CAMBODIA ECONOMIC UPDATE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK SPECIAL FOCUS Upgrading Cambodia in Global Value Chains NOVEMBER 2019 Cover photo: WDR © Graphic Roots CAMBODIA ECONOMIC UPDATE NOVEMBER 2019 Recent economic developments and outlook TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS������������������������������������������������������������������������������������������������������1 ABBREVIATIONS������������������������������������������������������������������������������������������������������������������ 2 EXECUTIVE SUMMARY������������������������������������������������������������������������������������������������������� 3 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK������������������������������������������ 9 Recent developments�������������������������������������������������������������������������������������������������������� 9 While slightly easing, growth remains robust����������������������������������������������������������������������������������������������9 The share of Cambodia’s exports to the US market is increasing���������������������������������������������������������12 While private investment rose, approved FDI eased��������������������������������������������������������������������������������12 Capital inflows have fueled rising domestic investment and consumption �����������������������������������������13 The current account deficit widened, but remained fully financed by FDI ����������������������������������������13 Vibrant construction activity continued, although FDI inflows eased �������������������������������������������������13 While visitor arrivals continued to increase, tourists visiting Angkor Wat temple declined ��������������14 Almost half of arrivals from China came for business purposes ���������������������������������������������������������16 Slower cultivation is due to less favorable weather conditions���������������������������������������������������������������16 Cambodia continued to make inroads into poverty reduction���������������������������������������������������������������19 Rural students performed less well, while maternal and child malnutrition remains severe among the poor����������������������������������������������������������������������������������������������������������������������������������19 Inflation was subdued mainly on the back of easing food and petroleum prices�������������������������������20 The easing of foreign currency deposits slowed broad money growth������������������������������������������������21 The policy to promote the use of local currency is showing encouraging results�������������������������������21 The exchange rate remained broadly stable�����������������������������������������������������������������������������������������������23 Interest rates on riel-denominated loans declined, thanks to the promotion of local currency ������23 Credit growth accelerated and outstanding loans exceeded 100 percent of GDP������������������������������23 The construction and real estate sector received the largest share of bank credit������������������������������23 Cambodia has maintained adequate foreign reserve buffers, according to the Financial Stability Review�����������������������������������������������������������������������������������������������������������������������24 Strong revenue collection has happened across-the-board���������������������������������������������������������������������25 Expenditure performance remained prudent��������������������������������������������������������������������������������������������26 The overall fiscal deficit is expected to remain steady at two-year lows ���������������������������������������������26 iv CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 TABLE OF CONTENTS China is the largest creditor, accounting for half of Cambodia’s outstanding debt����������������������������28 The European Union and the United States remain Cambodia’s largest export markets �����������������28 Outlook�����������������������������������������������������������������������������������������������������������������������������29 With slower global demand, the growth outlook is projected to ease ��������������������������������������������������29 Risks���������������������������������������������������������������������������������������������������������������������������������30 Risks are rising due to possible EBA withdrawal, a China slowdown, and a prolonged construction and property boom �����������������������������������������������������������������������������������������30 Policy approaches to managing rising risks��������������������������������������������������������������������30 SPECIAL FOCUS: Upgrading Cambodia in Global Value Chains����������������������������������������33 1. Introduction������������������������������������������������������������������������������������������������������������������33 2. Lots of participation�����������������������������������������������������������������������������������������������������33 3. Little progression ���������������������������������������������������������������������������������������������������������37 Cambodia rapidly engaged in limited manufacturing tasks…�����������������������������������������������������������������37 …with little diversifying or upgrading since����������������������������������������������������������������������������������������������38 Moving to the next stage of participation��������������������������������������������������������������������42 4.  Economic fundamentals and policy choices determine participation���������������������������������������������������42 More sophisticated polices support more sophisticated participation��������������������������������������������������43 Deep trade agreements help�������������������������������������������������������������������������������������������������������������������������45 Own protectionism is costly�������������������������������������������������������������������������������������������������������������������������46 Human capital is vital������������������������������������������������������������������������������������������������������������������������������������46 Technological change and the future of GVCs������������������������������������������������������������50 5.  CONCLUSION����������������������������������������������������������������������������������������������������������������������� 51 Additional figures�������������������������������������������������������������������������������������������������52 ANNEX 1:  ANNEX 2: Cambodia’s Key Indicators����������������������������������������������������������������������������������53 REFERENCES�����������������������������������������������������������������������������������������������������������������������54 ADDITIONAL REFERENCES���������������������������������������������������������������������������������������������54 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 v ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The 2019 April Cambodia Economic Update (CEU) was prepared by Sodeth Ly, with contribution from Claire Honore Hollweg. Other contributors include Ekaterine Vashakmadze, Marong Chea, Linna Ky, Kimsun Tong, and Runsinarith Phim. Saroeun Bou and Socheat Ath helped with the press release, logistic support, web display, and dissemination events. The team worked under the overall guidance of Deepak Mishra. The team is grateful for the advice and comments provided by Gevorg Sargsyan and Inguna Dobraja. Several colleagues provided comments on the draft version including Aaditya Mattoo, Andrew Mason, and Ergys Islamaj. 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 Socheat Ath (sath@worldbank.org). For questions on the content 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. 1 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 ABBREVIATIONS ABBREVIATIONS AFTA ASEAN Free Trade Agreement ASEAN Association of Southeast Asian Nations Brexit Withdrawal of the United Kingdom from the European Union CEU Cambodia Economic Update CR Cambodian riel DSA debt sustainability analysis EAP East Asia and Pacific EBA Everything But Arms EC European Commission EMDEs emerging markets and developing economies EU European Union FCD foreign currency deposit GDP gross domestic product GVC global value chain HCI Human Capital Index IMF International Monetary Fund ILO International Labor Organization LPCO Liquidity-Providing Collateralized Operation MFA multifiber agreement NCD negotiable certificate of deposit NPL nonperforming loan OECD Organisation for Economic Co-operation and Development PISA program for international student assessment PPP Public-private partnership RMS Revenue Mobilization Strategy SDR Special Drawing Rights SME small and medium-sized enterprise UK United Kingdom UN United Nations US United States US$ United States dollar VAT value-added tax WBG World Bank Group WDI World Development Indicator y/y or yoy year-on-year CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 2 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent developments wage agriculture income were the main drivers of poverty reduction in Cambodia during the Cambodia’s economy continues to show period 2009-17. In urban areas, declining non- signs of robust growth, underpinned by solid labor income increased poverty between 2009 export performance and strong domestic and 2013, before rising and helping to reduce demand. Key macroeconomic data for the first poverty during 2013-17. Non-labor incomes were six-months, however, indicate a slight deceleration rising throughout the rural areas, contributing to of economic activity this year, compared to a poverty reduction in both subperiods. Remittance, strong growth performance of 7.5 percent in a subcomponent of non-labor income, continued 2018. Garment and footwear exports, accounting to reduce poverty rates in both urban and rural for about 70 percent of total merchandise exports, areas. The share of remittances to total household grew at 17.7 percent in 2018, but eased slightly to income increased from 3 percent in 2009 to 12 15.3 percent (y/y) in June 2019. percent in 2017 – among the poorest households. Bustling construction activity has continued, The contribution of transfer to poverty reduction reflecting a sustained appetite for investment. was very small, reflecting the weak public social As a result, steel imports skyrocketed, rising 63.5 protection programs. percent (y/y) in volume terms in June 2019, The financial sector is playing an increasingly up from 27.7 percent in 2018. During the first important role in the economy. Bank credit half of 2019, although the reported value of growth accelerated to 28.3 percent (y/y) by newly approved investment projects accelerated, mid-2019, up from 24.2 percent in December foreign direct investment (FDI) inflows, of which 2018. Reflecting the tapering of capital inflows, about 40 percent originated from China, eased. The growth in foreign currency deposits slowed down tourism sector remained resilient; international to 21.7 percent (y/y) by mid-2019, compared arrival growth increased to 11.2 percent (y/y) in with 25.8 percent in December 2018. However, June 2019, compared with 10.7 percent in 2018, accumulation of gross international reserves with almost 40 percent of foreign visitors coming accelerated, partly underpinned by initial success from China. in expansion of the use of local currency. Gross Rising domestic consumption fueled by a international reserves reached US$11.3 billion surge in FDI inflows in recent years drove (more than five months of import coverage) or import growth. Imports of petroleum products 24.7 percent (y/y) in mid-2019, up from US$10.1 and motor vehicles rose by 91.0 percent and 18.5 billion or 15.8 percent (y/y) at the end of 2018. percent, respectively. Thanks mainly to depressed Fiscal performance continued to be domestic food and oil prices, inflation continued characterized by impressive revenue to be subdued, declining slightly to 1.4 percent performance, due largely to continued (y/y) in mid-2019, down from 1.6 percent in improvements in customs and tax administration 2018. While being softly pegged at around 4,000 and bustling economic activity. Total revenue riel per US dollar, the local currency depreciated (including grants) reached 23.6 percent of GDP slightly to 4,089 riel per US dollar in August 2019, in 2018 and is projected to remain sustained at the up from 4,018 riel per US dollar in December same level in 2019. Despite continued pressures 2018, likely due to slower capital inflows. from a rising public wage bill, government outlays Growth in labor income was the key driver are expected to remain contained at 24.2 percent of poverty reduction in Cambodia. Income of GDP in 2019. As a result, the overall fiscal decompositions show that wage and non- deficit is anticipated to remain almost unchanged 3 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 EXECUTIVE SUMMARY at 0.6 percent of GDP in 2019, thanks to to the EU and on the flow of FDI and tourists continued strong revenue performance. from China. Recently, high-frequency indicators have suggested a further moderation in economic Outlook activity in China. In addition, a prolonged Cambodia’s exports are expected to moderate construction and property boom and the increase with the easing of global demand, while of credit provided to the construction and real investment decelerates with sluggish capital estate sectors alongside rising indebtedness— inflows due to slower projected growth in China. where combined bank and microfinance credit The economy is therefore projected to ease now accounts for over 100 percent of GDP— gradually in the short to medium term. Growth also present a downside risk for Cambodia. is expected to decelerate to 7.0 percent in 2019, The National Bank of Cambodia’s latest down from 7.5 percent in 2018. The easing of financial stability review2 discussed potential exports and continued strong growth in imports macroprudential policies both on the supply will result in a widening of the country’s current and demand sides, while emphasizing account deficit to 9.8 percent of GDP in 2019, the importance of effective interagency up from 9.4 percent of GDP in 2018, but remain coordination. For a supply-side macroprudential fully financed by foreign direct investment. policy, an example of a widely used tool in other A relatively large fiscal stimulus to be financed countries is a sectoral capital requirement measure, by government savings could be introduced where higher risk weights could be imposed in 2020 to mitigate the negative impacts of the on loans to construction and real estate-related potential withdrawal of Everything But Arms sectors. To mitigate potential risks of speculation (EBA). In February 2019, the European Union and to safeguard sound lending practices, demand- (EU) launched the process that could lead to the side macroprudential measures have been under temporary withdrawal of Cambodia’s preferential consideration. Equally important, fiscal policy access to the EU market through the EBA initiative could be used to deal with potential vulnerabilities in 2020. in the real estate sector. For instance, last year, Singapore introduced property cooling measures Poverty reduction is expected to continue. by raising the rates of the Buyer’s Stamp Duty Economic growth, particularly growth in labor currently levied on all purchases of properties, income in the form of higher wage income, except on its citizens and permanent residents continues. Labor income has now become the who are purchasing their first home. main driver of poverty reduction. However, most of the poor have wage incomes and low-paying Cambodia’s remarkable participation in global jobs, signaling that low skills and productivity value chains (GVCs) began in the 1990s following remain to be challenges. Inequality is on the rise the arrival of the export-oriented garment and in both urban and rural areas, with the largest footwear industry. GVC participation grew faster increase in the rural areas. in Cambodia than in other regional countries such as Malaysia, Thailand and Vietnam as well as other Risks and challenges developing countries such as Bangladesh and Sri Lanka, although from a low base. The recent years Downside risks, arising from domestic and however are marked by stagnation. Unlike other external factors, have intensified.1 A possible countries in the region, Cambodia has not been able withdrawal of the EBA initiative, as well as a to transition to the next stage of GVC participation sharp slowdown in the Chinese economy (a of advanced manufacturing and services. Instead, potential outcome of continued U.S.-China trade there has been little diversification into other value tensions), could substantially dampen growth chains, but also little upgrading within existing prospects, given Cambodia’s reliance on exports value chains. 1 EBA withdrawal (and fiscal stimulus) is not factored in. 2 https://www.nbc.org.kh/download_files/publication/fsr_eng/FSR-for-publication-final-22Apr2019.pdf CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 4 EXECUTIVE SUMMARY FDI inflows, a large pool of low-skill and facilitate trade by lowering logistics costs and low-wage labor, and preferential access to key supporting businesses with a six-day reduction in exports markets are behind Cambodia’s rapid the number of publicly observed holidays in 2020. integration into limited manufacturing GVCs. Human capital accumulation is vital for Global experience shows that transitioning to countries’ integration in more complex GVCs. limited manufacturing GVCs from primary Countries that are human-capital abundant product specialization typically requires FDI, tends to export products that are more human- competitive labor costs, addressing business capital intensive. Cambodia’s export basket climate constraints, assuring basic political not only contains products that employ fewer stability and rule of law, and timely access to skilled workers than the products exported by imported inputs. Advanced manufacturing GVCs comparator countries, but Cambodia has also typically require a more educated workforce and seen less progression towards more skill intensive improvements in managerial practices and technical products over the past decade than comparator skills.  Improved access to finance for domestic countries. firms, more advanced logistics, competitive energy costs, access to more sophisticated services inputs, To move to the next stage of participation, a and enhanced contract enforcement are needed much more sophisticated policy mix is for these advanced manufacturing and services needed. First, expand and deepen trade sectors. Policy predictability, in addition to agreements to go beyond issues of market access macroeconomic stability, becomes an increasingly and national treatment. Second, lower barriers to important dimension of governance. Improving trade and connect to markets to expand the country’s external competitiveness through Cambodia’s small domestic market size and gain increased productivity in the presence of rising access to the inputs needed for production. Third, wages is therefore imperative. Cambodia’s ranking continue improving the education and skills of in the ease of doing business index continued to Cambodia’s labor force. Fourth, harness the digital slip, declining to 144th in 2019, down from 127th economy to support firms to integrate into GVCs in 2016, when the country’s ranking improved, through digital platforms as well as connect value compared with its 135th ranking in 2015. The chain participants. authorities recently introduced measures to 5 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth is projected to decelerate… … as key exports eased… Real growth (percent) Garment and footwear exports (y/y, percent change) 7�6 30 7�5 25 7�5 7�4 7�4 20 7�3 7�3 15 7�2 7�1 10 7�1 7�1 5 7�0 7�0 7�0 7�0 7�0 0 6�9 -5 6�8 -10 6�7 -15 p 9/ Jul-17 Sep-17 Nov-17 Mar-18 Jul-18 Sep-18 Nov-18 Mar-17 May-17 May-18 Mar-19 Jan-17 Jan-18 Jan-19 May-19 11 12 13 14 15 16 17 18 1 20 20 20 20 20 20 20 20 20 … construction sector expansion, however …underpinned by accommodative broad money continued…Construction materials and steel Broad money (y/y, percent change) imports (y/y, percent change) 30 Other materials Steel imports 100 Cement imports Cooling equipment 25 80 60 20 40 15 20 10 0 -20 5 -40 0 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Feb-18 Oct-18 Feb-19 May-18 Jun-18 Jul-18 Aug-18 Sep-18 May-19 Nov-18 Dec-18 Jun-19 Jan-18 Mar-18 Jan-19 Mar-19 Apr-18 Apr-19 …with increased lending to the construction sector Government deposit (savings) increased further Contribution to credit growth of lending to the Government deposit at the banking system construction and real estate sector (percentage points) (percent of GDP) 20 12 18 10 16 8 14 6 12 4 10 2 8 0 6 -2 4 -4 2 0 Oct-12 Jul-14 Feb-15 Aug-11 Sep-15 Nov-16 Aug-18 Jan-11 Jan-18 Dec-13 Apr-16 Jun-10 Mar-12 May-13 Jun-17 Mar-19 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sources: Cambodian authorities and World Bank staff estimates and projections. Note: p = projection. Section I Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments a sharp deceleration of industrial activity has been observed in July. Growth moderated to 6.3 While slightly easing, growth remains robust percent year-on-year in the first half of 2019 from Growth continues to remain robust in 2019, 6.8 percent in the first half of 2018, reflecting underpinned by strong performance in the weaker exports and private investment growth. garment, construction and tourism sectors. Most other major regional economies experienced Key macroeconomic data for the first six growth slowdowns. Activity in the smaller regional months, however, indicate a slight deceleration economies, however, remained robust. of economic activity this year, compared with There was a slight deceleration of Cambodia’s a better-than-expected growth performance of garment and footwear exports, which grew at 7.5 percent in 2018 (figure 1). While economic 15.3 percent in June 2019, compared with 2018’s growth is projected to ease to 7.0 percent in 2019, 17.7 percent y/y uptick (figure 2). Disaggregating Cambodia is likely to remain the fastest-growing the export data shows that while garment exports economy in the developing East Asia and Pacific slightly eased to 14.7 percent y/y, down from 17.6 (EAP) region. percent in 2018, footwear exports accelerated, Growth in developing EAP slowed in the first reaching 20.0 percent y/y in June 2019, compared half of 2019.3 Regional growth declined from to 19.2 percent in 2018. As a result, the share 6.5 percent year-on-year (y/y) in the first half of of footwear products in the total garment and 2018 compared to 6.0 percent y/y in the first half footwear exports rose gradually to 12.0 percent in of 2019, reflecting a broad-based deceleration June 2019, compared to only 11 percent in 2018 (see box 1). Intensifying trade disputes with the and 10.8 percent in 2017. The deceleration was United States weighed down on China’s economic the result of slow external demand. In the first of growth, which continues to soften amid a half of 2019, US retail sales, gauging US domestic planned rebalancing of the economy towards demand, eased. The retail trade (excluding a consumption-led growth. China’s economic automobiles) monthly sales for companies in the growth slowed in the first half of 2019, and retail trade and food services sectors, decelerated Figure 1: Contribution to real growth Figure 2: Garment and footwear exports (percent) (US$ million) Agriculture Indus-garment & footwear Garment exports Indus-construction Indus-others 1,200 Footwear exports 30 Serv-hotels & rests Serv-others Total (YTD, y/y percent change, RHS) Taxes less subsidies GDP growth 25 1,000 8 20 7�1 7�0 7�0 7�0 7�5 7�0 800 15 6 10 600 5 4 400 0 -5 2 200 -10 0 0 -15 Jul-16 Jul-17 Jul-18 Jan-16 Oct-16 Jan-17 Oct-17 Oct-18 Apr-17 Jan-18 Jan-19 Apr-16 Apr-18 Apr-19 2014 2015 2016 2017 2018 2019/p Source: Cambodian authorities. Source: Cambodian authorities. Note: p = projection. Note: RHS = Right-hand scale. 3 World Bank 2019d. 9 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook Box 1. Global and Regional Outlook and Risks1 Global growth is expected to remain subdued over is contributing to heightened policy uncertainty, which the forecast horizon. The global economic growth rate is expected to dent confidence and investment. Barring a is projected to slow to 2.5 percent in 2019, reflecting a renewed escalation of trade tensions, global trade growth is broad-based weakness in advanced economies and major projected to weaken from 4.1 percent in 2018 to 1.9 percent emerging market and developing economies (EMDEs). in 2019, and then recover modestly to 2.2 percent in 2020. Global growth is projected to remain flat in 2020 before (figure B1.2). This forecast is predicated on policy support strengthening insignificantly to 2.6 percent in 2021 (figure measures implemented in major economies and firmer B1.1). Growth in advanced economies is projected to domestic demand in some EMDEs. This modest rebound moderate from 2.2 percent in 2018 to 1.5 percent on notwithstanding, global trade is expected to be weaker than average during 2019–21, reflecting a sharp deceleration in previously envisaged over the forecast horizon, reflecting trade, investment, and manufacturing. Growth in EMDEs a softer outlook for global investment and evidence of a is projected to slow to 3.7 percent in 2019 before recovering lower income elasticity of trade. to 4.2 percent in 2020 as earlier headwinds in some Global financing conditions are expected to remain countries ease. This forecast in predicated on the waning volatile, even if generally more supportive. This reflects impact of earlier financial pressures currently weighing on more accommodative monetary policy stances adopted activity in some large EMDEs and no major deterioration by the major central banks in the near term due to the in the global environment (for example, Argentina, Brazil, deteriorating global growth prospects. Despite the recent Russia, and Turkey) and no major deterioration in the global recovery of EMDE markets from the 2018 correction environment.2 episode, there is still a considerable risk of “monetary Global economic conditions are expected to remain shocks” associated with the global policy uncertainty. challenging over the forecast period. The increase in Financial market volatility will continue to have the tariffs by China and the United States that were announced strongest impact on countries with high vulnerabilities, over during 2019 will have more severe effects than the weak growth prospects, and elevated policy uncertainty. tariff hikes implemented in 2018. Beyond economic losses The eventual rise of advanced-economy yields will have for the affected exporters, the re-escalation of trade tensions a negative impact on capital flows to EMDEs. Policy Figure B1.1: Real GDP growth Figure B1.2: Global trade volume growth (percent) (percent) World 2000-18 average Advanced economies 6 Emerging and developing economies 12 EAP 10 4 8 6 4 2 2 0 -2 -4 0 2021f 2009 2010 2018 2019-20f 2007-08 2011-17 2019f 2016 2017 2018 2020 2021 Source: World Bank. Source: World Bank Notes: Working assumptions. Updated global projections Notes: Working assumptions. Updated global projections will be published in Global Economic Prospects, January will be published in Global Economic Prospects, January 2020 (forthcoming). 2020 (forthcoming). 1 This box was prepared by Ekaterine Vashakmadze, PG. 2 These are working assumptions, which will be finalized and published in the June 2019 Global Economic Prospects, World Bank. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 10 Recent Economic Developments and Outlook uncertainty, geopolitical risks, and security concerns could in the region is projected to remain robust in the near term, also continue to adversely impact EMDE capital inflows. underlying potential growth—which has fallen considerably over the past decade, in large part reflecting slowing Modest declines are forecast for global commodity prices. potential growth in China—is likely to decline further over Oil prices are expected to average US$60 per barrel the long term, largely owing to deteriorating demographic in 2019 and 2020, with high uncertainty around the trends, especially in China, Thailand, and Vietnam. outlook. Overall, metals prices are expected to decline slightly in 2019 and 2020, reflecting a weaker outlook for Risks continue to be firmly on the downside. There is global metals demand. Agricultural prices are expected to considerable uncertainty around the outlook for the global remain broadly flat in 2020 (figure B1.3). economy. The balance of risks remains firmly on the downside and has recently intensified, reflecting the re-escalation of Growth in the region is projected to slow from 6.3 trade tensions amid heightened global uncertainty. Although percent in 2018 to 5.8 percent on average in 2019-20, unlikely in the near term, the simultaneous occurrence of a and to ease further to 5.6 percent by 2021. This outlook sharper-than-expected slowdown in China, the Euro Area, assumes no further escalation of trade tensions between and the United States could trigger a significant downturn in China and the United States, slightly lower commodity global activity. The further escalation of trade tensions could prices, and supportive global financing conditions, especially be highly disruptive to global activity amid the presence of in the near term. The baseline also assumes that the fiscal complex value chains. The risk of severe and broad-based and monetary policy support in China and the other major financial stress adversely affecting the outlook for EMDEs regional economies would partly mitigate the impact of remains high amid elevated debt levels in many countries. heightened policy uncertainty and weak global demand on Policy uncertainty and geopolitical risks remain high, and the regional growth. Growth in China is projected to slow could negatively impact confidence and investment in to 6.1 percent in 2019 and ease further to 5.9 percent in both affected countries and globally. Policy uncertainty is 2020 and 5.8 percent in 2021 amid continued domestic and particularly elevated in a number of European countries, external headwinds (figure B1.4). Growth in the rest of the including the United Kingdom as it transitions out of the region is projected to decline to 4.9 percent in 2019 and European Union. stabilize at 5 percent on average in 2020-21. While growth Figure B1.3: World commodity price forecast Figure B1.4: Regional growth (Index=nominal U.S. dollars, 2010=100) (percent) 2018 2019f 2020f 130 8 7 110 6 90 5 4 70 3 50 2 1 30 0 Lao China Vietnam Mongolia Thailand 10 Myanmar Cambodia Malaysia 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: World Bank. Source: World Bank. Notes: Working assumptions. Updated global projections Notes: Working assumptions. Updated global projections will be published in Global Economic Prospects, January will be published in Global Economic Prospects, January 2020 (forthcoming). 2020 (forthcoming). 11 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook to 1.6 percent y/y in June 2019, compared to 5.9 market flattened, growing at 1.7 percent y/y in percent in 2018 (figure 3).4 June 2019, down from 5.3 percent in January. The share of Cambodia’s exports to the EU is expected The share of Cambodia’s exports to the US to shrink further, if EBA suspension occurs next market is increasing year. Boosted by the U.S. duty-free access granted While the EU had been the most important on June 30, 2016,6 investment projects in the market for Cambodia’s garment and footwear production of travel goods (luggage, backpacks, exports during the past several years, the share handbags, and wallets) has skyrocketed. Approved of the US market has expanded rapidly since foreign direct investment projects in the travel 2018, reaching 31 percent by June 2019, overtaking goods sector rose to US$202.5 million in the first the EU market (excluding the UK), which shrunk eight months of 2019, up from US$50 million in to only 30 percent during the same period (figure 4). 2018. The total number of factories producing The recent expansion of the U.S. market share may travel goods reached 105 factories in August 2019, have contributed in part by trade diversion resulting up from 67 factories in 2018.7 from the US-China trade war. As bilateral China- While private investment rose, approved FDI U.S. trade of tariff-affected products has declined,5 eased Chinese and U.S. imports of such products from other destinations have grown. Developing East Foreign direct investment (FDI) commitments Asian exporters also benefited: Vietnam and (approved FDI projects) has slowed in the first Malaysia feature among the top five beneficiaries half of 2019, compared to 2018. During the in Chinese and U.S. markets, respectively, while first six months of 2019, the value of approved Cambodia (from the United States) and Mongolia investment (domestic and FDI) projects increased (from China) enjoyed relatively small gains in to US$4.6 billion or about a 60 percent y/y absolute terms but significant gains relative to increase. During the same period, approved FDI their GDP. While remaining solid, Cambodia’s inflows eased to US$1.0 billion, compared with garment and footwear exports to the U.S. market US$2.4 billion in 2018. FDI commitments going to eased, expanding at 38.7 percent y/y in June 2019, the agriculture and food processing (non-garment) down from 51.6 percent y/y in January. During industries, and wholesale and retail sectors eased.8 the same period, the country’s exports to the EU In the real sector, private investment continued to Figure 3: U.S. retail sales and Cambodia’s Figure 4: Garment and footwear exports by exports to the United States main destination (y/y, percent change) (YTD, percent of total) Garment exports to the US US market EU (excl UK) market UK market US retail sales (RHS) 100 12 35 80 10 30 60 8 25 40 6 20 20 4 15 0 2 10 -20 0 5 -40 -2 0 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Jun-19 Source: Cambodian authorities and United States Census Bureau. Source: Cambodian authorities. Note: U.S. retail sales excluding auto and parts dealers. Note: YTD = year-to-date. 4 Retail Trade, ex Auto: U.S. Total, Not Seasonally Adjusted Sales, US Census Bureau. 5 World Bank 2019d. 6 For more detail, see https://kh.usembassy.gov/duty-free-access-travel-goods-made-cambodia/ 7 Monthly report (August 2019), Ministry of Industry and Handicraft. 8 Annual Report, 2018, the National Bank of Cambodia CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 12 Recent Economic Developments and Outlook flow to the construction, real estate, and tourism import growth. Imports of steel skyrocketed to sectors, which together accounted for about three- 63.5 percent y/y in volume terms, up from 27.7 quarters of total (approved) investment during the percent in 2018, while other construction materials first six months of 2019. The construction boom rose by 87.1 percent y/y (figure 6). has also fueled growing supporting industries, The current account deficit widened, but factors, and small and medium sized enterprises remained fully financed by FDI mostly owned by Chinese investors to manufacture and supply building material, furniture, metal, and The easing of exports and continued strong plastic products. growth in imports will result in a widening of the country’s current account deficit to 9.8 Capital inflows have fueled rising domestic percent of GDP in 2019, up from 9.4 percent investment and consumption of GDP in 2018, which remains fully financed by A surge in capital inflows that Cambodia FDI. Although merchandise exports eased, net experienced in the past several years has services exports rose, largely boosted by travel underpinned domestic investment and service receipts resulting mainly from tourism consumption. Cambodia is among the most receipts. Current transfers were supported by successful countries in attracting FDI with FDI workers’ remittances (net), estimated to reach inflows accounting for an average of 11.9 percent about US$1.0 billion in 2018. Continued FDI of GDP a year during the post-global financial crisis. inflows financed the current account deficit. FDI With continued upbeat consumer and investor inflows and the injection of local currency allowed confidence, domestic demand has sustained the central bank to continue to accumulate more and been met by a surge in imports. During the international reserves, which reached US$11.3 first six months of 2019, imports of petroleum billion by June 2019, or 24.7 percent y/y, covering products and motor vehicles rose by 91.0 percent more than five months of prospective imports. and 18.5 percent, respectively (figure 5). To meet continued strong domestic demand, consumption Vibrant construction activity continued, although FDI inflows eased goods imports such as foodstuff, electronics and medicines also increased, rising by 27 percent, 87.5 During the first six months of 2019, approved percent, and 14.7 percent, respectively. Similarly, residential and commercial development bustling construction activity driven by upbeat projects amounted to US$3.4 billion, or a investor confidence fueled construction materials whopping 56.5 percent y/y increase. In addition Figure 5: Imports of durable goods and Figure 6: Construction materials and steel petroleum products accelerated imports skyrocketed (y/y, percent change) (y/y, percent change) 140 Passenger cars Diesel 100 Other materials Steel imports 120 Gasoline Motocycles Cement imports Cooling equipment 100 80 80 60 60 40 40 20 20 0 0 -20 -20 -40 -60 -40 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Source: Cambodian authorities. Source: Cambodian authorities. 13 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook to the two largest cities of Phnom Penh and Siem Visitors from the Republic of Korea declined by Reap, international gateway cities such as the 20 percent (reflecting also a drop in South Korean seaside town of Sihanoukville, the Cambodia- investment in Cambodia), and the country is now Vietnam and Cambodia-Thailand economic ranked fifth, accounting for 4.2 percent of total corridors of Bavet and Poi Pet have also been international arrivals. Arrivals from Japan ranks experiencing construction booms. The most rapid sixth, accounting for 3.0 percent, with a 3 percent increase in construction activity has been in the y/y increase. As a result, Cambodia’s tourism provincial capital of Sihanoukville which received sector continues to be dependent on tourists US$1.0 billion of approved construction projects from Asia and Pacific which cover 82 percent of during the first six months of 2019, compared to international arrivals, while those from Europe US$1.08 billion in investment for the entire 2018. and the Americas capture only 12.4 percent and As a result, Sihanoukville is being transformed into 5.7 percent, respectively. an industrial boomtown with bustling investment, The coastal regions are rapidly emerging trade and tourism activity, supported by a nearby visitor destinations, especially the provincial international airport and the country’s largest town of Sihanoukville. During the first six months seaport. An expressway linking it to the capital of 2019, international arrivals to Sihanoukville city of Phnom Penh is under construction.9 skyrocketed, and the bustling town received about While visitor arrivals continued to increase, 300,000 visitors, or a huge 357.5 percent y/y tourists visiting Angkor Wat temple declined increase (see box 2). As a share of international visitors to Cambodia, foreign tourists visiting Driven largely by rising numbers of Chinese Phnom Penh (and surroundings) rose to 50 visitors, international arrivals accelerated to percent in 2019, up from 46 percent in 2018, due 11.2 percent y/y, up from 10.7 percent in 2018 to a rising share of visitors coming to Cambodia (figure 7). Similar to the rising share of Chinese for business purposes. FDI inflows, Chinese visitors account for almost 40 percent of total international arrivals or However, tourists visiting Angkor Wat temple 1.3 million tourists during the first six months declined by 8.3 percent y/y during the first of 2019. Arrivals from Vietnam, Lao PDR, 6 months of 2019. Foreign tourists arriving at and Thailand remained the next three largest, Siem Reap International Airport declined for the capturing 12.0 percent, 6.1 percent, and 5.2 first time since the 2008/09 global financial crisis. percent of total international arrivals, respectively. Arrivals at Siem Reap dipped by 5.5 percent in Figure 7: Tourist arrivals to Cambodia, Figure 8: International arrivals to Siem Reap Thailand, and Vietnam Airport (y/y, percent change) (YTD, y/y, percent change) Thailand Cambodia Vietnam 60 35 50 30 25 40 20 30 15 20 10 10 5 0 0 -10 -5 -10 -20 -30 Jun-19 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Nov-06 Sep-07 Jul-08 May-09 Nov-11 Sep-12 Jul-13 May-14 Jan-06 Jan-11 Jan-16 Nov-16 Sep-17 Jul-18 May-19 Mar-10 Mar-15 Source: Cambodian authorities. Source: Cambodian authorities. Note: YTD = year-to-date. 9 For more on the Phnom Penh - Sihanoukville expressway, see http://www.mpwt.gov.kh/kh/public-works/expressways CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 14 Box 2. Tourist attraction destinations: the emergence of Sihanoukville and the decline of Siem Reap While the Angkor temple complex and Phnom Penh significant resources for tourism that are diverse and well are still the main destinations, Sihanoukville has placed to be a pillar for socioeconomic development, the recently emerged as a key attraction site. During the first country was ranked low, at 98th in 2019 on the travel and six months of 2019, international arrivals to Sihanoukville tourism competitiveness index, compared to its neighbors, skyrocketed, and the rapidly growing town received about namely Lao PDR (97th), Vietnam (63rd) and Thailand (31st). 300,000 visitors (figure S2.1) or a whopping 357.5 percent This may indicate that the tourism sector needs boosting. y/y increase. The Sihanoukville International Airport Repeat visits by foreign tourists to Cambodia improved welcomed over 650,000 passengers (inbound and outbound) slightly, rising from 16.2 percent in 2013 to 21.3 percent in 2018 and has experienced an intensive acceleration of its in 2018 (but remained nowhere near Thailand, whose repeat growth with triple-digit figures every year since 2016 with visits are for 60 to 70 percent2). However, there are some the opening of new international routes, especially to and worrying trends. For example, length of stays remains short from Chinese cities, and between Sihanoukville and regional and have not changed much—5.4 days in 2013 to 6.4 days metropolises like Kuala Lumpur and Ho Chi Minh City. in 2018;—value captured per tourist has declined—from The extension of the airport’s runway to 3,300 meters is US$809 in 2013 to US$552 in 2018;—low-end businesses launched, while studies are underway for the building of have mushroomed; and there are signs of degradation of a new passenger terminal scheduled to be commissioned the key assets at the Angkor temples. In addition, during in mid-2022.1 The surge in international arrivals to the post-global financial crisis period, Cambodia’s tourist Sihanoukville, however, appears to be fueled particularly by arrivals growth decelerated, averaging 12 percent a year, an investment boom, with bustling construction activity. compared to 20 percent per year in the pre-global financial Figure B2.1: International arrivals to Cambodia’s crisis period. Recently, Cambodia’s tourist arrivals have main airports become increasingly dependent on Chinese visitors, which Phnom Penh Siem Reap Sihanoukville captured 32.6 percent of total arrivals with the y/y growth 2,500,000 rate surging to 67.2 percent in 2018. 2,000,000 A 2017 study provided substantial anecdotal 1,500,000 evidence that there is little formal integration by tourism enterprises along the vertical value chain.3 1,000,000 Destination management companies operating or owning 500,000 accommodation and transport companies do not exist, and at most, tourism enterprises have two outlets (Phnom - Jan-Jun 2016 Jan-Jun 2017 Jan-Jun 2018 Jan-Jun 2019 Penh and Siam Reap), often managed as a single entity. This reflects the way Cambodia is being offered to visitors, Source: Cambodian authorities. with limited overland travel and product development by In contrast, international arrivals by air to Cambodia’s operators around established destinations. Insufficient most visited attraction site of Siem Reap declined. Since transport infrastructure and weak environmental services early this year, the number of tourists visiting Siem Reap hold back sustainable and more inclusive tourism growth, has started to decline for the first time since the 2008/09 as many secondary destinations are unable to attract private global financial crisis. By mid-2019, tourist arrivals to Siem investment in quality tourist service infrastructure. This calls Reap, where the (World Heritage) Angkor temple complex for immediate action to address the major constraints which is located, dipped by 5.5 percent y/y, although total tourist appear to be insufficient public and private funding, weak arrivals by air to the three main airports grew by 17.4 coordination among tourism industry stakeholders, and percent (total international arrivals to the country grew by low capacity to design and implement effective destination 11.2 percent). While Cambodia is endowed with globally marketing campaigns. 1 See https://corp.cambodia-airports.aero/en/press-release/cambodia-airports-won-award-marketing-sihanoukville-airlines 2 See https://www.travstore.com/how-to-construct-itinerary-for-repeat-travelers-to-bangkok/ 3 See Selected Issue section on maximizing tourism potential, October 2017 Cambodia Economic Update 15 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook the year to June 2019, compared to increases of countries—Cambodia, Vietnam and Thailand. 6.5 percent and 20.8 percent in 2018 and 2017, During the same period, Thailand and Vietnam respectively (figure 8). As a share of international received 19.7 and 8.5 million tourists, respectively. visitors arriving by air to Cambodia, tourists Investing more toward the provision of sufficient coming to Siem Reap declined to 40.4 percent and well-functioning public tourism infrastructure, in 2019, compared to 47.3 percent in 2018 and while improving cooperation between commercial 55.0 percent in 2017. While it is a bit too earlier and public entities, is likely needed to tap into this to draw any conclusions, the declining number growing tourism market located at Cambodia’s of foreign visitors to Angkor Wat may indicate doorstep. For instance, a large investment plan that the temple in Siem Reap, which had been (2016-20) of US$24.0 billion (of which the state the country’s largest tourist attraction site, can budget accounts for 8 to 10 percent) is being no longer continue to attract tourists without implemented by Vietnam to build and upgrade additional products. In this regard, the authorities tourism and transport infrastructure in provinces are studying the tourism master plan for Siem with key tourist landmarks.10 Reap province and have identified new potential Slower cultivation is due to less favorable tourism products, particularly in Kulen Mountain, weather conditions the Tonle Sap area, and the areas located within the temples of Angkor. However, it is likely that Official statistics indicate that this year’s additional investment in tourism infrastructure, cultivation of rainy season rice and services, and products will be needed. supplemental and industrial crops was slower than last year.11 By July 2019, rainyseason rice Almost half of arrivals from China came for cultivation reached 2.1 million hectares, which is business purposes 0.13 million hectares below 2018’s cultivated area. In the first half of 2019, 42 percent of arrivals This amounts to 81.8 percent of the authorities’ from China came to Cambodia for business target. However, the authorities are committed to purposes, compared to only a quarter in 2018. boosting agriculture cultivation to meet this year’s Visitors coming to Cambodia for business targets by providing agriculture extension services purposes increased to 21.0 percent in June 2019, focusing on arable land areas ready for cultivation. up from 11.1 percent in December 2018 (figure Specifically, several measures have reportedly been 9). This indicates that Cambodia is increasingly introduced in this regard. They include training for attractive to (Chinese) investors, with their rising extension officials and farmers, seed production, share of the total international arrivals. This is research and development, contract farming consistent with the rising share of FDI inflows expansion including markets for agricultural from China that has supported the construction products. Rice production continues to play an boom, as well as newly flourishing trade and important role in Cambodia’s agriculture sector investment activities established by Chinese as it accounts for about half of agriculture GDP, small and medium-sized enterprises focusing of which rainy season rice production covers 75 primarily on building material, furniture, office percent and dry season rice production covers the equipment and household appliance products rest. serving the newly constructed properties. Rice production for 2018 increased to 10.8 Substantial untapped potential in tourism million metric tons or 3.5 percent y/y (figure remains. During the first six months of 2019, 10). This was 0.37 million metric tons higher Cambodia received 3.34 million foreign tourists, than production in 2017, even though it was but this accounts for a mere 10.5 percent of affected by midseason drought and floods in total international arrivals to the three regional some parts of the country. Of the 0.37 million 10 Decision No. 201/QD-TTg of January 22, 2013, approving the master plan on development of Vietnam’s tourism through 2020, with a vision toward 2030. 11 July 2019 report on agriculture, fisheries and forestry, dated August 16, 2019, Ministry of Agriculture, Fisheries and Forestry. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 16 Recent Economic Developments and Outlook ton increase, 0.21 million tons was a result of There is untapped potential that could be increased yield and 0.16 million tons a result of exploited to diversify agriculture products as land expansion (figure 11). Thus, in 2018, the well as to expand livestock production, given improvements in yields reflect better or more increased market demand for animal products efficient use of agricultural inputs. Yields of wet as household incomes rise. Rising income and and dry season rice production increased by 1.7 urbanization and a rapid expansion of the percent and 1.0 percent, respectively. However, tourism sector have led to rising demand for annual rice production growth halved, expanding animal products. Domestically, this is reflected at 4.1 percent after the global financial crisis, in the elevated (and past rapid increases in the) compared with 8.3 percent before global financial consumer price indexes for animal products crisis. Cambodia exports only about 17 percent such as beef, poultry, fish and seafoods, while of its rice surplus in the form of milled rice. Its consumer price indexes for cereals such as rice production of cassava (13.5 million tons) has have remained subdued (figure 12). This is also until recently been exported unprocessed.12 This true for exports due to expansion of the Asian indicates that much could be gained in terms of and Chinese middle class. However, during the last value added if the country were able to process decade or so, diversification toward production its main agriculture commodities—rice and of animal products (and aquaculture) has been cassava—before export, although diversification slow with a decline in livestock production for to other agricultural products such as bananas and both family and commercial farms, despite rising mangos for export shows some promising signs. demand and prices (table 1). Therefore, a well Agricultural gross value added (at constant prices) targeted national policy to promote agricultural decelerated to 1.2 percent in 2018, contributing diversification could play a crucial role to boost only 0.24 percentage points to real GDP growth private and public investment and the expansion in 2018.13 Rubber and cassava production also of animal products, underpinned by a favorable expanded last year, rising by 16.6 percent and 2.6 trade and export regulatory environment. percent, respectively. Figure 9: Air and business visitor arrivals to Figure 10: Annual rice production Cambodia (million metric tons) (y/y, percent change) 40 Business visitors (percent of total arrivals) Wet season Dry season Arrivals by air to S�Reap (y/y) y/y percent change, RHS 35 Arrival by air to P�Penh (y/y) 12 10 30 10 8 25 20 8 6 15 6 4 10 5 4 2 0 2 0 -5 0 -2 -10 2013 2014 2015 2016 2017 2018 Jun-19 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 12 A Hong Kong-based holding group is investing in building cassava processing plants. 13 Annual report, 2018 achievements and 2019 targets, Ministry of Agriculture, Forestry and Fisheries, March 2018. 17 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook Cambodia is a net importer of animal increased, reaching 11.6 percent and 24.0 percent products. In 2018, the authorities estimated of total production in 2018, up from 3.2 percent that the country imported 630,000 (live) pigs and and 22.4 percent in 2013, respectively. combined chicken and duck imports of 37 million Depressed commodity prices continue to heads as it could only supply 81 percent of animal weigh heavily on the country’s agriculture products demanded.14 As illustrated in table 1, commodities exports. In addition, the European overall production of livestock declined by 5.8 Commission (EC) has imposed safeguard percent in 2018. The country is shifting away measures on Cambodian rice.15 China, in contrast, from raising cattle as draught animals to breeding increased its import quota for Cambodia’s rice them for meat production. Poultry production, to 400,000 tons in 2019, up from 300,0000 in however, increased 5.3 percent last year. Both 2018. Official statistics show that total milled rice livestock and poultry production that is produced exports reached a quarter of a million metric tons commercially expanded slowly, though. During for the year to June, a 3.5 percent y/y decline. In the past five years, the share of livestock and value terms, the milled rice exports amounted to poultry that is raised commercially only gradually US$200 million or a 9 percent y/y increase. Table 1: Animal production (in thousand heads) Livestock (cows, buffalos and pigs) Poultry (chickens and ducks) Family Commercial Total Family Commercial Total Total (percent) (percent) (y/y) Total (percent) (percent) (y/y) 2013 11,877 96.8% 3.2% 27,625 77.6% 22.4% 2014 11,182 96.6% 3.4% -5.9% 31,584 81.1% 18.9% 14.3% 2015 10,739 96.0% 4.0% -4.0% 34,519 77.3% 22.7% 9.3% 2016 10,886 94.3% 5.7% 1.4% 35,733 79.5% 20.5% 3.5% 2017 7,469 90.1% 9.9% -31.4% 36,170 79.2% 20.8% 1.2% 2018 7,002 88.4% 11.6% -6.3% 38,094 76.0% 24.0% 5.3% Source: Cambodian authorities Figure 11: Contribution to total rice production Figure 12: Elevated consumer price indices of increase chicken, beef, and seafood items (in million metric tons) CPI (y/y, percent change) by Land by Yield Rice #1 Beef Chicken 0�80 Rice production Fish Seafood 16 0�60 14 12 0�40 10 0�20 8 6 0�00 4 2 -0�20 0 Nov-14 Aug-18 May-17 Dec-16 Feb-16 Oct-17 Mar-18 Apr-15 Sep-15 Jun-14 Jun-19 Jan-14 Jan-19 Jul-16 -0�40 -2 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Cambodian authorities. Source: Cambodian authorities. 14 Annual report for 2018-19 and targets for 2019-20, Ministry of Agriculture, Forestry and Fisheries. 15 Press release, European Commission, January 19, 2019. See http://europa.eu/rapid/press-release_IP-19-427_en.htm CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 18 Recent Economic Developments and Outlook Cambodia continued to make inroads into of non-labor income, still reduced poverty rates poverty reduction in both urban and rural areas. The share of remittances to total household income increased Poverty estimates for 2015-17 are currently from 3 percent in 2009 to 12 percent in 2017 – under review by the authorities and preliminary among the poorest households. The contribution indications are that poverty continues to decline. of transfer to poverty reduction was very small, While Cambodia continued to make inroads into reflecting the weak public social protection poverty reduction, progress during 2013-17 was programs. less well than during 2009-13. The non-poor benefited more from economic growth during Rural students performed less well, while 2009-13, and urban poverty reduction stagnated. maternal and child malnutrition remains severe among the poor Growth in labor income was the key driver of poverty reduction in Cambodia. Income While primary school student performance decompositions show that wage and non-wage significantly improved, rural students’ test agriculture income were the main drivers of scores were about 12 percentage points lower poverty reduction in Cambodia during the period than their urban counterparts. The national of 2009-17, largely due to the higher average wage student learning assessment report finds that per worker and non-agricultural income per adult. grade 6 student performance has improved Non-labor income also contributed positively to significantly in mathematics but moderately poverty reduction, but its contribution was smaller in the Khmer between 2007 and 2016 (figure in the period 2013-17. 13).16 Rural students, however, performed less well than their urban peers in both Khmer and The importance of non-labor income differed mathematics, with test scores in rural areas about completely between urban and rural areas. In the 12 percentage points lower than in urban areas. urban areas, declining non-labor income increased The most recent international assessment, the poverty between 2009 and 2013, before rising and Program for International Student Assessment for helping to reduce poverty during 2013-17. Non- Development (PISA-D), also found that 15-year- labor incomes had been rising throughout the old urban students outperformed their rural peers rural areas, contributing to poverty reduction in in reading by 42 points—equivalent to more than both sub-periods. Remittance, a sub-component a year of schooling.17 Figure 13: Grade six student achievements Figure 14: Under five stunting (percent, 2017) (percent) Khmer Maths 2010 2014 60 Percent correct (0-100 percent) 65 62�2 62�3 51�1 Prevalence (percent) 50 44�4 60 57�1 39�9 41�9 39�3 55�4 40 37�1 34�2 55 52�4 32�4 31�7 49�9 29�1 30 23�1 50 48�1 48�2 58�5 58�6 20 18�5 45 42�3 48�7 47�9 51�7 40 46�2 48�0 10 44�6 40�4 35 0 Female Male Rural Urban Q1 Q2 Q3 Q4 Q5 Total Lowest Second Middle Fourth Highest Gender Location Socio-economic Status Source: Cambodian authorities. Source: National Institute of Statistics, Directorate General Note: Q1=lowest, Q5=highest. for Health and ICF International 2011, 2015. 16 Ministry of Education, Youth and Sports, 2017 17 Ministry of Education, Youth and Sports, 2018 19 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook While maternal and child malnutrition remains food prices eased, given depressed agricultural widespread in Cambodia, it is particularly commodity prices. In addition, given the high level severe among the poor and in rural areas, of dollarization in Cambodia, a strong U.S. dollar compounding disadvantages in the early years. has also contributed to keeping inflation low. About one-third of all children under age five are In the East Asia and Pacific region, price stunted, exceeding the World Health Organization pressures remained generally subdued across threshold for “high” stunting. Many of these the larger regional economies, many of which stunted children are from poor households and, are Cambodia’s trading partners, but have at 42 percent, the prevalence of stunting among slowly increased since the start of the year.19 children under age five in the poorest quintile is Headline inflation in the EAP region’s larger more than double the stunting rate (18.5 percent) economies was lower in the first half of the 2019 of children in the top quintile (figure 14).18 compared to the first half of 2018 (figure 16). Inflation was subdued mainly on the back of Inflation, however, has started to increase since the easing food and petroleum prices start of the year, except in the Philippines, which experienced a steady decline in inflation from Despite strong internal demand, inflation has a peak in the third quarter of 2018 (see also box reached a four-and-a-half-year low. June 2019 1). In China, while weaker energy prices exerted inflation eased further to 1.4 percent, compared downward pressure on inflation in early 2019, to 1.6 percent in 2018 (figure 15). In June 2019, strong food price growth contributed to higher inflation declined with the easing of food and inflation, especially in March and April. In Thailand, petroleum prices. The food and non-alcoholic inflation remained near the low end of the central beverage subindex of Cambodia’s inflation basket bank’s 1–4 percent target range, reflecting lower decelerated to 1.1 percent in June 2019, compared demand pressures with the slowdown of domestic with 1.9 percent in December 2018. Reflecting the activity. In Vietnam, driven by a moderation in food easing of gasoline diesel prices, the transportation prices, headline CPI inflation remained subdued and telecommunication subindex fell into negative at 2.3 percent (y/y) in August 2019, down from 3 territory, declining by 2.5 percent y/y. Retail percent in December 2018. As China, Thailand, prices of gasoline and diesel also declined, helped and Vietnam are Cambodia’s main trading partners by the easing of international oil prices, while (importers), subdued inflation in those countries Figure 15: Inflation remained to be subdued Figure 16: Inflationary pressures have picked up Contributions to 12-month inflation in major economies (percent) Headline inflation (end of period, y/y, percent) Others Transport sub-index China Indonesia Food sub-index Housing & utilities sub-index Malaysia Philippines 8 Thailand Vietnam Y/Y 7 8 6 6 5 4 4 3 2 2 1 0 0 -1 -2 -2 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Feb-2018 May-2018 Jun-2018 Jul-2018 Aug-2018 Oct-2018 Aug-2019 Jan-2018 Mar-2018 Apr-2018 Sep-2018 Nov-2018 Dec-2018 Feb-2019 Jan-2019 Mar-2019 Apr-2019 May-2019 Jun-2019 Jul-2019 Source: Cambodian authorities. Source: World Bank 2019d (October), World Bank, Washington, DC. 18 National Institute of Statistics, Directorate General for Health and ICF International 2011, 2015. 19 World Bank 2019d. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 20 Recent Economic Developments and Outlook also helped contain inflationary pressures in economy. Although the contribution of the Cambodia. local currency in broad money growth remains relatively small, the central bank has recently The easing of foreign currency deposits been able to inject more local currency, while slowed broad money growth maintaining a broadly stable riel versus U.S. Broad money growth eased slightly to dollar exchange rate (figure 18). In December 21.3 percent in June 2019, compared to 24.0 2016, the central bank issued a Prakas20 requires percent in 2018, thanks to decelerated foreign that all banking and financial institutions to have currency deposit growth. In June 2019, the at least 10 percent of their total loan portfolio contribution to broad money growth from in national currency, effective December 31, foreign currency deposits, riel deposits, and riel 2019.21 To supply liquidity in local currency, the in circulation was 18.3 percent, 1.2 percent and central bank has established a facility called the 1.8 percent, respectively (figure 17). While slower Liquidity-Providing Collateralized Operation broad money growth seems seasonal, the rise of (LPCO) aimed at establishing a benchmark rate riel deposits is not. The contribution to broad of local currency borrowing for the market, while money growth from riel deposits, amounting to promoting the use of local currency. As the central 1.2 percent in June 2019 doubled, compared to bank requires Negotiable Certificates of Deposit 0.6 percent in December 2018 (and 0.8 percent in (NCDs) — a short-term interest-bearing debt it June 2018). Expansion of local currency deposits issues as collateral, LPCO operations “sterilize” in broad money may actually reflects the initial excess liquidity when additional volumes of success of the central bank in promoting the use riels demanded by the market are injected by the of Cambodian riel. central bank. The policy to promote the use of local A rapid expansion of LPCO is a good sign, as currency is showing encouraging results it shows that the demand for local currency is increasing. According to the central bank, during There are signs of the initial success of the the first six months of 2019, LPCO operations central bank’s policy to promote the use of amounted to 4 trillion riels, or an eleven-fold the local currency in the highly dollarized increase over the first half of 2018. By June 2019, Figure 17: Contribution to broad money growth Figure 18: Riel in circulation and riel compared (percentage points) to -U.S. dollar exchange rate (y/y, percent change) Riel in circulation Riel deposits Foreign currency deposits Riels/U�S� dollar exchange rate (RHS) 45 Riels in circulation 40 40 3 35 35 2 30 30 1 25 25 0 20 20 -1 15 15 -2 10 5 10 -3 0 5 -4 -5 0 -5 Dec-17 Dec-18 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 20 A Prakas is a regulation issued by head of public institutions such as Minister, or by the Governor of the central bank (https://asianbondsonline.adb. org/regional/guides/definition.php?term=Prakas). 21 Prakas issued by the National Bank of Cambodia) on Provision of Credit in National Currency of Banking and Financial Institutions, No. B7.016.334. PK, dated December 1, 2016. 21 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook Box 3. Cambodian households’ debt-to-income ratio Rapid financial deepening during the post-global increasingly being pumped into the economy, outstanding financial crisis period, with broad money growing at debt owed by each household increases. The 2017 Cambodia an average 20.7 percent during 2011-18, underpinned Socio-economic Survey found that average household increased access to finance and accommodated (disposable) income growth averaged 12.1 percent during economic growth. According to the central bank’s mid- 2013-17 period, but households’ outstanding debt expanded year report, by mid-2019, total outstanding credit reached at a much faster rate, growing at an average of 24.8 percent per 103 percent of GDP, 77.3 percent of which was provided year. Nonetheless, the decline in interest rates helps contain by the banking sector, while the rest was supplied by the debt repayment. Cambodia’s debt-to-income ratio has been microfinance sector. In 2018, the banking sector served estimated to have slightly declined, but remains elevated for 6.2 million depositor’ accounts and 2.6 million borrower’ some geographic areas, namely other urban and other rural accounts. The microfinance sector provided credit to 1.8 (figure B3.1). Elevated debt-to-income between 36 percent to million borrowers and obtained deposits from 2.1 million 49 percent warrants household’s efforts to lower it to be in a depositors. better position to handle unforeseen expenses. In addition, costs of borrowing have declined More importantly, the use of loan proceeds by borrowers substantially during the past several years as the matters. Financial intermediaries channel savings into efficiency of the banking and microfinance sectors has productive investment by providing liquidity in the form of improved. The weighted average interest rate of U.S. dollar- credit. Loan proceeds used for productive purposes will then denominated loans supplied by the banking sector declined generate additional income which helps reduce the debt-to- to 7.07 percent per year in 2018, down from 17.15 percent income ratio in the longer term, all else being equal. per year at the end of 2010. In the past, rural households, In Cambodia, rising credit may not necessarily be especially farmers relied heavily on informal private money supportive of future income generation. The 2017 lenders who more often than not loan-sharked them. But Cambodia Socio-economic survey showed the share of loan the majority of rural households now obtain loans from the proceeds used for agricultural and nonagricultural activities, (formal) microfinance sector, although interest rates charged which provided almost 40 percent of household’s income in by the sector remain relatively higher than those of the the rural areas, declined. For rural households, the share of banking sector. The 2017 Cambodia Socio-economic Survey loans provided for agricultural and nonagricultural activities found that the banking and microfinance sectors combined declined from 43.5 percent of total credit in 2013 to 30.2 supplied almost 80 percent of the credit demanded by rural percent in 2017 (figure B3.2). In contrast, the share of loans households (52.3 percent was provided by the microfinance provided for consumer durables rose from 12.4 percent sector and 26 percent by the banking sector). to 24.7 percent in 2017. For Phnom Penh, the share of Lower borrowing costs have so far helped contain the loans provided for household consumption needs rapidly debt-to-income ratio1, as outstanding debt rises with expanded, rising from 18.6 percent in 2013 to 55.1 percent increased access to finance by households. As credit is in 2017. Therefore, financial literacy needs to be improved. Figure B3.1: Estimated debt-to-income ratio Figure B3.2: O  utstanding debt by purpose of borrowing (percent) (percent share) 2013 2017 100 Agriculture Non-agriculture 60 Consumption needs Consumer durables 50 46 49 46 80 40 40 37 37 60 30 30 23 40 20 20 10 0 - Cambodia Phnom Penh Other urban Other rural Phnom Other Other Phnom Other Other Penh urban rural Penh urban rural 2013 2017 Source: World Bank staff estimates using 2017 CSES. Source: 2017 Cambodia Socio-economic Survey. 1/ Debt-to-income ratio is all monthly debt payments divided by gross monthly income. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 22 Recent Economic Developments and Outlook NCDs reached US$3.5 billion for U.S. dollar- denominated loans of the banking sector denominated NCDs and 3.5 trillion riels for and declined substantially, decreasing to 14.14 riel denominated NCDs. A rising demand for local percent in June 2019, down from 16.4 percent currency has led to a 6 percent increase y/y of in 2018. The central bank successfully injected U.S. dollar-denominated NCDs (used as collateral an increasingly large amount of local currency, by banks for LPCO operations) a 21 percent while maintaining a stable riel versus U.S. dollar reduction y/y of riel-denominated NCDs. The exchange rate. Despite acceleration of domestic rapid accumulation of gross international reserves credit, banks’ short-term interest rates for dollar- which reached US$11.3 billion or a 24.7 percent denominated loans remained broadly stable at y/y growth, the fastest increase since February 10.0 percent thanks to rising competition. The 2018—is due at least in part to the increase in overall trend is that lending rates are gradually use of local currency. The use of local currency declining as banks compete and the banking could be further expanded, if all banking and system continues to strengthen and expand. The financial institutions were required to increase microfinance sector’s interest rates are higher the share of their loan portfolios in the national than those of the banking sector. In June 2019, currency to more than 10 percent. Doing this will the microfinance sector’s interest rate of riel- enable the central bank to further accumulate denominated loans was as high as 17.7 percent, gross international reserves, while gradually de- while the sector’s interest rate of U.S. dollar dollarizing the economy. denominated loans remained at 16.9 percent. Note the current interest rate cap imposed by The exchange rate remained broadly stable the central bank is 18 percent.23 Interest rates To keep the riel-U.S. dollar exchange rate stable, of riel- and U.S. dollar-denominated deposits of the central bank conducts prudent market the banking sector were largely unchanged at 6.1 operations. During the first half of 2019, 2.0 trillion percent and 4.5 percent, respectively. Similarly, riels (equivalent to US$518 million) was supplied by interest rates of riel- and US-dollar denominated the central bank to commercial banks and money deposits of the microfinance sector were broadly changers.22 Due to a seasonal factor, there was a stable at 7.9 percent and 7.7 percent, respectively. slight depreciation of the riel versus the U.S. dollar Credit growth accelerated and outstanding exchange rate in June 2019, when the exchange loans exceeded 100 percent of GDP rate reached riel 4,066 per U.S. dollar, compared with riel 4,018 per U.S. dollar at the end of 2018. Driven by rising demand for credit fueled The riel also marginally depreciated against the by Cambodia’s booming economic activity, Thai baht but appreciated against the Vietnamese lending to the private sector increased further. dong (figure 19). Against the currencies of its main Credit growth accelerated, reaching 28.3 percent export markets (besides the United States), the riel y/y in June 2019, compared with 24.2 percent in appreciated against the euro, the Canadian dollar, 2018 and 19.6 percent in 2017. Credit growth has and the British pound. Cambodia’s nominal effective started to accelerate again since the second half exchange rate remained largely unchanged, which of last year, mirroring the rise of credit to the indicates that relatively stable local currency against construction and real estate sector (figure 20). the weighted basket of currencies of Cambodia’s The construction and real estate sector trading partners. received the largest share of bank credit Interest rates on riel-denominated loans In June 2019, bank credit going to the combined declined, thanks to the promotion of local construction, real estate and mortgage currency businesses captured the largest share, at 29.5 The (weighted average) interest rate of riel- percent of the total US$21.9 billion in bank credit provided to Cambodia’s nonfinancial 22 First semester report, the National Bank of Cambodia, 2019. 23 See Prakas on interest rate ceiling on loan at https://www.nbc.org.kh/download_files/legislation/prakas_eng/Prakas-on-Interest-Rate-Cap-Eng.pdf 23 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook sector. Before 2008/09 global financial crisis, the system introduced by real estate developers, rental share of domestic credit going to the construction and leasing firms, and informal lenders. Therefore, peaked at 22.8 percent when the construction the magnitude of total credit provided is much boom went bust. By mid-2019, the total greater, and the economy is highly leveraged (see outstanding credit provided to the construction, also box 3 on Cambodian households’ debt-to- real estate and mortgage businesses amounted to income ratio). US$6.45 billion with a growth rate of 38.9 percent Reported nonperforming loan (NPL) ratios y/y, contributing a record high of about 40 for the banking sector marginally increased. percent of bank credit growth. Bank credit going Reported NPL ratios for the banking sector to retail and wholesale was next, capturing 15.8 declined slightly to 2.3 percent in the first half percent and 11.4 percent, respectively. Credit to of 2019, compared with 2.8 percent in 2018.24 the agriculture and manufacturing sectors ranked Reported NPLs for the microfinance sector fourth and fifth, accounting for 6.9 percent and deteriorated slightly to 1.1 percent, increase 5.1 percent, respectively. from 1.0 percent in 2018. Still, the reported NPL Rapid financial deepening led to the rise in ratios need to be carefully interpreted as there outstanding loans financed by the banking and are inconsistencies in loan classifications and a microfinance sector. Domestic credit growth was continuous rolling over and refinancing of loans. rapid, far exceeding nominal GDP growth. Total Cambodia has maintained adequate foreign outstanding loans reached 103 percent of GDP or reserve buffers, according to the Financial 111.3 trillion riels by June 2019, up from less than Stability Review a quarter of GDP a decade ago. Cambodia’s credit- to-GDP overtook several large economies in the Continued efforts have been made to maintain region such as India, Indonesia, Pakistan and the the stability of the financial sector while Philippines, despite the country’s nascent banking promoting the use of local currency and making sector. The banking sector provided 77.3 percent inroads into dollarization. The central bank’s of outstanding loans, and the microfinance sector financial stability review indicated that volatility provided the remaining 22.7 percent.. This, however, in the global financial market has not affected excludes credit provided by the “shadow banking” capital inflows and local currency movements in a Figure 19: Riel appreciated against the dong but Figure 20: Contribution to domestic credit depreciated against the Baht growth nominal exchange rates (Riels vs US dollar, Dong and Baht) (percentage points) Construction, estate & mortg Manufacturing Riel per Baht Riel per 1000 dong Wholesale & retail Hotels and Restaurants 50 Others Agriculture Riel per US$ (RHS) Total 190 4,250 40 180 4,200 170 4,150 30 160 4,100 20 150 4,050 140 4,000 10 130 3,950 120 3,900 0 110 3,850 -10 Apr-16 Apr-17 Apr-18 Apr-19 Oct-16 Oct-17 Oct-18 Jan-16 Jan-17 Jan-18 Jan-19 Jul-16 Jul-17 Jul-18 Dec-12 Dec-18 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Mar-13 Mar-16 Mar-17 Mar-18 Mar-19 Mar-14 Mar-15 Sep-12 Sep-13 Sep-18 Sep-14 Sep-15 Sep-16 Sep-17 Jun-12 Jun-13 Jun-15 Jun-16 Jun-18 Jun-14 Jun-17 Jun-19 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 24 2019 Mid-Year Report, the National Bank of Cambodia. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 24 Recent Economic Developments and Outlook noticeable way and that Cambodia has maintained and investment demands, this year’s revenue an adequate international reserve buffer.25 performance markedly improved. There have been across-the-board improvements in revenue Potential macroprudential policies discussed collection. Thanks to rising imports fueled by in the financial stability review include both strong demand for durable goods such as motor on the supply side (higher risk weights could vehicles, together with construction materials be imposed on loans to construction and real imports driven by bustling construction activity, estate-related sectors) and the demand side (credit revenue from taxes on goods and services quality and lending standards improvements), (indirect taxes) accelerated. Taxes on goods and while fiscal policy is also considered important services, which comprises largely value-added tax to address potential vulnerabilities in the real (VAT) and excises accounts for the largest source estate sector. New minimum capital requirements of domestic revenue (54.4 of the total), reached were fully in place by the first quarter of 2018. 6,234 billion riels or a 23.1 percent y/y increase in The central bank also conducted a stress test that June 2019 (figure 22). showed that banking and financial institutions are resilient, except for a few institutions that need Revenue from direct taxes, covering mainly to be carefully monitored. Additional measures profit and salary taxes and accounting include a liquidity coverage ratio introduced in for 22.8 percent of domestic revenue is next, 2015 and steadily increased until 2020, and the rising to 2,615 billion riels or 15.8 percent y/y. strengthening of monitoring of currency and Despite the commitment under the ASEAN maturity mismatches.26 Free Trade Agreement (AFTA), revenue from the international trade tax which includes mainly Strong revenue collection has happened customs duties and fees and accounts for 11.7 across-the-board percent, grew at 22.7 percent y/y. Non-tax revenue, Revenue collection during the first six the fourth-largest component, capturing 10.5 months of 2019 accelerated, reaching 11,452.4 percent of total revenue, grew at 25.1 percent y/y. billion riels or a 21.0 percent year-on-year The authorities continue to reform and modernize increase (figure 21). Underpinned by the revenue administration, while enhancing taxpayer authorities’ efforts to modernize tax and customs services with the use of the banking system for administration together with rising consumption tax payments. E-tax services have been introduced Figure 21: Recorded central government revenue Figure 22: Recorded taxes on goods and services has grown rapidly. First six-month (indirect tax) drove central government collection revenue. First six-month collection (y/y, percent change) (billions of riels) Central government domestic revenue Non-tax revenue In't trade tax 30 Tax revenue Direct Tex on goods Non-tax revenue Domestic revenue & service (indirect) 12,000 25 10,000 20 8,000 15 6,000 10 4,000 5 2,000 0 - H1 2017 H1 2018 H1 2019 H1 2016 H1 2017 H1 2018 H1 2019 Source: Cambodian authorities. Source: Cambodian authorities. Note: H1 = First half. Note: H1 = First half. 25 Financial Stability Review, the National Bank of Cambodia, 2018. See thttps://www.nbc.org.kh/publications/fsr.php 26 Annual Reports for 2017 and 2018, the National Bank of Cambodia. See https://www.nbc.org.kh/english/publications/annual_reports.php 25 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook and supported by taxpayers’ education, covering wage budget, the (reclassified) wage bill decreases tax returns, tax registrations, and e-VAT, risk- to 7.6 percent of GDP (compared to 8.6 percent based audits, and improved compliance. The of GDP in 2018). In addition, this year’s recorded capacity of tax and customs officials has also been wage disbursement was slow, reaching, as of June strengthened. The 2019-23 Revenue Mobilization 2019 only 46 percent of the 2019 budget. Strategy (RMS) has been adopted, a key objective Disbursement of capital expenditure, of which is to further modernize tax and customs accounted for about a third of the 2019 budget administration and policy. Given the rapid growth during the first six months, was also slower of revenue collection during the past several than last year’s performance. By June 2019, years, the new RMS conservatively aims at a lower disbursement for the 2019 capital budget reached target, an additional 0.3 percent of GDP revenue only 30 percent of the 2019 annual budget, or a increase per year, compared with 0.5 percent set decline of 17.6 percent y/y. The slow disbursements in the previous RMS. were recorded for both domestically and externally Expenditure performance remained prudent financed capital spending, which reached 20.4 percent and 34.6 percent of the 2019 annual budget, Overall public outlay reached 8.8 trillion respectively. Nevertheless, disbursement of capital riels during the first six months of 2019 (figure budget often accelerates during the second half 23). Compared with the same period last year, of each year as the procurement process picks up. the outlay was flat. While current expenditure As a result, annual capital disbursement eventually managed to grow at 7.7 percent y/y, capital reaches the budgeted capital spending. Cambodia expenditure declined by 17.6 percent. By June continues to depend on development partners to 2019, non-wage disbursement accelerated, finance its capital investment. In the 2019 budget, increasing by 22.0 percent y/y, thanks largely to externally financed capital spending accounts for rising disbursements for social benefits that consist about 75 percent of the total capital budget, while mainly of social security and social assistance the remaining 25 percent is financed by domestic after they were split from wage and compensation funds. budget nomenclature starting this year (figure 24). With the reclassification whereby social security The overall fiscal deficit is expected to and social assistance were split from the (original) remain steady at two-year lows Figure 23: Recorded central government Figure 24: Recorded non-wage spending expenditure was flat due to slow capital increased thanks to budget budget disbursement. First six-month reclassification this year collection (billions of riels) (billions of riels) Non-wage Capital Wage and compensation Non-wage 4,000 Wage Total expenditure 10,000 3,500 3,000 8,000 2,500 6,000 2,000 4,000 1,500 1,000 2,000 500 - 0 H1 2016 H1 2017 H1 2018 H1 2019 H1 2015 H1 2016 H1 2017 H1 2018 H1 2019 Source: Cambodian authorities. Source: Cambodian authorities. Note: H1 = First half. Note: H1 = First half. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 26 Recent Economic Developments and Outlook This year’s overall fiscal deficit of the general Countries (LIC-DSF) showed that Cambodia government will remain largely unchanged remains at low risk of external debt distress. with sustained revenue collection and prudent All debt burden indicators are projected to remain expenditure management. Revenue collection under their indicative thresholds under the baseline (including grants) is projected to sustain at 23.5 and the shock scenarios. While the overall risk of percent of GDP, similar to the level collected debt distress is low, the analysis indicates that debt last year. Public outlays will remain contained at sustainability is vulnerable to export and growth 24.2 percent of GDP. Cambodia’s fiscal deficit shocks, and the materialization of contingent (including grants) is therefore anticipated to stay liabilities. Furthermore, the public and publicly steady at two-year lows, reaching 0.6 percent of guaranteed debt-to-GDP ratio is projected to rise GDP in 2019. The deficit remained to be fully by more than 10 percentage points during the financed by external funds (figure 25). After years next decade due to projected large fiscal deficits of prudent fiscal management, the government in the medium term. These findings reinforce the has succeeded in rapidly accumulating substantial importance of implementing reforms to increase deposits at the central bank, which currently the economy’s resilience to external shocks and stand at 17.3 percent of GDP in 2019 (figure 26). encourage export and economic diversification. The authorities are prepared to use part of the Efforts to mobilize fiscal revenue, to strengthen deposits as a fiscal stimulus in 2020 to mitigate the Public Investment Management framework the potential negative impacts of the withdrawal (including for PPPs) and further enhance of EBA, if the latter occurs. monitoring of PPP and financial sector risks, as well as introduction of a debt-based fiscal anchor, The debt distress level remained low as per are necessary to ensure debt sustainability in the the 2018 World Bank/IMF Debt Sustainabilty medium term.27 Analysis By end-2018, Cambodia had a total public The Debt Sustainability Analysis (DSA) using debt outstanding of US$7.02 billion (or 26.3 the revised joint IMF/World Bank Debt Sustainability Framework for Low Income percent of GDP) of which 0.04 percent is public Figure 25: The general government fiscal deficit Figure 26: Government deposit rose, thanks is expected to narrow, thanks to good to increased collection Government revenue collection deposit at the banking system (percent of GDP) (percent of GDP) Overall balance (including grants) Total revenue Total expenditure 29 20 24�3 24�2 23�6 23�6 23�5 18 24 21�9 21�4 22�1 21�6 20�0 20�7 16 19�5 19 14 12 14 10 9 8 6 4 4 -1 2 -1�4 -0�7 -0�6 0 -1�9 -1�9 -2�0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 -6 2014 2015 2016 2017 2018 2019e Source: Cambodian authorities and World Bank staff estimates. Source: Cambodian authorities. Note: e = estimates. 27 IMF Staff report for the 2018 Article IV consultation - Debt Sustainability Analysis. See https://www.imf.org/en/Publications/CR/ Issues/2018/12/17/Cambodia-2018-Article-IV-Consultation-Press-Release-Staff-Report-Staff-Statement-and-46478 27 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook domestic debt.28 Overall, the borrowing terms The economy has increasingly relied on the remained highly concessional, with a (weighted construction and real estate sector which average) interest rate, maturity and grade period of contributed about one fifth of real growth in 1.24 percent, 27.0 years, and 7.5 years, respectively. 2018, up from one sixth in 2013. In addition, By major currencies, outstanding debt in U.S. FDI inflows which have been largely originated dollar is the largest, accounting for 44.2 percent from China and partly behind construction and of total outstanding debt. Special Drawing Rights real estate boom, peaked in 2018 and are expected and Chinese yuan are next, covering 27.2 percent to moderate amid weakening global demand, and 15.1 percent, respectively. heightened trade policy uncertainty and slower projected growth in China. It is estimated that China is the largest creditor, accounting for Cambodia receive as much as half of the total half of Cambodia’s outstanding debt FDI inflows from China in recent years. Given Cambodia’s external public debt owed to China the recent FDI inflows have mainly financed the accounted for 48.7 percent of total outstanding non-tradeable sector, many of the advantages public debt by end-2018. The second- and third- associated with FDI inflows such as technological largest creditors are multilaterals, namely the transfers, skills, and management expertise which Asian Development Bank and the World Bank, contribute to improving the country’s external covering for 18.9 percent and 7.8 percent of total competitiveness remain limited. In addition, outstanding debt, respectively. The fourth- and if the share of the construction and real estate fifth-largest creditors are the Republic of Korea sector in the economy declines, there will be and Japan, accounting for 5.2 percent and 4.7 implications for sustained economic activity and percent of total outstanding debt, respectively. Old for employment. debts (under negotiation) account for 8.8 percent. Table 2: Cambodia’s exports to its main The European Union and the United States destinations remain Cambodia’s largest export markets (percent share) The trade preferential treatments offered by Country/region 2014 2015 2016 2017 2018 the European Union and the United States EU 27.0 28.8 30.8 31.5 31.4 have been largely behind Cambodia’s success o/w UK 11.0 10.2 9.5 8.9 7.4 in boosting its exports (see also the special focus section below). Although there has been United States 29.2 25.0 21.3 21.4 23.2 some progress on export diversification to China, China 7.6 6.9 8.2 8.8 10.1 Japan and ASEAN (table 2), Cambodia continues Japan 5.0 6.7 8.2 7.6 8.2 to rely on the European Union and the United Canada 7.4 6.4 6.5 6.7 6.6 States as its largest export markets. Cambodia’s exports to China, Japan, Canada and ASEAN ASEAN 5.3 9.0 8.6 7.9 6.1 combined covered only one third of the country’s Thailand 0.7 4.1 4.2 3.7 2.8 total exports in 2018, up from a quarter in 2014. Vietnam 1.4 2.2 2.3 2.3 1.7 Both the EU and U.S. remain Cambodia’s main Malaysia 1.8 1.6 1.0 1.1 1.0 export markets which combined accounted for 54.6 percent of total exports in 2018, slightly Singapore 1.0 0.7 0.6 0.1 0.0 lower than 56.2 percent of total exports in 2014. Korea, Republic of 1.8 1.6 1.6 1.7 1.8 As Cambodia’s access to the EU market under Other 16.6 15.6 14.7 14.4 12.6 the EBA arrangements is now uncertain with the Total 100.0 100.0 100.0 100.0 100.0 possible EBA withdrawal, the country’s export outlook is under threat. Source: Direction of Trade Statistics, IMF. 28 Ministry of Economy and Finance 2019. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 28 Recent Economic Developments and Outlook Outlook As illustrated in table 3, a relatively large fiscal stimulus to be financed by government With slower global demand, the growth savings is expected to be introduced in 202029 outlook is projected to ease to mitigate potential negative impacts of The economy is expected to decelerate the withdrawal of EBA. In February 2019, the gradually in the short to medium term. EU launched the process that could lead to the Cambodia’s exports will moderate with the easing temporary withdrawal in 2020 of Cambodia’s of global demand, while investment decelerates preferential access to the EU market through with sluggish capital inflows due to slower the Everything But Arms (EBA) initiative. The projected growth in China. Growth is projected stimulus will help growth remain robust in the to ease to 7.0 percent in 2019, compared to 7.5 short term. percent in 2018 (table 3). The easing of exports Poverty reduction is expected to continue. and continued strong growth in imports will result Economic growth, particularly growth in labor in a widening of the country’s current account income in the form of higher wage income, is deficit to 9.8 percent of GDP in 2019, up from the main driver of poverty reduction. Most of 9.4 percent of GDP in 2018, but remains fully the poor have wage income with low-paying financed by foreign direct investment. However, jobs, signaling challenges with low skills and in the developing East Asia and Pacific region, productivity. Inequality is on the rise in both Cambodia is projected to remain the fastest urban and rural areas with the largest increase is growing economy during 2019-21 (table 4). in the rural areas. Table 3: The macro outlook in the short and Table 4: East Asia and Pacific Economic Outlook medium term is relatively stable Percent of GDP unless 2018 2019p specified otherwise 2019 2020 2021 Cambodia 7.5 7.0 GDP growth (percent) 7.0 6.8 6.8 Fiji 3.2 3.4 Domestic demand 11.7 12.5 9.0 (percent change y/y) Indonesia 5.2 5.1 Inflation 2.1 3.1 3.0 Lao PDR 6.3 6.5 (percent change, average) Malaysia 4.7 4.6 Overall fiscal balance -0.6 -4.9 -4.5 Mongolia 6.8 6.9 Government debt 30.0 30.1 31.1 Export growth 9.3 8.2 8.9 Myanmar 6.5 6.6 (percent change) Papua New Guinea 0.3 5.1 Import growth 7.7 7.7 7.7 Philippines 6.2 5.8 (percent change) Solomon Islands 3.5 2.9 Current account -9.8 -12.5 -12.0 FDI 11.8 11.9 11.4 Thailand 4.1 2.7 Timor-Leste -1.1 4.2 Gross international reserves 5.6 5.6 5.5 (months of imports) Vietnam 7.1 6.6 Source: WDI, World Bank/IMF DSA and World Bank staff Source: World Bank 2019d. estimates and projections. 29 Ministry of Economy and Finance’s presentation on the macroeconomic framework and public finance policy at the National Assembly, July 15, 2019. 29 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Recent Economic Developments and Outlook Risks safeguard sound lending practices, demand- side macroprudential measures have been under Risks are rising due to possible EBA consideration. Equally important, fiscal policy withdrawal, a China slowdown, and a could be used to deal with potential vulnerabilities prolonged construction and property boom in the real estate sector. For instance, last year, Downside risks, arising from domestic and Singapore introduced property cooling measures external factors have intensified.30 Possible by raising the rates of the Buyer’s Stamp Duty withdrawal of the EBA initiative, as well as a sharp currently levied on all purchases of properties, slowdown in the Chinese economy (a potential except its citizens and permanent residents who outcome of continued U.S.-China trade tensions), are purchasing their first home. could substantially dampen growth prospects, It is imperative to improve the country’s given Cambodia’s reliance on exports to the EU external competitiveness by facilitating and Chinese FDI inflows and tourists. Recently, investment and trade, while enhancing the high-frequency indicators have suggested a further ease of doing business. Cambodia’s ranking moderation in economic activity in China. In in the ease of doing business index continued to addition, a prolonged construction and property slip, declining to 144th in 2019, down from 127th boom and the increase of credit provided to the in 2016, when the country’s ranking improved construction and real estate sectors alongside from its 135th ranking in 2015. The authorities rising indebtedness—where combined bank and recently introduced measures to facilitate trade by microfinance credit now accounts for over 100 lowering logistics costs and supporting businesses percent of GDP—also present a downside risk with a six-day reduction in the number of for Cambodia. publicly observed holidays next year. Successful Policy approaches to managing rising risks implementation of the measures, together with more efforts to address high electricity costs and Macro-prudential measures are needed to large skills gaps, will further promote investment ensure financial stability in Cambodia’s in high-value-added products, especially the highly-leveraged economy. The latest newly emerging and expanding products such financial stability review discussed potential as footwear, travel goods, electrical appliances macroprudential policies on both the supply and and components, and auto parts. Advancing demand sides, while emphasizing the importance Cambodia’s participation in regional and global of effective interagency coordination. For a value chains is needed to improve productivity in supply-side macroprudential policy, an example the presence of rising wages. See also the special of a widely used tool in other countries is a focus section below on Upgrading Cambodia in sectoral capital requirement measure, where global value chains that discusses the country’s higher risk weights could be imposed on loans opportunities and challenges to upgrading in the to construction and real estate-related sectors. apparel, footwear, and travel goods sector. To mitigate potential risks of speculation and 30 EBA withdrawal (and fiscal stimulus) is not factored in. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 30 Special Focus: Upgrading Cambodia in Global Value Chains Special Focus: Upgrading Cambodia in Global Value Chains Special Focus: Upgrading Cambodia in Global Value Chains31 1. Introduction participation in the garment value chain is firms that import textiles from China used to assemble Global value chains (GVCs), or the fragmentation t-shirts that are then exported to the United States of production across countries, are not new. as final products. Measures of backward GVC However, they grew swiftly after 1990 due to participation show that the foreign value added technological advances in transportation and in Cambodia’s exports grew from US$5 million information and communications, and reductions to US$523 million between 1990 and 2015 (the in trade barriers that allowed manufacturers latest year of available data). Measures of forward to extend production processes beyond GVC participation show that the domestic value national borders (World Bank 2019a). This has added in third countries’ exports grew from fundamentally changed how countries participate US$16 million to US$456 million. An example in international trade, the determinants of of Cambodia’s forward participation in the food that participation, and the consequences for and beverage value chain is firms that export development (see box S1). unprocessed cassava to Thailand that is processed Emerging technological advances and shifting into chips and exported. But participation grew trade policies are reshaping international trade particularly swiftly starting around 2004 (figure yet again. Notable are (a) the arrival of labor- S1). saving technologies such as automation and 3D Forward and backward GVC participation printing, and (b) increased protectionism among grew faster in Cambodia than in other regional large countries. Their implications, though, are countries such as Malaysia, Thailand, and surrounded by uncertainty. The World Bank’s World Vietnam, as well as other developing countries Development Report 2020: Trading for Development such as Bangladesh and Sri Lanka, although in the Age of Global Value Chains considers how from a low base (figure S2). Between 1990 and important GVCs have been and can continue 2015, backward GVC participation grew twice as to be for countries’ development given these fast as these comparator countries, at an average evolving global megatrends (World Bank 2019a). annual growth rate of 21 percent. Foreign GVC Cambodia—among the most open countries participation, at 14 percent, also surpassed other to trade in the world—embraced GVCs, which countries’ performance. supported growth and other development As in many countries, trade openness and GVC outcomes, but with relatively little diversification integration in Cambodia coincided with better or upgrading since. This special focus draws economic performance. Cross-country growth on the findings and policy insights of the World regressions suggest that a 10 percent increase Development Report 2020 and considers key in backward and forward GVC participation is policy areas to support Cambodia’s continued associated with a 13.6 percent and 10.5 percent development through GVC participation. increase in GDP per capita, respectively (World Bank 2019a). Both forms of GVC participation 2. Lots of participation are associated with higher income growth than Cambodia’s participation in GVCs has grown standard trade (World Bank 2019a). In Cambodia, steadily since the 1990s following the arrival GDP per capita growth in constant 2010 U.S. of the export-oriented garment and footwear dollars is strongly correlated with increased GVC industry. An example of Cambodia’s backward integration (figure S1).32 31 This special focus was prepared by Claire H. Hollweg with valuable inputs from Marong Chea, Runsinarith Phim, Karlygash Dairabayeva, Alberto Portugal, and Miguel Eduardo Sánchez Martín. The author thanks Aaditya Mattoo, Deepak Mishra, and Sodeth Ly for thoughtful suggestions. 32 The correlation coefficient between GDP per capita and backward participation is 0.95 and forward participation is 0.97. 33 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains Box S1. What is a global value chain? A global value chain (GVC) refers to the series of stages embodied in third countries’ exports. Using firm-level data, required to produce a good or service that is sold to GVC participation is proxied by firms that both export and consumers, with each stage adding value and with at least import. two stages conducted in different countries. GVCs account Two features distinguish GVC trade from traditional trade. for around half of world trade today. First, countries import not only for domestic consumption, Firms within countries participate in GVCs in two ways: but also for export production. As such, GVCs involve (1) by importing foreign inputs for processing and further hyperspecialization. Countries do not need to produce a export, referred to as “backward participation”; and (2) by whole good, they can focus on one part of that good. exporting inputs that are incorporated in the exports of Second, in contrast to “standard” trade carried out in other countries, referred to as “forward participation.” anonymous markets, GVC transactions typically involve GVC participation is measured at the country or sectoral longer-term firm-to-firm relationships. Participants often level. Backward participation is traditionally measured make relationship-specific investments, such as purchasing as the foreign value added embodied in a country’s or specialized equipment and inputs or customizing sector’s gross exports. Forward participation is traditionally intermediate products (see figure B.S.1). measured as the domestic value added of a country or sector Figure B.S.1: Firms within countries participate in GVCs in different ways Forward Forward and Backward participation backward participation participation Exporting to export Importing to export Exports for Exports Exports consumption Border Border Border Raw materials Semi-finished good Finished good Parts and components Source: World Bank 2019a. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 34 Special Focus: Upgrading Cambodia in Global Value Chains GVC participation also supported productivity process of a good; countries can specialize in improvements and employment growth in only a few tasks of the international production Cambodia. In Cambodia, firms that both export process. By allowing countries to specialize, and import—a proxy for GVC participation— GVCs make participation in trade easier and allow are more productive and achieve higher countries to better exploit comparative advantage. employment growth than other firms (figure Second, firm-to-firm relationships also make S3).33 Using the World Bank’s enterprise survey GVCs a mechanism for learning and technology data, manufacturing firms that export and import transfer. In GVCs, domestic firms become are 26 percent more productive than firms that interdependent with foreign firms that share neither export nor import and experience 29 know-how and technology with their buyers percent faster employment growth, consistent and suppliers. Firms have a shared interest with international experience. One-way traders in specializing in specific tasks, exchanging in manufacturing that export only or import only technology, and learning from each other (World are slightly less productive and grow more slowly Bank 2019a). For these two important reasons, than non-trading firms, an anomaly in Cambodia firms in developing countries that participate in compared to what is observed globally.34 GVCs tend to be more productive. The two distinctive features of GVCs— In Cambodia, for example, two-way traders hyperspecialization and firm-to-firm relationships​ have a higher incidence of providing training —make them particularly conducive to growth to workers than non-traders.35 Using the World and productivity improvements, for two reasons. Bank’s enterprise survey data, manufacturing First, because of hyperspecialization, exporting firms that export and import are 25 percent more no longer requires mastering the entire production Figure S1: Cambodia’s participation in GVCs Figure S2: Cambodia integrated into GVCs much has grown steadily since the 1990s, faster than other countries alongside strong GDP growth Level of backward GVC participation (foreign value added in exports) and Compounded average annual growth rate of backward GVC participation forward participation (domestic value added in third countries’ exports) from (foreign value added in exports) and forward participation (domestic value 1990 to 2015 (left axis) against GDP per capita (in constant 2010 US$) added in third countries’ exports) from 1990 to 2015 from 1993 to 2015 (right axis) Backward Forward GDP per capita Backward Forward 700 1100 25 Growth of GVC participation (percent) GDP per capita (constant 2010 US$, million) 1000 600 20 GVC participation (million US$) 900 500 800 15 400 700 10 300 600 500 200 5 400 100 0 300 am ia h ka ia d an es od ys an etn 0 200 lad ail ala mb iL Th Vi ng M 1990 1993 1996 1999 2002 2005 2008 2011 2014 Sr Ca Ba Source: Author’s calculations using data from EORA and Source: Author’s calculations using data from EORA. WDI. 33 Firm-level data can identify the set of firms in a country that participate in trade, further distinguishing between firms that export, firms that import, and firms that both export and import. When a given firm in a country both imports and exports, it is likely the firm participates in GVCs (World Bank 2019a). 34 This result may be driven by the subsectoral composition of firms that only import or only export within the manufacturing sector, or domestic factors that prevent resource allocation to the most productive firms. Further productivity analysis is needed. 35 Foreign firms are also more likely to provide training. A 2012 Employer Skills Needs Survey undertaken by the International Labor Organization and the National Employment Agency has information on training by ownership (foreign, Cambodian). Nearly three-quarters of foreign firms provide training to workers, compared to 57 percent of domestic firms. 35 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains likely to have formal training programs for their 14 percent in 1991 (figure S4). The garment and permanent, full-time employees. One-way traders footwear sector alone employs more than 660,000 in manufacturing that are either exporters or workers in Cambodia. importers are less likely than non-traders to have As the World Development Report 2020 and formal training programs. international experience shows, GVCs can GVCs are also associated with structural improve other development outcomes, such as transformation in developing countries, drawing lowering poverty. GVC participation is associated people out of less productive activities and into with poverty reduction through income and more productive manufacturing and services employment growth. In municipalities in Mexico, activities. Firms in GVCs tend to be more capital- for example, the expanded presence of GVC intensive than other (especially non-trading) firms is more strongly associated with poverty firms, and so their production is less job intensive. reduction than the presence of firms that export However, the enhanced productivity leads to an only or import only (World Bank 2019a). In expansion in firm output and thus to increases in Vietnam, poverty reduction was similarly greater firm employment (World Bank 2019a). Wage and in locations with a higher presence of GVC firms salaried workers as a share of total employment (World Bank 2019a).36 in Cambodia was 49 percent in 2018, up from Figure S3: Like global experiences, Figure S4: Employment is increasingly in wage manufacturing firms that both import and salaried jobs and export and more productive and grow faster Percentage difference in employment growth and labor productivity between Level of domestic value added in Cambodia’s exports from 1990 to 2015, as non-trading firms and (1) firms that both export and import or (2) firms that well as wage and salary workers as a percent of total employment only export or (3) firms that only import in the manufacturing sector Export and import Export only Import only Domestic value added in exports Domestic value added in exports (million US$) 0�4 Wage and salaried workers Difference between trading firms and nontrading 3000 45 0�3 Wage and salaried workers (percent) 40 2500 0�2 35 2000 30 0�1 25 firms (percent) 0 1500 20 -0�1 1000 15 -0�2 10 500 5 -0�3 0 0 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 -0�4 Employment growth Labor productivity Source: Author’s calculations using data from World Bank Source: Author’s calculations using data from EORA and Enterprise Surveys for Cambodia in 2007, 2013 and 2016. WDI. Note: The results are obtained by regressing firm Note: Modeled ILO estimate. employment growth (number of full-time workers) or firm labor productivity (log sales per worker) on dummy variables marking the type of firm (import and export, export only, import only), controlling for year fixed effects. All coefficient estimates are statistically significant. 36 Data do not exist to replicate this exercise for Cambodia. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 36 Special Focus: Upgrading Cambodia in Global Value Chains GVCs are also associated with better job manufacturing tasks. Malaysia, the Philippines, opportunities for women, and the broader Poland, and Thailand specialize in more complex development benefits that these opportunities manufacturing segments of the value chain or bring, such as more schooling and delayed marriage in services tasks that have become increasingly and childbirth, as was the case in Bangladesh traded. And mostly advanced countries and some (Heath and Mobarak 2015). Worldwide, GVC emerging countries such as the Czech Republic firms that both import and export tend to employ specialize mostly in innovation-intensive goods more women than non-GVC firms (World Bank and tasks. 2019a). Data from Cambodia’s Ministry of A taxonomy of GVC participation highlights Commerce show that there were 83 operating Cambodia’s specialization in limited manufacturing footwear factories in Cambodia at the end of 2018 value chains (figure S5). The taxonomy, developed employing around 112,589 workers, of which 87 in the World Development Report 2020, classifies percent are women. countries based on (a) the goods and services 3. Little progression exported, (b) the extent of GVC participation, and (c) measures of innovation. The arrival of the Cambodia rapidly engaged in limited export-oriented garment and footwear industry manufacturing tasks… into Cambodia in the mid-1990s transitioned Countries around the world participate in GVCs, the country from specializing primarily in but how countries participate differs (figure S5). commodities exports to developing GVC links in Some countries such as Venezuela and Algeria simple manufacturing tasks. Cambodia’s position engage at the base of value chains, selling in the value chain—primarily in assembly— predominantly unprocessed commodities and increased the share of manufacturing in total agricultural products to trade partners. Bangladesh, domestic value added in exports, with high Costa Rica, Ethiopia, Sri Lanka, and Vietnam, backward integration (imports of inputs), and among others, are mostly engaged in simple limited innovation activities. Figure S5: All countries participate in GVCs, but not in the same way Taxonomy of GVC participation Source: World Bank 2019a. Note: The type of a country’s GVC links is based on (a) the goods and services exported, (b) the extent of GVC participation, and (c) measures of innovation. See World Bank (2019a) for details. 37 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains Because countries participate differently in little diversification into other value chains, but GVCs, the consequences of participation are also also little upgrading within existing value chains. different. To maximize the benefits, countries First, there has been limited upgrading to higher need to move to the next stage of participation. value-added products or tasks within garments …with little diversifying or upgrading since over the past 20 years. The composition of top garment products in Cambodia has not changed While Cambodia has seen rapid growth in limited significantly; four of the top five garment products manufacturing GVCs for many years, particularly in 2017 were also the top five garment products garments and footwear, the country has not yet in 2000.37 transitioned to the next stage of GVC participation of advanced manufacturing and services. Cambodia’s top export garment products Examples of such stages of participation are (hs6=611020 and hs6=611030) are also on the motor vehicles parts and components, electronics lower end of the quality ladder globally (figure assembly, medical devices manufacturing, and the S6). Cambodia’s unit value for knit or crocheted services segments of value chains such as design sweaters, pullovers, and vests (hs6=611030) ranked or marketing and branding. Instead, there has been 15th of 99 countries exporting that product to the Figure S6: Within garments, there has been little upgrading within products between 2000 and 2016/2017 The relative unit value of a product for each year and exporting country Exports of knit or crocheted sweaters, pullovers, or vests (hs6=611030) to the United States 2000 3 2016 7 2�5 6 Relative unit value Relative unit value 2 5 4 1�5 3 1 2 KHM BGD MYS THA LKA KHM VNM THA LKA BGD MYS VNM 0�5 1 0 0 0 20 40 60 80 100 0 20 40 60 80 100 120 Rank Rank Exports of cotton sweaters, pullovers, or vests (hs6=611020) to the UK 2000 2017 1�8 10 1�6 9 1�4 8 Relative unit value Relative unit value 7 1�2 6 1 5 0�8 VNM KHM LKA 4 THA MYS 0�6 BGD 3 0�4 2 VNM THA KHM MYS BGD LKA 0�2 1 0 0 0 20 40 60 80 100 0 20 40 60 80 100 Rank Rank Source: Author’s calculations using data from Centre d’Études Prospectives et d’Informations Internationales (CEPII). Note: For each product, year, and importing country (the United States and the UK), the relative unit value is calculated as the exporting country’s unit value relative to the unit value at the 90th percentile of the unit value distribution across countries that export that product to the importing country. BGD = Bangladesh; KHM = Cambodia; LKA = Sri Lanka; THA = Thailand; VNM = Vietnam. 37 There has been some diversification within garments, where the top five garment products exported in 1997 represented 57 percent of total garment exports, declining to 36 percent in 2017. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 38 Special Focus: Upgrading Cambodia in Global Value Chains United States in 2016, and 11th of 80 countries upgrading (see box S2). exporting cotton sweaters, pullovers, and vests Second, there has been little diversification into (hs6=611020) to the UK market in 2017. other GVC sectors outside of garments and More striking is that comparator countries including footwear (figure S7). The garment and footwear Vietnam experienced a significant increase in sector remains the largest exporting sector of their relative unit values between 2000 and 2016, Cambodia’s economy, representing about 70 moving up the quality ladder, while Cambodia percent of total merchandise exports. has fallen behind globally. For knit or crocheted Transitioning to advanced manufacturing and sweaters, pullovers, and vests (hs6=611030) to services GVCs presents a much bigger challenge the U.S. market, Vietnam improved in relative unit for countries, an experience not unique to value rank from 3rd to 22nd between 2000 and 2016, Cambodia. Like Cambodia, the composition while Cambodia fell from 51st to 15th. A number of Bangladesh’s and Sri Lanka’s merchandise of factors explain Cambodia’s performance in the exports has changed little since the arrival of sector, and the challenges the country faces for garments and footwear. The factors that make Figure S7: Cambodia’s participation has been concentrated in garments, but little diversification since then, unlike other comparator countries Sectoral export share Cambodia Bangladesh 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sri Lanka Malaysia 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Thailand Vietnam 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Agriculture Fishing Mining and quarrying Food and beverages Textiles and wearing apparel Paper and wood Petroteum, chemical and non-metallic mineral products Metal products Electrical and machinery Transport equipment Other manufacturing Source: Author’s calculations using data from UN Comtrade (mirror data). 39 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains Box S2. Cambodia in the garment, footwear and travel goods global value chain The garment and footwear sector grew sharply over the garment and footwear operations in the country. A study past two decades to become the Cambodian economy’s conducted by the International Labor Organization (ILO) largest export earner. Exports grew from US$80 million in 2016 found that electricity costs more than twice as much in 1996 to more than US$9.5 billion in 2018, and the in Cambodia than in Vietnam and Thailand despite recent sector now employs more than 660,000 workers. Footwear cost reductions. The cost of electricity in Cambodia for products specifically are growing remarkably. Cambodia was industrial and commercial enterprises is US$0.13 to US$0.17 among the top 10 footwear producers, exporting footwear per kilowatt hour compared to around US$0.04 to US$0.09 products at a value of US$1,041 million in 2018. Key in Thailand and Vietnam. However, electricity costs have questions emerging from this impressive performance are fallen slightly in recent years, and there are signs that the what are the key factors behind the success of the garments price of electricity may be further cut in Cambodia. During and footwear sector in Cambodia in the past two decades, the Government Private Sector Forum, the government and what are the main challenges confronting the sector to initiated measures to reduce the price of electricity and move up the value chain. outlined reduced electricity price targets in the Industrial Development Policy 2015–2025. Analytical work conducted by the World Bank in 2015 identified three key reasons to motivate investors to invest Cambodia’s performance in logistics is uncompetitive in the garment and footwear sector: (1) competitive labor compared to neighboring Thailand and Vietnam. Logistics costs; (2) market access to international markets, such as the costs remain high due to poor quality of logistics services EU through EBA; and (3) tax incentives provided by the and inadequate quality of the transport infrastructure. The government to garment producers in the form of qualified cost and time to export a container from Sihanoukville, investment projects. To some extent, these factors were the Cambodia’s major seaport, is much higher than the global key competitive advantages to compete with other players in average, as reflected in the country’s poor ranking in the the sector, such as Bangladesh, Myanmar, and Vietnam. In Trading Across Borders indicators of Doing Business addition, the comparative advantages that enable Cambodia (108th out of 190 countries). Transport and warehousing to compete with larger garment producers include the high costs in Cambodia are higher than in Thailand and Vietnam. level of investment and trade openness; liberal economic This means that reducing logistics cost in Cambodia is not policies; and macroeconomic, political, and social stability. just an issue of cutting transport cost. The high cost of inventory is a by-product of the unreliability of Cambodia’s Despite its strengths, the garment and footwear sector faces logistics system. key challenges that could hinder further developments of the sector, in particular for it to move up the value chain. These Not much progress has been made to improve backward challenges include lower productivity, higher electricity links by connecting FDI firms with domestic suppliers. and logistics costs, unofficial fees, and low backward links. More than half of all FDI firms surveyed were keen to The combination of these factors results in high cost of increase local sourcing, but often had not found competitive doing business in the sector making it less competitive and suppliers to buy from. The main reason behind this are, creates a barrier to diversifying into similar productions and as reported by FDI firms, is a lack of competitive local producing higher value-added products. entrepreneurs active in FDI-dominant sectors. Supporting industries for light manufacturing are also missing. The Many factory managers operating in multiple countries in cumbersome process for receiving value-added tax (VAT) recent years say that the level of productivity of Cambodian refunds for locally sourced purchases was also highlighted workers is lower than that of workers in Vietnam—by around as a critical barrier. In addition, the supply chains of the 20 percent—and the productivity of garment factories in garment sector are primarily controlled by international China is 20 to 30 percent higher than in garment factories in buyers and the headquarters of garment factories. Vietnam. Key factors causing this are the low level of basic Furthermore, domestic suppliers are often unable to comply education of workers in Cambodia and the limited quality of with FDI criteria related to quality, cost, and delivery (QCD) general education to produce a skilled labor force, and low of inputs. Relatively few businesses hold internationally enrollment in the Technical and Vocational Education and recognized quality certifications, and there are few business Training Centers. development services (public or private) available to provide The high cost of electricity is also a major issue facing support. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 40 Special Focus: Upgrading Cambodia in Global Value Chains The analysis of key strengths and weaknesses also suggests removing CamControl from border checkpoints; (2) that Cambodia’s competitive advantages have been eroding removing KAMSAB (Kampuchea Shipping Agency and in recent years due to both internal and external factors. Brokers) officers from ports; (3) canceling Certificates of First, the cost of labor is increasing yearly, which must be Origin (COs) for destinations not required; (4) reducing compensated for with higher productivity and reduction in logistic cost, port charges, and handling fees (lift-on/lift- other operating costs. The minimum wage for the garment off, LOLO); (5) reducing electricity costs; (6) reducing and footwear sector increased from US$128 in 2015 to the number of public holidays; (7) streamlining factory US$190 in 2020. Second, the EU has started a process that inspection procedures; and (8) railway development. If might lead to the withdrawal of Cambodia’s duty-free and implemented strictly and effectively, these reforms will quota-free access to the EU Single Market under the EBA undoubtedly increase the competitiveness of the country scheme in 2020. Third, a higher level of workforce skills and and reduce the cost of doing business, but it will take time investment in machinery and business processes to compete for business communities to realize the benefits. on quality are needed for the emerging travel goods industry, Going forward, several measures can be taken to mitigate which is viewed as a relatively high-value industry compared risks and promote this important sector into the next phase to other industry segments, such as cut-make-trim garment of development. These policy measures and action plans operations. Fourth, Vietnam and the EU reached a free should include (1) fast-tracking implementation of new trade deal agreement in October 2018 after three years of government initiatives to improve the investment climate negotiations. The new EU-Vietnam Free Trade Agreement, and monitoring the effectiveness of government policy when effective, will eliminate more than 99 percent of all measures introduced during the Government-Private Sector tariffs, the most salient of which, with respect to Cambodia, Forum to reduce the cost of doing business; (2) continuing will be the removal of duties on all textile fabric trade to maintain and improve the business enabling environment, between Vietnam and the EU. These duties are currently set and the stability and predictability of both the political at 12 percent. The agreement was signed on June 30, 2019. and social environment while enhancing and improving However, a comprehensive impact assessment is needed to production capabilities, access to international markets understand the negative and positive impacts of this trade aimed at moving up the value chain, and encouraging product agreement on the garment and footwear sector in Cambodia. diversification; (3) strengthening the absorptive capacity The Royal Government of Cambodia recently launched supported by the entire system of institutions, support several initiatives to improve the country’s competitiveness. infrastructure, and the policy environment that promotes While these initiatives are welcome measures, only time will learning and innovation, and facilitating the needed change tell whether they are successful. These initiatives include (1) toward a more proactive and competitive mindset and creation of the state-owned Small and Medium Enterprise business culture by entrepreneurs and the workforce; (4) Bank of Cambodia (SME Bank), which will increase access improving logistics performance through lowering logistics to finance for Cambodian SMEs capitalized with US$100 costs, increasing service reliability, reducing delays, and million; (2) creation of the Entrepreneurship Development speeding up efforts to establish a modern and efficient Fund, which will support the Entrepreneurship Promotion logistics/multimodal transport system that will improve Center and promote the capacity of high-potential SMEs logistics services, reduce costs, increase reliability, and with a US$5 million annual fund; (3) creation of a Skills decrease the time needed to move goods within Cambodia Development Fund to promote skills training; and (4) SME and across borders; and (5) intensifying efforts to promote tax incentives consisting of profit tax exemptions and FDI links with domestic firms to foster GVC integration special deductibles for SMEs in prioritized sectors. and transformation of the production base by designing a comprehensive FDI linkages action plan and considering Several reform measures were also introduced during the establishment of demand-driven supplier development Government-Private Sector Forum on March 29, 2019, as programs to upgrade the capacity of Cambodian firms in part of trade facilitation and improving the competitiveness line with international market demand. of the country. These reform measures include (1) Note: This box was prepared by Marong Chea based on several ILO “Cambodia Garment and Footwear Sector Bulletins” and various research reports. 41 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains GVCs a particularly strong vehicle for technology under the EBA, putting further pressure on transfer, such as interdependence of firm-to- established exporters. It is also observed that the firm relationships and knowledge asymmetries UK market represents a significant market share along the value chain, can also make it particularly in the EU market for garments and footwear. difficult for upgrading (World Bank 2019a). In Cambodia exported 1.0 billion (10.6 percent of some countries and sectors, firms could be stuck total garment and footwear exports) to the UK in dead-end tasks with few opportunities to market alone in 2018. Therefore, changes in UK innovate, upgrade, and diversify. The wrong skills market conditions, such as a disorderly Brexit, mix of the domestic workforce, the organization could also have significant implications for the and governance of some value chains, and the garment and footwear sector. While Cambodia nature of certain technologies may not favor the has been able to attract a few pioneer producers process of learning and innovation typical of of bicycles, electrical appliances (Minibea), and relational GVCs. auto parts (Denso, Sumi Wiring System), it has so far been unable to form industrial clusters Yet other countries in the region have seen in these value chains, and export diversification more progression than Cambodia. Thailand and remains limited. Furthermore, there are signs that Malaysia, for example, have diversified sectors FDI into the manufacturing sector has slowed and transitioned into advanced manufacturing significantly in recent years. GVCs (figures S5 and S7). Vietnam has also been outperforming Cambodia since the beginning of One notable exception is the recent diversification this decade, driven by successful integration into into travel goods exports of Cambodia, such the electronics GVC, something that Cambodia as handbags and suitcases, which is growing has not yet achieved. While garments are also a quickly from a low base. Cambodia is enjoying key export sector for Vietnam, which from the preferential access to the U.S. travel goods beginning enjoyed a broader production base and a market under its General System of Preferences, more diversified export basket, the country has also which has granted Cambodia tariff-free access been able to deepen its integration in the electronics for travel goods exports since July 1, 2016. The global value chain. In particular, since the beginning removal of U.S. customs tariffs on Cambodian- of the operation of a massive Samsung factory in made travel products such as suitcases, handbags, 2012, Vietnam has attracted a horde of international wallets, vanities, and similar products is widely and national suppliers, giving way to an established believed to be an important trade policy to help industrial cluster. An abundant and relatively well- boost Cambodia’s travel goods export-oriented skilled labor force and the role of the state in industry. Cambodia exported travel goods worth supporting worker recruitment and training, as well just under US$400 million to the United States in as needed fixes in the business environment, are 2018, up from about US$50 million in 2016. The often cited as the reasons why Vietnam succeeded travel goods and handbags sector is thus offering in attracting the Korean multinational (Sturgeon significant scope for growth. and Zylberberg 2017). Moving to the next stage of participation 4.  Cambodia’s prospects for diversification and upgrading look more challenging. Despite Economic fundamentals and policy choices impressive growth performance in recent decades, determine participation Cambodia’s exports remained heavily dependent Economic fundamentals—such as factor on EU (39 percent) and U.S. (31 percent) markets endowments, market size, geography, and in 2018, making the sector vulnerable to the institutions—determine GVC participation external environment, for instance, the possible (World Bank 2019a). Econometric analysis withdrawal of Everything But Arms (EBA) trade undertaken for the World Development Report 2020 preferential treatment. In 2018, the EU initiated shows that a multitude of factors are correlated the process toward suspending Cambodia’s access with participation globally (figure S8). Some factors CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 42 Special Focus: Upgrading Cambodia in Global Value Chains are more important for forward or for backward hubs such as the United States, the EU, and participation. For example, countries with higher China. Trade liberalization that improves access to endowments of natural resources are more likely foreign inputs and entry into trade agreements that to have higher forward participation, because improves access to foreign markets can promote they sell raw materials used in the production of both backward and forward participation. intermediate inputs. Countries with lower labor More sophisticated polices support more costs are more likely to have higher backward sophisticated participation participation, because they import foreign inputs for assembly and export final products. Global experience shows that transitioning to limited manufacturing GVCs from primary Extending the econometric analysis to include product specialization typically requires FDI, country-specific factors confirms that the cross- competitive labor costs, addressing business country regression results also hold for Cambodia.38 climate constraints, assuring basic political stability Given Cambodia’s current performance with and rule of law, and timely access to imported respect to determinants, Cambodia overperforms inputs. Cambodia’s transition from commodities globally with respect to its backward participation to limited manufacturing GVCs has similarly been (use of foreign inputs for export), similar to other driven by this basic policy mix. regional countries such as Malaysia, Thailand, and Vietnam. At the same time, Cambodia significantly In Cambodia, FDI inflows, a large pool of low- underperforms in forward participation (supplying skill and low-wage labor, and preferential access inputs for further export) globally and relative to to key exports markets were behind Cambodia’s all comparator countries. rapid integration into limited manufacturing GVCs. While higher capital endowments stimulate GVC But policy choices that shape these economic participation, for countries relatively scarce in fundamentals also matter (World Bank 2019a). capital, FDI can provide foreign capital as well as For example, FDI is a key determinant of both know-how to successfully participate. In Cambodia, forward and backward participation, and the right FDI inflows have been high and sustained over business environment matters for attracting FDI. many years. Since 1993, Cambodia’s average FDI Improved connectivity overcomes geographic net inflows have averaged 7.8 percent of GDP, barriers such as remoteness from major GVC Figure S8: Factors that determine participation globally also hold for Cambodia Backward participation Forward participation Gross exports (log) Backward GVC participation level (log) Gross exports (log) Forward GVC participation level (log) Backward GVC participation share Forward GVC participation share Rents from resources/GDP *** FOI inflows (log) ** Polilital slabillty Index** Land/GDP (log)*** Low-skilled labor/GDP (log) * Market size (manufacturing) (log)** Capital/GDP (log)** Capital/GDP (log)** Rents from resoerces/GDP*** Distance to GVC hubs (log)*** Avg. tariff rate*** Political stability index** Distance to GVC hubs (log)*** Land/GDP (log)*** FDI inflows (log)* Market size (manufacturing) (log)** Low-skilled labor/GDP (log) *** -0.6 -0.4 -0.2 -0.0 0.2 0.4 0.6 0.8 -0.6 -0.4 -0.2 -0.0 0.2 0.4 0.6 0.8 1.0 Sources: World Bank 2019a; Fernandes, Kee, and Winkler 2019. Note: The graphs show standardized beta coefficients for each variable on the y-axis from three separate regressions using gross exports, backward GVC participation (levels and shares, left figure), and forward GVC participation (levels and shares, right figure) as dependent variables. The determinants are measured as averages in the previous decade. 38 Specifically, a Cambodia interaction term is included in separate cross-country regressions. The interaction was not statistically significant, suggesting that the Cambodia-specific relationship is not different from the global relationship. 43 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains higher than Vietnam’s (6.2 percent) and other in garment firms. (World Bank 2019c). By 2019, the countries like Bangladesh (0.7 percent), Sri Lanka minimum wage had increased to US$182 a month.40 (1.3 percent), Malaysia (3.8 percent), and Thailand In Vietnam, the minimum wage ranged from the (2.8 percent). Key policy reforms for Cambodia in equivalent of US$126 to US$180 per month in these areas have included an open FDI policy and 2019,41 while garment workers in Bangladesh earn improved trade facilitation. According to the World approximately the equivalent of US$95 a month.42 Bank’s Doing Business, the time (days) to export But the policies that have supported Cambodia’s declined from 43 in 2006 to 22 in 2015, while the entry into limited manufacturing will likely not time to import fell from 54 to 24.39 Since 2015, be those that support Cambodia’s upgrading; a time to import and export (border and document much more sophisticated policy mix is needed. compliance in hours) have not changed. Transitioning from limited manufacturing to Labor costs until recently have been relatively lower advanced manufacturing and services—the next in Cambodia. The minimum wage in the garment stage of participation—presents a much bigger sector was around US$80 a month in 2013. The challenge than basic manufacturing (figure S9). country’s minimum wage legislation has been in While FDI and market access remain important, effect since 1997, when the regular minimum wage these advanced manufacturing GVCs typically was set at US$40, and has been revised multiple require a more educated workforce and times since then. In recent years, the minimum improvements in managerial practices and technical wage in the garment industry has been increasing skills. Improved access to finance for domestic rapidly, which has led to an overall increase in wages Figure S9: Policies support transitioning to more sophisticated participation in GVCs Commodities to limited Limited manufacturing to advanced Advanced manufacturing and manufacturing manufacturing and services services to innovative activities Fundamentals Policy priorities Foreign direct investment: adopt supportive investment policy, promote investment, and improve the business climate Improved access to finances for domestic firms Endowments Labor costs: avoid exchange rate Technical and managerial skills: Advanced skill: education and tertiary educational and openness training for innovation and R&D; overvaluation to foreign skills openness to foreign skills Trade infrastructure: invest in parts Advanced logistics services: invest in multimodal, digitally enabled and transport infrastructure; customs transport infrastructure; liberalize transport services reform; liberalize transport services Geography Basic ICT connectivity: invest in ICT infrastructure; liberalize ICT Advanced ICT services: promote services fully comparative markets Access to inputs: Access to inputs: expand access to goods and services inputs, including liberalize access to key inputs trade, investment, and domestic regulatory policy (tariffs, NTMs, services reform) Market size Market access and governance: Market access: negotiate and implement trade agreements pursue deep trade agreements (including investment and services) Governance: promote political stability Governance: improve policy predictability Institutions Standards: adopt and enhance a Legal: enhance contract Legal: ensure IPR protection basic compliance regime enforcement Source: World Bank 2019a. 39 The Doing Business methodology changed in 2015. 40 Unlike many countries in the region, the Cambodian economy is highly dollarized, and employees are paid in U.S. dollars. 41 https://www.vietnam-briefing.com/news/vietnam-hikes-minimum-wages-by-5-3-percent-in-2019.html/. 42 https://fashionunited.uk/news/business/bangladesh-raises-minimum-wage-for-garment-workers/2018091438912. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 44 Special Focus: Upgrading Cambodia in Global Value Chains firms, more advanced logistics, competitive energy is related to the granting of the General System costs, access to more sophisticated services inputs, of Preferences of the United States to drive this and enhanced contract enforcement are needed transition. In Vietnam’s case, the U.S.-Vietnam for these advanced manufacturing and services Bilateral Trade Agreement of 2001 resulted in sectors. Policy predictability, in addition to a boom in the exports of garments (and other macroeconomic stability, becomes an increasingly products) to the United States (figure S10). While important dimension of governance. surpassed by Cambodia (which benefits from EBA) in 2014, Vietnam’s garment export share Deep trade agreements help in the EU market has not stopped growing and Market access through trade preferences has been could receive a further boost when the free trade a key determinant of Cambodia’s participation. agreement with the EU goes into effect. As in many other countries, during the first One question is how a potential loss of preferences, stage of GVC development, the granting of and increased trade protectionism globally, will preferential trade access to key markets coupled impact GVC trade. Recent World Bank estimates with low labor costs contributed to the arrival suggest that the loss of EBA preferences could of the export-oriented garment and footwear result in a decline of Cambodia’s exports to the industry. In Cambodia, joining the General EU market of about 8.7 percent to 10.4 percent System of Preferences in 1997 supported the for garments, 25 percent for footwear, and 36 to arrival of Taiwanese and Chinese producers and 81 percent for milled rice. The total value amount kick-started garment exports to the United States is US$513.6 million to US$654.0 million (World under the Multifiber Agreement (MFA). While Bank 2019d). Uncertainty also exists around Cambodia’s share of garments in the U.S. market increased protectionism by major markets. plateaued once the quota-system under MFA Weakening external demand combined with ended at end-2004, garment exports to the EU global trade policy uncertainty have been weighing surged since. In 2011, the rules of origin under on regional activity through declining exports, the Everything But Arms arrangement shifted deteriorating business confidence, and weakening from double (yarn→textiles→apparel) to single investment, though Cambodia currently has been (textiles→apparel) transformation requirement. less exposed than other regional countries (World The recent surge in travel goods exports similarly Bank 2019d). Figure S10: Trade agreements, and their rules of origin, have been important for Cambodia’s GVC participation Share of Cambodia’s and Vietnam’s garments exports in the U.S. and EU markets Share in EU market, percent Share in U�S� market, percent 5 16 4�5 Cambodia 14 4 EBA single End of MFA transformation 12 quota-system 3�5 (2011) (2004) 3 Vietnam 10 Vietnam 2�5 8 2 6 1�5 Cambodia 4 1 2 0�5 0 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Author’s calculations using data from UN Comtrade (mirror data). 45 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains As highlighted in the World Development Report costs of inputs. In a world of GVCs, where firms 2020, international cooperation enables GVC- import to export, higher costs of intermediate related trade growth, but particularly when inputs (as well as higher wages) can act as a this goes beyond issues of market access and barrier to participation. In fact, trade liberalization national treatment, to include agreements to has a more positive effect on GVC trade than protect certain types of intellectual property, to on traditional exports. Though tariffs declined adopt common approaches to regulate services following Cambodia’s World Trade Organization sectors, or to implement a competition law that membership, the average weighted tariff rate of embodies criteria that mirror those of trading manufacturing products is higher in Cambodia partners (World Bank 2019a). In fact, GVC trade than comparator countries except Bangladesh is greater between countries sharing deep trading (figure S12). In Cambodia, the average weighted agreements (World Bank 2019a). tariff is 9.7 percent, relative to, for example, Vietnam, which is 2.6 percent. Own protectionism is costly Human capital is vital Market size also determines the level of GVC participation; countries with larger markets have International evidence shows that investments a larger industrial capacity and are less likely in people are needed to drive economic progress to use imported inputs in their exports (World and sustainable development. High and rising Bank 2019a). Countries like China, Japan, and endowments of human capital, combined with the United States have lower backward GVC high rates of physical capital investment, account participation as a percentage of total exports. for a large part of the growth successes of the Larger market size also allows countries to achieve East Asian miracle countries, including Malaysia economies of scale and to specialize in more and Thailand (World Bank 2018). contiguous stages of production. Cambodia’s Human capital accumulation also enables market size, particularly in manufacturing, is countries’ integration in more complex GVCs. smaller than peer countries, creating a natural While the abundant supply of low-cost labor in barrier to participation (figure S11). lower-income countries is often an entry point for Trade liberalization can help expand market size participation in the labor-intensive manufacturing and promote GVC participation by lowering the segments of GVCs, upgrading knowledge Figure S11: Cambodia has a smaller market… Figure S12: …but with higher barriers to imports Manufacturing value added in current US$, 2018 Weighted average tariff rate on manufacturing products in percent, 2016 160 14 12 Manufacturing value added (current US$) 140 120 10 Tariff rate (percent) 100 8 80 6 60 4 40 2 20 0 0 h m a ia ka d di a a m h sia nd an es ys na an di nk es bo na lad ala ail y a bo et lad iL La ala ail m et Th Vi ng M m Th Sr Vi ng Ca M i Sr Ba Ca Ba Source: Author’s calculations using data from Penn World Source: Author’s calculations using data from World Bank Tables. World Development Indicators. Note: Data for 2015 for Thailand and Sri Lanka. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 46 Special Focus: Upgrading Cambodia in Global Value Chains and skills becomes necessary for transitioning scores. PISA was developed by the OECD in into advanced manufacturing and services and 1997 to evaluate 15-year-old students on reading, innovation activities. For example, cross-country mathematics, and scientific proficiencies and evidence supports the positive correlation measures their competence in real-life contexts. between skills and integration in innovative GVCs; Since 2014, the OECD has piloted PISA for a relatively low endowment of low-skilled labor in Development, which includes nine members the 2000s increased the probability of a country from low- and middle-income countries, specializing in innovative activities in 2011 (World including Cambodia. Though Cambodia’s score Bank 2019a). on mathematics is on par with other PISA for Development countries, student performance in Cambodia performs below comparator countries reading and science is significantly below average. on human capital accumulation. Cambodia’s score In Cambodia, looking at the minimum level of on the Human Capital Index (HCI) of the World proficiency, only 8 percent of students achieve Bank demonstrates gaps in health, early childhood level 2 in reading, and 10 percent of students nutrition, education, and skills that constrain the achieve level 2 in mathematics. Only 5 percent productivity of the future labor force.43 Cambodia achieve level 2 in science.44 But, importantly, has an overall HCI value of 0.49, meaning that— Cambodia scores significantly below the regional based on the status of health and education average, by almost a third. outcomes—a child born today will be 49 percent as productive when she grows up as she could have The education level of the workforce employed been if she enjoyed complete education, good in the production of goods and services varies health, and a well-nourished childhood. Overall, across different sectors, where some sectors Cambodia ranks 100th out of 157 countries on employ high- or low-skilled labor more intensely. the HCI, far behind countries such as Vietnam Textiles and wearing apparel—an example of and Thailand but ahead of neighboring Lao PDR. limited manufacturing participation—is one of the least human capital-intensive sectors. Data for Cambodia has made good progress in improving the United States show that for each worker with education outcomes over the past decade, with a college education, there are about seven workers gross enrollment for primary education similar with secondary education or lower (Annex 1, to Vietnam and Malaysia. Yet learning outcomes figure A1). This ratio is likely to be much larger remain to be further improved (World Bank in developing countries that specialize in low- 2019b). Access to secondary and tertiary school skilled segments of the value chain. Advanced remains a challenge. In 2017, gross enrollment for manufacturing sectors, in contrast, employ a lower secondary was only 69 percent and upper higher proportion of more educated workers. In secondary 29 percent. Gross enrollment for electrical and machinery—an example of advanced tertiary was the lowest of comparator countries manufacturing and services participation—there (figure S13). Quality of schooling also places are about two workers with secondary education Cambodia at a disadvantage relative to middle- or lower for each worker with a college education income countries in East Asia. While four-year- in the United States. old Cambodian children today are expected to complete 9.5 years of school, in terms of quality- Because countries export different baskets of adjusted years of education, their learning will be goods and services that require a different skills equivalent to only 6.9 years because of the lower mix, the average human capital intensity of a quality of the schooling they are likely to receive. country’s exports also varies across countries. The revealed human capital intensity of a country’s This is reflected in Cambodia’s recent Programme export basket is measured as the weighted average for International Student Assessment (PISA) 43 These investments in human capital must start early. Research shows that the first 1,000 days between conception and a child’s second birthday are critical periods of physical and cognitive development. These investments in human capital must then continue into adulthood. 44 The PISA measures proficiency along six levels, which captures students’ capacity to apply knowledge and skills in real-life contexts. A level 2 proficiency is considered the “minimum level,” which is in line with the sustainable development goals for education. 47 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains ratio of “skilled” to “unskilled” workers, where the Second, even given Cambodia’s relatively low weights represent the importance of that sector HCI, Cambodia underperforms in terms of in a country’s export basket. As above, skilled is the skill intensity of its export basket. Malaysia, proxied by having achieved tertiary education. Thailand, and Vietnam—the countries that export Malaysia, Thailand, and Vietnam, whose export products that are more human-capital intensive— baskets have diversified into sectors such as also have higher scores on the HCI. Bangladesh electrical and machinery, food and beverages, and Cambodia—the countries that export transport equipment, or petroleum products, products that are less human-capital intensive— which are relatively more human-capital intensive, have lower scores on the HCI. This finding reveal a higher skill intensity of exports. Countries holds across countries, where countries with like Bangladesh, Cambodia, and Sri Lanka that higher endowments of human capital specialize export largely textiles and/or wearing apparel, in relatively more human capital-intensive export exhibit lower skill intensity. sectors (figure S14). And countries that are human-capital abundant Third, Cambodia’s export basket not only contains tend to export products that are more human- products that employ fewer skilled workers than capital intensive (figure S14). This is in line with the products exported by comparator countries, the Stolper Samuelson theory of international but Cambodia has also seen less progression trade, which suggests that a country that is toward more skill-intensive products over the relatively capital abundant will export capital- past decade than comparator countries. Malaysia, intensive goods, while a country which is relatively Thailand, Vietnam, and Sri Lanka have all seen labor abundant will export labor-intensive goods. improvements in the average human capital intensity of their exports—meaning that these Cambodia is an outlier in a few respects. First, countries’ export baskets are shifting to more Cambodia’s HCI is lower than both comparator skill-intensive products—while at the same time countries and countries at a similar level of have improved their HCI (figures S15 and S16). economic development. Figure S13: Though having improved remarkably, Figure S14: Countries with higher endowments of Cambodia’s educational outcomes human capital specialize in relatively remain below comparator countries more skill intensive export sectors Gross school enrollment rates, 2017 Index of human capital per person vs. skill intensity of exports, 2014 Primary Lower secondary 0�5 Upper secondary Tertiary 0�45 140 0�4 MYS Skill intensity of exports THA 0�35 Gross school enrollment rate 120 100 0�3 VNM 0�25 80 LKA 0�2 60 KHM 0�15 BGD 40 0�1 20 0�05 0 0 h a d m ia ka di es an ys na bo an lad ail ala et iL m Th ng Vi M Human Capital Index Ca Sr Ba Source: Author’s calculations using data from the United Source: Author’s calculations using data from Penn World Nations Conference on Trade and Development Table, U.S. Standard Industrial Classification (SIC), and (UNCTAD). UN Comtrade (mirror data). Note: Data for upper secondary for Cambodia are for 2015, Note: The orange dot represents Cambodia and the gray data for primary for Bangladesh are for 2018, and data for dots represent the comparator countries of Bangladesh, Sri tertiary for Thailand and Vietnam are for 2016. Lanka, Malaysia, Thailand, and Vietnam. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 48 Special Focus: Upgrading Cambodia in Global Value Chains Cambodia and Bangladesh, in contrast, have the skills of its workforce. seen stagnating human capital intensity of their Yet there is high demand for skills in Cambodia, export baskets, and less improvement in human indicated by high returns to completing secondary capital. Only recently has Cambodia experienced and tertiary education (World Bank 2019c) an uptick in the skill intensity of its export basket. and relatively high turnover rates (World Bank At the same time, an inadequately trained 2017). Completing upper secondary schooling workforce could be preventing Cambodia from and college has large payoffs in Cambodia in moving into higher value-added products and terms of individual’s increased expected income diversifying its economy. The lack of skills appears to each additional year of education. The first to be a binding constraint for firms. The most 11 years of schooling (before completing upper recent World Bank enterprise survey revealed secondary) have an average return of only 1.3 that a significant percent of firms found an percent for every year of schooling. This is much inadequately trained workforce to be among their lower than the average returns in other countries, top three constraints, higher than other regional which are 10.6 percent per year for primary and countries except Lao PDR. A similar share of 7.2 percent per year for secondary. It seems firms in the World Economic Forum’s Executive the labor market does not put much value on Opinion Survey signaled an unskilled workforce as the skills that are acquired in these initial years. a significant impediment to conducting business. However, individuals who have completed upper Firms reported that a lack of skills could lead to secondary schooling earn wages that are 9 percent lower worker productivity and hurt business as a higher than those earned by workers with only 11 result of delays in developing new products and years of schooling. Completing college or higher services, an increased workload for other workers, provides an additional return of 14 percent per difficulties in meeting customer service objectives, year of schooling. Internationally, average returns lost business to competitors, and difficulties to a year of tertiary schooling are similar to those meeting quality standards (World Bank 2019c). in Cambodia, at around 15 percent (World Bank Cambodia’s success will depend heavily on its 2019c). ability to accumulate human capital and increase Figure S15: Countries like Vietnam that have Figure S16: …have also improved the skill improved human capital… intensity of exports Change in index of human capital per person, 1990–2014 Trade-weighted skill intensity (ratio of skilled to unskilled workers) of a country’s export basket 3�5 BGD KHM LKA 3 MYS THA VNM 0�40 Skill intensity of exports 2�5 0�35 0�30 Change in HCI 2 0�25 1�5 0�20 1 0�15 0�10 0�5 0�05 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 KHM BGD VNM THA LKA MYS Source: Author’s calculations using data from Penn World Source: Author’s calculations using data from U.S. Standard Table (PWT). Industrial Classification (SIC) and UN Comtrade (mirror data). 49 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Special Focus: Upgrading Cambodia in Global Value Chains Technological change and the future of 5.  of the production process. Technological change GVCs means that 21st century workers require a more complex set of skills than in the past. Jobs are One important question confronting the region increasingly knowledge-intensive and technology is the impact of the changing technology of based. There has been a global shift away from production and what this means for GVCs as manual, routine jobs and into nonroutine, a path for development. These labor-saving knowledge-intensive jobs. This may make human technologies, especially automation and 3D capital and skills more important for GVC printing, will likely pose both opportunities and participation going forward. challenges for countries’ future participation in Third, there is a risk that these technologies could GVCs, including Cambodia’s. bring production closer to consumers at home First, technologies of distribution, like digital and reduce labor-intensive imported inputs from platforms, are creating opportunities for SMEs developing countries. But the evidence so far to sell to the world, which can potentially benefit suggests that these technologies are enhancing Cambodia. Yet in Cambodia, the share of firms with the contribution of GVCs to development. a website is lower than in comparator countries, as Automation has encouraged countries to use well as regionally and globally (figure S17). less labor-intensive methods of production, including in developing countries. But it has also Second, while automation is not necessarily an contributed to higher productivity and a larger immediate threat to the Cambodian economy, scale of production, which has increased the some jobs will disappear while others will be demand for imports of inputs from developing created. For instance, the availability of online countries. In fact, the sectors that are the most services for mobile banking, travel bookings, and automated are also the ones seeing the fastest public services through e-government negatively growth in imports from developing countries affects workers in medium-skilled, routine-based (figure S18). Technological change is likely to be occupations, such as tellers and clerical jobs. more a boon than a curse for trade and GVCs, at Machines are taking over routine tasks or parts least at this stage (World Bank 2019a). Figure S17: Fewer small and medium-sized Figure S18: Increased adoption of industrial establishments in Cambodia have robots in the north has promoted their own website imports from the south Share of establishments in the Enterprise Surveys that have their own website 45 10 Percent change in imports of parts 40 Percent of firms with a website 35 8 30 25 6 20 4 15 10 2 5 0 0 6 tru s A g ti o n e on er r, pr es Ch cts ac s ive 11 cs an edal s g g g g ry s 5 3 5 16 e M ical tic ur rin in a n n ti n rin ne rie C o i l i ti ti l ni 01 01 La 201 ati 01 u ot in ult as tu tr o pa Tex Fo actu c M od em hi 20 20 m M uc Ut i pl ac ric -2 nt pr ec to -2 -2 Ed uf d ns uf El Au od an pe a- ou - a- m er m d m h ia n- bb nk an di lc d, es no ys na Ru th oo bo er lad O ail Al ala W th et Industries in order of increasing automation O m Th Vi ng M i Sr Ca Ba Source: Author’s calculations using data from World Bank Source: World Bank 2019a. Enterprise Surveys. Note: Small and medium-sized firms are firms with less than 100 employees. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 50 Conclusion Conclusion Despite Cambodia’s remarkable participation in GVCs since the mid-1990s, the recent years have been marked by stagnation. Unlike other countries in the region, Cambodia has not been able to diversify outside of or upgrade within garments and footwear. To move to the next stage of participation, a much more sophisticated policy mix is needed, which should include the following. First, expand and deepen trade agreements to go beyond issues of market access and national treatment. Attention should also be paid to contract enforcement, protecting intellectual property rights, and strengthening national certification and testing capacity to ensure compliance with international standards to facilitate greater GVC participation. Second, lower barriers to trade and connect to markets to expand Cambodia’s small domestic market size and improve access to the inputs needed for production. Reducing tariffs, improving customs and border procedures, promoting competition in transport and logistics services, improving the business environment, and enhancing port structure and governance can reduce trade costs related to time and uncertainty of trading. Third, continue improving the education and skills of Cambodia’s labor force. To strengthen domestic capacity to support upgrading in value chains, Cambodia should invest in human capital. The Penang Skills Development Centre in Malaysia is an example of an industry-led training center that has played an important role in supporting Malaysia’s upgrading to electronics and engineering GVCs (World Bank 2019a). Fourth, harness the digital economy to support firms to integrate into GVCs through digital platforms as well as by connecting value chain participants. 51 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 Annex 1: Additional figures Additional figures Annex 1:  Figure A1: Different GVC sectors require a more educated workforce for production Ratio of skilled to unskilled workers at the sectoral level based on US national accounts data 0�6 0�5 Skilled to unskilled labor ratio 0�4 0�3 0�2 0�1 0 �, r s ts re el t ry g g g en pe ge -�� lin in rin ar uc tu ne on rry m ra Pa pp yc tu ul od hi ve ip N ric c ua ac gA ac d Pr Re qu Be an uf Q nd Ag M tE al rin an & d nd la nd et oo ea M or M od ica ga la W W sp er Fo m ca in an th nd he tri in O Tr M sa ,C ec El ile m xt leu Te tro Pe Source: Author’s calculations using data from U.S. Standard Industrial Classification (SIC). Note: Skilled is proxied by having achieved tertiary education. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 52 Annex 2: Cambodia’s Key Indicators Annex 2: Cambodia’s Key Indicators 2016 2017 2018 2019p 2020f 2021f Output and Economic Growth             Real GDP (percent change, yoy) 7.0  7.0  7.5  7.0  6.8  6.8  Domestic demand (percent change, yoy) 9.9 7.8 8.7 11.7 12.5 9.0 GDP per capita (US$, nominal) 1,264.9 1,363.1 1,500.5 1,612.2 1,747.1 1,910.2 GNI per capita, Atlas method (current US$) 1,140.0 1,230.0 1,380.0 Money and Prices Inflation, consumer prices (annual %, period average) 3.4 2.3 4.1 2.1 3.1 3.0 Broad money (percent of GDP) 79.2 88.2 100.7 118.8 136.6 154.4 Domestic credit to private sector (percent of GDP) 81.7 86.7 99.6 117.5 135.1 152.7 Nominal Exchange Rate (local currency per US$) 4,058.0 4,062.0 4,067.0 4,075.0 4,082.0 4,050.0 Nominal Effective Exchange Rate (2015=100) 1/ 100.6 100.5 99.8 100.7 101.1 102.9 Real Exchange Rate Index (2015=100) 101.4 100.4 99.5 101.6 105.1 107.0 Short-term interest rate (percent p.a.) 11.9 11.7 7.1 8.0 8.2 8.0               Fiscal             Revenue (percent of GDP) 20.7 21.6 23.6 23.5 23.3 22.9 Expenditure (percent of GDP) 22.1 23.6 24.3 24.2 28.2 27.4 Overall Fiscal Balance (percent of GDP) -1.4 -2.0 -0.7 -0.6 -4.9 -4.5 Primary Fiscal Balance (percent of GDP) -1.0 -1.7 -0.3 -0.1 -4.4 -4.1 General Government Debt (percent of GDP) 29.1 30.3 30.6 30.0 30.1 31.1               External Accounts             Export growth, f.o.b (nominal US$, annual percent) 8.6 5.3 5.3 9.3 8.2 8.9 Import growth, c.i.f (nominal US$, annual percent) 8.6 4.1 4.1 7.7 7.7 7.7 Merchandise exports (percent of GDP) 45.5 45.6 46.0 47.6 48.2 48.5 Merchandise imports (percent of GDP) 56.9 56.1 55.1 58.5 60.9 60.6 Services, net (percent of GDP) 7.0 7.1 7.4 8.7 8.9 9.4 Income, net (percent of GDP) -7.2 -7.2 -7.6 -7.6 -8.8 -9.2 Current account balance (current US$ millions) 2/ -2,312.5 -2,332.9 -2,289.2 -2,624.3 -3,665.6 -3,888.1 Current account balance (percent of GDP) -11.6 -10.6 -9.4 -9.8 -12.5 -12.0 Foreign Direct Investment, net inflows 2,395.3 2,663.5 3,071.7 3,149.9 3,494.9 3,717.0 (current US$ millions) Gross international reserves (millions US$) 6,730.8 8,757.9 10,143.7 12,172.5 14,363.5 16,518.1 (prospective months of imports of g&s) 4.7 5.4 5.3 5.6 5.6 5.5               Memo: Nominal GDP (millions US$) 20,020.2 21,906.1 24,476.1 26,682.6 29,324.0 32,498.9 Sources: Cambodian authorities, IMF and World Development Indicators, and World Bank staff estimates and projections Note: f = forecast. p = projection. 1/ An increase = appreciation. 2/ Excluding transfers. 53 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 References References Fernandes, A., H. 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World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank Group. ―――. 2019b. Cambodia Public Expenditure Review: Improving the Effectiveness of Public Finance. Washington, DC: World Bank Group. ―――. 2019c. Cambodia’s Future Jobs: Linking to the Economy of Tomorrow. Washington, DC: World Bank Group. ―――. 2019d. East Asia Pacific Economic Update October 2019: Weathering Growing Risks. Washington, DC: World Bank Group. Additional references Annual Reports (2013–18), Ministry of Agriculture, Forestry and Fisheries Annual Reports (2016–19), National Bank of Cambodia Balance of Payment Statistics (2019), National Bank of Cambodia Banking Supervision Reports (2016–18), National Bank of Cambodia Budget Law (2019), Royal Government of Cambodia Cambodian National Accounts Statistics (2018), National Institute of Statistics, Ministry of Planning Cambodia Tourism Statistics (2017–18), Ministry of Tourism Cambodia Public Debt Statistical Bulletin, Volume 7, March 2019, Ministry of Economy and Finance Cambodia Socioeconomic Surveys (2004–17), National Institute of Statistics, Ministry of Planning IMF Article IV Staff Report (2018), International Monetary Fund Macro-fiscal framework for the 2020 budget Monetary Statistic Bulletin (2019), National Bank of Cambodia Monthly reports for 2019, Ministry of Agriculture, Forestry and Fisheries Monthly reports for 2019, Ministry of Tourism World Bank. 2019. “Weathering Growing Risks” East Asia and Pacific Economic Update (October), World Bank, Washington, DC. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2019 54 The World Bank Cambodia Country Office Exchange Square Building Floor 10th IBRD and 11th IFC Streets 51-61 and Streets 102 -106 Sangkat Wat Phnom, Khan Daun Penh Phnom Penh, Cambodia Website: www.worldbank.org/cambodia