Fast-Growing Cambodia Can Reap Further Benefits from Reforms

After years of sustained growth, Cambodia set for middle-income status

External risks from stronger dollar, slowdown in Europe, weak Chinese growth

Measures needed to guard against risks to financial stability

Cambodia’s impressive economic performance over two decades has resulted in a substantial reduction in poverty, and noteworthy progress in achieving the Millennium Development Goals.

Looking ahead, further regional integration with the countries of the Association of Southeast Asian Nations (ASEAN), and Cambodia’s strategic location close to fast-growing major economies provide opportunities to boost growth further.

“However, to capitalize on these opportunities, and achieve sustainable and inclusive growth for the next stage of development, reform efforts should be stepped up, and vulnerabilities addressed,” said Sonali Jain-Chandra, the IMF’s mission chief for Cambodia.

Strong growth, but growing risks

Cambodia’s economic growth has been one of the fastest among Asia’s developing economies in recent years driven by vibrant garment exports, real estate, and construction activity.

The near-term outlook remains broadly favorable, and growth is projected to remain robust at 7 percent in 2015, and rise modestly to 7.2 percent in 2016, supported by lower oil prices, and the same factors that contributed to past growth.

This outlook is nevertheless subject to substantial risks, both domestic and external, the report says. Domestic risks include rising financial sector vulnerabilities stemming from rapid credit growth, fiscal pressures, and erosion of competitiveness from wage increases, and the uncertainty related to wage policy and labor disputes.

External risks arise from a stronger U.S. dollar, growth slowdown in Europe constraining garments exports, and weaker-than-expected growth in China having negative spillovers through foreign direct investment, banking, and tourism channels.

“Going forward, with Cambodia increasingly integrated into the global economy, domestic risks, and the evolving external environment underscore the need to decisively address financial sector vulnerabilities, build policy buffers, and foster economic diversification and inclusion,” said Jain-Chandra.

Addressing financial sector vulnerabilities

Private sector credit has grown by nearly 30 percent on average in the past three years, and the credit-to-GDP ratio doubled over this period. The speed of financial deepening has been striking, with credit...