Cambodia

Cambodia's gradual recovery continues

While the country’s economic growth is expected to continue accelerating modestly in 2025, it will remain slower than before the pandemic (8% in average over 2015-2019). Despite an economic slowdown expected in the US, Cambodia’s first export market (37% of goods exports in 2023), the activity would continue to be driven by exports (73% of GDP). Following a contraction in 2023 notably linked to the US and EU markets, garment, footwear and travel goods exports (48% of total exports in 2023), should improve. This would be supported by an economic improvement in the EU, the country’s second-largest export market for these products. In addition, political uncertainty in Bangladesh may may shift some orders to Cambodian garment factories. Agricultural exports are expected to keep rising, boosted by better weather conditions under La Niña. However, photovoltaic cell and panel exports (7.7% of total exports in 2023) growth will slow down following the introduction of tariffs by the US – which accounted for the bulk of these exports – from June 2024.

Meanwhile, the continued revival of the tourism sector (25.8% of GDP in 2019), should support economic activity. International tourist arrivals in the first half of 2024 reached 94.8% of the level recorded during the same period in 2019, a notable improvement from 77.3% in the previous year.

Dynamic exports and recovering tourism sector would support employment and, in turn, the other main source of growth - household consumption. Moreover, below-target inflation (under 3%) and strong remittance inflows, which amounted to 8.8% of GDP in 2023 and are primarily sourced from Thailand, will also contribute to supporting domestic demand. The construction sector will remain weak due to a prolonged real estate downturn amid an oversupply.

Moderate twin deficits

In 2023, Cambodia posted its first current account surplus in 27 years, primarily driven by a sharp reduction of the trade deficit as imports fell. The surge in solar cell and panel exports ahead of the U.S. tariff increase, coupled with a shift in gold trade—with exports spiking following a surge in imports in 2022—also contributed to this. As trade in these goods should normalize, the current account is projected to return to a deficit in 2024 and 2025. Nonetheless, lower energy and food prices help contain import costs compared to the high levels seen post-pandemic. Additionally, an uptick in tourism will bolster the services surplus. The current account deficit will remain covered by resilient foreign investment, in the form of FDIs (9.3% of GDP in 2023). This would support international reserves to remain at comfortable level (6.6 months of imports in 2023). Moreover, given Cambodia's highly dollarized economy, the gradual U.S. monetary easing—even slow— should reduce the need for the National Bank of Cambodia to intervene in the foreign exchange market to stabilize the riel against a strong U.S. dollar, as it did in the previous years.

After having widened in 2023 amid stagnant economic growth and rising tax exemptions, the fiscal deficit is expected to narrow from 2025 onwards amid the government’s fiscal consolidation plan. This plan involves a reduction in public spending, notably with a nearly 50% cut in capital expenditure in 2024. Capital expenditure, which is largely allocated to infrastructure, accounted for 28% of total public spending in 2023. Despite this reduction, the government aims to maintain its focus on welfare through more targeted social programs, such as the newly introduced Family Package Programme, which replaces the broader stimulus measures implemented during the pandemic. Public debt-to-GDP will remain moderate. In addition to the existence of fiscal reserves (16% of GDP in 2023), the debt profile limits risk as it is, albeit quasi-exclusively external, mostly concessional and mainly composed of medium to long-term maturities.

Indebtedness-related risks rely more on the private sector, with domestic credit to private hitting 180% of GDP in 2023. With almost a third of it being related to the weak real estate sector, the private debt affects the country’s banking sector, which faced a rise in non-performing loan ratio (from 3,1% in 2022 to 5,4% in 2023).

Towards a more balanced diplomacy

After nearly four decades of Hun Sen’s rule—a former Khmer Rouge military commander—power was formally transferred to his son, Hun Manet, in July 2023. He was officially sworn in as Prime Minister the following month for a five-year term, following a parliamentary vote of confidence. However, this was largely a formality, as the Cambodian People's Party (CPP), led by the Hun family, holds a near-total monopoly in parliament, occupying 120 out of 125 seats after the main opposition party was barred from participating in the last elections. Despite stepping down as Prime Minister, Hun Sen continues to wield significant influence in Cambodian politics, retaining his positions as the CPP’s leader and President of the Senate.

In a bid to attract foreign investment, Prime Minister Manet has shifted Cambodia’s diplomacy towards a more diversified and balanced approach. He notably acts to enhance Cambodia’s relationship with Western countries, with numerous bilateral meetings with the US and European Union members, especially France. This pivot, however, is not at the expense of Cambodia’s close relationship with China, which is a major trading partner—accounting for 44% of total goods imports in 2023—as well as its main investor and top financial aid provider. An example of this strong relationship is the recently launched Funan Techo Canal project, a waterway that will allow navigation on Mekong to the Gulf of Thailand without passing through Vietnam. However, the project has raised concerns from Vietnam, a fellow ASEAN member, due to its potential impact on water flow and fears over security implications. Vietnamese officials worry that the canal could be used by Chinese naval vessels.

These concerns are echoed by the United States, Cambodia’s leading export market, making the project particularly sensitive amid intensifying U.S.-China rivalry. The relations with the U.S. have already been weakened by Washington’s criticism of Cambodia's democratic backsliding and human rights issues, as well as country's use by China to circumvent US trade sanctions (for solar device exports, for example).

Last updated: October 2024