Public Disclosure Authorized CAMBODIA ECONOMIC UPDATE Public Disclosure Authorized SALT Public Disclosure Authorized RECENT ECONOMIC DEVELOPMENTS Public Disclosure Authorized AND OUTLOOK SELECTED ISSUE Investing in Cambodia’s Future: Early Childhood Health and Nutrition MAY 2019 CAMBODIA ECONOMIC UPDATE MAY 2019 Recent economic developments and outlook TABLE OF CONTENTS ACKNOWLEDGEMENTS ................................................................................................................. 1 ABBREVIATIONS................................................................................................................................ 2 EXECUTIVE SUMMARY..................................................................................................................... 3 Recent Economic Developments and Outlook...................................................................................... 9 Recent developments....................................................................................................................................................9 The economy performed better than expected last year....................................................................................9 Key exports burgeoned...........................................................................................................................................9 Rapid growth of investment in travel goods helped boost exports...............................................................10 Upbeat investor confidence underpinned construction boom.......................................................................10 Domestic demand was strong .............................................................................................................................10 The current account deficit was fully financed by FDI inflows .....................................................................11 FDI inflows helped sustain vibrant construction activity ...............................................................................11 The number of Chinese visitors has already reached more than 2 million, a target set for 2020 ............12 Almost a quarter of arrivals from China came for business purposes ........................................................12 Only 5 percent of tourists visiting Vietnam, and 13.5 percent visiting Thailand, extended their visits to Cambodia ......................................................................................................................12 Weather conditions were less favorable for agriculture production...............................................................13 The EU imposed safeguard measures on rice from Cambodia and Myanmar.............................................14 Poverty reduction continued, but the bottom 40 percent are doing less well than before.........................15 Inflation was subdued as easing of petroleum prices more than offset food price increases................................................................................................................................................15 FDI inflows underpinned foreign currency deposits.......................................................................................16 There was a recent shift of domestic credit to finance the services sector..................................................17 The recent surge in FDI inflows sustained the construction boom..............................................................18 Revenue is estimated to have reached a new high in 2018...............................................................................18 The next revenue mobilization strategy aims at modernizing administration..............................................19 The public wage bill is estimated to have reached 8.6 percent of GDP in 2018.........................................19 The debt distress level remained low as per the 2018 World Bank/IMF Debt Sustainabilty Analysis.....20 China is the largest creditor, accounting for half of Cambodia’s outstanding debt....................................21 The 2019 budget reflects the authorities’ fiscal consolidation stand..............................................................21 The budgeted wage bill for 2019 is 7.6 percent of GDP................................................................................21 The 2019 budget boosts the subnational administration budget by 30 percent...........................................22 Outlook.........................................................................................................................................................................22 With better-than-expected export performance, the growth outlook has been revised up, compared to earlier projections............................................................................................................................22 Risks..............................................................................................................................................................................23 Cambodia is increasingly dependent on China to sustain FDI and tourism flows......................................23 Heightened trade uncertainty has intensified the risks.....................................................................................25 Analyzing price elasticity of garment (footwear, milled rice, and bicycle) exports helps quantify the impact of EBA suspension....................................................................................25 If EBA is suspended, estimated maximum decline of garment exports to the EU market is 10.4 percent .............................................................................................................................26 Estimated decline of footwear exports to the EU market is 25.2 percent ..................................................26 Cutting production and export costs could help mitigate the impact of EBA suspension.......................27 Lowering macroeconomic vulnerabilities is critical.........................................................................................29 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition........ 33 1. Introduction.............................................................................................................................................................33 2. Human Capital and Its Contributions to Cambodia’s Economic Development..........................................33 3. The State of Child Health and Nutrition in Cambodia....................................................................................37 4. Drivers of Poor Child Nutrition..........................................................................................................................39 A. Poor Nutrition Behaviors.................................................................................................................................39 B. Low availability and affordability of nutritious foods..................................................................................41 C. Gaps in nutrition services delivered by the health sector..........................................................................42 D. Limited access to improved water supply and sanitation and poor hygiene............................................43 E. Constraints on women’s resources for optimal care....................................................................................44 F. Limited Availability and Efficiency of Public Expenditures for Child Health and Nutrition...............46 5. Policy Options.........................................................................................................................................................49 ANNEX 1: PRICE ELASTICITIES OF GARMENT, FOOTWEAR AND MILLED RICE IN THE WORLD...................................................................................................... 52 ANNEX 2: CAMBODIA’S KEY INDICATORS................................................................................. 53 REFERENCES.................................................................................................................................... 54 ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The 2019 April Cambodia Economic Update (CEU) was prepared by Sodeth Ly, with contributions from Miguel Eduardo Sánchez Martín, Runsinarith Phim, Linna Ky, Kimsun Tong, Anne Marie Provo, Somil Nagpal, Phyrum Kov and Ekaterine Vashakmadze. 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 Ellen Goldstein and Inguna Dobraja. Several colleagues provided comments on the draft version including Andrew Mason, Ergys Islamaj, and Francesca de Nicola. 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 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). 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 | MAY 2019 ABBREVIATIONS ABBREVIATIONS AFTA ASEAN Free Trade Agreement MFI microfinance institution ASEAN Association of Southeast Asian Nations MOEYS Ministry of Education, Youth and Sport CEU Cambodia Economic Update MOH Ministry of Health CDHS Cambodia Demographic and Health MOP Ministry of Planning Survey NCD negotiable certificate of deposit CR Cambodian riel NIS National Institute of Statistics C/S commune/sangkat NPL nonperforming loan EAP East Asia and Pacific RGC Royal Government of Cambodia EBA Everything But Arms RMS Revenue Mobilization Strategy EC European Commission RS Rectangular Strategy EMDEs emerging markets and developing SDR Special Drawing Rights economies SME small and medium-sized enterprise EU European Union TVET Technical and Vocational Education FCD foreign currency deposit Training FDI foreign direct investment TEU twenty-foot equivalent unit GDP gross domestic product UK United Kingdom GVC global value chain UNAIDS Joint United Nations Program on HIV/AIDS human immunodeficiency virus/ HIV/AIDS acquired immunodeficiency syndrome UNICEF United Nations Children’s Fund HS Harmonized system US United States IDP Industrial Development Policy US$ United States dollar IMF International Monetary Fund VAT value-added tax LPCO Liquidity-Providing Collateralized Operation WBG World Bank Group MCH Maternal and Child Health WHO World Health Organization MDI microfinance deposit-taking institution YTD year-to-date MEF Ministry of Economy and Finance y/y or yoy year-on-year CAMBODIA ECONOMIC UPDATE | MAY 2019 2 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent developments foreign direct investment (FDI). FDI is estimated to have reached a record high of more than US$3.0 Preliminary estimates show real growth billion or 13.4 percent of GDP in 2018. Burgeoning achieved a four-year high of 7.5 percent in 2018, exports and strong FDI inflows have contributed to compared to 7.0 percent in 2017. Driven primarily further accumulation of gross international reserves, by rapid expansion of exports and robust internal which in 2018 reached US$10.1 billion or about six demand, the economy performed better-than- months of prospective imports. expected. Exports burgeoned as external demand, Three-quarters of the (approved) FDI inflows especially in the United States and European Union originated from China. In recent years, foreign markets, strengthened. Garment and footwear investment from China has surged, mainly directed exports which account for more than two-thirds of towards construction (infrastructure, commercial total merchandise exports, recorded a five-year high, and residential real estate), tourism and, to a lesser rising by 17.6 percent in 2018, up from 8.3 percent extent, manufacturing and agriculture. The seaside in 2017. provincial town of Sihanoukville has emerged as the Upbeat consumer confidence led to a surge in hotspot of the current construction boom. imports. Motor vehicles and steel imports, which Improved confidence in the banking system gauge domestic consumption and construction has resulted in rising foreign currency deposits. demands, rose by 50 percent and 48 percent, Foreign currency deposits grew 26.5 percent in respectively. 2018, up from 23.6 percent in 2017. Bank credit The current account deficit widened to 10.4 to the private sector once again edged up, growing percent of GDP in 2018, from 9.7 percent of at 24.2 percent in 2018, compared to 19.6 percent GDP in 2017, but remained fully financed by in 2017. Bank lending to the construction and real 3 CAMBODIA ECONOMIC UPDATE | MAY 2019 EXECUTIVE SUMMARY estate sectors continues to drive domestic credit logistics costs, availability of a skilled workforce, expansion, contributing about 40 percent of credit and improved supply chain links will be essential growth. This is followed by the wholesale and to remain competitive. In the short term, filling retail sector, which captured one-fifth of domestic the skills gaps is needed, while addressing the lending growth. human capital deficiency must start now to underpin Cambodia’s long-term aspirations. Please Inflation has moderated, underpinned in part by see the detailed discussion on Cambodia’s skills gaps a stable exchange rate. The easing of petroleum and human capital deficiency in the selected issue prices since the fourth quarter of 2018 more than section. offset the increase in food prices. As a result, inflation declined to 1.6 percent as of December Risks and challenges 2018, from 2.2 percent in 2017. The Cambodian riel (CR), which is pegged to the US dollar, has remained Heightened uncertainty has intensified the stable, at CR 4,018 per US dollar at the end of 2018, risks. In February, the EU started the process compared to CR 4,037 in 2017. that could lead to the temporary suspension of A rapidly rising public payroll exerted pressures Cambodia’s preferential access under the Everything on the fiscal position, but better-than-expected But Arms (EBA) scheme. The EU market currently revenue performance contained the fiscal accounts for more than a third of Cambodia’s key deficit. In 2018, despite a rising wage bill, together exports, mainly consisting of garments, footwear, with an initial boost in domestically financed capital and bicycles. Therefore, losing EBA preferences, spending, the overall deficit remained contained. which currently provide Cambodia duty-free and The deficit (including grants) is estimated to have quota-free access to the EU, would likely result in reached 1.9 percent of GDP in 2018, compared slower exports and growth. with 1.6 percent of GDP in 2017. A slowdown in China and an overextended Cambodia’s debt distress level remained low, financial sector pose downside risks to according to the 2018 World Bank/IMF Debt Cambodia’s growth prospects. Given Cambodia’s Sustainability Analysis. This is due to the concessional heavy reliance on capital inflows and tourists from profile of the public debt and low deficit in the China, a sharp slowdown in the Chinese economy past. After several years of fiscal consolidation, the could dampen growth prospects. The prolonged authorities have accumulated rising government expansion of domestic credit growth, which has deposits, which stood at 14.9 percent of GDP in been largely behind the construction and real 2018. estate boom, has overextended the financial sector. As construction and real estate typically are more Outlook prone to boom and bust cycles, rising domestic credit going to the construction sector increases the After experiencing accelerated growth of financial sector’s vulnerability. 7.5 percent in 2018, the economy is expected It is urgent that measures are taken to mitigate to return to its long-term potential of about the potential negative impacts of EBA 7 percent. As exports moderate in line with suspension. Cambodia ranks at a low 185 out deceleration in global demand (see box 1), real of 190 economies globally on ease of starting a growth is projected to ease to 7 percent in 2019. business, according to Doing Business 2019.1 Trade The robust economic growth is expected to result costs weigh heavily on Cambodia’s export structure in continued poverty reduction. and exporting firms’ performance. The contribution The longer-term outlook, however, depends of transport and logistics to the total exported value on the country’s ability to productively absorb added reached 14 percent, double the corresponding rising FDI inflows, while promoting domestic number in Thailand and 3.5 times that of Malaysia investment. In this regard, cheaper energy and or Vietnam. The supply chain links between foreign 1 See Doing Business 2019, the World Bank. CAMBODIA ECONOMIC UPDATE | MAY 2019 4 EXECUTIVE SUMMARY and domestic firms are weak. Addressing these the construction and real estate boom, strengthening challenges will require embarking on structural oversight capacity and crisis preparedness in the reforms, especially those that can help improve the financial sector is an important first step. The recent investment climate, and reducing costs of doing surge in FDI inflows has sustained a prolonged business, including the introduction of competitive construction boom, while masking the financial energy prices and lower logistic costs. See box 2 sector’s vulnerability after years of rapid lending for cost-cutting and trade facilitation measures growth. However, such large foreign capital inflows introduced in March 2019 by the authorities. may not be sustained, especially in a context of Authorities could consider introducing increasing global uncertainty and slowdown in additional macroprudential measures such as China. The drying up of foreign investment in limiting banks’ exposure to construction and construction sector could result in a collapse in real estate. Given prolonged expansion of domestic prices and expose financial sector vulnerabilities. credit growth, which has been largely behind 5 CAMBODIA ECONOMIC UPDATE | MAY 2019 EXECUTIVE SUMMARY CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth quickly accelerated… … as key exports burgeoned and Real growth (percent) 35 Garment exports (y/y, percent change) 3535 35 7.5 30 7.4 7.4 7.5 7.5 7.5 3030 3530 7.4 7.3 7.4 35 25 7.37.3 7.3 7.52525 3025 7.4 7.5 30 20 7.4 7.1 7.3 2020 2520 7.3 7.1 25 15 7.1 7.1 7.1 7.1 7.1 7.0 7.1 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 1515 2015 7.0 20 10 7.1 7.1 7.1 7.1 7.0 7.0 1010 1510 7.0 7.0 7.0 15 5 7.0 5 5 10 5 10 0 00 50 11 01 12 13 3 14 15 5 1 16 01 7 pr e re 18 8pr 20 1 20 1 1 8p 201 5 1-1 0 1Dec-c1- -11 c1-3 -12 - 13 3 1 4 1 5 1 6 17 7 -1 8 21 2 54 127 20 0176 e7 e 01 2 20 01 2 20 01 2 20 01 2 20 01 2 20 01 2 20 1 cec ec-1 13Dece-c ec-1 1 D ce-c1ec-1 1 cec c-1 1 D cec c-1 1 D cec1 c-1 18 ec c-1 11 3 4 6 11 11 2011 02 013 14 20 5 16 07 prre ep 20201 0 11 32 D154 D165 D176 8 0 20 1 201 21 20 3 201 1 20 5 201 21 c D ce- ec 0 D10 1- DD D1e1 D12 D14 8- D D1e8 D11 2 2 2 128 7 0182 ec 10 c- 2 ec 1-4 - -5 1-6 1-7 -8 20 0 2 20 0 0 0 0 e e e - ec 0 ec-- - ec 5 ec-- ec 6 ec-- ec 7 ec-- 1 Dec- 0 e ec 12 ec ec 4 ec 0- DD D 3- DD 4- DD 5- DD 6- DD 7- DD e e e e e e e 2 4 6 D D D 2- D 0 121 122 123 124 125 126 8 1 … construction sector expanded… …underpinned by a record high FDI 0p1r ec ec ec ec ec ec ec ec ec 20 20 20 20 -1 -1 -1 -1 -1 -1 -1 -1 -1 D D D D D D D D D ec ec ec 20 (change at current prices) (percent of GDP) D D D D D D D D D 14 14 1414 25% 13 25% 25% 25% 1313 1413 14 12 25% 20% 25% 20% 1212 1312 20% 20% 13 11 1111 1211 20% 15% 12 10 20% 15% 15% 15% 1010 1110 11 9 15% 10% 9 9 10 9 15% 10% 10% 10% 10 8 88 98 10% 5% 9 7 10% 5%5% 5% 77 87 8 6 5% 0% 66 76 0%5% 0% 0% 7 5 2011 2012 2013 2014 2015 2016 2017 2018e 2011 2011 20112012 2012 20122013 2013 20142015 20132014 2014 2015 20162017 20152016 2016 2017 2017 2018e 2018e 2018e 5 5 6 5 2011 2012 2013 2014 2015 2016 2017 2018e 0% 6 2011 2011 2012 2013 2013 20122013 2014 20152016 20142015 2015 2016 2017 20172018e 20162017 2018e 2018e 2011 2012 2014 0% 2011 2012 2013 2014 2015 2016 2017 2018e 5 Lending 2011 2012 to 2013 construction 2014 2015 sector 2016 rose 2017 2018e 5 Fiscal expansion 2011 2012 2013 fueled domestic 2014 2015 2016 demand 2017 2018e 2011 2012 2013 2014 2015 2016 2017 2018e (contribution to credit growth of lending to General government expenditures (percent of GDP) construction 10% and real estate sector, percentage points) 24 10% 2424 24 10% 10% 8% 22 8%8%10%8% 2222 2422 10% 6% 24 6% 20 6%6%8% 2020 2220 8% 4% 22 4% 18 4%4%6% 1818 2018 6% 2% 20 2%2%4% 2% 16 4% 0% 1616 1816 0% 18 0%0%2% 14 2%-2% 1414 1614 -2%0% -2% -2% 16 12 0%-4% -4% 12 1412 12 14 Aug-10 Dec-12 Jan-10 Apr-15 Nov-15 Jun-16 Aug-17 Mar-11 Oct-11 Jul-13 Feb-14 Sep-14 Jan-17 Mar-18 Oct-18 Oct-18 May-12 -4% -4% -2% 10 Aug-10 Dec-12 Jan-10 Apr-15 Nov-15 Jun-16 Aug-17 Mar-11 Oct-11 May-12 Jul-13 Feb-14 Sep-14 Jan-17 Mar-18 Oct-18 Aug-10 Dec-12 Jan-10 Oct-11 Jul-13 Sep-14 Apr-15 Nov-15 Jun-16 -2% Mar-11 May-12 Feb-14 Jan-17 Aug-17 Mar-18 Oct-18 Jan-10Aug-10 Dec-12 Jan-10 Oct-11 Jul-13 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Aug-10Mar-11 May-12 Feb-14 Mar-18 Oct-18 -4% 10 1210 10 12 01 10 11 12 2 13 14 15 5 6 17 7 18 e -4% 8e 20 018 20 1 20 1 20 1 020 1 Aug-10 Dec-12 Jan-10 Mar-11 Oct-11 Apr-15 Jun-16 Aug-17 May-12 Jul-13 Nov-15 Feb-14 Sep-14 Jan-17 Mar-18 110 21 43 54 76 e 01 20 20 01 20 20 01 20 20 01 20 20 01 20 20 01 20 20 01 20 20 01 2 20 10 10 3 6 e 11 11 11 11 2010 2002 13 2004 05 16 7 18e Dec-12 Oct-11 Jul-13 Apr-15 Nov-15 Jun-16 Aug-17 Mar-11 May-12 Feb-14 Sep-14 Jan-17 Mar-18 Oct-18 2 20 7 2018 20 0 201 1 20 2 201 1 01 20 5 201 20 6 201 2 2 2 20 4 22 20 10 1 3 0e1 120 121 122 123 124 125 126 127 128 20 20 20 Sources: Cambodian authorities and World Bank staff estimates and projections. Note: e = estimates; pre = preliminary. CAMBODIA ECONOMIC UPDATE | MAY 2019 6 SECTION 1 Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments Key exports burgeoned The economy performed better than Exports, the mainstay of Cambodia’s economy, expected last year burgeoned as external demand strengthened. Garment and footwear exports accelerated, growing Preliminary estimates show real growth at 17.7 percent in 2018, up from 8.4 percent in 2017 achieved a four-year high of 7.5 percent in 2018, (figure 2). Cambodia benefited from robust growth compared to 7.0 percent in 2017 (figure 1). Growth in high-income economies, especially in the U.S. was driven by both exports and robust domestic U.S. growth picked up in 2018 to 2.9 percent, bolstered demand. Cambodia was the fastest growing country by fiscal stimulus and deregulation measures.2 U.S. in East Asia, and among the few countries that retail trade also expanded last year.3 The retail trade performed better than previous forecasts in 2018 (excluding autos) accelerated to 5.3 percent in 2018, (along with Mongolia and Vietnam). from 4.5 percent in 2017.4 The expansion of trade Growth in the developing East Asia and Pacific preferences to cover travel goods, effective since region remained resilient despite deteriorating June 2016, helped bolster Cambodia’s exports to the global conditions. The resilience in the region U.S. market. Cambodia’s exports to the EU market was driven by robust domestic demand, which was slightly strengthened, although Euro Area growth supported by benign inflationary pressure, strong slowed in 2018 to 1.8 percent, amid weakening labor market outcomes and, in some cases, fiscal external demand. Thanks to strong retail sales in stimulus. Poverty continued to fall on the back of the United States, Cambodia’s exports expanded resilient growth outcomes, which have been largely at 29 percent in 2018, up from 4.6 percent in 2017 driven by exports, albeit at a slower pace than in the (figure 3). Cambodia’s exports destined for the EU past. However, global economic headwinds from market also rose, growing at 12.9 percent in 2018, unresolved trade tensions and moderating global compared to 9.3 percent in 2017. The share of the demand remain. US market for Cambodia’s garments and footwear FIGURE 1: Contribution to real growth FIGURE 2: Garment and footwear exports by main (percentage point) destination (US$ million) 8.0 7.5 1,200 25% 7.1 7.0 7.0 7.0 20% 1,000 6.0 15% 800 10% 4.0 600 5% 0% 400 2.0 -5% 200 -10% 0.0 0 -15% Nov-17 Nov-18 May-17 May-18 Mar-17 Mar-18 Sep-17 Sep-18 Jan-17 Jan-18 Jul-17 Jul-18 2014 2015 2016 2017 2018pre Agriculture Indus-garment & footwear Indus-construction Indus-others Serv-hotels & rests Serv-others Others Japan Taxes less subsidies GDP growth EU US Total (YTD, y/y percent change, RHS) Source: Cambodian authorities. Source: Cambodian authorities. Note: pre=preliminary. Note: RHS = Right-hand scale. 2 April 2019 East Asia and Pacific Economic Update, the World Bank 3 Monetary Policy Outlook for 2019, Speech by Vice Chairman Richard H. Clarida, Board of Governors of the Federal Reserve System https://www.federalreserve.gov/ newsevents/speech/clarida20190110a.htm 4 Retail Trade, ex Auto: U.S. Total, Not Seasonally Adjusted Sales, US Census Bureau. 9 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook exports rose to 29.7 percent in 2018, up from 25.0 value of approved investment projects increased percent in 2017, while the share of the EU market to US$5.8 billion, of which two thirds was FDI. declined to 39.1 percent, down from 46.0 percent FDI inflows have grown by 24.8 percent, reaching during the same period. a record high of more than US$3.0 billion, or 13.4 percent of GDP, in 2018 (figure 4).6 In the real sector, Rapid growth of investment in travel private investment continued in the construction, goods helped boost export real estate, and tourism sectors, which together Rapid increase of projects investing in the accounted for about 60 percent of total (approved) production of travel goods has been facilitated investment in 2018. Supported by the construction by duty-free access to the US market. On June boom, key manufacturing activities such as building 30, 2016, the Office of the U.S. Trade Representative material, furniture, metal, and plastic products have (USTR) announced a major expansion of trade also quickly flourished. preferences. Under the new changes to the The non-garment manufacturing sector captures U.S. Generalized System of Preferences (GSP), about 20 percent of total investment. Three quarters Cambodia (and other least developed beneficiary of the (approved) FDI originated from China. developing countries) producing travel goods such as luggage, backpacks, handbags, and wallets will Domestic demand was strong be able to export those products to the United Rapidly rising domestic demand was met by States duty free.5 The expanded GSP by the US has a surge in imports. Strong consumption demand boosted (approved) FDI project investments going fueled household purchases of durable goods. The to the travel goods sector, amounting to US$120 imports of motor vehicles increased by 52.9 percent million in the first two months of 2019, up from in 2018 (figure 5) and was accompanied by soaring US$50 million in 2018. fuel imports. Gasoline and diesel imports rose by Upbeat investor confidence underpinned 30 percent each. Reflecting a rapid expansion of construction boom construction activity, the imports of steel, cooling equipment, and other construction materials, Private investment, largely driven by FDI skyrocketed, reaching 47.6 percent, 54.3 percent and inflows, climbed to new highs. In 2018, the FIGURE 3: U.S. retail sales and Cambodia’s FIGURE 4: Foreign direct investment exports to the United States (percent of GDP) 14 100% 12% 13 80% 10% 60% 8% 12 40% 6% 11 20% 4% 10 0% 2% 9 -20% 0% 8 -40% -2% 7 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Apr-16 Nov-16 Aug-18 Jan-11 Sep-15 Jun-17 Jan-18 6 Exports to the US (y/y) US retail sales (y/y, RHS) 5 2011 2012 2013 2014 2015 2016 2017 2018e Source: Cambodian authorities. Source: Cambodian authorities and bank’s staff estimate. Note: The EU market in 2014 included UK. RHS = Right-hand scale 5 For more detail, see https://kh.usembassy.gov/duty-free-access-travel-goods-made-cambodia/ 6 Annual Report, 2018, the National Bank of Cambodia CAMBODIA ECONOMIC UPDATE | MAY 2019 10 Recent Economic Developments and Outlook 73.0 percent respectively (figure 6). As discussed FDI inflows helped sustain vibrant above, the construction boom has concentrated construction activity in the capital city of Phnom Penh and more recently in the seaside town of Sihanoukville. The In 2018, approved residential and commercial economy has been increasingly dependent on the development projects (excluding mega projects construction sector, consequently risks associated of US$1 billion or more) amounted to US$4.6 with construction boom have been rising. billion, or a 14 percent increase. Sihanoukville, the largest seaside town in Cambodia, has become a The current account deficit was fully newly emerging high-rise construction hotspot with financed by FDI inflows bustling construction activities, which are largely financed by Chinese investors. The current account deficit is estimated to have widened to 10.4 percent of GDP in 2018, The most rapid increase in high-rise compared to 9.7 percent of GDP in 2017. building numbers in the provincial capital of Healthy exports continued to partly offset the surge Sihanoukville was recorded in 2018 when 238 in import demand. In 2018, merchandize exports buildings were approved, up from 188 buildings were estimated to have reached US$11.2 billion, in 2017. Sihanoukville, together with Phnom Penh, while merchandize imports rose to US$13.8 billion. accounts for 1,217 buildings of five stories and Rising net services was largely boosted by travel above.7 The rising popularity of coastal zones, service receipts with the expansion of the tourism especially Sihanoukville province, with their share sector. Current transfers were supported by workers’ of tourists rising to 10 percent of total destination remittances (net), estimated to reach about US$1.0 arrivals in 2018 (compared to only 5.5 percent in billion. As a result, the widened current account 2010), boosted by rehabilitation and expansion deficit remained fully financed by FDI inflows. of a nearby international airport helps drive the The better-than-expected export performance and construction boom there. In 2018, total approved record high FDI inflows also allowed the central investment projects for Sihanoukville alone reached bank to accumulate more international reserves, US$1.03 billion, of which 43 percent is for the which reached US$10.1 billion by end-2018, manufacturing sector. In addition, to improve covering about six months of prospective imports. connectivity between Sihanoukville and Phnom Penh, an expressway costing US$1.87 billion under BOT is being constructed.8 FIGURE 5: Motor vehicle imports accelerated FIGURE 6: Construction materials and steel imports (y/y, percent change) (y/y, percent change) 60 100 50 80 40 60 30 40 20 10 20 0 0 -10 -20 -20 -40 -30 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Other materials Steel imports Cement imports Cooling equipment Source: Cambodian authorities. Source: Cambodian authorities. 7 2018 Annual Progress Report and 2019 Performance Objectives dated February 7, 2019, Ministry of Land, Urbanization and Construction. 8 For Phnom Penh - Sihanoukville expressway, see http://www.mpwt.gov.kh/kh/public-works/expressways 11 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook The number of Chinese visitors has a 25 percent increase in 2018 (figure 8). In 2018, the already reached more than 2 million, a three airports received more than 4 million foreign target set for 2020 travelers, or 65.8 percent of total international arrivals, and served 89 destinations of which 57 are Growth of international tourist arrivals was within China. Of the 65.8 percent, Phnom Penh (35 sustained at 10.7 percent year-on-year in 2018, airlines with 34 international destinations of which slightly lower than 11.8 percent in 2017, thanks 21 are in China) and Siem Reap (32 airlines with 46 mainly to the rising number of Chinese visitors international destinations of which 29 are in China) (figure 7). Arrivals from China are number one; its international airports received 31 percent of total 2.03 million visitors account for 32.6 percent of total international arrivals each. Sihanoukville airport (10 visitor arrivals. This means the authorities achieved airlines with 9 international destinations of which their target two years earlier. Under its China Ready 7 are in China) obtained the remaining 3.8 percent. strategy, which was issued in 2016, the authorities The three platforms combined serve about 700 targeted receiving 2 million Chinese visitors by 2020. regular flights per week.9 Arrivals from Vietnam, Lao PDR, and Thailand are next, capturing 12.9 percent, 6.9 percent, and 6.2 Only 5 percent of tourists visiting percent of total arrivals, respectively. Reflecting Vietnam, and 13.5 percent visiting increased Chinese investors in Cambodia, a large Thailand, extended their visits to proportion of Chinese visitors reportedly visited Cambodia the country for business purposes. However, substantial untapped potential Almost a quarter of arrivals from China remains, given that only about 5 percent of tourists came for business purposes visiting Vietnam and 13.5 percent visiting Thailand, extended their visits to Cambodia.10 In 2018, while In 2018, almost a quarter of arrivals from China Cambodia received 6.2 million foreign tourists reported coming to Cambodia for business (a 10.7 percent year-on-year increase), Thailand purposes (figure 8). Thanks to the rapid increase received 38.3 million (an 8.2 percent year-on-year in air travel, the three main international gateways increase) and Vietnam 15.5 million (a 20 percent —Phnom Penh, Siem Reap and Sihanoukville year-on-year increase). airports—served more than 10 million passengers or FIGURE 7: Tourist arrivals to Cambodia, Thailand, FIGURE 8: Air and business visitor arrivals to and Vietnam (y/y, percent change) Cambodia (y/y, percent change) 35 30 10 30 9 25 25 8 20 7 20 15 6 10 15 5 5 4 0 10 3 -5 2 5 -10 1 -15 0 0 2013 2014 2015 2016 2017 2018 9 0 1 2 3 4 5 6 7 8 -0 -1 -1 -1 -1 -1 -1 -1 -1 -1 ec ec ec ec ec ec ec ec ec ec Business visitors (percent of total arrivals, RHS) D D D D D D D D D D Thailand Cambodia Vietnam Visitor arrival by air (y/y, percent change) Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = Right-hand scale. 9 See https://corp.cambodia-airports.aero/ 10 34.7 percent and 31.2 percent of foreign tourists come to Cambodia via Thailand and Vietnam, respectively, according to the 20017 Annual Report of the Ministry of Tourism. CAMBODIA ECONOMIC UPDATE | MAY 2019 12 Recent Economic Developments and Outlook Making inroads into this growing market located Weather conditions were less favorable last year. at Cambodia’s doorstep may be difficult to tap Production was affected by midseason drought and and is likely to require more investment and floods in some parts of the country.13 Nevertheless, improved coordination. Several initiatives have agricultural gross value added (at current prices) been introduced to improve and upgrade tourism continued to increase at 4.4 percent in 2018, services such as “clean city-clean resorts-good reaching 21,913 billion riels (or 22.0 percent of services”, street food standards, public places with GDP). Rice production, which accounts for about free Wi-Fi, and green belt and smart city initiatives. half of agricultural GDP, grew by 3.5 percent, However, investing more toward providing sufficient reaching 10.8 million metric tons, lower than the 5.7 and well-functioning public tourism infrastructure, percent growth rate in 2017 (figure 9), of which 2.0 and improving cooperation between commercial percentage points were contributed by dry season and public entities are needed. rice and 1.5 percentage point by wet season rice production. Development and provision of tourism infrastructure is seen as a prerequisite to become In 2018, the increase in yields accounted for 57 a popular tourist destination. An attractive tourist percent of rice production increase, while the rest destination not only relies on its natural resources, was due to expansion of harvested land. In 2017, but also on its available infrastructure, facilities, 93.2 percent of the rice production increase was and services.11 For instance, Vietnam is spending contributed by land expansion, with better weather as much as US$24 billion during 2016-20, of which conditions. Thus, in 2018, the improvements the state budget accounts for 8 to 10 percent, in yields reflect better or more efficient use of focusing on building and upgrading tourism and agricultural inputs. Yields of wet and dry season rice transport infrastructure in provinces with key tourist production increased by 1.7 percent and 1.0 percent, landmarks.12 Tourist arrivals to Vietnam surged respectively. during the past three years, rising 56 percent, to 15.5 Total rice cultivated area rose to 3.3 million million in 2018, up from 9.9 million in 2016. Until hectares or 3.0 percent largely due to the 2015, Vietnam attracted about 6 million tourists a increase in cultivated area of rainy season rice. year. Rainy season rice’s cultivated areas rose to 2.74 Weather conditions were less favorable for million hectares in 2018 (or a 3.4 percent increase), agriculture production up from 2.65 million hectares in 2017. Dry season FIGURE 9: Contribution from annual wet season FIGURE 10: Milled rice exports were flat rice production increased modestly (in thousand tons) (in million metric tons) 0.6 700 0.4 600 500 0.2 400 0 300 -0.2 200 100 -0.4 2010 2011 2012 2013 2014 2015 2016 2017 2018 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total gains Due to land expansion Due to yield improvements Source: Cambodian authorities. Source: Cambodian authorities. 11 Abdullah, S., Abdul Razak A., Jaafar M., 2014. Public Tourism Infrastructure: Challenges in the Development and Maintenance Activities. 12 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. 13 Annual report, 2018 achievements and 2019 targets, Ministry of Agriculture, Forestry and Fisheries, March 2018. 13 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook rice’s cultivated area, however, remained at 0.59 In contrast, China has increased its import million hectares, likely reflecting challenges in the quota for Cambodia’s rice to 400,000 tons in expanding irrigation system for rice production 2019, up from 300,0000 in 2018. In 2018, actual during dry seasons. milled rice exports to China (which includes the mainland, Hong Kong SAR, China; and Macau Official statistics indicate that Cambodia’s SAR, China), however, reached 170,154 tons, or 27 paddy rice surplus reached 5.8 million metric percent of total milled rice exports. This is reportedly tons, or 3.7 million metric tons milled rice due to the slow process of granting permission (by equivalent. Cambodia, however, exports its rice Chinese customs) to export to China. The Chinese surplus mostly in the form of paddy rice, while market, like the EU market, bought largely fragrant milled rice exports accounted for 0.6 million tons rice from Cambodia. (or 16.7 percent of total surplus) (figure 10). Overall, the decline of Cambodia’s rice exports Cambodia’s fragrant rice exports accounted to the EU was more than offset by the increase for about 79 percent of total milled rice exports in the country’s rice exports to the Chinese in 2018. White long grain rice accounted for 17 market. In February 2019, when the safeguard percent and long grain parboiled rice 4 percent.14 measures were fully applied, rice exports to the The fragrant rice once again won the World’s Best EU declined by 57.8 percent month-on-month. In Rice Award in 2018 in the World’s Best Rice Contest contrast, Cambodia’s rice exports to the Chinese organized annually by The Rice Trader.15 Since market grew by 45.6 percent. As a result, Cambodia’s 2009, Cambodian Jasmine rice has been competing milled rice exports managed to increase by 2 percent globally, especially against Thai Jasmin rice, for the during the first two months of 2019. Official data annual title of World’s Best Rice. So far, Cambodia show that Cambodia received US$413.5 million has won four awards, in 2012, 2013, 2014, and 2018, from its milled rice exports in 2018.17 while Thai rice received five awards. U.S. rice and Myanmar rice received one award each. During the last decade or so, there has been some progress on quality differentiation and The EU imposed safeguard measures on branding. As Cambodia is located within the rice from Cambodia and Myanmar neighborhood of commodity giants, Malaysia, The European Commission (EC) imposed Thailand, and Vietnam, the country has been safeguard measures on Cambodia’s rice. strategically working toward quality differentiation According to the EC, an investigation confirmed a (rice, pepper), sustainability premiums (“green”), significant increase in imports of Indica rice from and improved food safety (“clean”), while advancing Cambodia and Myanmar into the EU that was agroprocessing (cashews, starch). In this regard, causing economic damage to European producers. authorities have introduced the “Malys Angkor” In response, the EC decided to re-introduce import rice brand as well as Geographical Indication (GI) duties, which will be steadily reduced over a period products such as Kampot pepper and Mondulkiri of three years. Effective January 18, 2019, the EU Coffee. Cassava processing plants are being built. reinstated the normal customs duties of €175 per However, diversification toward production of ton in year one, progressively reducing it to €150 animal products and fisheries remains less successful per ton in year two and €125 per ton in year three.16 despite rising demand and prices. Rising income and As a result, in February 2019, Cambodia’s milled rice urbanization with a rapid expansion of the tourism exports to the EU reached only 10,080 tons or a sector is changing household food consumption, 57.8 percent month-on-month decline. Cambodia particularly regarding its consumption of animal exported 270,000 tons (or 43 percent of total milled products. This is also true for exports as the Asian rice exports) to the EU market in 2018. middle class, especially in China, expands. In this 14 Report on Cambodian Rice Export Status in 2018, Secretariat for One Window Service for Rice Export. 15 https://thericetrader.com/conferences/2018-WRC-Hanoi/worlds-best-rice/ 16 Press release, European Commission, January 19, 2019. See http://europa.eu/rapid/press-release_IP-19-427_en.htm 17 In 2018, the export value was associated with 567,500 tons of milled rice exports (customs data), but Cambodia Rice Federation recorded 626,200 tons of milled rice exports. CAMBODIA ECONOMIC UPDATE | MAY 2019 14 Recent Economic Developments and Outlook regard, a national strategy to promote agricultural there are still many households that are only just diversification could play a crucial role. above the poverty line and have limited ability to absorb shocks, even small ones. Any negative shock Poverty reduction continued, but the bottom reducing consumption per capita by Cambodian riel 40 percent are doing less well than before 2,000 (US$0.50) would double the poverty rate. While poverty continues to decline, the drivers Inflation was subdued as easing of of poverty reduction are changing. Poverty petroleum prices more than offset food estimates for 2015-17 are currently under review by the authorities, but preliminary indications are that price increases poverty continues to decline. Though impressive Inflation has been at four-year low. In 2018, gains continued to be made, the reduction in inflation moderated as the easing of petroleum poverty during 2013-17 was less than during 2009- prices since the fourth quarter of 2018 more than 13, mainly because economic growth benefited offset the increase in food prices. Consumer Price the non-poor more, while urban poverty stagnated Index eased to 1.6 percent in 2018, down from 2.2 compared to the earlier period. Consumption per percent in December 2017 (figure 11), thanks largely capita for the bottom 40 percent grew at 13 percent to the moderation of the transport component during 2013-17, while it expanded at 22 percent (subindex) as retail prices of gasoline and diesel for the top 60 percent. The non-agricultural wage declined, and helped by the easing of international played a more significant role in reducing poverty oil prices toward the end of 2018. Given the high during 2013-17, compared to 2009-13 period when level of dollarization in Cambodia, the appreciation household agriculture was the primary driver of of US dollar in the second-half of 2018 has also poverty reduction. been a contributing factor to keeping inflation low. Declining monetary poverty is reflected in In July 2018, to stabilize the retail prices of improvements of household living conditions. petroleum products against the gradual rise For example, the ownership of electric fans in international oil prices, the authorities increased by 37 percentage points during 2013-17, introduced a reduction in a special tax (one of access to electricity rose by 27 percentage points and four taxes: custom duties, value-added tax, excise access to improved sanitation rose by 24 percentage and special tax) levied on imported petroleum points. Access to improved sanitation and electricity products. The special tax on gasoline was cut to 15 increased faster than during2009-13. However, percent (from 35 percent), on diesel to 5.5 percent FIGURE 11: Contributions to 12-month inflation FIGURE 12: Inflationary pressures have eased (percent) markedly in major economies… Headline inflation (end of period year-over-year, percent) 7 8 7 6 5 4 2 3 2 1 0 -1 -3 Jan-2016 Mar-2016 May-2016 Jul-2016 Sep-2016 Nov-2016 Jan-2017 Mar-2017 May-2017 Jul-2017 Sep-2017 Nov-2017 Jan-2018 Mar-2018 May-2018 Jul-2018 Sep-2018 Nov-2018 Jan-2019 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 Others Housing & utilities sub-index China Indonesia Malaysia Transport sub-index Y/Y Food sub-index Philippines Thailand Vietnam Source: Cambodian authorities. Source: April 2019 East Asia and Pacific Economic Update, the World Bank. 15 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook (from 15 percent), and on kerosene to 5 percent in 2018, up from 23.6 percent in 2017. It contributed (from 15 percent).18 The reported revenue forgone 22.1 percentage points of 24.0 percent broad money is US$30 million a year. While Cambodia imports all growth (figure 13). Reflecting increased dollarization, petroleum products and has a full inflation “pass- as a share of broad money in 2018, FCD accounted through” from international oil prices to domestic for 84.8 percent, up from 83.1 percent in 2017. retail prices, the authorities regularly issue bi-monthly retail gasoline and diesel prices for compliance by Accumulation of gross international reserves formal petroleum product retailers. (GIR) decelerated with slower injection of local currency in the market by the central bank. The In the East Asia and Pacific region, inflationary central bank purchased US$875 million in 2018, a pressures were also subdued in the large 9 percent decline from 2017. Consequently, GIR economies, many of which are Cambodia’s accumulation decelerated to 16.0 percent in 2018, trading partners. Most of the region’s large down from 30 percent in 2017. Nevertheless, GIR economies recorded moderating inflation outcomes reached US$10.1 billion or six months of prospective (figure 12).19 As China, Thailand and Vietnam are imports coverage in 2018. Riel in circulation growth Cambodia’s main trading partners, so subdued decelerated to 11.5 percent in 2018, down from 28.2 inflation in those countries helped contain percent in 2017 as the local currency was under inflationary pressure in Cambodia. Many major increased pressures because of rising demand for regional economies tightened monetary policy imports (figure 14). in response to exchange rate depreciation and U.S. monetary policy normalization. Given that However, the riel versus the U.S. dollar inflation in most of these economies had been well exchange rate, which depreciated in the third contained, the tighter policy stances kept prices quarter of 2018, stabilized toward the end of further subdued. 2018. The exchange rate was CR 4,018 per U.S. dollar in December 2018, compared to CR 4,037 in FDI inflows underpinned foreign currency 2017. The riel also slightly depreciated against the deposits Thai baht, but appreciated against the Vietnamese Although broad money growth remained at dong and Chinese yuan. Against the currencies of 24.0 percent in 2018, foreign currency deposits its main export markets (besides the United States), (FCD) surged at the expense of riel deposits the riel appreciated against the euro, the Canadian and riel in circulation. FCD grew at 26.5 percent dollar, and the British pound. FIGURE 13: Contribution to broad money growth FIGURE 14: Riel in circulation decelerated (percentage points) (y/y, percent change) 45 50 40 45 35 40 30 35 30 25 25 20 20 15 15 10 10 5 5 0 0 Dec-12 Aug-14 May-13 Oct-13 Mar-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 -5 Sep-18 Dec-15 Dec-16 Sep-17 Dec-17 Jun-18 Dec-18 Dec-12 Sep-13 Dec-13 Jun-14 Sep-14 Dec-14 Sep-15 Jun-16 Sep-16 Jun-17 Mar-18 Mar-13 Jun-13 Mar-14 Mar-15 Jun-15 Mar-16 Mar-17 Riel in circulation Foreign currency deposits Foreign currency deposits Riel deposits Riel in circulation Source: Cambodian authorities. Source: Cambodian authorities. 18 http://cnv.org.kh/petroleum-price-decrease-0-03-first-july/ 19 April 2019 East Asia and Pacific Economic Update, April 2019, the World Bank Group, Washington, DC. CAMBODIA ECONOMIC UPDATE | MAY 2019 16 Recent Economic Developments and Outlook Promoting the use of local currency has been lending to the private sector once again underpinned by the success of the Liquidity- accelerated, after moderating in late 2017 and early Providing Collateralized Operations (LPCO) of 2018. Credit growth reached 24.4 percent in introduced in October 2016 to establish a 2018, up from 19.6 percent in 2017. Cambodia has benchmark rate of local currency borrowing. The experienced a rapid acceleration of bank lending LPCO facility, which requires negotiable certificates growth, especially during the post-global financial of deposit (NCDs) as collateral to obtain the local crisis period. This period is associated with the currency (together with the requirement to increase construction and real estate boom. Cross-country riel-denominated loans to at least 10 percent of comparison shows that Cambodia’s bank credit as a the total loan portfolio by the end of 2019) has percent of GDP overtook that of Indonesia and the allowed the central bank to inject local currency Philippines, despite the country’s nascent banking while maintaining a relatively stable riel-U.S. dollar sector (figure 15). exchange rate.20 The introduction has led to a There was a recent shift of domestic gradual reduction of the riel lending rate. credit to finance the services sector Short-term interest rates continued to gradually Recently, it appears that domestic credit going to decline, albeit from an elevated level. The the services sector has been rising. This includes weighted average of the U.S. dollar lending rate wholesale, transports and telecommunications, of banks dropped to 11.08 percent per year in and personal consumption purposes (figure 16). September 2018, down from 11.7 percent per year at The trend underscores rising consumption and the end of 2017. However, the average lending rates construction demands, increasingly catered to by of microfinance institutions are substantially higher relatively large wholesale businesses witnessed in the than of banks. Deposit interest rates remained surge in imports of durable goods such as motor largely unchanged. The weighted average of the vehicles and construction materials. In contrast, U.S. dollar deposit interest rate (12-month maturity) domestic credit going to the agriculture sector, stayed at 4.42 percent per year in September 2018. manufacturing activities, or retail services (including Driven by the booming economic activity, the food sector) shrank. FIGURE 15: Cambodia’s banking sector credit to FIGURE 16: Contribution to domestic credit growth private sector is relatively high (percentage points) (domestic credit, percent of GDP, 2017) 35% 180 30% 160 140 25% 120 20% 100 15% 80 60 10% 40 5% 20 0 0% -5% ng m Th ysia do R ilip tes U amb nd o s ya a ar ea a M ore Vi ep. d ia La pine M nesi or in In PD 2013 2014 2015 2016 2017 2018 nm Si etna te d C ila Ph Sta ,R K Ch ni o ap ala a Construction and real estate Personal & credit cards Transport & telecom Retail (hotels & restaurants) Wholesale Manufacturing and utilities Source: World Development Indicators, World Bank. Mining & quarrying Agriculture Total Source: Cambodian authorities. 20 See Cambodia Economic Update, April 2018, for a detailed discussion on the introduction of the LPCO under the monetary sector. 17 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook Total outstanding loans financed by the strengthened monitoring of currency and maturity banking and microfinance sectors reached mismatches.22 New minimum capital requirements more than 100 percent of GDP, or 104.2 trillion were fully in place by the first quarter of 2018. The riels in 2018. Of which 80 percent was provided by central bank conducted stress test which showed the banking sector and the remaining 20 percent by that banking and financial institutions are resilient, the microfinance sector. This, however, excludes except for a few institutions that need to be carefully credit provided by the “shadow banking” system monitored. introduced by real estate developers, rental and leasing firms, pawn shops, and informal lenders. Revenue is estimated to have reached a Therefore, the magnitude of total credit provided new high in 2018 to the economy is much greater. Domestic revenue (including grants) is Reported nonperforming loan (NPL) ratios estimated to have reached a record high of 22.3 for the banking sector marginally deteriorated. percent of GDP in 2018, thanks improved tax Reported NPL ratios for the banking sector rose to administration (figure 17). Taxes on goods and 2.8 percent in 2018, compared with 2.3 percent at the services (indirect taxes) continued to be the main end of 2017.21 NPL in the agriculture sector was the source of domestic revenue, contributing about highest at 8 percent, followed by construction and half of the total collection last year, of which the manufacturing at about 4 percent each. Reported VAT and excise taxes (on imports) account for NPLs for the microfinance sector improved, 70 percent. Meanwhile, direct taxes improved declining to 1.0 percent in 2018, compared with 2.0 significantly during the past several years, reaching percent in 2017. Still, the reported NPL ratios need 4.3 percent of GDP in 2018, up from 4.2 percent in to be carefully interpreted as there are inconsistencies 2017, partly thanks to better revenue administration. in loan classifications and a continuous rolling over In particular, among other measures, e-tax services and refinancing of loans. covering tax returns, tax registrations and e-VAT, The recent surge in FDI inflows sustained as well as the use of the banking system for tax the construction boom payments have been introduced. The recent surge in FDI inflows not only In addition, driven by rising imports, trade sustained the construction boom further but also tax collection is estimated to have accelerated masked the financial sector’s vulnerability. The last year, contributing 2.4 percent of GDP, or a contribution of credit provided to the construction, 20 percent year-on-year increase (figure 18), up real estate and mortgage sectors accounted for 8 from 2.2 percent in 2017. This happened despite percentage points, or 40 percent of total domestic the commitment under the ASEAN Free Trade credit growth. Construction and real estate typically Agreement (AFTA). are more prone to boom and bust cycles and a slowdown in FDI inflows may then unmask the A newly introduced initiative to improve banking sector’s exposure and vulnerabilities. non-tax revenue administration includes the introduction of a non-tax revenue management Nevertheless, continued efforts have been made information system (NRMIS). This, together to maintain the stability of the financial sector, with inter-ministerial Prakases (agreements) and a while promoting the use of local currency standardized receipting system have helped improve by trying to make inroads into dollarization. non-tax revenue administration and sustain non-tax Macroprudential measures have been introduced revenue collection. Non-tax (and others) revenue including liquidity coverage ratio introduced in 2015 are estimated to contribute 3.7 percent of GDP in and steadily increasing until 2020, coupled with 2018, up from 3.5 percent in 2017. 21 2018 Annual Report, the National Bank of Cambodia. 22 Annual Reports for 2017 and 2018, the National Bank of Cambodia CAMBODIA ECONOMIC UPDATE | MAY 2019 18 Recent Economic Developments and Outlook The next revenue mobilization strategy a month by 2018. Further expansion of the wage aims at modernizing administration bill is not likely to be sustainable in the long run, and there is a need to accelerate the critical tasks The authorities are planning to introduce on public administration reforms to improve the next Revenue Mobilization Strategy (RMS) public service delivery. As the country embarks on covering 2019-23, targeting modernization of structural reforms, those critical tasks, which include tax and customs administration and policy. This improving the investment climate, reducing costs largely consists of income and consumption tax of doing business, introducing competitive energy reforms. The new RMS will identify new source prices and lowering logistic costs require enhanced of revenues for optimum revenue collection, public sector productivity and more efficient public promoting innovation and ensuring level playing service delivery. This is also crucial to underpin fields and equity. Revised tax incentives are expected private sector development role in driving growth to support capital acquisition and innovation, while and reducing poverty. the introduction of a personal income tax helps ensure equity. Excises will be designed to address While last year’s fiscal expansion boosted public externalities and unfair competition. While the investment, exceptional revenue performance 2014-18 RMS targeted an increase of 0.5 percent of contained fiscal deficit. Fiscal deficit (including GDP in (current) revenue collection per year, initial grants) marginally rose to 1.9 percent of GDP in discussions show that the new RMS aims at a lower 2018, compared to 1.6 percent in 2017. The deficit, target, an additional 0.3 percent of GDP revenue however, remained to be fully financed external increase per year. funds. Fiscal expansion in 2018 served as a stimulus, partly underpinning robust consumption growth. The public wage bill is estimated to have Public outlay is estimated to have increased to 24.2 reached 8.6 percent of GDP in 2018 percent of GDP in 2018, up from 23.1 percent in 2017 The public sector wage bill is estimated to (figure 21). Despite the authorities’ fiscal expansion have increased to 8.6 percent of GDP in 2018 last year, government’s overall fiscal position (figures 19 and 20). This represents a tripling of civil remains strong. After years of fiscal consolidation, servants’ minimum wage, compared to the level in government has accumulated substantial deposits 2013, having reached the target of 1 million riels at the central bank. The deposits, which currently stand at 14.9 percent of GDP, can be used by FIGURE 17: Main components FIGURE 18: Trade tax collection accelerated last (percent of GDP) year (y/y, percent change) 25 30% 25% 20 2.7 20% 2.6 2.6 2.4 15 2.2 15% 2.5 10% 10 10.8 9.7 8.8 5% 5 0% 3.6 4.2 4.3 -5% - 2011 2012 2013 2014 2015 2016 2017 2018e 2016 2017 2018e Taxes on international trade Total revenue All other revenues Non-tax revenues Taxes on international trade Taxes on goods and services Direct taxes Source: Cambodian authorities. Source: Cambodian authorities. Note: e = estimates. Note: e = estimates. 19 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook the authorities as a fiscal buffer (figure 22), given that of US$6.79 billion (or 28.6 percent of GDP) the monetary policy continues to be constrained by of which 0.04 percent is public domestic debt.24 Cambodia’s highly dollarized economy.23 Overall, the borrowing terms remained highly concessional, with a (weighted average) interest rate The debt distress level remained low as of 1.37 percent, a maturity of 25.5 years, and a grace per the 2018 World Bank/IMF Debt period 8 years. By major currencies, outstanding Sustainabilty Analysis debt in US dollar, Special Drawing Rights (SDR) According to official data, by mid-2018, and Chinese Yuan are 43.2 percent, 28.1 percent and Cambodia had a total public debt outstanding 16.1 percent, respectively. FIGURE 19: General government expenditure: FIGURE 20: Public sector wage bill Main components (percent of GDP) (percent of GDP) 25 9.0 8.6 7.9 8.0 7.2 20 6.8 8.2 7.3 7.0 6.5 0.4 0.4 6.0 5.7 15 0.4 5.0 5.0 4.4 4.3 4.6 7.9 7.1 10 7.3 4.0 3.0 5 2.0 7.2 7.9 8.6 1.0 - - 2016 2017 2018e 2010 2011 2012 2013 2014 2015 2016 2017 2018e Capital expenditure Expenditure on goods and services Interest payment Wages and compensation Wages and compensation Expenditure on goods and services Source: Cambodian authorities. Source: Cambodian authorities. Note: e = estimates. Note: e = estimates. FIGURE 21: The general government fiscal deficit FIGURE 22: Government deposits at the banking remained almost unchanged in 2018 thanks to good system revenue collection (percent of GDP) (percent of GDP) 24 16 21.5 19.6 14 18.4 19 16.8 17.6 15.0 14.5 12 14 12.7 12.8 10 9 8 6 4 4 -1 2 -6 0 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Jun-11 May-12 Dec-16 Oct-18 Apr-13 Mar-14 Feb-15 Jan-16 Nov-17 2010 2011 2012 2013 2014 2015 2016 20172018e Total revenue Overall balance (including grants) Total expenditure Source: Cambodian authorities. Source: Cambodian authorities. Note: e = estimates. 23 As of June 2018, 31 percent of government deposits at the National Bank of Cambodia were in U.S. dollars. 24 “Cambodia Public Debt Statistical Bulletin,” Volume 6, September 2018, Ministry of Economy and Finance. CAMBODIA ECONOMIC UPDATE | MAY 2019 20 Recent Economic Developments and Outlook China is the largest creditor, accounting improved revenue collection, while containing for half of Cambodia’s outstanding debt public outlay. Cambodia’s external debt owed to China The budgeted revenue (including grants) for the accounts for 48.4 percent of the total 2019 budget is conservative. Although domestic outstanding debt as of the first half of 2018. The revenue is budgeted to increase to 19.3 percent of second- and third-largest creditors are multilateral, GDP in 2019, up from 18.6 percent of GDP in namely the Asian Development Bank and the World 2018 budget, it remains below the estimated revenue Bank, covering for 19.3 percent and 8.0 percent of collection of 21.5 percent of GDP achieved for total outstanding debt, respectively. The fourth-and 2018 (figure 24). Public outlay is budgeted to be fifth-largest creditors are the Republic of Korea contained at 23.9 percent of GDP in 2019, only and Japan, accounting for 5.1 percent and 4.4 slightly lower than 24.0 percent of GDP in 2018 percent of total outstanding debt, respectively. Old budget (and the estimated public outlay). debts (under negotiations) account for 9.1 percent. Cambodia’s debt distress level remained low as per The budgeted wage bill for 2019 is 7.6 the 2018 World Bank/IMF Debt Sustainability percent of GDP Analysis, thanks mainly to the authorities’ principle For the 2019 budget, the wage bill (under of borrowing only on concessional terms. chapter 64 of the budget classification) has been The 2019 budget reflects the authorities’ corrected (split). In 2019, the corrected wage bill fiscal consolidation stand accounts for 7.6 percent of GDP (figure 25) under chapter 64 (personnel), while 0.8 percent of GDP, Indicating the authorities’ fiscal consolidation representing general government expenditures for policy, the deficit of the 2019 budget is targeted social security benefits (which had been part of to narrow to 4.6 percent of GDP, compared to 4.8 the wage bill until 2018) is now reclassified under percent in the 2018 budget. The deficit, however, social security benefits (chapter 62) under the non- is substantially higher than 2018’s estimated deficit wage category. Chapter 62 finances social security of 1.9 percent of GDP (figure 23). To reduce the benefits for both civil servants and veterans. 2019 budget deficit, this year the authorities target FIGURE 23: Fiscal balances and financing for the FIGURE 24: Budgeted revenue for the 2019 budget 2019 budget (percent of GDP) (percent of GDP) 6 25 4 20 2.7 5.3 2.6 2 4.5 2.5 3.7 3.6 3.9 3.3 3.7 2.6 2.4 2.4 2.8 3.2 15 2.2 2.5 2.2 0 10 10.8 -2 9.7 9.2 8.8 5 -4 3.6 4.2 4.3 3.9 -6 - 2016 2017 2018e 2019b All other revenues Non-tax revenues Domestic financing Amortization Taxes on international trade Taxes on goods and services External financing Overall balance (including grants) Direct taxes Source: Cambodian authorities. Source: Cambodian authorities. Note: e = estimates and b = budget. Note: e = estimates and b = budget. 21 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook The 2019 budget boosts the subnational TABLE 1: Rising subnational budget in 2019 administration budget by 30 percent Sub-national The allocated budget for the subnational budget (in 2018 2019 Change administration increases by 30 percent in the millions of budget budget (%) 2019 budget, up from a mere 5 percent increase riels) in the 2018 budget, of which the municipal and provincial administration budget experiences the Total 1,684,674 2,199,636 30.6% largest increase, at 39.3 percent. The city and district Municipal administration budget increases by 24 percent, while and provincial 1,060,233 1,476,946 39.3% the Commune and Sangkat budget expands by 20 administration percent (table 1). o/w transfer The 2019 budget sets the (external) borrowing from the central 148,814 83,808 -43.7% ceiling at SDR1.4 billion, which is SDR114 administration million lower than the borrowing ceiling allowed City and district under the 2018 budget. The 2018 budget’s (external) 160,400 198,890 24.0% administration borrowing ceiling was initially set at SDR1 billion o/w transfer but it was amended in the 2019 budget to increase from the central 155,015 192,060 23.9% by SDR514 million, effectively bringing the total administration borrowing ceiling for the 2018 budget to SDR 1.514 billion. Commune and Sangkat 434,041 523,800 20.7% Outlook administration With better-than-expected export o/w transfer performance, the growth outlook has been from the central 434,041 523,800 20.7% revised up, compared to earlier projections administration The growth outlook has been revised up for the Source: 2018 and 2019 Budget Laws, Cambodian Authorities. short term, compared to the previous projections made in October 2018 (table 2). This is due to better- FIGURE 25: Budgeted expenditures for the 2019 than-expected export performance, expansion of budget (percent of GDP) consumption and construction. Yet, as exports moderate in line with deceleration in global demand (see box 1 for the global and regional economic 25.0 outlook and risks), real growth is projected to ease to 7 percent in 2019, while remaining near 7 percent 20.0 6.8 8.2 7.6 7.3 in the short term. After experiencing accelerated 15.0 growth of 7.5 percent in 2018, the economy is 7.9 7.1 8.2 expected to return to its long-term potential of 10.0 7.3 about 7 percent. The robust economic growth is expected to result in continued poverty reduction. 5.0 8.6 7.2 7.9 7.6 The longer-term outlook, however, depends on the country’s ability to productively absorb FDI inflows, - 2016 2017 2018e 2019b while promoting domestic investment. There is potential to maintain growth at a healthy pace in the years ahead, but addressing structural bottlenecks is Capital expenditure Wages and compensation a must. Expenditure on goods and services Source: Cambodian authorities. Note: e = estimates and b = budget. CAMBODIA ECONOMIC UPDATE | MAY 2019 22 Recent Economic Developments and Outlook Risks TABLE 2: Improved macro outlook in the short and medium term, compared to earlier projections Main risks include the concentrated FDI inflows, originating mainly from China and Percent of GDP unless 2019 2020 2021 financing a few sectors, and the potential specified otherwise temporary withdrawal of EBA. In addition, October 2018 projections 6.8 6.8 - weather shocks are a risk to agricultural production. The authorities’ efforts to promote the use of local GDP growth (%) 7.0 6.9 6.8 currency is undermined by rising foreign currency Domestic demand 9.8 8.9 10.5 deposits. (% change y/y) Cambodia is increasingly dependent on Inflation 3.3 3.0 3.1 China to sustain FDI and tourism flows (% change, average) Chinese FDI inflows account for a large Overall fiscal balance -3.8 -3.2 -2.7 proportion of the recent surge in the inflows (figure 26). A slowdown or reversal of FDI inflows, Government debt 30.0 30.1 31.1 especially Chinese FDI, will significantly impact private investment and growth. As FDI inflows are Export growth (% change) 9.0 8.6 8.1 coming largely from China, risks are associated with Import growth (% change) 7.6 7.1 6.8 an abrupt slowdown in Chinese FDI. In addition, spillovers from a large economy, such as China, can Current account -9.5 -9.1 -9.2 occur both through trade and financial channels. FDI 10.4 9.3 9.2 The channels, namely FDI and tourism through which growth spillovers from large economies, such Gross international 6.6 6.2 6.0 as China, can affect Cambodia growth rate. reserves (months of imports) Cambodia has been able to sustain tourist Source: World Bank/IMF DSA and World Bank staff estimates and projections. arrival growth, thanks to rising Chinese visitors. Note: Government debt is projected to edge up slightly due to rising Without the contribution of Chinese tourists, borrowing ceiling. FIGURE 26: Chinese FDI have recently increased FIGURE 27: Tourists arrival from China has Approved FDI continued to increase (y/y, percent change) Tourist arrivals (y/y, percent change) 600 500 60 400 50 40 300 30 200 20 100 10 0 0 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -100 2014 2015 2016 2017 2018 Total FDI Y/Y % change Total tourist arrivals Total FDI (excl. China), Y/Y % change Total arrivals excluding Chinese tourists Source: Cambodian authorities. Source: Cambodian authorities. 23 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook Box 1 Global and Regional Economic Outlook and Risks1 Global growth is expected to stabilize in 2020-21 recovering 21, reflecting weaker global growth and remaining high from a temporary dip in 2016. The global economic growth global policy uncertainty. Global financing conditions rate is projected to slow to 2.6 percent in 2019, reflecting are expected to remain volatile, even if generally more a broad-based weakness in advanced economies and major supportive. This reflects a more accommodative monetary Emerging Market and Developing Economies (EMDEs) at policy stance adopted by the major central banks in the the start of the year, before stabilizing at 2.8 percent on near term due to the deteriorating global growth prospects. average during 2020-21. Growth in advanced economies Despite the recent recovery of EMDE markets from the is projected to moderate from 2.1 percent in 2018 to 1.7 2018 correction episode, there is still a considerable risk percent on average during 2019–21 toward its potential rate, of “monetary shocks” associated with the global policy as capacity constraints become more apparent and labor uncertainty. Financial market volatility will continue to have markets tighten. Growth in EMDEs is projected to slow the strongest impact on countries with high vulnerabilities, to 4.0 percent in 2019 before recovering to 4.5 percent on weak growth prospects, and elevated policy uncertainty. Oil average during 2020-21 assuming the recovery in a few large prices are expected to average US$64/barrel (bbl) in 2019 economies (for example, Argentina, the Islamic Republic of and US$65/bbl in 2020, with high uncertainty around the Iran, Turkey) (figure B1.1).2 outlook. Despite weaker demand prospects, metals prices Global economic conditions are expected to remain are anticipated to stabilize in 2019 and 2020 due to modest challenging over the forecasted period. Barring a renewed supply growth and low inventory levels. Agricultural prices escalation of trade tensions, global trade growth is projected are expected to remain broadly flat over the next two years to moderate towards 3.3 percent on average during 2019- (figure B1.2). FIGURE B2.1: Real GDP FIGURE B2.2: World commodity price forecast FIGURE B2.3: Regional growth growth (percent) (Index=nominal U.S. dollars, 2010=100) 8 8 6 110 4 6 2 60 4 0 -2 2 -4 10 0 2007-08 2009 2010 2011-17 2018e 2019-20f 2021f Mongolia Cambodia Lao PDR Vietnam Myanmar China Malaysia Thailand 1980 1985 1990 1995 2000 2005 2010 2015 2020 World Advanced economies Energy Metals Agriculture Emerging and developing economies 2018 2019 Source: Global Development Finance, January 2019 (forthcoming). After moderating from 6.3 percent in 2018 to 6.0 percent especially in China, Thailand, and Vietnam; demographic in 2019, EAP growth is projected to remain around this developments are projected to be broadly neutral for growth rate during 2020-21. The outlook is predicated on a gradual in the rest of the region (figure B1.3). moderation in global growth and more rapid deceleration in global trade, alongside broadly stable commodity prices Risks continue to be on the downside. There is considerable and supportive global financing conditions, especially in uncertainty around the outlook for the global economy the near term. The baseline also assumes that there will and the balance of risks remains firmly on the downside. be a constructive resolution of trade disputes between Although unlikely in the near term, the simultaneous China and the United States, and that Chinese authorities occurrence of a sharper-than-expected slowdown in China, successfully calibrate their policy response to any headwinds Euro Area, and the United States could trigger a significant to activity. Growth in China is projected to slow to 6.2 downturn in global activity. The re-escalation of trade percent in both 2019 and 2020 and to moderate further to tensions could be highly disruptive to global activity amid 6.0 percent in 2021 amid continued domestic and external the presence of complex value chains. The risk of severe and rebalancing. Growth in the rest of the region is projected broad-based financial stress adversely affecting the outlook to remain broadly unchanged at around 5.2 percent a year for EMDEs remains high amid elevated debt levels in many during 2019-21. Resilient domestic demand is expected to countries. Policy uncertainty and geopolitical risks remain offset the negative impact of slowing exports. While growth high and could negatively impact confidence and investment in the region is projected to remain robust in the near term, in both affected countries and globally. Policy uncertainty is underlying potential growth—which has fallen considerably particularly elevated in a number of European countries— over the past decade, in large part reflecting slowing potential including in the United Kingdom as it transitions out of the growth in China—is likely to decline further over the long European Union, and in Italy where fiscal slippages have led term, largely owing to deteriorating demographic trends, to a market reassessment of country risk. 1 Prepared by Ekaterine T. Vashakmadze, Senior Country Economist, World Bank. 2 These are working assumptions, published in the World Bank’s January 2019 Global Economic Prospects. CAMBODIA ECONOMIC UPDATE | MAY 2019 24 Recent Economic Developments and Outlook total arrivals would have declined in 2018 (figure year starting from January 18, 2019, €150 per ton in 27). As discussed above, arrivals from China are the second year, and €125 per ton in the third year.27 number one, accounting for 32.6 percent, or 2.03 Garment exports account for roughly 80 million visitor arrivals. Any interruption of Chinese percent of Cambodia’s total exports to the tourist inflows, for example by a sharp slowdown EU market. It is therefore crucial to estimate the of the Chinese economy, will significantly impact impact of EBA suspension on Cambodia’s garment Cambodia’s tourism sector and growth. exports. As presented in table 4, main categories Heightened trade uncertainty has of Cambodian-made garments are subject to 12 intensified the risks percent tariff, except harmonized system (HS) code 6104 products which are subject to a tariff of 6.5-8 As discussed above, effective January 18, 2019, percent. the EU reinstated the normal customs duties of € 175 per ton in year one, progressively reducing it Analyzing price elasticity of garment to €150 per ton in year two and € 125 per ton in year (footwear, milled rice, and bicycle) three.25 In addition, in February, the EU started the exports helps quantify the impact of EBA process that could lead to the temporary suspension suspension of Cambodia’s preferential access under the EBA The EU’s tariffs, if EBA is suspended, will scheme.26 According to the EU, EBA preferences can increase the prices of Cambodia’s products be removed, if beneficiary countries fail to respect exported to the EU market. Therefore, the size core human rights and labor rights. The process of the price elasticity is important from a policy (starting February 2019) includes a six-month period perspective. If, for example, the export demand of intensive monitoring and engagement with the for this product is price elastic (that is if the price Cambodian authorities, followed by another three- month period for the EU to produce a report based TABLE 3: Cambodia’s main exports and EU tariff on the findings. After a total of twelve months rates (February 2020), the European Commission will conclude the procedure with a final decision on Harmo- Main Share Value* Tariff/ whether or not to withdraw tariff preferences. The nized exported (%) (US$ safe- Commission will decide the scope and duration of system products million) guard the withdrawal. Any withdrawal would come into code effect after a further six-month period (August (HS) 2020). 61+62 Garment 77.6 4,206.3 12% A summary of the EU’s tariffs, if EBA were 64 Footwear 13.1 729.2 16% suspended, on Cambodia’s key products 87 Bicycle 6.1 331.7 10% exported to the EU market is presented 10 Milled 3.2 169.6 Beginning under the tariff/safeguard column in table 3. rice with Cambodia’s main products exported to the EU €175/ton market include garments, footwear, bicycles and milled rice. Overall, the EU’s tariffs on garments, Note: * estimated figures for 2018 as only first 11 months of 2018 data available.. footwear, and bicycle products are 12 percent, 16 Source: UN Comtrade website https://comtrade.un.org/ and percent and 10 percent, respectively. The EU has Schedule of customs duties, Official Journal of the European already imposed safeguards on Cambodia’s milled Union (see https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=OJ:L:2017:282:FULL&from=EN) rice —€175 (or about US$200) per ton in the first 25 Press release, European Commission, January 19, 2019. 26 The EBA scheme was adopted by resolution of the EU Council No. 416/2001 dated 28 February 2001. It is an EU initiative to allow the importation of all kinds of goods from least developed countries except arms into EU countries both duty free and quota free. EBA is part of EU generalized system of preferences which entered into force on 5 March 2001 with no time limit. Cambodia is among 48 least developed countries that enjoy this preferential treatment. https://trade.ec.europa.eu/doclib/press/index.cfm?id=1981&title=Cambodia-EU-launches-procedure-to-temporarily-suspend-trade-preferences 27 According to the EC’s decision, as of 18 January the European Union reinstated the normal customs duty on this product of €175 per ton in year one, progressively reducing it to €150 per ton in year two, and €125 per ton in year three. See http://trade.ec.europa.eu/doclib/press/index.cfm?id=1970 25 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook elasticity is greater than 1), then any increase in (reported in Annex 1), the estimated decline of the price of the product resulting from EBA Cambodia’s garment product exported to the suspension, all other things remaining unchanged EU market ranges from 8.7 percent (columns (for example, there is no corresponding increase 5 of table 5) to 10.4 percent (column 6), if EBA in the price of the commodity by other exporting is suspended and importers pass all tariffs on the countries), will lead to a substantial reduction in the garment products to EU consumers. In volume quantity exported and have negative implication for terms, using Cambodia’s garment export volume in the garment industry in Cambodia. Alternatively, if 2018, the estimated decline ranges from 0.02 million the export demand for Cambodian products is price (column 8) to 0.03 million metric tons (column inelastic (i.e. if it is less than one), then there may be 9). In value terms, the estimated garment exports less concern about EBA suspension with regard to decline is between US$320.0 million (column 11) its impact on Cambodia’s garment exports. and US$381.4 million (column 12). If EBA is suspended, estimated maximum Estimated decline of footwear exports to decline of garment exports to the EU the EU market is 25.2 percent market is 10.4 percent Similarly, the estimated decline of footwear Applying elasticities found in the existing studies export is 25.2 percent (column 6). Cambodia’s TABLE 4: Cambodia’s main garment product export categories and the EU’s tariff rates duties rate customs % Share million, (in US$ 2018*) (2017) Value EU HS code Main garment products 6110 Jerseys, pullovers, cardigans, etc. 20.7 837.4 12% knitted or crocheted 6104 Women's suits, dresses, skirts etc. & 15.6 642.5 6.5-8% short, knit/crocheted 6109 T-shirts, singlets and other vests, 9.9 414.9 12% knitted or crocheted 6204 Women's suits, jackets, dresses skirts 12.1 536.5 12% etc. & shorts 6203 Men's suits, jackets, trousers etc. & 7.7 315.3 12% shorts 6205 Men's shirts 2.2 84.8 12% 6108 Women's slips, panties, pyjamas, 3.2 134.5 12% bathrobes etc., knitted/crocheted 6102 Women's overcoat, cape, etc., knitted/ 2.7 102.8 12% crocheted, o/t of hd 61.04 6112 Track suits, ski suits and swimwear, 2.8 120.6 12% knitted or crocheted 6103 Men's suits, jackets, trousers etc. & 3.2 146.2 12% shorts, knitted/crocheted Total (top 10 garments products) 80.2 3335.4 Source: UN Camtrade website, https://comtrade.un.org/ and schedule of customs duties, Official Journal of the European Union (see https://eur-lex. europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2017:282:FULL&from=EN). Note: * estimated figures for 2018 as only first 11 months of 2018 data available. CAMBODIA ECONOMIC UPDATE | MAY 2019 26 Recent Economic Developments and Outlook footwear export volume and value are the estimated February 2019.28 The actual decline, therefore, falls to decline by 0.01 million metric tons (column 9) within the estimated range of decline. In volume and US$128.5 million (column 12), respectively. terms, using Cambodia’s milled rice export volume Therefore, estimated decline of Cambodia’s in 2018, the estimated decline ranges from 0.10 garment and footwear export combined, if EBA million (column 8) to 0.21 million metric tons is suspended is US$510 million, or 5.4 percent of (column 9). In value terms, the estimated milled rice Cambodia’s total garment and footwear exports. export decline is between US$65.1 million (column Last year, Cambodia exported US$9.5 billion of 11) and US$144.1 million (column 12). For bicycle garment and footwear products. The EU market products, the elasticity is not found in any studies. share accounts for 33 percent. Therefore, estimated decline is not discussed there. With the imposition of EU safeguards, the Cutting production and export costs estimated decline of Cambodia’s milled rice could help mitigate the impact of EBA exported to the EU market ranges from 36.6 suspension percent (column 5) to 81.2 percent (column 6). Measures to improve competitiveness will As discussed earlier, the actual milled rice export decline was 57.8 percent month-on-month in mitigate the potential negative impacts of EBA TABLE 5: Estimated decline in exports to the EU market, if EBA is suspended Elasticities Estimated Volume (in millions Value (in US$ million) of demand declines in of metric tons)1 (from existing quantity studies) 3 demanded (%) 1 2 3 4 5=2x3 6=2x4 7 8=5x7 9=6x7 10 11=5x10 12=6x10 (2018) Impact Exports Estimated min decline Estimated (2018) of EBA suspension on rate (%)2 max decline Exports Estimated min decline Estimated Min Max Min Max max decline EU tariff Garment 12.0 -0.73 -0.87 -8.76 -10.44 0.27 -0.02 -0.03 3,653.4 -320.0 -381.4 Footwear 16.0 -1.58 -25.28 0.04 -0.01 508.1 -128.5 Milled 26.2 -1.40 -3.10 -36.68 -81.22 0.26 -0.10 -0.21 177.5 -65.1 -144.1 rice Subtotal 4,339.0 -513.6 -654.0 Bicycle4 10.0 1.52 331.07 Total 4,670.1 Source: Authors’ estimates using the data from the authorities, EU’s schedule of custom duties, and the elasticities reported in Annex 1. Note: 1 Garment, footwear, and milled rice exports are in millions of metric tons, while bicycles are in million units. 2 For Cambodia’s milled rice exports, it represents EU safeguard. 3 See annex 1 for elasticities reported by different studies. 4 For bicycle, elasticity is not found in any studies. 28 Cambodian premium rice is sold from $950 to $960 per ton while normal rice – or Indica rice – is sold at about $420 per ton see https://en.vietstock.vn/2019/02/ kingdom-sees-minimal-change-in-rice-exports-between-2016-2018-41-348482.htm. 27 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook Box 2 Measures to facilitate trade and lower the cost of doing business introduced in March 2019 During the Public-Private Sector Forum on March 29, 2019, • Electricity cost reduction will be discussed to respond a range of measures to facilitate trade and reduce the cost to the growing short- and medium-term needs in the of doing business were announced by the authorities. The country. measures are: • The government announced policies to support small • Withdrew the inspection role of the Cambodia Import- and medium-sized enterprises (SMEs), which include Export and Fraud Repression Directorate General establishment of an SME bank with initial capital of (Camcontrol) at the international gateways, which US$100million, entrepreneurship funds with a budget include border crossings such as checkpoints, seaports, of US$5 million a year, and SME tax incentives for special economic zones, and other export and import six priority sectors, related to agro-industry and food inspection zones in Cambodia. production and processing. • Abolished the (state-owned) Kampuchea Shipping • Trade facilitation measures under customs include a Agency and Brokers (Kamsab). Prakas on customs automated and transparent receipted fees and charges. Effective April 1, 2019, container • Ceased issuing Certificates of Origin (CO) for the scan fees are reduced by 50 percent, declining to US$10 export of goods unless importing countries need from US$20 for 20-foot containers, and to US$16 from one (Inter-ministerial Prakas No. 1627 between the US$32 for 40 foot containers, and implementation of Ministry of Economy and Finance and the Ministry of risk-based container scanning. Commerce). • Measures under tax administration include online VAT • Reduced logistics costs including loading costs and refunds and VAT credits, a tax audit review period services fees at both the Phnom Penh and Sihanouk going back three years (instead of 10 years), while Ville Autonomous ports. Those fees include the the late tax payment penalty has been reduced to 1.5 Terminal Handling Charge (THC) which was reduced percent a month from 2 percent a month. by US$5/twenty-foot equivalent unit (TEU); and the Container Imbalance Charge (CIC) which was reduced • Reduced the number of observed holidays by seven by US$20 (to US$100 from US$120) for 20-foot days, starting 2020. Now, there are from 28 to 30 containers, and US$40 (to US$200 from US$240) for official holidays a year. This is estimated to result in a 40 foot containers. The Ocean Freight Charge (OFC) 0.5 percent gain in economic growth. was reduced by 50 percent (SITC Logistics Cambodia • Consolidated factory inspections (by various agencies) agreed). The Emergency Bunker Charge (EBC) was into one team and once a year. eliminated. It was US$15, US$30, and US$30 for 20-, 30-, and 40- foot containers, respectively. Lift-on/lift- • Accelerated the amendment to the Law on Investment off (LoLo) fees at Sihanoukville port were reduced and the finalization of the draft Law on Special by 10 percent, while bonus was reduced to US$5/ Economic Zones, expected to be ready in the first half box down from US$7.5/box with shifting is now free of 2019. In principle, incentives are to be moved from of charge. Phnom Penh port is considering reducing the Law on Investment to the Budget Law. the Stevedoring Charge, the Gate Fee, the Export Container fee, and the LO-LO scan fee. • Projected the E-commerce law will be finalized by mid- 2019. Source: 18th Public- Private Sector Forum, March 29, 2019. CAMBODIA ECONOMIC UPDATE | MAY 2019 28 Recent Economic Developments and Outlook suspension. It is a priority to embark on structural is essential, while addressing the human reforms, especially those that can help improve capital deficiency must start now to underpin investment climate, and reduce costs of doing Cambodia’s long-term aspirations. Focusing business, including by introducing competitive on the role of early childhood health and nutrition energy prices and lower logistic costs. See box 2 is a priority. See the detailed discussion on for recent measures to facilitate trade and lower the Cambodia’s skills gaps and human capital deficiency cost of doing business recently introduced by the in the selected issue section entitled “Investing in authorities. Foreign investors confirm that low labor Cambodia’s Future: Early Childhood Health and costs, high tax incentives and preferential access Nutrition” in the selected issue section below. to key export markets are the reasons for their Lowering macroeconomic vulnerabilities investment in Cambodia. With wages rising rapidly is critical and Cambodia facing the potential suspension of the EBA, the country’s attractiveness is likely to erode. Considering further macroprudential measures The current cost of doing business in Cambodia such as bank limits in terms of exposure to construction and real estate to lower the does not encourage enough domestic investment banking sector’s vulnerabilities to construction and entrepreneurship. Cambodia ranks 185th out boom. Given prolonged expansion of domestic of 190 economies globally on ease of starting a credit growth, which has been largely behind the business. Trade costs weigh heavily on Cambodia’s construction and real estate boom, and strengthening export structure and exporting firms’ performance. oversight capacity and crisis preparedness in the The contribution of transport and logistics to the financial sector, is the way forward. The recent total exported value added from Cambodia reached surge in FDI inflows may have helped sustain the 14 percent, double the contribution of these construction boom further, while masking the sectors in Thailand and 3.5 times that in Malaysia financial sector’s vulnerability after years of rapid or Vietnam.29 The current quality and intensity of lending growth. However, it is unlikely that such supply chain linkages between FDI and Cambodian large FDI inflows currently biased toward the firms is low. In the short- to medium-term, given construction sector will be sustained, given that its large FDI stock, the long-standing policy goal underpinning FDI inflows requires improvements to facilitate backward linkages for local firms— in external competitiveness which may only be to improve productivity and capture knowledge achieved in the longer term. A significant slowdown spillovers—needs to be implemented earnestly. in FDI inflows may then unmask the banking Also in the short term, filling the skills gaps sector’s exposure and vulnerabilities. 29 See box 1 — Cambodia Investment Climate Review — lessons for future competitiveness, October 2018 Cambodia Economic Update for more details. 29 CAMBODIA ECONOMIC UPDATE | MAY 2019 Recent Economic Developments and Outlook CAMBODIA ECONOMIC UPDATE | MAY 2019 30 SECTION 2 SELECTED ISSUE: Early Childhood Health and Nutrition: A Smart Start for Cambodia’s Economic Growth and Prosperity SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition30 1. Introduction wealth (estimated at $1,143 trillion in 2014). Produced capital (buildings, machinery, and infrastructure) and A child born today in Cambodia will enter the labor natural capital (agricultural land, forests, protected market around 2040, perfectly aligned to accompany areas, minerals, oil, coal, gas reserves) have long been Cambodia on the ambitious goal of reaching high- income country status. The time is right to ask the it is only recently that global wealth accounting questions: will she be prepared for the economy has included human capital, or the sum total of a of the future? Will improvements in education be population’s skills, health, knowledge, and resilience, enough to stimulate this readiness? And, if not, what as an explicit contributor to the overall assets and other changes are essential to enhance the quality economic health of a country.31 of the labor force and favorably bend Cambodia’s Improving the quality of Cambodia’s human economic development curve? Grounded in the capital is at the core of the country’s aspirations wide body of evidence on the early foundations of to reach upper middle-income country status by education and skills formation, this report aims to 2030 and high-income country status by 2050.32 answer these questions by: (i) summarizing what is Human capital wealth increases in importance as known about Cambodia’s human capital acquisition countries climb the income ladder: whereas human and economic progress, focusing on the role of capital wealth accounted for 51 percent of total early childhood health and nutrition; and (ii) drawing wealth in lower-middle-income countries, this share rose to 70 percent among high-income OECD key challenges and opportunities to improve early countries.31 The ability of the labor force to interact childhood nutrition and maximize the readiness with and transform natural and produced capital of Cambodia’s future labor force to advance the is necessary to increase economic output, and country’s development aspirations. therefore Cambodia’s ability to achieve upper- 2. Human Capital and Its middle income status. Contributions to Cambodia’s However, Cambodia trails regional and Economic Development economic comparators in human capital wealth acquisition (table S1). Cambodia has made Growing evidence highlights the investments in people are needed to drive economic progress mid-1990s. However, at 43.3 percent of total per and sustainable development. While building capita wealth, Cambodia’s human capital wealth human capital has many intrinsic and private is well below the average for low middle-income countries (50.6 percent) and the East Asia and of economies. Recent estimates indicate that human capital accounts for over two thirds of total global 30 Thi note was prepared by Anne Marie Provo and Somil Nagpal 31 Lange GM, Wodon Q, Carey K, eds. 2018. The Changing Wealth of Nations 2018: Building a Sustainable Future. Washington, DC: World Bank. Note: Human capital wealth estimated as the present value of future earnings for the labor force. 32 See Fourth Rectangular Strategy, Royal Government of Cambodia, September 2018, p. 44. 33 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition The World Bank introduced the Human Cambodia performs slightly better than Capital Index (HCI) in October 2018 as a expected for a lower middle-income country on metric designed to forecast a country’s human capital (Box S1). The HCI captures the impact of to attain human capital levels of regional and investments in children today on future productivity economic comparators. Overall, Cambodia ranks and long-term economic growth. The HCI provides 100th out of 157 countries on the HCI, far behind countries with a mechanism for understanding the countries such as Vietnam and Thailand but ahead quantity and quality of their human capital, helping of neighboring Lao PDR (table S2). them to determine priorities for developing these Cambodia performs well on child and adult assets. survival and test scores Cambodia’s HCI score demonstrates gaps in but underperforms relative to health, early childhood nutrition, education, other countries in the region and lower middle- and skills which constrain the productivity of income group with respect to school attainment the future labor force. Cambodia has an overall and childhood stunting (panel HCI value of 0.49, meaning that—based upon One-third of Cambodia’s future labor the status of health and education outcomes—a force experiences childhood stunting, a sign of poor child born today will be 49 percent as productive nutrition, care, and health in early life; high stunting when she grows up as she could be if she enjoyed is a sign of children growing up in an inadequate complete education, good health, and a well- environment.34 Quality in education is a concern, nourished childhood.33 and when years of schooling are adjusted for quality of learning, learning gap is 2.7 years. TABLE S1: Human capital wealth per capita as TABLE S2: Human Capital Index score and rank, a share of total wealth per capita, Cambodia and Cambodia and regional and economic comparators comparator countries Country Total Human Human Wealth Capital Capital as Country HCI Score HCI Rank Share of Total (%) Vietnam 0.67 47th Bangladesh 12714 7170 56.4 Thailand 0.60 65th Cambodia 16933 7337 43.3 Philippines 0.55 84th Guatemala 43140 25450 59.0 Nicaragua 0.53 92nd Lower middle- 25,948 13117 50.6 income Cambodia 0.49 100th 140,042 84334 60.2 Bangladesh 0.48 106th Nicaragua 37084 16698 45.0 Philippines 30823 17790 57.7 Guatemala 0.46 109th Vietnam 27368 13740 50.2 Lao PDR 0.45 111th Source: Lange et al. 2018. Note: Estimates are in 2014 U.S. dollars per Source: World Bank, 2018. capita at market exchange rates. 33 World Bank. 2018. Human Capital Index: Cambodia Country Brief. Available online: https://databank.worldbank.org/data/download/hci/HCI_ 2pager_KHM.pdf. 34 population and dividing by the SD of the standard population (4). In a healthy population, ~2.5% of all children have a HAZ <–2SD. A higher percentage <–2SD is Perspective: what does stunting really mean? A critical review of the evidence. Adv Nutr. 2019;10:196–204; doi: https://doi.org/10.1093/advances/nmy101. CAMBODIA ECONOMIC UPDATE | MAY 2019 34 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition Box S1 The Human Capital Index The Human Capital Index (HCI) is a component children in some countries learn far less than of the World Bank’s Human Capital Project and those in other countries, despite being in school a metric of countries’ investments in the human for a similar amount of time. capital of the next generation. The HCI aims to forecast the joint effects of health and education on 3. Health. This component uses two indicators for future productivity, defined as the human capital a a country’s overall health environment: (1) the child born today can expect to attain by the end of rate of stunting of children under age 5; and (2) secondary school given the risks of poor health and the adult survival rate, defined as the proportion education that exist at the time of the child’s birth. of 15-year-olds who will survive until age 60. The The HCI is built upon three main ingredients: first indicator reflects the health environment experienced during prenatal, infant, and early 1. Survival. This component reflects the fact that childhood development. The second reflects children born today need to survive until the the range of health outcomes that a child born process of human capital accumulation through today may experience as an adult. formal education can begin. Survival is measured using the under-5 mortality rate. The resulting index ranges between 0 and 1. A country in which a child born today can expect 2. Expected years of learning-adjusted school. to achieve both full health (no stunting and 100 Information on the quantity of education a child percent adult survival) and full education potential can expect to obtain by age 18 is combined with (14 years of high-quality school by age 18) will score a measure of quality: how much children learn in a value of 1 on the index. Therefore, a score of 0.70 school based on countries’ relative performance signals that the productivity as a future worker for on international student achievement tests. a child born today is 30 percent below what could This combination produces the expected years have been achieved with complete education and of learning-adjusted school. By adjusting for full health. quality, this component reflects the reality that SURVIVAL SCHOOL HEALTH HCI Children who Contribution of Contribution of Productivity of don’t survive X quality-adjusted health (average X of = a future worker don’t grow up to years of school adult survival (relative to become future to productivity of rate and benchmark of workers future workers stunting) to complete productivity of education and future workers full health) Source: “World Bank. 2018. The Human Capital Project. World Bank, Washington, DC.. https://openknowledge.worldbank.org/handle/10986/30498 35 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition Promoting educational attainment and care, and repeated infections are associated with improving the quality of education are key poor child growth, or linear growth faltering. The priorities for promoting human capital growth evidence is well-established that stunting—a marker and ensuring the future employability of the of undernutrition and measure of the severity of Cambodian labor force. Cambodia’s employers linear growth faltering—are associated with lower are affected more by inadequately skilled labor than cognition and motor development in early childhood neighboring countries and returns to primary and and later life learning, health, and ultimately, adult earnings potential.35 Access to primary education has improved, with a From an early age, the dimensions of human net enrollment rate of 93 percent and completion capital complement each other. Adversities, of 79 percent (2017-2018). However, the quality when experienced, accumulate from pre-conception is inadequate, as demonstrated by poor learning and continue throughout prenatal and early life. outcomes. According to the 2018 International These adversities can disrupt brain development, Student Assessment for Development, PISA-D, health, and early learning; developmental delays Cambodia has a high proportion of students who performed below the baseline in all the three childhood, and continue throughout life.36 On the domains—92 percent in reading, 90 percent in other hand proper nutrition in utero and in early mathematics and 95 percent in science. Access childhood improves children’s physical and mental to secondary school remains a challenge; in 2017- well-being. Evidence from a multi-country study in 2018 gross enrollment for lower secondary was Southeast Asia found that both underweight and only 56.8 percent and drop-out rates were still high obese children had lower IQ scores than healthy- at 15.4 percent. A well-educated and highly skilled weight children.37 Early abilities make it easier to population is needed to drive innovation and income generation, and subsequently economic growth and motivation to learn more. poverty reduction in the ‘knowledge economy’. Smart investments in the nutrition, physical, However, the foundations human capital, cognitive, social, and emotional development education, and skills development are set long of children -- starting before birth until they transition to primary school – are critical to days between conception and a child’s second set in motion human capital formation. Early birthday are critical period of physical and cognitive development. Poor nutrition, inadequate and likelihood of success of later investments FIGURE S1: Cambodia’s employers are affected FIGURE S2: Low rate of return to education more by inadequately skilled labor force than other countries All 25 23 1 20 18 16 8 16 14 Percent 15 11 Percent 10 6 10 10 8 4 5 2 0 6) Ph mar 5) ne 16) sia 5) Ba ia & 5) c ) La ia ( ) ) 13 11 PD 016 cifi 0 01 01 1 1 20 20 20 20 0 Pa (2 (2 2 (2 Years of schooling s( ( Sr sh ( ( R m Ca ka d na e an e bo pi lad -2 n n et As iL do ya ilip m o Vi ng M In st Ea 1 3 6 9 12 College+ Source: Enterprise Survey, 2016. Note: Percent of employers reporting Source: World Bank. 2019. Future jobs in Cambodia. Note: Percent returns inadequately educated workforce as a barrier to firm operation. to wages by year of schooling.. 35 Sudfeld CR, Charles-McCoy D, Danaei G, et al.. 2015. Linear growth and child development in low- and middle-income countries: a meta-analysis. Pediatrics;135:e1266. 36 Black MM, Walker SP, Fernald LC, et al. 2017. Early childhood development coming of age: science through the life course. Lancet; 389: 77–90. 37 Sandjaja BK, Poh N, Rojroonwasinkul B, et al. . 2013. Relationship between Anthropometric Indicators and Cognitive Performance in Southeast Asian School-Aged Children.British Journal of Nutrition;110 (supplement 3): S57–S64. CAMBODIA ECONOMIC UPDATE | MAY 2019 36 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition in education and skills building. On the other Millennium Development Goals for both maternal hand, nutritional, physical, and socioemotional and child mortality.38 deprivations that emerge early in life are difficult— Despite progress in many health areas, child if not sometimes impossible—to remedy later in life. undernutrition remains an impediment to 3. The State of Child Health and Cambodia’s human capital formation. Child undernutrition—including stunting, wasting, Nutrition in Cambodia underweight, and micronutrient deficiencies—are Cambodia has made remarkable progress in of concern in Cambodia. Child stunting declined health outcomes over the past three decades. from 59 percent in 1996 to 32 percent in 2014 (figure Emerging from widespread poverty in the 1990s, S4), but is still considered ‘high’ according to global Cambodia’s health outcomes improved rapidly and standards.39 At nearly 10 percent, child wasting (a the country has surpassed several better-off countries form of acute malnutrition) is also considered ‘high’.40 in reductions in mortality and improvement in life Maternal undernutrition poses risks to a expectancy (table S3). Cambodia was one of only woman’s own health and productivity and also four Countdown to 2015 countries to achieve the impacts the nutrition of her child: undernutrition FIGURE S3: Cambodia’s overall performance on the human capital index is about as expected as compared to other low middle-income economies, though years of schooling, adult survival, and child stunting remain key issues A: Human Capital Index B: Probability of Survival to Age 5 Lower Middle Income 0.48 Lower Middle Income 0.96 East Asia & Pacific 0.61 East Asia & Pacific 0.98 Cambodia 0.49 Cambodia 0.97 Upper Middle Income 0.58 Upper Middle Income 0.98 0.0 0.2 0.4 0.6 0.8 1.0 0.0 0.5 1.0 C: Adult Survival Rate D: Harmonized Test Scores Lower Middle Income 0.81 Lower Middle Income 391 East Asia & Pacific 0.87 East Asia & Pacific 451 Cambodia 0.83 Cambodia 452 Upper Middle Income 0.86 Upper Middle Income 428 0.0 0.2 0.4 0.6 0.8 1.0 0 100 200 300 400 500 600 E: Expected Years of Schooling F: Fraction of Children Under 5 Not Stunted Lower Middle Income 10.4 Lower Middle Income East Asia & Pacific 11.9 East Asia & Pacific 0.73 Cambodia 9.5 Cambodia 0.78 0.68 Upper Middle Income 11.7 Upper Middle Income 0.87 0.0 2.0 4.0 6.0 8.0 10.0 12.0 0.0 0.5 1.0 Source: The World Bank. 38 Countdown to 2015 countries include 75 countries that accounted for more than 95% of maternal, newborn, and child deaths globally in 2005. For more information see: UNICEF and WHO. 2015. A decade of tracking progress for maternal, newborn, and child survival. The 2015 report. Geneva: World Health Organization. 39 According to the World Health Organization (WHO) public health thresholds. 40 Notably, little progress was made in reducing wasting between 2005 and 2014. The high prevalence of wasting is of particular concern given Cambodia’s relatively low levels of absolute poverty and food insecurity. 37 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition during pregnancy and lactation can result in TABLE S3: Human Development Indicators, Cambodia (2000–2014) development of the fetus. Among Cambodian Indicator 2000 2014 women of reproductive age (15–49 years), 14 percent are underweight and nearly half (45 percent) suffer from anemia. These high levels of undernutrition Total population 12,152,354 15,270,790 contribute to low birth weight births (11 percent), which can signal both linear growth faltering during Total fertility rate 3.8 2.7 gestation and pre-term births. Importantly, up to 20 percent of stunting in children ages 1 to 5 years can Life expectancy 65.6 68.3 be attributed to small for gestational age births.41 83 35 Overall, Cambodian children in poor households rate (deaths per (located in the rural areas) are more vulnerable 1,000 live births) to undernutrition than their wealthier peers Stunting prevalence in the poorest Infant mortality rate 80 29 wealth quintile (42 percent) is more than double that (deaths per 1,000 live births) relatively high prevalence of maternal and child Neonatal mortality 37 18 undernutrition among the richest households is a rate (deaths per sign that undernutrition in Cambodia is not solely 1,000 live births) a function of poverty. Interestingly, Cambodia’s stunting prevalence among children in the wealthiest Maternal mortality 437 170 households remains three times higher than that of ratio (deaths per 100,000 live births) Vietnam,42 highlighting the importance of non- income causes of undernutrition in the country. Source: CDHS 2000 and 2014. FIGURE S4: Child (<5) undernutrition prevalence, FIGURE S5: Geographic Distribution of Stunting Cambodia, 2000-2014 and Wasting among Children (<5) 60 50 45 50 40 40 35 Percent 30 30 Percent 25 20 20 10 15 10 0 5 2000 2005 2010 2014 0 Stunting Wasting Stunting Underweight Wasting Severe Wasting Urban Rural Total Source: Cambodia DHS 2014 Source: Cambodia DHS 2014 41 Christian P, Lee SE, Donahue AM, et al. 2013. Risk of childhood undernutrition related to small-for-gestational age and preterm birth in low- and middle-income countries. International Journal of Epidemiology;42: 1340–55. 42 According to the 2011 Multiple Indicator Cluster Survey in Vietnam, stunting prevalence was 6.1 percent among children in the highest wealth quintile. CAMBODIA ECONOMIC UPDATE | MAY 2019 38 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition The prevalence of stunting in Cambodia is The UNICEF framework is a well-established similar to regional comparators, yet the country conceptual model for assessing the drivers of needs to accelerate progress to catch up with undernutrition in a given context (Figure S8). aspirational peers such as Malaysia, Thailand, Reducing the burden of child undernutrition in and Vietnam (Figure S7). Notably, child stunting Cambodia will require interventions to: (a) improve remains a widespread challenge in ASEAN the immediate drivers of undernutrition by improving countries: in Indonesia, Philippines, Lao PDR, and nutrition intake, care, and disease; (b) prevent and Myanmar roughly one third of children are stunted reduce undernutrition through improvements in according to the most recent estimates. maternal health, care, and nutritional status; and (c) simultaneously addressing underlying drivers (food Cambodia’s burden of undernutrition carries insecurity; poor care for women and children; low short and long-term effects for individuals access to health services; and poor access to water, and society. Undernutrition was estimated as an sanitation, and hygiene [WASH]). underlying cause over 60 percent of Cambodia’s child mortality in 2010. For surviving children, the A. Poor Nutrition Behaviors consequences of early childhood undernutrition Improving the diet of women and children is at range from delayed cognitive development to lower the core of achieving better nutrition outcomes school achievement, lower adult earnings, increased in Cambodia. The Cambodian diet is heavily rice- health expenditures, and higher probability of adult based, and there is little evidence that women noncommunicable chronic diseases. Nationally, the enhance dietary quality or quantity to accommodate overall costs of undernutrition43 were estimated at the needs of pregnancy.45 On the contrary, qualitative US$ 250-400 million annually in 2010, or 1.5 - 2.5 analysis demonstrates that pregnant women often percent of gross domestic product.44 display one or more of the following poor behaviors: 4. Drivers of Poor Child Nutrition skipping meals to avoid gaining weight and maintain physical appearance as well as have an easy delivery; The causes of undernutrition in Cambodia skipping meals to avoid chanh (morning sickness); are multiple, interacting, and multisectoral. and eating excess sugar and sugary snacks.46 FIGURE S6: Undernutrition in Children Under- FIGURE S7: Stunting prevalence over time in EAP Five by Wealth Quintile, 2014, Cambodia Countries 45 70 40 60 35 50 30 40 25 Percent Percent 20 30 15 20 10 10 5 0 0 Lowest Second Middle Fourth Highest 1990 1995 2000 2005 2010 2015 Wealth Quintile Cambodia China Indonesia Lao PDR Malaysia Myanmar Lowest Second Middle Fourth Highest Philippines Thailand Vietnam Source: Cambodia DHS 2014 Source: World Development Indicators. 43 44 Journal of Clinical Nutrition. 23(4); 524-31. 45 In fact, recent analysis indicates that based upon current levels of rice consumption, achieving requirements for fats and select B vitamins is not possible without exceeding acceptable levels of caloric intake. For more information, see: World Food Program. 2017. Fill the Nutrient Gap: Summary Report. Rome: World Food Program. 46 MOH, UNICEF, HKI, iDE, and Melon Rouge. 2017. The 1000 Day Feeding Journey of Infants and Young Children in Cambodia. Phnom Penh: iDE. 39 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition Breastfeeding practices47 in Cambodia are The use of formula milk—which puts children at high relative to comparators (panels A and B, risk of inadequate nutrient intake and disease— figure S9) but show signs of deterioration over is rapidly expanding across ASEAN countries. time (panels C and D, figure S9). Breastfeeding Factors associated with its increased use are include: is a critical source of early life nutrients and decreased time for breastfeeding, particularly has significant impacts on children’s health and as women return to work, convenience, lack of development independent of the relationship with social support, and the status imparted by its use.49 linear growth. Children who are breastfed longer Recent studies have found widespread promotion have lower rates of disease and death and higher of formula milk within public and private health intelligence than do those who are breastfed for facilities despite regulation against this practice; the shorter periods, or not breastfed, with the impacts pervasive marketing has shifted the perceptions persisting until later in life.48 Growing evidence also and recommendations of health professionals, who suggests that breastfeeding might protect against often promote formula milk rather than providing overweight and diabetes later in life. quality lactation support.50 The decline in breastfeeding is most pronounced The complementary feeding period (6-24 among urban and wealthy Cambodian mothers. months of age) is particularly critical for FIGURE S8: Conceptual framework for identifying the causes of malnutrition Intergeneration consequences Non-communicable Sub-optimal adult diseases, reproductive Mortality, morbidity height, cognitive ability, Consequences health, premature from infectious economic/work mortality, disability, diseases, disability productivity, social isolation reproductive outcomes Overnutrition/unbalanced intake Maternal and child undernutrition Immediate causes Physical inactivity Poor dietary intake (quality and/or quantity) Disease Sedentary Insufficient Inadequate CARE and Poor water, sanitation Underlying causes lifestyle and access to FEEDING practices food safety and inadequate at household/ behaviours healthy FOODS and behaviours HEALTH services family level Access to natural capital (land, water, clean air), markets, education, support networks, social protection, infrastructure and transportation, employment, Basic causes at income, technology, information, marketing social level Culture and social norms; gender; fiscal and trade policies; legislation and regulations; agriculture; food systems; urbanization; climate change; pollution; political stability and security Source: ASEAN, UNICEF, and WHO. 2016. Regional Report on Nutrition Security in ASEAN: Volume 2. Bangkok: UNICEF. 47 The initiation, duration, and exclusivity of infant and young child breastfeeding plays an important role in establishing the child’s early life nutritional status and preventing infant mortality (Black et al. 2008). The WHO recommends the early initiation of breastfeeding within one hour of birth, exclusive consumption of breastmilk through six months of age, and continued breastfeeding through 24 months. 48 Victora CG, Bahl R, Barros AJ, et al. 2016. Breastfeeding in the 21st century: epidemiology, mechanisms and lifelong effect. Lancet; 387: 475–90. 49 Pries AM, Huffman SL, Mengkheang K, et al. 2016. Pervasive promotion of breastmilk substitutes in Phnom Penh, Cambodia, and high usage by mothers for infant and young child feeding. Maternal & Child Nutrition; 12(Suppl. 2): 38–51. 50 MOH, UNICEF, HKI, iDE, and Melon Rouge. 2017. The 1000 Day Feeding Journey of Infants and Young Children in Cambodia. Phnom Penh: iDE. CAMBODIA ECONOMIC UPDATE | MAY 2019 40 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition children’s nutrition and growth. Similar to global adequate complementary feeding at 6-24 months trends, there is a near doubling in the prevalence in addition to breastmilk. The quantity and quality of stunting among Cambodian children around of complementary foods52 in Cambodia is poor. the introduction of complementary foods: 16 Few infants and young children consume a diet of percent of infants under 9–11 months are stunted appropriate minimum diversity (48 percent) and compared with 34 percent of children age 18–23 this is low relative to peers such as Indonesia (52.6 months.51 This trend is largely attributed to: poor percent) and Vietnam (59 percent) (figure S10). quality, quantity, and hygiene of complementary Cambodia also experiences significant disparities foods; consumption of unsafe water; and increasing are between the dietary diversity of children in exposure to infection and illness as children become the wealthiest households (69 percent) compared mobile (particularly in unhygienic environments). to the poorest (33 percent).53 Importantly, a third Improvements in complementary feeding of Cambodia’s richest young children are not fed a practices are necessary to ensure Cambodian minimally diverse diet. children have adequate nutrient intake. B. Low availability and affordability of Children need timely, safe, appropriate, and age- nutritious foods FIGURE S9: Breastfeeding practices in Cambodia and Comparator Countries A: Early Initiation of Breastfeeding (within one hour B: Infants not receiving any breastmilk, by age group of birth) 80 30 70 25 60 50 20 Percent Percent 40 15 30 10 20 10 5 0 0 R s am a sia sia R a ar s d am ne di ne PD di an PD nm ne bo N ne pi bo N pi ail do ilip m do et o ya ilip m et o Th La Vi Ca In La M Vi Ca In Ph Ph 0-1 month 2-3 months 4-5 months C: Early initiation of breastfeeding (within one hour D: Exclusive breastfeeding (infants 0-5 months), of birth), Cambodia, 2000-2014 Cambodia, 2000-2014 70 80 60 50 60 Percent Percent 40 40 30 20 20 10 0 0 2000 2005 2010 2014 2000 2005 2010 2014 51 National Institute of Statistics, 2015. Cambodia Demographic and Health Survey 2014. 52 Beyond the first 6 months of age, the frequency of feeding, the diversity of diet, and nutrient composition of complementary foods has an impact on infants’ and young children’s nutritional status and has been strongly associated with stunting. See: Bhutta et al. 2013. 53 Minimum dietary diversity represents the percentage of children age 6–23 months who receive foods from at least four food groups in the previous day. For breastfed children, the minimum meal frequency is solid or semisolid food at least twice a day for infants 6–8 months per day least three times per day for children 9–23 months. For non-breastfed children, the minimum meal frequency is solid or semisolid food or milk at least four times a day for children 6–23 months. 41 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition Cambodia’s large increases in food availability twice as high as the national average ($3.62). Thus, (e. an estimated 66 percent of households in Northeast accompanied by only small improvements in provinces could not afford a nutritious diet.56 food access (namely geographic and economic access to a diverse, nutrient rich diet). Severe evidence points to a rising exposure of the food insecurity remains a challenge only in select Cambodian and population to food safety areas (largely poor and remote). Most agricultural hazards. Cambodia’s food system is ‘transitioning’, households can meet their staple food (rice) needs where growing food safety challenges will but rely on income and foraging to obtain nutrient- increasingly strain, if not overwhelm, existing dense foods. Geographic access to markets is not a country capacity.57 Foodborne disease is associated widespread concern: most households can access a with poor population health and illness, though market within 30 minutes and these markets have, on average, 270 foods available. understood. Cambodia’s food safety challenges On the other hand, the affordability of nutrient range from institutional (weak policy, prioritization, dense foods poses a common challenge. Recent and data availability) to individual (inappropriate estimates suggest 21 percent of households can’t and unhygienic food vendor locations; lack of afford a nutritious diet 54 and poor agricultural knowledge on temperature control, which is households are the most food insecure. The national especially problematic when delays between food average daily cost of the staple-adjusted nutritious preparation; poor personal hygiene practices, either diet55 in Ratanakiri/Mondulkiri ($6.06) is nearly due to low knowledge or lack of nearby facilities).58 C. Gaps in nutrition services delivered by FIGURE S10: Complementary feeding practices the health sector among children age 6-23 months, Cambodia and comparator countries of essential maternal and child health and nutrition 100 90 80 There are a number of high- 70 impact, evidence-based nutrition interventions 60 that—when delivered at 90 percent coverage—can Percent 50 40 contribute to a 20 percent reduction in stunting.59 30 According to the 2014 DHS, only two-thirds (65 20 percent) of children receive all basic vaccinations 10 by age 12 months. Over one quarter of children 0 age 12-23 months are not fully vaccinated, and sh sia R s am ua a ala ilip r a ne di many of these reside in ‘high-risk communities’, PD nm de ne m bo N pi la te do ya m et o ng La M Vi Ca In Ph Ba G Minimum dietary diversity Minimum meal frequency remotely-settled urban and rural populations, and Minimum acceptable diet children of migrant families. Only about half (59 percent) of children receive bi-annual deworming Source: UNICEF Infant and Young Child Feeding Indicators Database. medication and 70 percent receive bi-annual vitamin Most recent available year by country. A supplementation.60 54 World Food Programme. 2017. Fill the Nutrient Gap Summary Analysis, Phnom Penh, WFP. 55 The staple-adjusted nutritious diet is modeled using linear programming to identify the least expensive nutritious diet for a household including nutritionally vulnerable people should eat, but is instead based upon identifying how the macro-/micro-nutrient needs of individuals within a household can be met at the lowest cost based upon the foods available in local markets and small adjustments for local preferences. 56 World Food Programme. 2017. 57 World Bank. 2019. The Safe Food Imperative: Accelerating Progress in Low- and Middle-Income Countries. Washington, DC: World Bank. 58 DC: World Bank. 59 Bhutta ZA, Das JK, Rizvi A, et al. 2013. Evidence-Based Interventions for Improvement of Maternal and Child Nutrition: What Can Be Done and at What Cost? The Lancet 382: 452–77. 60 National Institute of Statistics, 2015. Cambodia Demographic and Health Survey 2014. CAMBODIA ECONOMIC UPDATE | MAY 2019 42 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition FIGURE S11: Coverage of essential maternal and child health and nutrition services by wealth quintile, Cambodia, 2014 100 90 80 Percent 70 60 50 Facility delivery Skilled birth ANC by skilled Full Vitamin A attendence provider immunization supplementation (children 6-59 months) Highest Fourth Middle Second Lowest Source: CDHS 2014. There are several bottlenecks to improving S12), and open defecation is associated with the delivery of nutrition services through the health sector, including: (i) limited quality S13). Open defecation within a community is of services in facilities, with a need to improve associated with harms to the physical and cognitive professional standards and skills related to nutrition development of children, even children living in counselling, growth promotion, and behavior change households that use toilets themselves. Children interventions for maternal, infant, and young child living in unhygienic environments (with repeated nutrition; (ii) low availability of nutrition services exposure to and ingestion of human and animal in communities and through outreach; (iii) limited feces) can experience impaired gut health, diarrhea, demand for and awareness of the importance of malnutrition, stunted growth. preventive and promotive nutrition services.61 Access to improved water supply and sanitation in D. Limited access to improved water supply and sanitation and poor hygiene though clear disparities persist alongside a growing need to focus on quality of services. Cambodia Access to water supply and sanitation appears achieved 75 percent access to improved water supply and 49 percent access to improved sanitation FIGURE S12: Access to improved water supply and sanitation and HCI Improved Sanitation and HCI Improved Drinking Water and HCI 0.9 0.9 0.4 0.5 0.6 0.7 0.8 0.5 0.6 0.7 0.8 Human Capital Index Human Capital Index 0.4 0.3 0.3 20 40 60 80 100 40 50 60 70 80 90 100 Percentage of Improved Sanitation Percentage of Improved Drinking Water Source: World Bank staff estimates using 2018 Human Capital Index and World Development Indicator data. 61 World Bank. 2019. Preliminary Findings: Cambodia Health Financing System Assessment. 43 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition in 2015.62 E. Constraints on women’s resources for the average for lower middle-income economies (90 optimal care and 52 percent, respectively). In urban areas, access Cambodia’s high female labor force participation rates for improved water supply were 78 percent outpaces other countries in the region for the poorest and 99 percent for the richest, while and facilitated the growth of manufacturing. An estimated 80 percent of Cambodian women age 100 percent, respectively.63 Despite good progress, 15-64 worked for at least an hour in the previous proportion of people practicing open defecation week, compared to an average of 66 percent for EAP women. Nearly 23 percent of Cambodian region. Only 24 percent of the population has women worked in the manufacturing sector in 2015, access to safely managed water supply in 2015.64, 65 as compared to 21 percent in Thailand and 19 Overcoming water supply and sanitation challenges percent in Vietnam.66 Manufacturing has driven the could be an important factor contributing to human rise in wage labor: 42 percent of working women capital development in the country. in 2016 held paid occupations, almost half of FIGURE S13: Growth faltering (height-for-age which were in the garment sector. There have also z-score) for households with and without a toilet for different levels of open defecation (2010) services and construction sectors between 2011 and -1.2 5). height-for-age z-score -1.4 Cambodian women working in the garment managing the balance between work and -1.6 caregiving roles, despite Labor Law provisions. Most garment and footwear workers cannot afford -1.8 to have children living with them due to the high 0 0.2 0.4 0.6 0.8 1 cost of accommodation and childcare expenses. open defecation in child’s locality household does not openly defecate Garment workers with children typically spend household does openly defecate about 50 percent more than single workers do on Source: Vyas S, Kov P, Smets S, Spears D. 2016. Disease externalities and net nutrition: evidence from changes in sanitation and child height in FIGURE S15: Female wage employment by sector in Cambodia, 2005-2010. Economics and Human Biology; 23:235-45. Cambodia FIGURE S14: Cambodia’s female labor force 50% participation relative to peers. 45% 40% Cambodia 35% Lao PDR 30% Vietnam 25% Thailand 20% 15% Myanmar 10% Indonesia 5% Malaysia 0% de s re n g ice in io ltu a ur ct Tr Philippines rv icu tr u ct Se a r ns uf Ag 0 10 20 30 40 50 60 70 80 90 Co an M Percent 2011 2016 Source: CSES 2011 and 2016. In: Gavalyugova, Dimitria and Wendy Source: ILO Modeled Estimates 2016. Cunningham. 2019. “Gender Analysis of the Cambodian Labor Market.” World Bank. In progress. 62 WHO/UNICEF Joint Monitoring Program (JMP) 2017 (Updated July 2017). Note: Improved sanitation refers to improved sanitation which is not shared. If shared 63 WHO/UNICEF JMP 2015. 64 disposed in situ or transported and treated off-site. 65 WHO/UNICEF JMP 2017. Note that the estimate for safely managed sanitation is not available. 66 Gavalyugova, Dimitria and Wendy Cunningham. 2019. “Gender Analysis of the Cambodian Labor Market.” World Bank. In progress. CAMBODIA ECONOMIC UPDATE | MAY 2019 44 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition their children’s living and educational expenses.67 periods. There are concerns regarding the quality of Moreover, factory non-compliance with childcare these caregivers in providing for optimal care and and breastfeeding provisions is pervasive: 72 percent child development, particularly grandmothers, who of surveyed factories were in noncompliance with have expressed low skills and bandwidth to take care the provisions to have both an accessible nursing of young children.70 According to the 2014 DHS room and functioning day care center.68 one in ten children under five in Cambodia are left in inadequate care.71 Even so, many of Cambodia’s working women are not covered under provisions of the labor law. There is growing evidence to scrutinize the Though women have been most visible as the engine role of care for women and children as a driver of the formal garment industry, their participation of undernutrition. The persistence of traditional is growing in private wage employment in services gender roles and weak social systems to provide care (such as hospitality and education), agriculture, and and feeding for children (both formal and informal), construction that in the large part remains informal. may contribute to unforeseen impacts on infant For instance, more than 500,000 women workers and young child feeding and nutritional outcomes. are in the informal wage employment sector in Recent analyses suggest there are tradeoffs between the services and construction sectors.69 Women in women’s productive and reproductive roles: that these informal sectors lack the formal protections benefits accrued from additional income may result in afforded to workers in large garment factories, such reduced breastfeeding but improved complementary as maternity protection, workload burden, wage, feeding. Among all children age 0-5, mother’s work breastfeeding, childcare, and others. and year-round work are both associated with better anthropometric and infant and young child feeding Thus, Cambodian women experience growing (IYCF) outcomes; however, these two variables constraints on the time available for care of young are associated with poorer outcomes (wasting, children. Due to the high cost, inconvenience, and underweight, and height-for-age) among children lack of safety inherent in relocating or commuting under 2 as compared to all children under 5 (figures with their mothers, young children are often S16 and S17). Moreover, significant improvements left in the custody of secondary caregivers (e.g. in IYCF practices disappear when limited to women grandmothers, neighbors, siblings) for extended working in non-agriculture sector (figure S16). FIGURE S16: Infant and young child (0-23 months) feeding outcomes associations with mother’s work force participation, 2014 0.15 0.10 0.07 * 0.06 *** 0.07 *** 0.05 *** 0.06 *** 0.04 * 0.05 ** 0.04 * 0.03 ** 0.03 ** 0.04 ** Standard deviation 0.05 0.00 0.04 * -0.05 -0.05 *** -0.10 -0.08 * -0.11 ** -0.10 *** -0.15 ly o or r ty d l al d k na to or un e m on nt ali ct oy r ec sio W e r re ro 2 se qu as oy pl gs t1 as se ge cu em Ag ar pl las oc -a ye m k in k on lf- or re or k in rn k Se or W N or W fo d Ea W W ke k or or Exclusive breastfeeding MAD MDD MMF W W Source: Authors’ calculations from CDHS 2014. MAD: Minimum Acceptable Diet; MDD: Minimum Dietary Diversity; MMF: Minimum Meal Frequency. * p< 0.10, ** p < 0.05, *** p < 0.01. 67 See the selected issue on the Garment Sector in Perspective, October 2016 Cambodia Economic Update, the World Bank. 68 International Labour Office (ILO). 2018. Better Factories Cambodia: Towards Gender Equality - Lessons from factory compliance assessments. Geneva: ILO. 69 See the selected issue on Future Jobs in Cambodia, April 2018 Cambodia Economic Update, the World Bank. 70 See for instance: World Bank and Planète Enfants & Développement. Results of consultations on the concept of community-based childcare for garment factory workers. In progress. 71 Defined as being left alone or in the care of a child under the age of 10 years. 45 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition F. Limited Availability and Efficiency of historically driven by macroeconomic growth rather Public Expenditures for Child Health and than a prioritization of the sector (figures S20 and Nutrition72 S21). Cambodia spends more on health (about 6-7% High out-of-pocket spending and reliance of GDP) relative to regional comparators, on external financing are challenges in the (figure S18), but the public expenditure on sustainable financing for universal health health is relatively low (1.3% of GDP in 2015). coverage. Health expenditures are largely financed Public expenditure accounts for 22 percent of total through out-of-pocket spending. Among sectors, health expenditure, and government share of per Cambodia’s health sector receives the largest share capita health expenditure remains low relative to of grant financing from overseas development other countries in the region at $16 (figure S19). assistance, but external financing has been declining Increases in public expenditure on health have been since 2011; by 2017 it was nearly halved from 2002 (figure S22). FIGURE S17: Infant and young child (0-23 months) anthropometric outcomes associations with mother’s work force participation, 2014 0.15 0.10 0.05** Standard devation 0.05 0.00 -0.05 -0.10 -0.05** -0.05** -0.07*** -0.15 ly o or r k d l al d r ty na to e or un e m on nt ali oy ct oy ec sio W rre ro 2 se qu as pl pl gs t1 as m se ge cu em Ag ar las oc -a re ye k in k on lf- or fo or k in rn k Se or W N or W d k Ea W W or ke W or W Stunting Wasting Underweight Source: Authors’ calculations from CDHS 2014. *p < 0.10, ** p < 0.05, *** p < 0.01 FIGURE S18: Cambodia’s total health expenditure is FIGURE S19: Though Cambodia’s public health high relative to regional peers expenditure per capita is lowest among regional peers Total health expenditure share of GDP, 2015 Public expenditure for health per capita, 2015 500 2,500 10,000 25 Low income Low income Lower middle income Lower middle income 10 15 Upper middle income Upper middle income High income High income Percentage (%) Ca Vi mb US dollars od Ph Ch etna ia Ma C ilip ina m Th l h pin aila aysia ina Ind Thai es nd 5 on l a nd La e sia Vi 100 oP In et DR La don nam o Ca P esia mb DR od ia 25 2 5 1 Source: WHO Global Health Expenditures Database. Source: WHO Global Health Expenditures Database. 72 Due to the importance of nutrition-specific interventions for improving child nutrition and growth, this section draws heavily upon preliminary findings from the following report led by Emiko Masaki: World Bank. Cambodia Health Financing System Assessment. In Progress. It focuses on trends in public expenditure in the health sector as sectoral home of nutrition service delivery. CAMBODIA ECONOMIC UPDATE | MAY 2019 46 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition Despite the slow increase in public health progress in integrating this financing into the expenditure, innovations in health financing domestic budget: While the national maternal and and service delivery have improved productivity child health program73 received 6-7 percent of the and efficiency of underlying investments overall Ministry of Health budget in 2016-2018, the in health to enable improvement in several National Nutrition Program received less than one population health and nutrition outcomes. percent (annual average US$ 127,000) of the MCH Specifically, the expansion of the Health Equity Fund program budget (Figure S24). The bottlenecks in and service delivery grant systems have: (i) mobilized service delivery identified above are to be expected. resources to frontline provides; (ii) improved health Domestic financing potential for early worker motivation and accountability; (iii) enabled childhood health nutrition exists within the systematic and structured supervision; (iv) created commune/Sangkat fund, yet this potential data systems of growing transparency; and (v) remains unrealized. Under the commune/sangkats improved the citizen-centeredness and responsivity general mandate, local authorities have the flexibility of public services. to support investments in social services and social Unfortunately, these mainstream systems of protection, including maternal and child health health financing and service delivery have and nutrition. The annual C/S fund allocation rose addressed nutrition only to a limited extent. incrementally by 2 percent since 2003 and reached Health sector investments in nutrition have a total of US$93 million in 2017. However, only historically been low, fragmented, and dominated about one-third of the total allocation (averaging by external financing (Figure S23). Cambodia’s US$63,000 per C/S) is available for development National Nutrition Program has long operated as activities.74 Thus, despite remarkable increases in a vertical program with ad hoc interaction with the total funding, the development investment per mainstream public health service delivery and capita is relatively low (US$2.37 in 2017) and has frontline providers. plateaued since 2013.75 However, the commune investment planning process and the complex As with the wider health sector, the nutrition procurement procedures often limit C/S investment program has been experiencing an external in local social services/development projects. financing transition. There has been slow FIGURE S20: Per capita public health expenditure FIGURE S21: Cambodia’s strong economic growth has increased over the past decade is not being translated into commensurate public investments in health 70 18 12 public health spending per capita (%) 45 Public health spending per capita 16 10 degree Real annual per capita growth, 60 line 14 8 Lao PDR Share of Central Government Thailand (KHR thousands) 50 6 Indonesia 12 Philippines Mongolia 40 10 4 Vanuatu Malaysia Expenditure 2 Micronesia Fiji 30 8 Tonga Solomon Is. 0 Palau 6 Tuvalu Marshall Is. 20 -2 Cambodia 4 Kiribati Cambodia 10 2 -4 Pacific Island countries -6 PNG East Asia 0 0 2000 2003 2006 2009 2012 2015 -2 0 2 4 6 8 10 Year Public health spending per capita (KHR thousands) Real annual per capita growth, GDP per capita (%) Share of Central Government Expenditure Source: Authors’ estimates. Source: IMF World Economic Outlook, WHO Global Health Expenditures Database. 73 Including sub-programs for reproductive health, maternal and newborn care, child health (including immunization), and nutrition. 74 Until 2013, it was a legal requirement that the cost of administration not exceed one-third of all total funding. By 2017, the cost of administration reached 61 percent of total costs. This raises potential allocative efficiency issues, as the opportunity costs of high salaries is reduced development spending on capital projects and, by extension, reduced effectiveness of SNAs. 75 World Bank. 2018. Cambodia’s Cross-Cutting Public Financial Management, Decentralization, and Public Administration Reforms: Achievements, Coordination, Challenges, and Next Steps. Phnom Penh: World Bank. 47 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition FIGURE S22: Composition of health financing in Cambodia and comparator country groups Cambodia Low Income 1% 5% 19% 22% 21% 0% 33% 1% 40% 58% Low Middle Income Upper Middle Income 4% 8% 3% 12% 37% 39% 33% 40% 6% 17% Public SHI/CPS OOP External Other Source: Source: WHO Global Health Expenditures Database 2017. SHI: Social Health Insurance. CPS: Contributory Pension Scheme. OOP: Out-of-Pocket. FIGURE S23: Health Spending by Program and FIGURE S24: Maternal and Child Health* Program Sources (latest available year) Budget by Sub-Program, Ministry of Health, FY 2016- 2018 100 30 9 80 25 67 60 77 20 83 Percent 95 Million USD 86 15 40 10 20 33 17 23 5 0 5 5 2) ) 8) ) 5) 17 15 0 01 01 01 20 20 (2 (2 (2 n( S( 2016 2017 2018 n TB ia tio ID io r ala rit iza /A ut M Activities at provinces and cities Reproductive health un IV N m H Child health Nutrition Im Government External Other Maternal and newborn care Sources: UNAIDS, Global AIDS Monitoring Database 2018; WHO, Source: General Department of Budget, MEF, Budget In Brief for Fiscal World Malaria Report 2017; WHO, World Tuberculosis Report 2018; Year 2016, 2017, 2018. WHO/UNICEF, JRF, 2018. Note: other includes OOP and Health Insurance. CAMBODIA ECONOMIC UPDATE | MAY 2019 48 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition 5. Policy Options will need to be done specifically to: (i) prioritize nutrition within existing sector resources; and (ii) Without dedicated effort and attention to address focus on improved quality to enhance the efficiency the foundations of early childhood health and of underlying public expenditures. nutrition, Cambodia will struggle to have its 2. Leverage mainstream health financing human capital formation keep pace national and service delivery reforms to improve development aspirations. In addition to rapid the coverage and quality of maternal poverty reduction combined with robust economic and child health and nutrition services growth, at least three achievements have likely delivered through public facilities. A first contributed to Vietnam’s rapid reduction in child priority will be to ensure the availability and stunting: prioritization of nutrition by the national government, policies designed to improve infant quality of nutrition-specific services such and child feeding practices, and efforts to reduce as maternal nutrition counselling (especially micronutrient deficiencies.76 through antenatal care), well-child visits including immunization and infant and young Increasing the magnitude and efficiency of the child feeding promotion, and management investments from individuals, public sector, and the and treatment of acute malnutrition are critical private sector can help ensure that children get off to first steps to improving nutrition outcomes. a smart start, preparing them with the foundations Small investments in building the capacity and to maximize their education and skills development. resources of the National Nutrition Program These investments will further help the country can enable the use of mainstream health system to take advantage of the country’s demographic platforms to dramatically increase the quantity, dividend and maximize its produced and natural quality, performance and efficiency of health resources. Policy makers can take several actions to sector spending on nutrition. contribute to accelerated progress in this area: 3. Engaging the subnational administration 1. Develop a comprehensive human capital (commune/sangkats) to increase the master plan that begins in the early years to efficiency of domestic resources at local guide domestic investments. Immediate steps level and create community awareness of can be taken to initiate the development of a the importance of early childhood nutrition. strategic vision for human capital improvement that will simultaneously: (i) meet the needs for Subnational finances and platforms can be short-term skills-building alongside medium- redirected to contribute to nutrition, even term improvements in the quality of education; within the existing resource envelope. Proposed and (ii) support long-term investments in the increases to the C/S Fund allocation present health, nutrition, and development of young opportunities to improve the magnitude and children. These two strategies should be quality of expenditure on nutrition. This can undertaken in parallel in order to avoid the loss best be achieved through: (i) dedicated staff of early childhood potential that would result if support at C/S level to manage and administer these investments are only undertaken one after social funds; (ii) clear guidelines and capacity the other. As will be outlined below, the agenda building (technical and fiduciary) to manage such is not for the public sector alone: progress can funds at the local level; and (iii) close interaction be augmented by linking sectoral programs and with the health sector to provide guidance and interventions and engaging the private sector quality assurance and support for community- and families. level health and nutrition promotion. Sector Specific Strategies 4. Support social and behavior change through To close gaps in early life nutrition outcomes, more a multi-component communication strategy 76 Keefe M. On the Fast Track: Driving Down Stunting in Vietnam. In: Nourishing Millions - stories of change in nutrition. Eds: S Gillespie, J Hodge, S Yosef, and R Pandya-Lorch. Washington, DC: IFPRI. 49 CAMBODIA ECONOMIC UPDATE | MAY 2019 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition and engagement with private sector. The 6. Expand the breadth and depth of social Cambodian government’s role in improving protection and labor policies to enable child health and nutrition extends beyond service Cambodia’s families invest in the next provision. The public sector can also invest in generation. Women’s participation in interventions to shape social norms and provide Cambodia’s labor force has intrinsic and information that can shape individual decisions instrumental value and should be maintained. for long term behavior change and sustainability. A medium-term policy agenda can include Experience in Vietnam and Bangladesh strengthening formal and informal social demonstrated that a national mass media support systems can minimize women’s campaign combined with counselling at health tradeoffs between work and care for children facilities and/or community mobilization could and improve child nutrition and development successfully improve complementary feeding outcomes. Options include: practices.7778 A similar approach is warranted in Cambodia to influence individual behaviors and a. Leverage the maternal and child cash transfer longer-term social change related to maternal, to stimulate demand and remove access infant, and young child nutrition and household barriers to health and nutrition service and food hygiene behaviors. Facilitating the utilization and improved dietary behaviors. entry of private sector actors (food processors, As the program moves toward roll-out, care sanitation providers, and water operators) can must be taken to maintain the integrity and leverage their expertise in developing marketing confidence in public health system to deliver solutions, thus reducing consumer barriers to quality services. Investing in a system to product uptake and increase perceived product easily, consistently, and transparently transfer benefits. promised benefits can help ensure there are no failed promises. 5. Improve the availability and affordability of nutrient-rich foods and complementary food b. Further expand and refine maternity products. A nutrition-sensitive value chains protections to enable women’s full approach can contribute to increasing the supply participation in the labor force. Developing of nutrient-rich foods and food processing that viable options for expanding the breadth enhances the nutritional value of food products. (duration of protection) and depth (possible Efforts are underway to improve agricultural beneficiaries) of maternity protection is productivity and diversification: intensifying needed to cover more women regardless of the focus of agricultural investments on research, sector of work. Contributory schemes may inputs, extension, and domestic market creation be explored to support such expansion. for nutrient-rich foods (e.g. fruits, vegetables, c. Improve the availability and affordability animal-source protein, and whole grains) can of child care options. While the labor law help enhance the quality of the Cambodian diet. mandates the provision of on-site childcare, Targeted public-private partnerships can support this may not be feasible or desirable in the manufacturers of commercially produced, Cambodian context, particularly for garment fortified complementary food products to workers. Expanding models of community- enhance their availability and affordability. based and private child care, accompanied These efforts need to be complemented by by strong quality standards and capacity stronger regulation and enforcement of private building, can improve the quality of care sector companies marketing unhealthy foods/ provided to children of working mothers. beverages and breastmilk substitutes, along with stronger private sector engagement in d. Create social support and pressure to fully self-regulation. involve fathers in child care. Given the finite 77 Rawat R, Nguyen PH, Tran LM, Hajeebhoy N, Nguyen H Van, Baker J, Frongillo EA, Ruel MT, Menon P. Social franchising and a nationwide mass media campaign increased the prevalence of adequate complementary feeding in Vietnam: a cluster-randomized program evaluation. J Nutr 2017;147:670–9. 78 Menon P,Nguyen PH, Saha KK,Khaled A, Sanghvi T, Baker J,Kaosar A, Haque R, Frongillo EA, RuelMT, et al. 2016. Combining intensive counseling by frontline workers with a nationwide mass media campaign has large differential impacts on complementary feeding practices but not on child growth: results of a cluster- randomized program evaluation in Bangladesh. J Nutr;146(10):2075–84. CAMBODIA ECONOMIC UPDATE | MAY 2019 50 SELECTED ISSUE: Investing in Cambodia’s Future: Early Childhood Health and Nutrition nature of women’s time, efforts to improve The requirement is much greater than what care and feeding for young children can be the public sector alone can afford, and thus maximized through greater involvement of options of leveraging private sector financing fathers in childcare. and household investment should be explored. A focus should be on creating the regulatory 7. Mobilize investment in water supply and environment to ensure the quality and safety of sanitation to expand services to unserved drinking water, and also strengthening support population. Achieving universal coverage for improved household hygiene environment, for water supply and sanitation by 2025 particularly in rural areas. would require US$211 million per year.79 Photo credited : Igor Dashevskiy 79 World Bank. 2015. Service Delivery Assessments for Water Supply and Sanitation in Cambodia: Turning Finance into Services for the Future. 51 CAMBODIA ECONOMIC UPDATE | MAY 2019 ANNEX 1: PRICE ELASTICITIES OF GARMENT, FOOTWEAR AND MILLED RICE IN THE WORLD ANNEX 1: PRICE ELASTICITIES OF GARMENT, FOOTWEAR AND MILLED RICE IN THE WORLD Author Article Methodology Price Elasticity Rice Wen S. Chern, Kimiko Analysis of food consumption Heckman -1.8 (Japan) Ishibashi, Kiyoshi behaviour by Japanese Taniguchi, Yuki households Tokoyama (2002) Erkan Erdil Demand systems for Rotterdam and AIDS -2.9 (Italy) (2006) agricultural products models -3.1 (Netherland) in OECD countries -1.5 (Norway) -1.4 (Portugal) -2.0 (Sweden) Noel D. Uri, The price elasticity of export Export Function -0.6 (USA) Jonathan D. Jones demand for US agricultural (1989) commodities reconsidered Garment Donatella Baiardi, The price and income Export Function -0.92 (China) Carlucci Bianchi, elasticities of the top clothing -0.73 (France) Eleonora Lorenzini exporters: evidence from a -0.75 (Germany) (2015) panel data analysis -0.96 (Hongkong) -0.74 (Hongkong) -0.72 (Netherland) -0.87 (UK) -1.25 (USA) Nadezhda Ivanova Estimation of own-and Demand Function -1.13 (Russia) (2005) cross-price elasticities of disaggregated imported and domestic goods in Russia Footwear Nadezhda Ivanova Estimation of own-and Demand Function -1.01 (Russia) (2005) cross-price elasticities of disaggregated imported and domestic goods in Russia Jan Kemper Cross-cultural differences in Demand Function -1.58 (EU) (2018) online price elasticity Garment and Footwear Jan Kemper Cross-cultural differences in Demand Function -1.07 (Austria) (2018) online price elasticity -0.97 (Belgium) -1.76 (France) -2.74 (Germany) -1.22 (Netherland) -0.48 (Sweden CAMBODIA ECONOMIC UPDATE | MAY 2019 52 ANNEX 2: CAMBODIA’S KEY INDICATORS ANNEX 2: CAMBODIA’S KEY INDICATORS 2016 2017e 2018e 2019f 2020f 2021f Output and Economic Growth Real GDP (% change, yoy) 7.0 7.0 7.5 7.0 6.9 6.8 Exports, GNFS 1/ 61.3 60.7 63.3 63.6 64.9 65.8 Imports, GNFS 65.7 64.1 66.6 65.3 65.1 65.7 Domestic demand (% change, yoy) 9.9 8.5 10.0 9.9 8.9 10.5 GDP per capita (US$, nominal) 1,264.9 1,375.8 1,476.8 1,640.3 1,789.9 1,951.9 Money and Prices Inflation, consumer prices (annual %, period average) 3.5 3.1 3.2 3.3 3.0 3.1 M2 (% of GDP) 70.9 79.4 88.8 96.0 103.2 110.4 Domestic Credit to the Private Sector (% of GDP) 69.5 74.5 82.8 91.1 100.2 110.2 Nominal Exchange Rate (local currency per USD) 4,058.0 4,062.0 4,067.0 4,075.0 4,050.0 4,030.0 Real Exchange Rate Index (2010=100) 104.9 105.2 108.6 110.3 111.2 113.7 Short-term interest rate (% p.a.) 11.9 11.7 11.3 11.0 11.0 11.0 Fiscal Revenue (% of GDP) 20.7 21.4 22.3 21.2 21.6 22.0 Expenditure (% of GDP) 22.1 23.1 24.2 23.9 23.6 23.6 Overall Fiscal Balance (% of GDP) -1.4 -1.6 -1.9 -2.6 -2.0 -1.6 Primary Fiscal Balance (% of GDP) -1.0 -1.2 -1.5 -2.1 -1.5 -1.1 General Government Debt (% of GDP) 29.1 30.3 30.6 30.0 30.1 31.1 External Accounts Export growth, f.o.b (nominal US$, annual %) 8.6 5.3 5.3 9.0 8.6 8.1 Import growth, c.i.f (nominal US$, annual %) 8.6 4.0 4.1 7.6 7.1 6.8 Merchandise exports (% of GDP) 45.5 45.2 46.8 46.8 47.5 47.7 Merchandise imports (% of GDP) 56.9 55.6 57.6 56.6 56.6 57.4 Services, net (% of GDP) 7.0 7.0 7.4 8.1 9.0 9.9 Current account balance (current US$ millions) 2/ -2,040.2 -2,155.5 -2,502.9 -2,540.7 -2,702.1 -3,012.4 Current account balance (% of GDP) -10.2 -9.7 -10.5 -9.5 -9.1 -9.2 Foreign Direct Investment, net inflows (current US$ 2,164.4 2,381.0 3,238.6 2,835.8 2,802.4 3,044.6 millions) Foreign Direct Investment, net inflows (% of GDP) 10.8 10.8 13.4 10.4 9.3 9.2 Gross international reserves (millions US$) 6,730.8 8,757.9 10,143.7 10,650.9 11,183.5 11,742.7 (prospective months of imports of g&s) 5.7 6.6 6.3 6.6 6.2 6.0 1.187 1.301 1.158 1.050 1.050 1.050 Memo: Nominal GDP (millions US$) 20,019.0 22,109.6 23,720.4 26,749.3 29,619.2 32,753.4 Sources: Cambodian authorities, IMF and World Bank staff estimates and projections e = estimates f = forecast p = projection 1/ Goods and Non-Factor Services (GNFS) 2/ Excluding transfers. 53 CAMBODIA ECONOMIC UPDATE | MAY 2019 REFERENCES REFERENCES Annual Reports (2013–18), Ministry of Agriculture, Forestry and Fisheries Annual Reports (2016–18), National Bank of Cambodia Balance of Payment Statistics (2018), National Bank of Cambodia Banking Supervision Reports (2016–17), National Bank of Cambodia Budget Law (2018), Royal Government of Cambodia Cambodian National Accounts Statistics (2017), National Institute of Statistics, Ministry of Planning Cambodia Tourism Statistics (2017–18), Ministry of Tourism Cambodia Public Debt Statistical Bulletin, Volume 6, September 2018, Ministry of Economy and Finance Cambodia Socioeconomic Surveys (2004–17), National Institute of Statistics, Ministry of Planning Cambodia Doing Business Ranking (2018), World Bank Cambodia Enterprise Survey (2016), World Bank Cambodia Investment Climate Assessment (2018), World Bank Donatella Baiardi, Carlucci Bianchi, Eleonora Lorenzini (2015): The price elasticity of export demand for US agricultural commodities reconsidered, 38, 14-30, https://doi.org/10.1016/j.asieco.2015.03.003 East Asia and Pacific Economic Update (April 2019), World Bank Erkan Erdil (2006): Demand systems for agricultural products in OECD countries, Applied Economics Letters, 13:3, 163-169, DOI: 10.1080/13504850500393386 IMF Article IV Staff Report (2018), International Monetary Fund Jan Kemper (2018): Cross-cultural differences in online price elasticity. http://ecis2018.eu/wp-content/ uploads/2018/09/2016-doc.pdf Logistic Performance Index (2016), World Bank Monetary Statistic Bulletin (2018), National Bank of Cambodia Nadezhda Ivanova (2005): Estimation of own-and cross-price elasticities of disaggregated imported and domestic goods in Russia. http://siteresources.worldbank.org/INTRANETTRADE/Resources/Topics/ Accession/elasticities_NIvanova_sep2005_eng.pdf Noel D. Uri, Jonathan D. Jones (1989): The price elasticity of export demand for US agricultural commodities reconsidered, Agricultural Systems, 28:4, 273-297, https://doi.org/10.1016/0308-521X(88)90071-6 Wen S. Chern, Kimiko Ishibashi, Kiyoshi Taniguchi, Yuki Tokoyama (2002): Analysis of food consumption behaviour by Japanese households. http://www.fao.org/3/a-ae025t.pdf CAMBODIA ECONOMIC UPDATE | MAY 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