality Cambodia’s competitiveness ranking Overall, 324% of (figure S.3, panel C). Between 2020-22, the sharp Labor 19% 5% slowdown in growth was associated with a collapse 106th in the world remains 15%very low, especially quantity in services and especially tourism due to COVID-19 compared Capital to its 104% neighbors Thailand 90 (40th), the Other industryshutdowns. This slowdown related 33% was partly offset, Philippines TFP (64th) -28% and Vietnam 0% (67th). Cambodia’s -5% 24% 61% (including however, by the resilience of the export-orientated competitiveness is being held back particularly by a construction) manufacturing sector. In 2023, services has come lack of business dynamism (127th in -251% the the world), Manufacturing 20% 19% back with the recovery of tourism, but sustainable quality of institutions (123rd), a lack of skills (120th), medium- and long-term growth will require a -3% product market competitiveness (113th) and poor resumption of the structural2017-19 2012-16 transformation out of 2020-22 infrastructure 2012-16 (106th). 2017-19 2020-22 (pre-COVID) (COVID) (pre-COVID) (COVID) agriculture (supported by improved human capital Figure S.3. Structural changes in the Cambodian economy Figure Panel A 3: Structural changes in the Cambodian Panel B economy Panel C GDP by sector Workers by sector Labor productivity Share of total, Percent Share of total employment, Percent Output per worker, 2021 PPP $ Statistical 6% 6% 6% Thailand 35.683 discrepancy 25% 23% 36% 36% Guatemala 23.886 Agriculture 35% Agriculture 56% Philippines 23.728 Vietnam 21.512 34% 40% 37% 37% Bangladesh 17.086 Services 38% 27% Myanmar 10.935 Other Services 18% industry 13% Cambodia 7% 7.757 (including (2021) 27% 27% +2.4% p.a. construction) 18% Cambodia 15% 16% Industry 17% 6.902 Manufacturing (2016) +5.6% p.a. 2011 2016 2021 2011 2016 2021 Cambodia 5.503 (2011) Sources: World Development Indicators (WDI); Cambodia Socio-Economic Survey (CSES) 2021; Total Economy Database (TED); and The Conference Board (2022). Note: p.a. = per annum. 32 Cambodia Economic Update November 2023 FigureS.4. Figure Progress on global 4: Progress competitiveness competitiveness over the past decade Panel A Panel B WEF global competitiveness ranking WEF sub-index rankings for Cambodia Change in ranking between 2009 and 2019; 2019 ranking Change in ranking between 2009 and 2019; 2019 ranking Market size 48 84 Philippines 23 64 Macroeconomic stability 47 75 Vietnam 8 67 ICT adoption 42 71 Financial system 6 88 Nicaragua 6 109 Innovation capability 5 102 Cambodia 4 106 Skills 2 120 Figure 4: Progress on competitiveness Health 2 105 Bangladesh 1 105 Infrastructure -11 106 WEF global Myanmar 1 competitiveness ranking 131 WEF sub-index Labor market rankings for Cambodia -13 65 Change in ranking between 2009 and 2019; 2019 ranking Change in ranking between 2009 and 2019; 2019 ranking Business dynamism -26 127 Thailand -4 40 Market size 48 84 Philippines 23 64 Product market -28 113 Macroeconomic stability 47 75 Guatemala -18 Institutions -31 123 Vietnam 8 98 67 ICT adoption 42 71 Financial Source: World Bank staff calculations using data from a series of the World Economic Forum’s system Global 6 Competitiveness Index reports 88 Nicaragua 6 109 Innovation capability 5 102 Cambodia 4 106 Skills 2 120 Figure 5: Progress on reducing firm costs Health 2 105 The recent pandemic helped accelerate some DESPITE Bangladesh RECENT 1 105 Infrastructure -11 important structural reforms that led to 106 PROGRESS, Myanmar Cost 1 of starting a business by country BUSINESS THE (2019, unless otherwise specified); 131 Cost of logistics by country Labor market reductions in firm (2020, unless otherwise specified); Business dynamism -13 Costcosts, of electricity butto industrial by country -26 costs remain 65 users (2020, unless otherwise specified); 127 high compared to Cents structural peers and other ENVIRONMENT Share of income per capita (Percent) Thailand -4 FORShare of GDP 40 (percent) Product market -28 per kW hour countries in East Asia. The COVID-19 pandemic 113 FIRMS Guatemala Nicaragua IN CAMBODIA -18 65% Cambodia 98(2015) Institutions increased the urgency 33% -31 supporting businesses123 of Cambodia (2017) 0.167and digitalizing government-to-business procedures, REMAINS Cambodia (2019) CHALLENGING 53% Cambodia (2020) which 26% -20%accelerate efforts to reduce the cost of helped Phillipines 0.166 Cambodia (2022) 22% -58% Cambodia (2022) 0.137 -18% Indonesia 22% Phillipines 22% Figure Figure 5: Progress S.5. onreducing reducing Progress on firm firm costs costs Lao PDR 0.110 Panel A Guatemala 18% Vietnam Panel B 20% Panel C Thailand 0.091 Cost of starting a business Cost of logistics by country Cost of electricity to industrial users Myanmar 15% by country Thailand 14% (2019, unless otherwise specified); (2020, unless otherwise specified); by country (2020, unless otherwise specified); Share of GDP (percent) Singapore Cents per kW hour 0.086 9% (Percent) Share of income per capita Bangledesh Malaysia 13% Malaysia 0.078 Vietnam Nicaragua 5% 65% Cambodia (2017) 0.167 Cambodia (2015) 33% Singapore 9% Vietnam 0.068 Thailand Cambodia (2019) 4% 53% Phillipines 0.166 Cambodia (2020) 26% -20% Cambodia (2022) 22% -58% Cambodia (2022) 0.137 -18% Indonesia 22% Phillipines 22% Figure 6: Private sector perceptions Figure 7: Provision Laoof 0.110 services government online PDR Guatemala of all firms (percent surveyed) 18% Vietnam 20% (index) Thailand 0.091 Private sector perceptions Myanmar 15% Provision of government online services Thailand 14% Percent of all firms surveyed, 2021 Index, 2022 Singapore 0.086 Bangledesh 9% Obstacles to Doing Business Malaysia 13% 0.9 Malaysia 0.078 Vietnam 5% What have been the main obstacles your company has 0.8 Singapore 9% Vietnam 0.068 Thailand encountered 4%during the past 12 months in Cambodia? 0.7 Non-transparent practices & unofficial fees 0.6 Sources: Doing Business Unfair 2020. For the Cambodia 2022 measure, staff calculations based on government-reported fees. Ly and Rastogi 2022, NESDC 2021; competition 0.5 and Banomyong and Varadejsatitwong, Taxation forthcoming. Note: kW Figure = Availability Kilowatt. 6: Private sector perceptions of human resources 0.4 Figure 7: Provision of government online services Bureaucratic procedures (percent of all firms surveyed) 0.3 (index) Customs procedures Electricity cost 0.2 Private sector perceptions Availability of legal information Non-transparent practices Provision of government online services remain an obstacle, but 0.1 2022 Percent of all firms surveyed, 2021 Index, Cambodia EconomicLogistics Update November 2023 slight improvements were 33 Infrastructure seen in taxation, and 0 reducing unfair competition. Cost of human resourcesObstacles to Doing Business 0.9 a ala ar a d es sh di m gu an Access to finance m in de tem bo na ra 0.8 n ail ip gle What have been the main obstacles your company has ya et am ica ill Th ua Vi M an 0% 10% 20% 30% 40% 50% 60% 70% Ph N C G Figure Figure 6: 6: Private Private sector sector perceptions perceptions Figure Figure 7: Provision 7: Provision of of government government online online services services (percent (percent of of all all firms firms surveyed) surveyed) (index) (index) Figure Private PrivateS.6. sectorPrivate sector perceptions sector perceptions perceptions Figure S.7. Provision Provisionof of Provision government government of government online online services services online services Percent Percent all ofof firms all firms surveyed, surveyed, 2021 2021 Index, Index, 2022 2022 (percent of all firms surveyed) (index) Obstacles Obstacles to Doing to Doing Business Business 0.9 0.9 What Whathave havebeen been the main the mainobstacles obstacles your your company has has company 0.8 0.8 encountered encountered during during the the past past 12 months 12 months Cambodia? inin Cambodia? 0.7 0.7 Non-transparent Non-transparent practices practices && unofficial unofficialfees fees 0.6 0.6 Unfair Unfair competition competition 0.5 0.5 Taxation Taxation Availability Availability human ofof human resources resources 0.4 0.4 Bureaucratic Bureaucratic procedures procedures 0.3 0.3 Customs Customs procedures procedures Electricity Electricitycost cost 0.2 0.2 Non-transparent Non-transparent practices practices Availability Availability legal ofof information legal information remain remain obstacle, anan but obstacle, but Logistics Logistics 0.1 0.1 slight slight improvements improvements were were Infrastructure Infrastructure seen seen inin taxation, taxation, and and 00 reducing reducing unfair unfair competition. competition. Cost Cost human ofof human resources resources dia a mala ala r ar gua a Ba land Bang d G nes Gua s eh Vi sh bodi nma am Ph m ragu ip ne ailan ledes Access Access finance toto finance yanm tem o na illipi i ngled icara etn amb Thai uate Mya Viet Cam Nica Phill Th M 0% 10% 0% 10%20% 20% 30% 30%40% 40% 50% 60%70% 50% 60% 70% N C Source: EuroCham Cambodia Business Confidence Survey 2021. Source: UN E-Government Development Index 2022. firm establishment and operation (figure S.5, panel including Thailand (14 percent) and Vietnam (20 A). For example, Cambodia’s business registration percent). Transportation costs are particularly high, process was significantly simplified and almost fully representing more than 40 percent of total logistics digitalized in 2020 through a single, integrated online costs (alongside warehousing), pointing to significant portal, enhanced in speed (down to eight  days) and inefficiencies in the transport sector. Finally, costs (reduced by nearly 60 percent). In addition, Cambodia still has one of the highest electricity tariffs logistics costs fell by 20 percent between 2015 in the region for industrial users. and 2020 (figure S.5, panel B), supported by the establishment of a National Single Window and Compliance with licensing requirements also National Logistics Council, and by the abolishment remains a significant burden for businesses, of several state agencies that had regulated (and made more difficult by a lack of digitalization. increased the complexity of) cross-border trade (for According to the private sector, Cambodian example, the Cambodia Import-Export Inspection businesses face an unusually large amount of red and Fraud Repression Directorate-General tape from business licensing regulations and there is (Camcontrol) and the Cambodian Shipping Agency a perception that regulation has increased after the [Kamsab]). Finally, electricity prices for industrial pandemic (figure S.6). Although the government users fell by 18  percent between 2017 and 2022 has attempted to make licensing requirements following the implementation of tariff reforms. more transparent,30 there is no complete inventory of licenses and permits and no unified approach Despite these improvements, many firm costs toward risk-based regulations. Digital government- remain relatively high compared to peers, to-business services (including license issuance) are suggesting room for further improvement. The sporadic and lack interoperability. Cambodia ranks cost of starting a business remains the highest among 127th in the world on the 2022 United Nations all structural peers except Nicaragua, and more than E-Government Development Index, well below four times higher than in neighboring Vietnam and regional and world averages. The “provision of online Thailand (figure S.5, panel A). Transport and logistics services” score is the lowest of the areas measured by constraints are increasing the costs of domestic and the index (figure S.7).  cross-border trade, creating inefficiencies in supply chains, and reducing Cambodia’s international The broader enabling environment in Cambodia competitiveness. National logistics costs in is also not conducive to firm productivity and Cambodia are estimated at 26 percent of GDP competitiveness. First, corruption and challenges (2020) which is higher than most ASEAN countries to the rule of law increase the costs and uncertainties of doing business. Cambodia ranks 150th out of 30 An informational website www.business.gov.kh lists licensing requirement for more than 400 business activities mainly related to the Ministry of Industry, Science, Technology and Innovation, Ministry of Tourism and Ministry of Posts and Telecommunication.  34 Cambodia Economic Update November 2023 Figure S.8. Progresson 8: Progress onboosting investment boosting investment in in, infrastructure and provision of, infrastructure Panel A Panel B Panel C Gross capital formation Telecommunication Infrastructure Cambodia’s Road Network (% of GDP, period average) Index, 2022 Pavement rate (Percent) (2017-21, unless otherwise specified) 2022 2017 Vietnam 32% National 100% Thailand 0.75 (1-digit) 100% Myanmar 32% Vietnam 0.70 73% Bangledesh 31% National (2-digit) 70% Thailand 25% Indonesia 0.65 Cambodia 38% 24% Provincial (2017-21) 30% Cambodia 0.56 Phillipines 24% (2022) 10% Rural Nicaragua 23% 5% Loa PDR 0.30 Cambodia 21% +15% 22% +29% (2012-16) Cambodia 0.25 Total +125% 17% Guatemala 14% (2016) Sources: World Bank staff estimates based on data from WDI (2021); MPWT and MRD (2023); and UN DESA (2022). 180 countries Figure on perceptions 9: Relative performance corruption, of on the Human 31 and cents onIndex Development the dollar (HDI)in Cambodia, compared to 35.5 the judicial system is relatively weak and enforcing in the East Asia Pacific region on average, and 70.2 commercial contracts takes a long time and is costly.32 in Organisation for Economic Co-operation and Human Development Index (HDI) ranking Human Development Index (HDI) metrics for Cambodia Second, the private sector is characterized Change in score between 2010 and 2021; 2021 ranking by a high Change in score [OECD] Development between 2010countries). and 2021; 2021 score degree of informality, which is a problem as the informal economy tends to employ lower-skilled Bangladesh 20% 129and Gross national income 57% 4079 less productive workers, and the average informal Myanmar 15% firm in emerging market and developing economies is 149 SIMILARLY, (GNI) per capita only one-quarter as productive Cambodia 10% as the average formal 146 DESPITE Mean years of RECENT firm. Third, anticompetitive practices have the 33 24% 5.1 Nicaragua 9% potential to distort the allocation of resources and 126 PROGRESS, schooling (years) MAJOR raise domestic prices above Thailand 9% efficient levels. The 66 last INFRASTRUCTURE GAPS Global Competitiveness Report published ranked Expected years of Cambodia 107th out Vietnam 6%of 141 countries for national 115 PERSIST schooling (years) 7% 11.5 competition (including 100 out of 141 on domestic There were some positive developments Philippines competition and 4% 118th on competition in services, 116 onLife increasing expectancy investment in, and provision 3% 69.6 which Guatemala is significantly 4% lower than ASEAN peers 135such of, (years) at birth infrastructure over the past five years. as Thailand and Vietnam.34 Fourth, the Insolvency The government made significant progress on Law provides a solid foundation in Cambodia but modernizing laws aimed at boosting public and the regulatory framework remains incomplete, and private investment in infrastructure over the past there is a lack of stakeholder awareness, preventing five years, including, for example, approving a new Figure 10A: Progress on access to education and learning outcomes the full benefits of the insolvency regime from being Public-Private Partnership (PPP Law in 2021) and realized Net in practice. enrollment by schoolIn the level inlast 15 years, only Cambodia; Net a handful primary enrollment taking rate steps to develop LowerCambodia’s capital markets. secondary completion rate of high-profile Percent insolvency cases have been of population handled (%, by available) 2020 or latest (%, 2020 or latest available) These reforms contributed to increased investment Cambodian municipal courts, and all cases processed 100 levels, with gross fixed capital formation rising from have 90 led to a low recovery90 Primary Vietnam (14.6 rate for creditors around 21 to 99% Vietnam 24 percent of GDP (figure S.8, panel98% A) +10% 80 82 Thailand 98% Bangladesh 88% 31 Corruption Perception Index 2022, Transparency International; https://www.transparency.org/en/cpi/2022/index/khm  70 32 In the last Doing Business 2020 report, Cambodia ranked 182nd out of 190 countries in enforcing contracts.  Philippines 97% Thailand 85% 60 33 This is only in part explained by informal characteristics such as their younger age, less experience, and smaller size. Moreover, firms in the formal sector 50 that face informal competition are, Lower on average, only three-quarters as productive as those that do not (see Yu and Ohnsorge (2019),. Nicaragua 96% Philippines 83% 47 34 World Economic Forum 2019; https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf secondary 40 +52% 31 Upper Bangladesh 95% Nicaragua 66% 30 30 secondary +77% 20 Cambodia 17 Economic Update November 2023 Guatemala 89% Cambodia 58% 35 10 Cambodia 89% Guatemala 56% 0 and helped fund more investment in infrastructure transit of Cambodia exports to US and East Asia but (figure S.8, panel B). For example, progress has been is underutilized due to capacity constraints. Fourth, made in improving the country’s main national the full potential of railways in facilitating trade road corridors. Cambodia also made significant with Thailand has not been realized, with less than 1 progress in improving its telecommunications percent of total modal share. infrastructure between 2016 and 2022 (but still lags most ASEAN peers). In addition, electrification rates In addition, Cambodia’s energy sector faces have increased rapidly and Electricite du Cambodge a dual challenge of meeting rapid growth in (EDC) has continued to improve the reliability and electricity demand in an affordable manner efficiency of electricity services. Finally, there has while meeting its climate change commitments. been improvements in access to water supply and Domestic coal-fired generation accounted for around sanitation with, for example, access to piped water a quarter of total electricity supply in 2022, while in cities increasing from 69 percent to 80 percent hydropower generation and power imports accounted between 2015 and 2020. for around a third each. At the same time, electricity demand is growing fast, which will result in a shortfall However, the infrastructure investment gap in in supply in the absence of additional investment. Cambodia remains large. Public investment in From 2003 to 2022, electricity demand in Cambodia infrastructure accounted for only 3.2 percent of GDP increased at an average of 17.8 percent per year, in during 2019-22, while estimated annual investment line with the experience in other countries where per needs are about 10 percent of GDP. The transport capita consumption of electricity is growing from a sector accounts for a substantial portion of these low base. Rapid economic development is expected investment needs. About 85 percent of national roads to see demand for electricity in Cambodia increase (including one- and two-digit road classifications) around fourfold between 2023 and 2040. The Bank are paved, but only 38 percent of provincial roads team estimates that more than US$ 20 billion of and 10 percent of rural roads are paved (figure S.8, investment will be needed to expand Cambodia’s panel C) indicating a major gap on resilient last-mile generation capacity and power grid over this period. domestic connectivity. Maintenance spending is also In the absence of adequate investments to meet this inadequate, and because of this, the current value of growing demand, supply shortfalls may be expected. road assets is estimated to be more than a third below In addition, continued industrial growth is likely to their potential maximum net present value. see energy intensity remain high compared with the countries in the region, putting ongoing pressure on Cambodia’s persistent high transportation and the energy supply. logistics costs are among major bottlenecks to its economic competitiveness and diversification. Finally, there are large gaps in urban National logistics costs in Cambodia are estimated infrastructure, which are hindering the at 26 percent of GDP (2020) which is higher than development of livable, efficient, and most ASEAN countries including Thailand (14 environmentally sustainable cities. Reflecting percent) and Vietnam (20 percent). The World inadequate infrastructure, only 29 percent Bank’s Logistics Performance Index 2023 (LPI) also Cambodians have access to a safely managed points to significant logistics challenges in Cambodia, water supply, and 37 percent have access to safely as the country ranked 115th out of 138 countries. managed sanitation. Inadequate investment in First, border clearance is slow and costly due to wastewater infrastructure and insufficient attention poorly synchronized procedures and inadequate to operation and maintenance have negative impacts cross-border facilities. Second, there are bottlenecks on the environment and the livability of urban areas. along regional road corridors (for example, the To date, only a few secondary cities have developed section running from Siem Reap to the Oyadav sewerage systems and wastewater treatment plants, check-point at the Cambodia-Vietnam border which financed through aid or the national budget. Phnom connects Cambodia with Vietnam, Thailand, and Penh does not have an adequate sewerage system Lao PDR, and is part of the Master Plan on ASEAN or wastewater treatment plant, and wastewater Connectivity).35 Third, waterway connectivity is discharged untreated into the rivers and water between Cambodia and Vietnam is a vital asset for bodies. Only a limited amount of solid waste is 35 MPAC 2025; https://asean.org/wp-content/uploads/2018/01/47.-December-2017-MPAC2025-2nd-Reprint-.pdf. 36 Cambodia Economic Update November 2023 collected.36 Moreover, the combination of rapid modest progress on education and, especially, health urbanization, limited resources, inadequate urban metrics (figure S.9, panel B). However, Cambodia’s management and planning systems, and the fact progress was less impressive than Bangladesh (up 20 that Cambodia’s cities are ”growing out, not up,” percent) and Myanmar (up 15 percent). Moreover, are rendering urbanization less inclusive (inequity is Cambodia continues to rank lowly on most measures higher than in rural areas), less efficient (congestion of human assets. For example, Cambodia is ranked is growing as is the cost of expanding urban services 146th in the world on the HDI overall, the lowest across growing urban sprawl), and a growing source score among its structural peers after Myanmar, and of carbon emissions (37 percent). significantly behind more prosperous neighbors Figure Figure 8: Progress 8: Progress on onboosting boosting investment investment in infrastructure in infrastructure Thailand (ranked 66th) and Vietnam (ranked 115th). Progress in recent years was made more challenging by the COVID‑19 pandemic, which put massive FINALLY, Gross Gross (% (% of capital GDP, of GDP, formation capital period formation average) period PROGRESS average) Telecommunication Telecommunication Index, Index, 20222022 Infrastructure Infrastructure strains on Cambodia’s Cambodia’s Cambodia’s Pavement Pavement rate (Percent) health Road Road Network system Network rate (Percent) and resulted in (2017-21, (2017-21, unless unless otherwise otherwise specified) specified) ON BUILDING HUMAN 20222022 20172017 the closure of schools for 280 days (and partially for Vietnam Vietnam 32% 32% 253 days) between National2020 and February February 2022. ASSETS HAS BEEN MODEST 0.75 0.75 National 100%100% Thailand Thailand (1-digit) (1-digit) 100% 100% Myanmar Myanmar 32% 32% The moderate progress on education and AND MIXED, WITH Vietnam Vietnam 0.70 0.70 mixed progress, with skills reflects strong 73% 73% Bangledesh Bangledesh 31% 31% National National SIGNIFICANTLY MORE improvements in access to education (2-digit) (2-digit) 70% 70% by offset Thailand Thailand 25% 25% declining learning outcomes. There have been REFORM Cambodia Cambodia NEEDED 24% 24% TO Indonesia Indonesia 0.65 0.65 encouraging improvements Provincial Provincial 38% 38% in lifting enrolment rates MOVE (2017-21) (2017-21) Phillipines Phillipines THE NEEDLE 24% 24% Cambodia Cambodia (2022) (2022) levels at all0.56 0.56 30% 30% of schooling over the past decade (between 2009 and 2019/20), especially 10% secondary schools in10% Cambodia made moderate Nicaragua Nicaragua progress on improving 23% 23% (figure S.10, panel Rural A). In 5% Rural addition, enrollment Loa PDR Loa PDR 0.30 0.30 5% human capital over the past decade. Cambodia in public technical and vocational schools more Cambodia Cambodia (2012-16) its Human Development Index (HDI) improved (2012-16) +15% 21% 21% +15% than doubled – albeit off a low 22% base22%- driven +29%+29% by the Cambodia Cambodia TotalTotal score Guatemala by Guatemala 10 percent between 14% 14% 2010 and 2021 (2016) (2016) (figure 0.25 0.25 +125%+125% opening of 14 new Ministry of 17% Education 17% schools S.9, panel A). This improvement reflects strong (raising the total to 18). Despite this progress, progress on raising per capita income, but more primary enrollment and secondary completion rates Figure Figure 9: Relative Figure S.9. Progress 9: Relative on building performance performanceonhuman on capital Human thethe Human over the past decade Development Development Index Index (HDI) (HDI) Panel A Panel B Human Human Development Development Index Index (HDI) ranking (HDI) ranking Human Human Development Development Index Index (HDI) (HDI) metrics for Cambodia metrics for Cambodia Change Change in score in score between between 20102010 and 2021; 20212021 and 2021; ranking ranking Change Change in score in score between between 20102010 and 2021; and 2021; score 20212021 score Bangladesh Bangladesh 20% 20%129 129 Gross Gross national national income income 57% 57% 40794079 (GNI) (GNI) per capita per capita Myanmar Myanmar 15% 15% 149 149 Cambodia Cambodia 10% 10% 146 146 Mean yearsyears Mean of of 24% 24% 5.1 5.1 schooling schooling (years) (years) Nicaragua Nicaragua 9% 9% 126 126 Thailand Thailand 9% 9% 66 66 Expected Expected of of yearsyears 7% 7% 11.5 11.5 schooling schooling (years) (years) Vietnam Vietnam 6% 6% 115 115 Philippines Philippines 4% 4% 116 116 Life expectancy Life expectancy 3% 3% 69.6 69.6 (years) (years) at birth at birth Guatemala Guatemala 4% 4% 135 135 Source: Human Development Report 2021/22, United Nations Development Program (UNDP). Figure Figure 10A: 10A: Progress Progress on on access access to education and to education learning and outcomes learning outcomes 36 A pre-feasibility study on solid waste management conducted in municipalities in Siem Reap, Kandal and Kampong Speu provinces in 2022 suggested Net Net solid waste aenrollment enrollment collection by school by school rate levellevel infor households Cambodia; in Cambodia;of 45 percent. Net primary Net primary enrollment enrollmentrate rate Lower secondary Lower completion secondary completionrate rate Percent Percent of population of population (%, 2020 (%, 2020 or latest or latest available) available) (%, 2020 (%, 2020 or latest or latest available) available) 100 100 Vietnam Vietnam 99% 99% Vietnam Vietnam 98% 98% 37 90 Cambodia 90 90 November Economic Update 90 Primary 2023 Primary +10% +10% 80 80 82 82 Thailand Thailand 98% 98% Bangladesh Bangladesh 88% 88% 70 70 Philippines 4% 116 Life expectancy 3% 69.6 (years) at birth Guatemala 4% 135 Figure S.10. Figure 10A: Progress Progresson access to education and learning outcomes on access to education and learning outcomes Panel A Panel B Panel C Net enrollment by school level in Cambodia; Net primary enrollment rate Lower secondary completion rate Percent of population (%, 2020 or latest available) (%, 2020 or latest available) 100 90 Vietnam 99% Vietnam 98% 90 Primary +10% 80 82 Thailand 98% Bangladesh 88% 70 Philippines 97% Thailand 85% 60 50 Lower Nicaragua 96% Philippines 83% 47 secondary 40 +52% 31 Upper Bangladesh 95% Nicaragua 66% 30 30 secondary +77% 20 Guatemala 89% Cambodia 58% 17 10 Cambodia 89% Guatemala 56% 0 2009 2019/20 Figure Figure 10B: 10B: Progress Progress on on access access to to education education and and learning learning outcomes outcomes Panel D Panel E Cambodia Cambodia National National Learning Learning Assessment Assessment Scores Scores International International comparison comparison ofof performance performance Maths Maths (Grade (Grade 6) 6) Most Most recent recent data data Reading Reading 584 584 7%7% 4%4% 6%6% Singapore Singapore 535 535 Advanced Advanced 21% 21% 13% 13% 490 490 33% 33% 2727 OECD OECD 6%6% average average 493 493 Proficient Proficient 23% 23% 495 495 18% 18% Viet Viet Nam Nam 487 487 Basic Basic 7%7% 29% 29% 446 446 Malaysia Malaysia 73% 73% 431 431 49% 49% 49% 49% 415 415 Below basic Below basic Thailand Thailand 34% 34% 409 409 386 386 Indonesia Indonesia 397 397 2016 2016 2021 2021 2016 2016 2021 2021 325 325 Math Math Khmer Khmer Cambodia Cambodia 321 321 language language Source: World Bank staff estimates based on CSES 2009 and 2019/20; Sustainable Development Report 2022 (United Nations); Ministry of Education Youth and Sports; and PISA International Data Explorer, most recent data. Figure Figure 11: 11: Overall Overall progress progress on on upskilling upskilling Cambodia’s Cambodia’s workforce workforce Highest Highest level ofof level education ofof education the workforce the workforce byby age age Classification Classification Cambodian ofof jobs Cambodian byby jobs skill level skill level Share of of Share total (%) total (%) Share of of Share total (%) total (%) remain below peer countries (figure S.10, panels B they progress from primary to secondary school. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% and C). Moreover, increasing enrollment rates have High Skilled High 4% Skilled and declining4% 5%5% of basic +2+2 ppt ppt College+ College+ 11%11% 12% 12% The poor quality coincided with declining 14% 14% learning 14% outcomes14% (figure 5%5% 6%6% Secondary Secondary 5% 5% Medium Medium Skilled Skilled +1 +1 pptppt S.10, Complete panel D). National tests reveal Complete 5%5% 6%6% a 15-percentage 6%6% education is driven by a range of factors, and the point increase (to 49 percent) in the proportion lack of a solid educational foundation is having < Secondary 40% < Secondary of 40% grade 6 students 41% 41% cannot read (from 34 to who knock-on effects at higher levels of education. 49 percent) and a 24- percentage 54% increase 54% 58% (to 73 58% Poor learning outcomes in primary school can largely percent) in the proportion of students who lack be attributed Low Skilled Low Skilled to a78% shortage 78% 77% teachers, of effective 77% ppt -1 -1 ppta