Enhancing Export Competitiveness The Key to Cambodia’s Future Economic Success Cambodia Economic Update October 2016 @ All rights reserved This Cambodia Economic Update is a product of the World Bank Group. The findings, interpretations and conclusions expressed in this update are those of World Bank staff and do not necessarily reflect the views of its management, Executive Board, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. Preface and Acknowledgements The Cambodia Economic Update (CEU) is a product of the staff of the World Bank Group. It was prepared by Sodeth Ly and incorporates contributions by Miguel Eduardo Sánchez Martín, both at the Macroeconomics and Fiscal Management Global Practice (MFM GP). Linna Ky served as research assistant. The team worked under the guidance of Mathew A. Verghis, Practice Manager, MFM GP. The team is grateful for the comments, advice and guidance provided by Ulrich Zachau, Country Director, Inguna Dobraja, Country Manager and Shabih Ali Mohib, Program Leader. The CEU is produced bi-annually to provide up-to-date information on macroeconomic developments in Cambodia. It is published and distributed widely to the Cambodian authorities, the development partner community, the private sector, think tanks, civil society organizations and academia. The update is timed to coincide with the six-monthly publication of the East Asia and Pacific Economic Update by the East Asia MFM GP of the World Bank. We received valuable inputs, comments and suggestions from Ahmad Ahsan, Lead Economist, East Asia and Pacific Chief Economist Unit, while the poverty section was contributed by Obert Pimhidzai and Kimsun Tong, at the Poverty Global Practice. The report also benefited from the advice, comments and views of various stakeholders in the Royal Government of Cambodia (RGC), the private sector, development partner institutions and academia. The team is very grateful for their time and inputs. We are also grateful to the Cambodian authorities, in particular the Ministry of Economy and Finance and the National Bank of Cambodia for their cooperation and support in the preparation of this CEU. The World Bank Cambodia Office Communications Team, comprising Saroeun Bou and Sophinith Sam Oeun prepared the media release, web display and dissemination. 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 Linna Ky (lky@worldbank.org). For questions on the content of this publication, please contact Saroeun Bou (sbou@worldbank.org). Table of Contents A. Executive Summary .........................................................................................................................................1 B. Recent Economic Developments ..................................................................................................................6 An overview...............................................................................................................................................................6 The real sector ...........................................................................................................................................................6 a) Garments...........................................................................................................................................................6 b) Footwear ...........................................................................................................................................................8 c) Construction and real estate ...........................................................................................................................8 d) Tourism .............................................................................................................................................................9 e) Agriculture ..................................................................................................................................................... 10 Poverty .................................................................................................................................................................... 12 The external sector ................................................................................................................................................ 13 a) Merchandise exports .................................................................................................................................... 13 b) Services and transfers receipts .................................................................................................................... 14 c) Merchandise imports .................................................................................................................................... 14 d) Foreign direct investment ............................................................................................................................ 15 Inflation ................................................................................................................................................................... 15 The monetary sector.............................................................................................................................................. 16 a) Monetary aggregates, interest rates and exchange rates .......................................................................... 16 b) The banking sector ....................................................................................................................................... 17 c) Microfinance .................................................................................................................................................. 18 The fiscal sector ..................................................................................................................................................... 19 a) Revenue composition ................................................................................................................................... 20 b) Expenditure composition ............................................................................................................................. 20 c) Fiscal balance .................................................................................................................................................. 21 C. Outlook and risks.......................................................................................................................................... 22 D. Key messages and policy options ............................................................................................................... 22 E. Selected Issue – Cambodia’s Garment Sector in Perspective ................................................................ 24 Cambodia: Key Indicators .................................................................................................................................... 41 Executive Summary increased risks associated with the construction boom. Investor appetite for construction and real estate investments remains strong, resulting in an acceleration in the value of Cambodia’s economic activity continues to expand, led by construction project approvals, reaching US$6.8 solid growth in garment exports and strong construction billion with over 1,000 projects approved by mid- activity. Real growth is projected to reach 7.0 percent in 2016 alone, compared with US$3.3 billion with 2016, in line with the resilient performance across the about 2,000 projects for the entire year in 2015. region. The economy is projected to sustain its high growth Imports of construction equipment and materials trajectory, expanding at 6.9 percent in both 2017 and are rising. Imports of steel (in volume terms) 2018 propelled by exports and government consumption. remain high, at 42.4 percent year-on-year during The agriculture sector is expected to improve slightly due to the first half of 2016. Given the prolonged better weather conditions this year and to expand gradually expansion of the construction and real estate in the near term, thanks to concerted efforts by all sector, timely migrating the risks associated with stakeholders, in particular the public sector. Risks, the existing construction boom is highly however, include potential uncertainty related to commune recommended. and general elections in 2017 and 2018, respectively, a sharp decline in the construction and real estate sector, While continuing to grow, international fallout from a rise in US interest rates, regional tensions arrivals have decelerated. Total tourist arrivals and slower global growth. Although severe drought caused in the first of half 2016 eased to a 2.6 percent year- by El Niño is a challenge, the downward trend of poverty on-year increase, compared with a 4.6 percent is expected to continue over the next few years, albeit driven increase in the same period last year. It appears mainly by the garment, construction, and services sectors. that arrivals to Cambodia continue to be largely The agriculture sector, which was the main driver of poverty attracted by the Angkor Wat complex although reduction in the past has recently eased. the country is endowed with countless historical, cultural and natural destinations. Recent developments Due to better weather conditions, the Real growth is projected to reach 7.0 percent agriculture sector is likely to marginally in 2016, slightly higher than an earlier expand this year. While improvements in estimate of 6.9 percent. Garment exports, which production and yield remain to be seen, the started to accelerate in the second half of 2015, cultivation of rice crops -- which account for 60 maintained their high growth trajectory through to percent of the agriculture sector’s value addition mid-2016, rising by 10.5 percent (in value terms) in the gross domestic product -- expanded by 13.5 year-on-year, compared with 7.8 percent during percent during the first eight months of this year, the same period last year. The return of more compared with the same period last year. stable industrial relations supported by a Depressed agriculture commodity prices, participatory minimum wage-setting mechanism however, continue to exert pressures on and initial achievements in gradually integrating agriculture exports. higher value addition underpinned by recovery in the Euro area appear to have helped the garment Resilient exports and depressed oil prices industry grow despite US dollar appreciation. contributed to a narrowing of the trade deficit, supporting the country’s overall external In 2016, strong activity in the construction position. The current account deficit (excluding sector has continued; however, prolonged official transfers) is projected to narrow slightly to expansion of the construction sector has 10.2 percent of GDP in 2016, compared with 10.6 Cambodia Economic Update October 2016 >> 1 percent in 2015. This is being mainly financed by overriding principle of borrowing only on continued strong FDI inflows, projected to reach concessional terms. US$1.7 billion in 2016, or 8.5 percent of GDP. Rapid gross international reserves accumulation Over the past decade, Cambodia has achieved continued, reaching US$6.4 billion (or 5.4 months dramatic gains in terms of poverty reduction, of prospective imports) by mid-2016, compared driven by higher agricultural prices, an expansion with US$5.6 billion in 2015. in land under cultivation and increases in yields. Rural households have reaped the benefits of Financial deepening has accommodated growth in the agriculture sector, while in recent growth while continued strong internal years urban households have benefitted from the demand has resulted in rising inflationary expansions of the garment and construction pressures. Although there are signs of slowing, in sectors. particular in the micro-finance sector, the banking sector’s credit growth remained high at 26.9 Outlook percent year-on-year by mid-2016, similar to that of 2015. Improved confidence may have attracted Looking ahead, economic growth remains private sector deposits which accelerated to 19.3 favorable. Growth is projected to be sustained at percent year-on-year by mid-2016, from 16.6 6.9 percent in both 2017 and 2018, partly buoyed percent in 2015. The loan-to-deposit ratio remains by rising government spending. On the high, at 97 percent. Continued strong domestic production side, solid garment exports should demand, boosted by consumption with vehicle continue to boost growth while the construction imports rising at 29 percent year-on-year (in value sector is expected to slow only gradually. The terms) pushed up inflationary pressures resulting tourism sector may expand modestly due in part in an increase in the consumer price index (CPI) to newly established direct flights and a number to 3.3 percent year-on-year by mid-2016, of initiatives to boost tourist arrivals. The compared with 2.8 percent at end-2015. The agriculture sector is anticipated to improve slightly Cambodian riel (CR) has recently depreciated due to better weather conditions this year and to against the US dollar, the Thai baht and the expand marginally in the near term, thanks to Vietnamese dong. The riel/US dollar exchange concerted efforts by all stakeholders, in particular rate reached CR 4,080 in June 2016, compared the public sector to promote programs on seeds with CR 4,050 in December 2015. The real and irrigation. In the medium term, the favorable effective exchange rate has also depreciated. outlook is likely to continue, strategically underpinned by regional integration. After several years of fiscal consolidation, fiscal policy became expansionary in 2016, Poverty reduction in Cambodia has been while strong revenue collection has resilient to various economic shocks in the continued. In 2016, public outlay is projected to past. Further reductions of poverty are expected rise, reaching 21.7 percent of GDP, compared for both urban and rural households throughout with 20.5 percent of GDP in 2015. Collection 2015-16, but with a different set of drivers than remains remarkable, projected to achieve 18.8 previously. For urban households poverty percent of GDP, compared with 18.5 percent of reduction will be driven by growth in the GDP in 2015. The overall fiscal deficit (including construction, garment and services sectors. For grants) is therefore expected to widen to 1.2 rural households there has been an increase in the percent of GDP in 2016, compared with 0.1 sources of non-agriculture income. Agriculture percent of GDP in 2015. Cambodia’s debt now constitutes only 25 percent of income of the distress rating in the latest World Bank/IMF Debt bottom 40 percent in rural areas and this Sustainability Analysis conducted in 2016 diversification has cushioned households from remained low, largely underpinned by the the impact of declining food prices. However, the Cambodia Economic Update October 2016 >> 2 decline in food prices will still deprive households encouraging more supporting industries to the a previous source of income growth. Thus, the garment sector from locally-owned small and pace of poverty reduction is anticipated to be medium-sized enterprises. Given the “footloose” slower than in previous years. characteristics of its garment industry together with the existing ownership structure whereby Risks to this outlook include potential there are only a handful of domestic investors, uncertainty related to commune and general garment factories can be relocated relatively elections in 2017 and 2018, respectively, a sharp quickly from Cambodia to more attractive decline in the construction and real estate sector, countries, if they face a squeeze in profit margins fallout from a rise in US interest rates, regional due to rising input costs, higher taxes, less tensions and slower global growth. favorable preferential trade treatment, or an economic slowdown in key export markets. Key messages and policy options Promoting joint ventures and partnerships between domestic and foreign investors may also Economic diversification is important be a way forward. through reforms to improve competitiveness. The economy remains largely dependent on Managing risks arising from the construction narrowly based exports with garment (and boom will be important for maintaining footwear) exports accounting for about 80 economic resilience. While continued strong percent of total merchandise exports. Enhancing activity in the construction activity supports competitiveness is therefore key to ensuring growth, risks associated with the construction Cambodia’s future economic success. The boom are rising. Although the boom is not garment industry is exposed to increasing entirely financed by domestic credit, a sharp competition from Vietnam which has also decline in the construction sector could cause developed upstream in the sector (see Box 1: major economic disruptions, negatively affecting Exports of Textile and Apparel Articles: Cambodia growth and employment. Exposure of households is a strong competitor for Vietnam in the EU market) to the existing real estate boom is likely to be together with emerging competition from substantial. Therefore, risks arising from the Myanmar which is opening up to foreign construction boom need to be promptly investment. In addition, given potential negative addressed and their negative impacts timely impacts of the European Union-Vietnam Free mitigated. Closely monitoring the construction Trade Agreement (EVFTA) and the Trans-Pacific sector in order to maintain macroeconomic Partnership (TPP) on Cambodia’s garment stability is crucial. International experience shows exports, it will be important to devise a concrete policy options to contain a boom (before it plan to improve competiveness and diversifying reaches dangerous proportions) include monetary export sectors. Currently, there are significant and fiscal tightening and macro-prudential risks of investment and export diversion away measures (see a more detailed discussion in the from Cambodia unless key constraints, such as construction sector section). Positive initial steps high energy and transportation costs and have been made to monitor and regulate the infrastructure bottlenecks are successfully housing development by introducing a regulation addressed. Structural reforms to make called Prakas on Housing Development Cambodia’s tradeable sector more competitive is Management in August 2016. core to improving competitiveness of the economy (see the Selected Issue on the Garment Developing tourism further as growth engine. Sector in Perspective for a more detailed Given untapped potentials as Cambodia is discussion). endowed with countless historical, cultural and natural destinations, the tourism sector can be Promoting local participation in the garment revitalized so that it once again becomes a strong industry will be important including Cambodia Economic Update October 2016 >> 3 driver of growth. While positive initial steps have been made by establishing more connecting flights from Japan and other countries (and regions), introducing the “China Ready” initiative aimed at attracting 2 million Chinese visitors by 2020 and adopting “Two Kingdoms, One Destination”, a joint tourism initiative with Thailand with single visas, diversification of tourist attraction sites beyond the Angkor Wat complex appears necessary (see the Tourism Sector for a more detailed discussion). Closing the human opportunities gap. Despite the reduction in extreme poverty, the share of non-poor but economically insecure households has been growing, with very limited mobility towards economic security since 2009. This is in part because of limited human capital or other assets such as land. The challenge for Cambodia, is to close gaps in human development and build the foundations for a middle-class society, while also investing in programs to promote the resilience of households and help minimize their vulnerability (see the Poverty Sector for a more detailed discussion). Cambodia Economic Update October 2016 >> 4 THE CAMBODIAN ECONOMY AT A GLANCE Cambodia’s export-led growth continues … …driven by solid garment and footwear exports… Robust growth continues, percent Garment and footwear exports continue to expand, US$ million Proj. Footwear Garment Change (%, y/y) (RHS) 8,000.0 35.0 7.3 7.4 7.1 7.1 7.0 7.0 7,000.0 30.0 6.1 6,000.0 25.0 5,000.0 20.0 4,000.0 15.0 3,000.0 10.0 2,000.0 1,000.0 5.0 - - 2010 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 6m-2016 …and continued strong construction activity… …witnessed by rising construction materials imports… Construction permit approval continues to rise, US$ Strong construction equipment and steel imports million, YTD continues, metric tons, YTD y/y % change 45.0 8,000.0 700.0 40.0 Construction Approval (US$ mln) 7,000.0 Average US$/m2 (RHS) 600.0 35.0 6,000.0 30.0 500.0 25.0 5,000.0 400.0 20.0 4,000.0 300.0 15.0 3,000.0 10.0 200.0 2,000.0 5.0 1,000.0 100.0 0.0 Jun-14 Jun-15 Jun-16 0.0 0.0 Dec-13 Dec-14 Dec-15 Jun-16 Construction material imports Steel imports …while strong exports support the external position … …and good collection partly offsets impacts of the fiscal expansion. After several years of fiscal consolidation, Narrowing current account deficits financed largely by expansionary fiscal policy starts in 2016, percent of FDI, percent of GDP Current accounts balance Trade balance FDI GDP 15.0 22.8 20.9 21.6 21.5 21.6 21.7 20.5 10.0 18.1 18.5 18.8 15.7 15.1 5.0 13.0 13.1 0.0 -5.0 -10.0 -0.1 -1.4 -2.0 -1.2 -3.3 -3.4 -2.7 -2.8 -4.6 -3.8 -15.0 -6.1 -6.6 -8.2 -9.5 -20.0 Revenue Expenditure 2011 2012 2013 2014 2015 2016e 2010 2011 2012 2013 2014 2015 2016p Cambodia Economic Update October 2016 >> 5 Recent Economic Developments Garment exports maintained a high growth rate of 10.5 percent (in value terms) year-on-year by mid- 2016, compared with 7.8 percent during the same period last year. This is underpinned by relatively An overview stable industrial relations as the tripartite Labor Advisory Committee minimum wage has so far Strong growth has been underpinned by solid successfully handled wage negotiations1 since garment exports, construction and services. 2014, underpinned by a recovery in the Euro area As one of the main drivers of growth, the garment which is proceeding at a moderate pace, supported (and footwear) sector contributed a quarter of real by an exceptional level of monetary policy growth in 2015 (Figure 1). Expansion of the accommodation, low oil prices and slightly construction sector has also continued, driven in expansionary fiscal policies2 (Figure 2). Rising part by foreign direct investment (FDI) inflows. volume has continued to drive garment exports Performance of the tourism sector was weaker growth over the past four years, led largely by the than expected with the total tourist arrivals in the exports to the EU market as Cambodia is first of half 2016 rising by 2.6 percent year on year, currently enjoying “Everything But Arms” (EBA) compared with 4.6 percent during the same period preferential treatment under the EU’s Generalized last year. The agriculture sector is likely to Scheme of Preferences (GSP). See an analytical improve marginally this year due to better weather note on Cambodia’s garment sector in the selected conditions. issue section entitled “the Garment Sector in Perspective”. Real GDP growth is therefore expected to reach 7.0 percent in 2016, slightly higher than Figure 2: Garment exports accelerated in the first half of 2016, YTD, year-on-year percent change an earlier projection of 6.9 percent and similar to 40.0 that of 2015. growth rate (YTD, y/y in value) 35.0 growth rate (YTD, y/y in volume) 30.0 Figure 1: Continued solid garment (and footwear) 25.0 performance. Contribution to annual real growth, 20.0 percent 15.0 Agriculture Indus-garment Indus-construction 10.0 Serv-real estate Indus-others Serv-trade Serv-others Taxes less subsidies GDP growth 5.0 10.0 10.0 0.0 7.1 7.3 7.4 7.1 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 8.0 6.1 7.0 7.0 8.0 6.0 6.0 Source: The Cambodian authorities 4.0 4.0 During the first six months of 2016, garment 2.0 2.0 exports to the EU market expanded by 0.0 0.0 US$248 million, contributing to 83 percent of -2.0 -2.0 the total exports value increase while garment -4.0 2010 2011 2012 2013 2014 2015 2016 -4.0 exports to the US market declined by US$114 Source: The Cambodia authorities and World Bank staff estimates. e= estimate; p = projection. million. Although Vietnam has already shifted its focus to higher value added products, it still competes with Cambodia for garment export The real sector market share and to attract FDI (see Box 1: a) Garments Exports of Textile and Apparel Articles Cambodia is a strong competitor for Vietnam in the EU market). Note that unlike Cambodia, 1 The Labor Advisory Committee was set up in 2006 under the Labor Law. Vietnam does not receive “EBA”. For more detail, see http://www.cambodiainvestment.gov.kh/press- 2 release-of-labor-advisory-committee-molvt-lac_061019.html Development economics - prospects, the World Bank (June 2016) Cambodia Economic Update October 2016 >> 6 Box 1: Exports of Textile and Apparel Articles Cambodia is a strong competitor for Vietnam in the EU market.1 Textiles and textile articles (mainly apparel and clothing Figure B1: Exports of Textile and Textle Articles accessories) are an important source of merchandise exports for (Share of total merchandise exports) both Cambodia and Vietnam. At present, the shares of garment 90% exports in total merchandise exports are about 70 and 16 percent 80% for Cambodia and Vietnam, respectively (Figure B1). While 70% Vietnam’s share of garment exports is broadly stable, Cambodia’s 60% share appears relatively volatile, gradually declining prior to (and 50% significantly shrinking during) the 2008-09 global financial crisis. Cambodia Vietnam 40% The industry accounts for about one quarter of total employments for Cambodia and nearly 10 percent of employment in Vietnam’s 30% corporate sector. 20% 10% 0% The European Union (EU) market is the most important market 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 for garment exports from Cambodia while the United States (US) is the largest market for Vietnam’s garment exports. Both countries have successfully gained their market share in these markets over Figure B2: Exports of Textile and Textile Articles the years. Cambodia’s share in EU garment imports rose rapidly 12.0 (Share of the market, 2015) from 0.7 percent in 2010 to 2.2 percent in 2015. During the same period, Vietnam increased its share in the US garment market from 10.0 Cambodia Vietnam 7.0 percent to 10.6 percent (Figure B2). 8.0 Currently, Vietnam and Cambodia have similar shares in the EU 6.0 market for imported apparel. However, Cambodia has an 10.6 advantage relative to Vietnam in exporting knitted and crocheted 4.0 apparel (HS code 61) to the EU market. While Vietnam’s share of this apparel category in the EU market did not significantly change 2.0 in 2010-15, Cambodia’s share jumped significantly from 1.4 2.2 2.4 2.5 percent to 3.5 percent (Figure B3). In nominal terms, Cambodia 0.0 EU-28 market US market exported about US$2.0 billion in knitted and crocheted apparel to the EU in 2015—twice as much as Vietnam. Despite the importance of the garment industry in job creation and Figure B3: Share of EU-28 market, 2015 income generation for lower-skill workers in both Cambodia and (Articles of apparel and clothing accessorties, knitted or crocheted - HS 61) Vietnam, the activities of the industry in both countries are at the 4.0 Cambodia Vietnam lowest end of the value chain; primarily consisting of CMT (Cut, Make, Trim). The CMT process uses mostly imported materials 3.0 and accessories. Strategic development of supporting industries for the garment industries in both countries could be critical to gain further benefits. In addition, diversification of export markets 2.0 would help the two countries to mitigate the negative impacts from 3.5 fluctuations in external demand for key exports. 1.0 1/ Authored by Viet Tuan Dinh, Senior Economist, Vietnam Country Office and 1.4 1.5 Sodeth Ly, Senior Economist, Cambodia Country Office, the World Bank Group. 0.9 0.0 2010 2015 Source: National data, UN Comtrade and World Bank WITS Cambodia Economic Update October 2016 >> 7 b) Footwear real estate investment projects, especially in modern high-rise residential and commercial The footwear sector is a promising export buildings, seems to have remained strong, as seen industry for Cambodia, largely destined for in an acceleration of construction project approval the EU market. In 2015, the EU market value, reaching US$ 6.8 billion with 1,200 projects accounted for almost 50 percent of total footwear approved by mid-2016, compared with US$ 3.3 billion with 2,000 projects for the entire year in Figure 3 : Rising exports of footwear continues, 2015 (Figure 4).3 However, due to oversupply US$ million concerns, a few developers were reportedly forced 700.0 60.0 Footwear to put their projects (or parts thereof) on hold, 600.0 Growth (% Y/Y, RHS) 50.0 given that living in high-rise buildings remains 500.0 relatively new experience for local population.4 40.0 400.0 30.0 Figure 4: High-end construction projects are 300.0 20.0 expanding, as seen in the rising average cost 200.0 per m², while the number of approved projects 100.0 10.0 has surged 8,000 700 - 0.0 Construction Approval (US$ mln) 2011 2012 2013 2014 2015 6m-2016 7,000 Average US$/m2 (RHS) 600 Source: The Cambodian authorities 6,000 exports. The US and Japan markets captured 16 5,000 500 percent and 13 percent, respectively. Footwear 4,000 400 exports grew by 11.6 percent year-on-year, 300 3,000 reaching US$353 million during the first six 200 2,000 months of 2016 (Figure 3), compared with a 40 100 1,000 percent year-on-year jump in 2015. A low base effect appears to have contributed to high 0 Dec-13 Dec-14 Dec-15 Jun-16 0 footwear exports growth rates in recent years. Source: The Cambodian authorities c) Construction and real estate Given the prolonged expansion of the In 2016, strong activity in the construction construction and real estate sector, timely sector has continued; however, prolonged migrating the risks associated with the expansion of the construction sector has existing construction boom is highly increased risks associated with the recommended. During the period 2000-15, construction boom. The construction (and real foreign investment in the construction sector estate) sector accounted for almost 30 percent of amounts to US$ 3.5 billion, accounting for 27.3 real growth in 2015 and is projected to remain the percent of the total registered investment value in second most dynamic driver of growth after the the construction sector. 5 South Korea appears to garment sector. Imports of construction be the largest investor in the construction sector, equipment and materials are rising. Imports of accounting for about US$1.6 billion or 44.6 steel (in volume terms) remained high, at 42.4 percent of the total registered investment value percent year-on-year during the first half of 2016, during the period 2000-15 (Figure 5). South reflecting continued strong activity (For more Korea’s investment appears to focus on high-end discussion on imports, refer to the external sector construction projects, having the highest cost per section). Investor appetite for construction and square meter averaging US$ 433.6/m2 invested in 3 Lack of detailed construction project data does not allow for investigating 4 “Developer puts condo project The Bay on hold as supply glut looms”. whether there is (are) mega project(s) that prompted the surge. However, The Phnom Penh Post, August 29, 2016. total number of projects increased. 5 Report on Foreign Direct Investment Survey 2014, July 2016, NBC Cambodia Economic Update October 2016 >> 8 44 projects or 17 percent of total registered Figure 5: South Korea is the largest investor in the foreign funded construction projects. Chinese construction sector investing in high-end projects. investment in the sector is next, amounting to Foreign investment in the construction sector by country (2000-15) Box 2: Cambodia and Thailand: Tourism 1,561.0 (44.6%) 945.0 (27%) US$ mln Cost (US$/m2) Highlights Cambodia Thailand 207.0 142.0 120.0 120.0 406.0 International arrivals (2015) 4.7 million 29.3 million (5.6%) (4.1%) (0.3%) (0.3%) (11.6%) (year-on-year change) 6.1 percent 17.7 percent 433.6 400.0 400.0 345.0 369.1 262.5 284.0 Arrivals by air (% of total) 52.0 percent 34.3 percent Largest market Vietnam China (Number of visitors) 1 million 8 million South China Japan UK Thailand Singapore Other Korea (% share) 20.7 percent 30.0 percent Source: The Cambodian authorities Contribution to GDP 16.0 percent 19.3 percent Positive initial steps have been made to monitor (Rank) 74th 14th and regulate housing development activity by Direct employments (‘000) 985.4 2,210.2 introducing a regulation called Prakas on Housing (Rank) 17th 8th Development Management in August 2016.7 The (% of total employments) 11.9 percent 5.8 percent regulation aims at improving the management of Expense by tourist a day US$ 94.0 US$ 149.4 the housing market by closely monitoring housing Average stay 6.5 days 10.0 days development activity while also improving its transparency. Housing development projects Source: World Travel and Tourism Council (2015), Department of Tourism, Ministry of must now follow licensing requirement processes Tourism. See https://www.wttc.org/- /media/files/reports/economic%20impact%20research/countries%202015/thailand2015.pdf that will allow the regulators to strengthen their for more details. ability to better monitor and manage property market developments, to protect consumers and almost US$1 billion or 27 percent of the total to prevent money laundering activity. registered foreign funded investment value. However, China seems to invest mainly in low- d) Tourism end construction projects, having the lowest cost per square meter, averaging US$ 262.5/m2 with Table 1: Arrivals to Cambodia eased by mid-2016 while the largest number of 94 projects or 37 percent of arrivals to Thailand decelerated, million total projects. Cambodia Thailand 6m 6m The construction and real estate sector needs 2014 2015 2016 2014 2015 2016 to be closely monitored in order to maintain Total arrival 4.5 4.8 2.4 24.8 29.3 16.6 macroeconomic stability and international Change 6.9% 6.1% 2.6% -6.4% 17.7% 12.1% experience shows policy options to contain a (y/y, %) o/w Air boom before it reaches dangerous proportions arrival 2.3 2.5 1.3 15.5 18.4 13.6 include both monetary and fiscal tightening such Change 12.7% 8.9% 6.0% 1.0% 18.6% 47.6% (y/y, %) as property taxes and transaction and capital gain Source: The Cambodian authorities and the Tourism Authority of Thailand taxes, and macro-prudential measures such as differentiated capital requirements for real estate While continuing to grow, international loans and higher risk weights on real estate loans.6 arrivals decelerated in the first half of 2016. Total tourist arrivals in first of half 2016 eased to 6 How to Deal with Real Estate Booms: Lessons from Country 7 See the Prakas No.965 MEF Brk dated 24 August 2016 for more details. Experiences, IMF working paper (2011). Cambodia Economic Update October 2016 >> 9 a 2.6 percent year-on-year increase (Table 1). This and Lao PDR) accounted for 51 percent of the is compared with a 4.6 percent increase during the total during the first six months of 2016. same period last year. While arrivals by air held up Figure 6: International arrivals remain largely rather well, growing at 6.0 percent year-on-year by attracted by Angkor Wat (and negatively affected by mid-2016, compared with 8.2 percent during the the 2008-09 global finanical crisis). Arrivals and vistors same period last year, arrivals by land (and to Angkor Wat, 3mma, year-on-year percent change 40.0 waterways) were disappointing, declining by 1.4 percent, compared with a 0.6 percent year-on-year 30.0 increase. The initial strong recovery in regional 20.0 tourism activity, in particular tourist arrivals to 10.0 Thailand, was short-lived and its positive impact 0.0 earlier anticipated on the tourism sector in -10.0 Cambodia failed to materialize. It is important to -20.0 Cambodia Visitors to Angkor Wat note the dependency of Cambodia‘s relatively new -30.0 tourism sector on Thailand’s more developed Jan-07 Nov-07 Feb-09 Oct-10 Jan-12 Nov-12 Feb-14 Oct-15 Mar-06 Aug-06 Jun-07 Jul-09 Mar-11 Aug-11 Jun-12 Jul-14 May-10 May-15 Apr-08 Apr-13 Sep-08 Dec-09 Sep-13 Dec-14 tourism sector remains (see Box 2: Cambodia and Source: The Cambodian authorities Thailand: Tourism for highlights of the tourism sector in the two countries). The countries comprising Cambodia’s top ten tourist markets remain almost unchanged over the Diversification of tourist attraction sites past several years. However, dynamics within the beyond the Angkor Wat complex may be top ten countries have shifted toward continued necessary to restore strong arrivals growth rising arrivals from China while visitors from that Cambodia had witnessed until 2013. South Korea and Lao PDR have been on the Unlike Thailand, where 80 percent of tourists decline since 2014 although their large shares prefer sea-sun-sand and nature-based remain. A recent initiative, the “China Ready”, destinations, arrivals to Cambodia continue to be focusing on attracting more Chinese visitors largely attracted by the Angkor Wat complex introduced by the authorities appears to exactly (Figure 6) although the country is endowed with take advantage of the shift. countless historical, cultural and natural destinations. Tourist destination diversification Efforts have been made by the authorities to will help improve Cambodia’s tourist return rate revitalize the sector by establishing more which currently stands at about 16 percent, connecting flights from Japan and other countries compared with over 50 percent for Thailand and (regions), the “China Ready” initiative aiming at further broaden the domestic market base, attracting 2 million Chinese visitors by 2020 and encouraging additional investments in the services “Two Kingdoms, One Destination”, a joint sector such as travel services, telecommunications tourism initiative with Thailand with single visas. and transports, hospitality and more. Tourist products in Cambodia also remain to be diversified. Appreciation of the US dollar has also Arrivals from Vietnam and China continue to made tourists’ trips to Cambodia more expensive. be ranked first and second, commanding 19.6 percent and 16.0 percent of the total arrivals, e) Agriculture respectively. South Korea (replacing Lao PDR) became the third largest market, accounting for The performance of the agriculture sector is 8.2 percent of the total by mid-2016 while likely to improve marginally this year due to Thailand was ranked fourth. Asia continues to be better weather conditions. While improvements the major source of tourists and arrivals from the in production and yield remain to be seen, the top four markets (Vietnam, China, South Korea cultivation of rice crops -- which account for 60 percent of the agriculture sector’s value addition Cambodia Economic Update October 2016 >> 10 in the gross domestic product -- expanded by 13.5 Cambodia’s average rice yield (and other crops’ percent during the first eight months of this year, yields) remains lower than those of regional compared with the same period last year (Table 2) countries, with the sole exception of Thailand due to modest rainfall. Cultivation of cassava, (Table 3). corn and vegetable also witnessed progress during the same period. In 2015, despite depressed prices, production of the main agricultural products such as Table 2: Agriculture cultivation has expanded due to rubber and cassava continued to improve. relatively favorable weather conditions this year Agricultural Rubber production rose to 126,800 metric tons or Change 30.7 percent year-on-year increase in 2015 while production 8m-2015 8m-2016 (%) cassava production increased to 12.5 million (planted area, 000’ ha) Rice 1,988.39 2,256.58 13.5 metric tons or a 4.6 percent year-on-year increase (see also the discussion on agricultural product Cassava 541.28 627.88 16.0 exports in the external sector section).8 Corn 53.88 69.03 28.1 Production of sugarcane, however, declined to 0.6 Vegetable 23.69 25.29 6.7 million metric tons or a 57.7 percent year-on-year decrease. Bean 37.59 32.32 -14.0 Source: The Cambodian authorities, http://www.maff.gov.kh/reports/69-cropingstatus/1558- weekly-report-17-08-16.html Initial efforts have been made to revitalize the agriculture sector supported by all During 2004-12, agricultural growth was stakeholders, namely the public sector, the impressive, averaging 6.0 percent (at constant private sector, development partners and prices). During the same period, Cambodia’s rice agricultural research and training institutions. yield rose by almost two-thirds, reaching 3.1 To ensure the appropriate targeting of public metric tons per hectare in 2012 from 1.9 metric programs and support to the agriculture sector, tons per hectare in 2002. However, during 2013- consultation workshops are held regularly and are 15, agricultural growth slowed significantly, widely attended. In addition, in recent years, averaging 0.2 percent due largely to stagnant yield budget appropriation to the Ministry of as the country confronted less favorable Agriculture, Forestry and Fisheries (MAFF), the conditions and constraints on expansion of Ministry of Water Resources and Meteorology cultivated areas. (MoRAM) and the Ministry of Rural Development (MRD) that directly supports the Table 3: Cambodia’s average rice yield remains low agriculture sector has been gradually increased compared with those of regional countries, average (Figure 7). In 2015, the World Bank produced a rice yield 2010-13, metric tons per ha report entitled “Cambodian Agriculture in Transition: Opportunities and Risks”9 suggesting the Country Paddy rice Cassava Maize revitalization of the agriculture sector based on Cambodia 3.0 22.0 4.1 four sets of policies: (i) maintaining a private- Thailand 3.0 20.5 4.3 sector-friendly agriculture policy environment Vietnam 5.5 17.7 4.3 Indonesia 5.0 21.1 4.7 with additional attention to lower the regulatory Philippines 3.8 10.2 2.3 burden in farm input sectors; (ii) strengthening Source: Cambodian agriculture in transition: opportunities and risks, the World Bank (2015) environmental sustainability of agriculture production; (iii) improving the quality of agriculture programs while increasing allocations 8 Annual report, Ministry of Agriculture, Forestry and Fisheries, 2015 achievements and 2016 targets. 9 The full report can be accessed at http://documents.worldbank.org/curated/en/2015/08/24919384/camb odian-agriculture-transition-opportunities-risks. Cambodia Economic Update October 2016 >> 11 to more effective programs; and (iv) developing previously. Poverty reduction in Cambodia has the agribusiness and agro-processing industry. been resilient to various economic shocks in the Figure 7: Combined (domestically financed) budget for the three ministries, MAFF, MRD, and MoRAM Figure 8: Despite the reduction in extreme poverty, diretly engage in the agriculutre sector is gradually the share of non-poor but economically insecure rising, percent of GDP households has been growing 0.90 100.0 90.0 0.88 80.0 70.0 Share of the population 0.86 60.0 50.0 0.84 40.0 0.82 30.0 20.0 0.80 10.0 - 0.78 2004 2009 2012 2013 2014 2015 2016 Extreme poor Moderatetly poor Economically Vulnerable Economically secure Middle class Source: the Cambodian authorities Source: World Bank staff estimates Poverty past. Further reductions in poverty are thus expected for both urban and rural households Cambodia has recently been reclassified as a throughout 2015-16 but with a different set of lower-middle-income economy by the World drivers than previously. For urban households Bank Group (WBG). Published by the WBG on poverty reduction will be driven by growth in the July 1, 2016, Cambodia’s GNI per capita for 2015 construction, garment and services sectors. For was US$1,070, above the threshold for the low- rural households there has been an increase in income group, set at $1,025 for the World Bank’s sources of non-agriculture income. Agriculture 2017 fiscal year. now constitutes only 25 percent of income of the bottom 40 percent in rural areas and this Over the past decade, Cambodia has attained diversification has cushioned households from dramatic gains in terms of poverty reduction, the impact of declining food prices. However, the driven by higher agricultural prices, the expansion decline in food prices will still deprive households of land under cultivation and increases in yields. a previous source of income growth. Thus, the Rural households reaped the benefits of growth in pace of poverty reduction is likely to be slower the agriculture sector, while in recent years, urban than in previous years. households have benefitted from expansion of the garment and construction sectors. As discussed in Despite the reduction in extreme poverty, the the agriculture sector section above, confronted share of non-poor but economically insecure with less favorable weather conditions, growth has households has been growing, with very slowed recently. And this year, although the limited mobility towards economic security since weather conditions are slightly better, the ongoing 2009, in part because of limited human capital or 2015-16 El Nino event which has caused severe other assets such as land (Figure 8). The challenge droughts in most parts of the country continues for Cambodia will therefore be to close gaps in to be a challenge for poverty reduction. human development which remain large (Table 4), and build the foundations for a middle-class Nonetheless, the downward trend in poverty society, while also investing in programs that is expected to continue over the next few promote resilience of households and to help years but driven by different factors than minimize their vulnerability. Cambodia Economic Update October 2016 >> 12 Table 4: Cambodia’s large gaps in human development remain Growth in total merchandise exports is expected KHM LAO VNM LMC to remain strong, at 10 percent year-on-year in Education (2013) 2016, compared with 10.8 percent in 2015, Lower secondary completion 43.6 48.9 77.4 71.2 contributing to the narrowing of the current rate, total (% of relevant age group) Primary completion rate, total 93.9 98.8 99.2 91.2 Figure 9: FDI largely finances current account (% of relevant age group) deficits which are narrowing, percent of GDP Health (2015) Current accounts balance Trade balance FDI Mortality rate, infant (per 1,000 24.6 50.7 17.3 40.0 15.0 live births) Mortality rate, under-5 (per 28.7 66.7 21.7 52.8 10.0 1,000 live births) Basic Services (2015) 5.0 Improved sanitation facilities 42.4 70.9 78.0 52.0 (% of population with access) 0.0 Improved water source 75.5 75.7 97.6 89.5 (% of population with access) -5.0 Access to electricity 31.1 70.0 99.0 78.0 (% of population, 2012) -10.0 Note: KHM: Cambodia; LAO: Lao PDR, VNM: Vietnam; and LMC: Lower middle-income economy -15.0 Source: WDI (2016) -20.0 2010 2011 2012 2013 2014 2015 2016e The external sector Source: The Cambodian authorities and Bank staff estimates account deficit. This is underpinned by the robust Cambodia’s external position improved performance of garment (and footwear) exports further with a continued solid export which account for about 80 percent of the total. performance and sluggish oil prices. The Despite the appreciation of the US dollar, garment current account deficit (excluding official and footwear exports are expanding due largely to transfers) is projected to narrow to 10.2 percent of the return of stable industrial relations and GDP in 2016, compared with 10.6 percent in recovery in the Euro area (see also the discussions 2015, mainly financed by FDI. FDI is expected to on this in the Selected Issue on The Garment reach US$1.7 billion or 8.5 percent of GDP in Sector in Perspective). 2016, similar to US$1.6 billion in 2015 or 9.1 percent of GDP (Figure 9). The slightly easing Prolonged low agricultural commodity prices FDI inflows as a percentage of GDP could be have partly thwarted an otherwise successful partly explained by increasing regional effort in agricultural export diversification competition and perhaps also by the toward higher value added agricultural products, postponement of investment decisions until after namely rubber, cassava, sugarcane and other the elections. However, rapid gross international crops (other than rice) that potentially broaden reserves accumulation continued, reaching US$6.4 agro-processing industries well beyond rice billion (or 5.4 months of imports) by mid-2016, milling and processing. Exports of these compared with US$5.6 billion in 2015.10 agricultural commodity products remained sluggish during the first six months of 2016. Rubber exports have been hardest hit with year- a) Merchandise exports on-year export value declining by 30.4 percent while exports of milled rice fell by 9 percent year- The solid export performance has helped on-year, compared with 50 percent increase in narrow the current account deficit. 2015, achieving only US$147 million by mid- 2016.11 10Includes Chinese Yuan Milled rice exports account for 30 percent of total rice export earnings 11About 20 percent of paddy rice is milled and exported as milled rice (the (US$722 million in 2014). Paddy rice and cassava exports are not recorded. balance of 80 percent of rice surplus is exported in the form of paddy). Cambodia Economic Update October 2016 >> 13 Progress on manufactured product exports Figure 11: Workers' remittance increase in 2014-15, diversification continues. In addition to reflecting the large number of migrant workers footwear exports which have been rapidly employeed outside Cambodia, US$ million growing, a range of new and more sophisticated 400 manufactured products, notably vehicle parts and 350 accessories including bicycles, electronic 300 machinery equipment parts and articles of leather, 250 travel goods and handbags have emerged (Figure 200 10). 150 Figure 10: Diversification beyond garment has 100 started, led by footwear, bicycle, vehicle parts, electrical machinery/equip parts, and leather and 50 travel goods, percent of goods exports 0 2010 2011 2012 2013 2014 2015 Footwear Source: The Cambodian authorties 10.6 Vehicle parts and accessories Electrical machinary/equip & parts c) Merchandise imports Leather, saddlery, travel goods Growth in merchandise imports accelerated to 9.6 percent year-on-year from 8.4 percent in 5.4 5.3 2015, fueled by strong domestic demand for 3.9 3.1 construction and consumption, although import 1.3 substitution industries especially beverage, sugar, 0.8 0.2 tobacco and cement industries are rapidly 2012 2015 Source: UN COMTRADE emerging. As discussed in the construction sector section above, the ongoing construction boom b) Services and transfers receipts continues to fuel construction equipment and steel imports (Figure 12). Services receipts come in second, after merchandise exports, accounting for 15 Figure 12: The volume of construction equipments percent of GDP. Vibrant travel and international and steel imports is rising as a result of the ongoing construction boom, metric tons, YTD trade activity fueled by strong household and government consumption has continued to boost 800 Construction material imports Thousands services receipts. Of the total services receipts, 80 700 Steel imports percent is projected to be generated by travel 600 services in 2016. 500 400 For transfers receipts, remittances are 300 estimated to account for about US$400 million 200 in 2015 (Figure 11). This corresponds to the large number of Cambodian migrant workers who are 100 now employed in the neighboring countries, 0 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Jun-16 particularly in Thailand. The remittances are likely Source: The Cambodian authorities to remain strong this year. Similarly, imports of key consumption goods such as vehicles, electronics, and foodstuff remain buoyant while petroleum products Cambodia Economic Update October 2016 >> 14 imports are slowly rising because of continued compared with 2.8 percent by end-2015, largely depressed oil prices (Figure 13).12 due to rising food prices, in particular meat, fish and fruits fueled by strong domestic demand Figue 13: Imports of consumption goods are rising, (Figure 14). Low oil prices, however, have helped year-on-year percent change subdue other CPI sub-indices such as housing, Petroleum 41.6 utilities and transport which remain largely in 36.1 35.4 Motor vehicle 32.5 negative territory. Foodstuff 27.4 Figure 14: Inflation has edged up due to rising prices of food and other components (restaurant, health, 21.7 20.0 furnishings, and clothing) of CPI basket. Contributions to 13.4 15.9 12-m inflation, percentage point 12.6 10.6 11.2 Others Transport sub-index 6.2 6.0 Food sub-index Housing & utilities sub-index Y/Y 0.2 0.5 5.0 2012 2013 2014 2015 6-m 2016 4.0 3.0 Source: The Cambodian authorities 2.0 1.0 0.0 d) Foreign direct investment -1.0 -2.0 Over the past decade, Cambodia has been -3.0 successful in attracting FDI inflows. Asia Jan-15 Jan-16 Jan-13 Jan-14 May-16 May-13 May-14 May-15 Sep-14 Sep-15 Sep-13 contributed almost 90 percent of the total FDI Source: The Cambodian authorities Cambodia received up to 2014.13 Chinese FDI accounted for the largest sum, at US$8.4 billion or Inflation has also edged up across the region. 44 percent of the total US$19.2 billion in FDI Cambodia’s CPI, while remaining in low single stock by end-2014, concentrated in digits, edged up fastest during the first six months manufacturing, in particular the garment, of 2016, while regional inflation also rose. accommodation and entertainment sectors (see Figure 15: Cambodia CPI rose fastest lately while the Selected Issue on the Garment Sector in regional inflation has also edged up, year-on-year Perspective for more details on Chinese FDI).14 percent change South Korean FDI was ranked second, 10.0 10.0 accounting for US$2.8 billion or 15 percent of the 8.0 Cambodia 8.0 Vietnam total FDI stock, invested mainly in the Thailand Laos 6.0 6.0 construction and real estate sector. Vietnamese Singapore Malaysia FDI, which is concentrated in agriculture and ICT 4.0 4.0 was ranked third, accounting for 8 percent of the 2.0 2.0 total FDI stock, followed by Malaysia, Thailand, Singapore and Japan in descending order of size. 0.0 0.0 -2.0 -2.0 Inflation -4.0 -4.0 Nov-13 Jan-14 Nov-14 Jan-15 Nov-15 Jan-16 Jan-13 Mar-14 Jul-14 Mar-15 Jul-15 Mar-16 Mar-13 Jul-13 May-15 May-16 May-13 May-14 Sep-14 Sep-15 Sep-13 Rising food prices are building up inflationary Source: The Cambodian authorities and regional countries pressures. As a result, the consumer price index Most of regional countries’ inflation rates are now (CPI) rose 3.0 percent year-on-year by July 2016, in positive territory (Figure 15), ending 12 Another major imported item is the fabric used in the production of 14China, together with Hong Kong SAR, China; Macau SAR, China; and garments that are almost entirely for export. Taiwan, China. 13 Report on FDI Survey 2014, NBC and NIS Cambodia Economic Update October 2016 >> 15 deflationary pressures, notwithstanding 2016, compared with US$5.6 billion by end-2015 continuing depressed international oil and food (Figure 17).15 This amount is equivalent 5.4 prices. Figure 17: GIR growth and (prospective) import coverage of GIR have been rising since 2013 The monetary sector 6.0 GIR (in months of imports) 50.0 y/y (% change, RHS) 45.0 a) Monetary aggregates, interest rates and 5.0 40.0 exchange rates 4.0 35.0 30.0 Improved confidence in the banking system 3.0 25.0 20.0 appears to have supported the expansion of 2.0 15.0 foreign currency deposits. Broad money 10.0 1.0 growth picked up during the first half of 2016, 5.0 accelerating to 18.0 percent year-on-year by mid- 0.0 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jun-16 Figure 16: Broad money growth estabilized as Source: World Bank staff estimates foreign currency deposits recovered. Contribution to months of prospective imports. broad money growth, year-on-year percent change 70 Strong demand for US dollar denominated Riel in circulation 60 Riel deposits credit may have exerted some pressures on 50 Foreign currency deposits lending (and deposit) interest rates, which 40 have been edging up since May 2015 (Figure 30 18). The weighted average of 12-month US dollar 20 deposit rates increased to 4.52 percent by mid- 2016, up from 4.45 percent in 2015, while the 12- 10 month US dollar lending rate also rose to 11.74 0 percent, from 11.60 percent in the same period. -10 The interest rate spread—the difference between Mar-07 Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11 Jun-11 Mar-12 Jun-12 Mar-13 Jun-13 Mar-14 Jun-14 Mar-15 Jun-15 Mar-16 Jun-16 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 the nominal lending and deposit rates—widened Source: The Cambodian authorities to 7.22 percent by mid-2016 from 7.16 in June 2016, compared with 14.7 percent in 2015 (Figure 2015 as the lending rate hike was more than offset 16). The contribution from foreign current by the deposit rate increase. With its highly deposits, which is responsible for most broad dollarized economy and one-third of its exports money growth, accounted for 15.5 percentage going to the US, Cambodia seems to be points by mid-2016, up from 12.6 percentage influenced by US monetary policy and the US points in 2015. Contributions by riel deposits and business cycle. riel in circulation are 1.6 percentage points and 1.0 percentage point, respectively. The subdued The central bank continues to maintain a contribution by riel deposits and riel in circulation broadly stable Cambodian riel versus US to broad money growth reflects persistently high dollar exchange rate to obtain overall price dollarization of the Cambodian economy. stability. The riel, however, depreciated slightly, reaching CR 4,084 per US dollar in June 2016, Net foreign assets of the central bank compared with CR 4,050 per US dollar in continue to rise with rapid gross foreign December 2015. Similarly, depreciation of the riel reserves accumulation, growing at 24 percent against the Thai baht (and the Vietnamese dong) year-on-year, reaching US$ 6.4 billion by June occurred, reaching CR 117.8 per baht in June 15 Includes Chinese Yuan. Cambodia Economic Update October 2016 >> 16 2016, compared with CR 114.3 per baht in the same period. The depreciation should help December 2015 (Figure 19). underpin the balance of payments and growth. Figure 18: 12-month weighted average dollar deposit b) The banking sector and lending rates have edged up, percent per annum Lending rate Deposit rate 16.4 17.2 Figure 20: Banking sector's high credit growth 16.7 15.8 16.0 15.4 has continued while deposits growth picked up 11.7 11.6 11.6 recently. Credits to and deposits by the private sector, 11.4 11.5 year-on-year percent change 50 45 Deposits by the private sector 6.34 4.51 Credits to the private sector 4.91 5.32 4.44 4.29 4.44 4.45 40 4.84 4.27 4.30 35 30 25 20 Feb-11 Feb-16 Oct-07 Jan-09 Nov-09 Jul-11 Oct-12 Jan-14 Nov-14 May-07 Mar-08 Aug-08 Jun-09 May-12 Mar-13 Aug-13 Jun-14 Apr-10 Apr-15 Dec-06 Dec-11 Sep-10 Sep-15 15 10 Source: The Cambodian authorities 5 Cambodia’s effective exchange rates 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 May-10 May-11 May-12 May-13 May-14 May-15 May-16 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 experienced deprecation towards mid-2016, indicating that Cambodia’s external Source: The Cambodian authorities competitiveness may have improved slightly.16 The nominal effective exchange rate Continued financial deepening has supported (NEER) and the real effective exchange rate economic expansion. Although there are signs (REER) have recently depreciated.17 The NEER of slowing, in particular in the micro-finance index (2010=100) declined to 110.55 in June 2016 sector, the banking sector’s credit growth from 113.1 in December 2015 while the REER remained high, at 26.9 percent year-on-year, or US$11.2 billion, by mid-2016, compared with 27.0 Figure 19: The riel has now depreciated against percent in 2015 (Figure 20).18 In contrast, growth the US dollar, baht and dong of private sector deposits has picked up as 220.0 Riel per Baht Riel per 1000 dong 4,250 confidence in the banking sector improved, Riel per US$ (RHS) 4,200 reaching to 19.3 percent year-on-year by mid- 200.0 4,150 2016, compared with 16.6 percent in 2015. As the 180.0 4,100 initial recovery in deposit growth is more than 160.0 4,050 offset by continued elevated credit growth, the 4,000 loan-to-deposit ratio rose, reaching 97.0 percent 140.0 3,950 3,900 by mid-2016. The non-performing loan (NPL) 120.0 3,850 ratio improved slightly to 1.99 percent by end- 100.0 3,800 2015 up from 2.22 percent at end-2014.19 It is important to note, however, that repayment rates Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Oct-14 Jul-12 Jan-15 Oct-15 Jul-13 Jan-16 Jul-14 Jul-15 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Source: the Cambodian authorities, Bank of Thailand, and Vietnam stastics office. generally look good in high-growth environments index (2010=100) fell to 119.58 from 122.3 during with about 30 percent year-on-year loan growth 16 As the economy is highly dollarized, Cambodian Riel versus US dollar 18 If excluding (additional) credit by a new commercial bank which just was exchange rate loses most of its original meaning. The exchange rate only upgraded from micro-finance institution in April 2016, the banking sector’s has meaning within the territory where riel is circulated. credit growth would have dropped to 20.2 percent year-on-year (instead of 17 REER is the nominal effective exchange rate (a measure of the value of 28.8 percent). a currency against a weighted average of several foreign currencies) divided 19 Annual report, General Directorate of Banking Supervision, National by a price deflator or index of costs. See Bank of Cambodia (2015). http://datahelp.imf.org/knowledgebase/articles/537472-what-is-real- effective-exchange-rate-reer Cambodia Economic Update October 2016 >> 17 rates because the denominator (total loans The expansion of the banking sector has outstanding) often grows faster than NPLs. continued to squeeze banks’ net foreign assets. Banks' net foreign assets declined as the Domestic credit has continued to contribute, rise in foreign liabilities more than offset the at least partly, to the ongoing construction increase in foreign assets (Figure 22). boom. The share of domestic credit provided to the construction, real estate and mortgage In view of this, the central bank has introduced a segments increased further, reaching 21 percent higher reserve requirement of 12.5 percent for foreign borrowing together with a number of Figure 21: Loans and mortages to the construction macro-prudential measures, namely doubling sector rose further in 2015, percent of total banks’ capital requirements and raising the Construction, real estate, and mortgages liquidity coverage ratio. Nonetheless, it will also be important to enhance supervision, coordination and the quality of information. 23% 19% 19% 20% 21% c) Microfinance 17% 17% 17% 16% MFI credit growth declined to 19.3 percent year-on-year in May 2016 with outstanding 2008 2009 2010 2011 2012 2013 2014 2015 mid-2016 credit of US$2.9 billion, down from 48.3 percent Source: The Cambodian authorities in December 2015 with outstanding credit of US$3.0 billion (Figure 23). Microfinance of total domestic credit by mid-2015 or US$2.6 institutions (MFIs), which have played an billion, compared with 20 percent or US$2.2 important role in providing access to finance for billion in 2015 (Figure 21). The share is close to the rural population, had experienced much faster the peak of 23 percent in 2008, in the run-up to credit growth than the banking sector until the global financial crisis when the housing bubble recently (see April 2016 Cambodia Economic in Phnom Penh eventually burst. Update for a more in-depth discussion of MFIs). However, an apparently sharp deceleration in MFI Figure 22: DMBs' NFAs declined as the rise in Figure 23: With the graduation of one institution, foreign liabilities more than offset the increase in credits provided by MFI decelerated by mid 2016 foreign assets, US$ million 4,000.0 US$ million y/y change (%, RHS) 70.0 1,000 3,500.0 60.0 800 600 3,000.0 50.0 400 2,500.0 200 40.0 0 2,000.0 -200 30.0 -400 1,500.0 -600 DMB's NFA 20.0 1,000.0 -800 -1,000 500.0 10.0 -1,200 0.0 0.0 Dec-08 Feb-08 Dec-13 Jan-06 Nov-06 Oct-09 Jan-11 Nov-11 Feb-13 Oct-14 Jan-16 Jun-06 Jul-08 Mar-10 Aug-10 Jun-11 Jul-13 May-09 Mar-15 Aug-15 Jun-16 May-14 Apr-07 Apr-12 Sep-07 Sep-12 Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Oct-14 Jul-12 Jan-15 Oct-15 Jul-13 Jan-16 Jul-14 Jul-15 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Note: NFAs: net foreign assets, DMBs: deposit money banks Source: The Cambodian authorities Source: The Cambodian authorities Previous real estate boom-bust cycles have had credit growth, from 45.9 percent year-on-year in limited impact on households and the banking March 2016 to 22.3 percent in April 2016 was sector because the construction and real estate caused by the fact that an MFI was upgraded to sector was largely foreign financed while the commercial bank status (and its credit was then economy was mainly cash-based. Cambodia Economic Update October 2016 >> 18 recorded in that of commercial banks). After April Figure 25: Despite an increasing number of MFIs 2016, a further decline in MFI credit growth has interest rates remain high while market also occurred and reasons behind this decline are segmentation has deepened as competition among MFIs heats up, percent per annum still unclear. Some initial analysis, however, attributes the decline to lower demand for financing due to slower business activity caused by 45.0% continued depressed agricultural products in the 40.0% rural areas as well as some difficulties in exporting 35.0% the products to Cambodia’s neighbors. 30.0% 25.0% 20.0% There has been a rapid increase in the number 15.0% Min rate Max rate of MFIs and MFI branches. In 2015, there were 10.0% 5.0% 167 MFIs and registered micro-finance operators 0.0% (RMOs) with a total of 5,533 branches. Of these Jan-11 Jul-11 Oct-11 Jan-12 Jul-12 Oct-12 Jan-13 Jul-13 Oct-13 Jan-14 Jul-14 Oct-14 Jan-15 Jul-15 Oct-15 Jan-16 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 eight were microfinance-deposit-taking Source: the Cambodian authorities institutions (MDIs), 50 MFIs and 109 RMOs (Figure 24).20 During the same period, the Interest rates charged by MFIs remain high, microfinance sector witnessed a rapid increase in given the non-existence of currency risk as the number of borrowers to 2.037 million, up 14.8 they borrow and lend in US dollars. This percent and an increase in average loan size to reflects inefficiency in the MFI sector. In addition, about US$1,500 up 30 percent on 2014’s. The the difference between minimum interest rates NPL ratio of MFIs was 0.77 percent in 2015, and maximum rates has widened since April 2015, lower than the NPL ratio of 1.99 percent in the which may reflect deeper penetration by the sector with increased market segmentation (Figure 25) as Figure 24: There was a surge in the number of microfinance institutions and their branches in competition heats up. As a result, loan quality has 2015 deteriorated with the rising NPL ratio to 0.77 180 6000 percent in 2015, up from 0.59 percent in 2014.21 160 MDI MFI As loan growth declines or becomes negative, the 140 RMO Branches (RHS) 5000 NPL ratio will likely start to rise. 120 4000 100 109 The fiscal sector 3000 80 60 38 2000 After several years of fiscal consolidation, 35 40 32 50 fiscal policy became expansionary in 2016 1000 20 28 29 32 while strong collection has continued. In 2016, 0 7 7 7 8 0 public outlay is projected to reach 21.7 percent of 2012 2013 2014 2015 Source: The Cambodian authorities GDP, compared with 20.5 percent of GDP in MDI: Microfinance institution; MDI: Microfianance deposit-taking institution; RMO: Registered microfiannce operators. 2015. Collection remains remarkable, is projected to reach 18.8 percent of GDP, compared with banking sector. MFIs register an average return on 18.5 percent of GDP in 2015 (Figure 26). The equity of 22 percent. overall fiscal deficit (including grant) is therefore expected to widen to 1.2 percent of GDP in 2016. 20 2015 Annual Report, Banking Supervision, the National Bank of Cambodia. See 21 Annual report, General Directorate of Banking Supervision, National Bank http://www.nbc.org.kh/download_files/supervision/sup_an_rep_eng/AnnualRep of Cambodia (2015). ort-2015_ENG.pdf Cambodia Economic Update October 2016 >> 19 In 2015, despite the rising wage bill, the overall The overall structure of domestic revenue has fiscal balance (including grants) narrowed to 0.1 progressively shifted, with a rise in direct taxes, percent of GDP due to a positive revenue Figure 27: Revenue performance continued be performance and slower disbursements. strong during the first six months of 2016, year-on- year pecent change Figure 26. Despite rising public sector wage, fiscal 60.0 consolidation continues supported by good collection, percent of GDP 50.0 25.0 22.8 20.9 21.6 21.5 21.6 21.7 40.0 20.5 18.1 18.5 18.8 20.0 15.7 15.1 30.0 15.0 13.0 13.1 20.0 10.0 5.0 10.0 0.0 - -0.1 Direct taxes Indirect taxes Int'l trade taxes Non-tax revenue -1.4 -2.0 -1.2 -5.0 -3.3 -2.7 -2.8 -3.4 -3.8 Source: The Cambodian authorities -4.6 -6.1 -10.0 -8.2 -9.5 -6.6 reaching 3.3 percent of GDP in 2015, compared -15.0 Revenue Expenditure Deficits (exl grants) Deficits (incl grants) with 2.9 percent in 2014. Trade-related collection 2010 2011 2012 2013 2014 2015 2016p gradually declined, as required under the ASEAN Source: The Cambodian authorities and Bank staff estimates and projections Free Trade Area (AFTA), to 2.8 percent of GDP from 2.9 percent in the same period. a) Revenue composition b) Expenditure composition The strong revenue performance has Figure 28: Excise, VAT on imports, and profits tax components contributed a quarter of the total continued. Domestic revenue is growing at about revenue inrease in 2015, constribution to revenue 15 percent year-on-year with good collection growth, percent registered across the main revenue sources (Figure 27).22 Domestic revenue is expected to reach about Non-tax and others 15.9 18.8 percent of GDP in 2016. 7.9 In't trade taxes In 2015, revenue collection was impressive and 26.3 higher than an earlier estimate, reaching 18.5 Excise percent of GDP. Gains have been registered, 24.9 VAT (imports) particularly, in excise, VAT on imports, profits taxes, trade taxes and non-tax revenue (Figure 28). Profit taxes 25.0 2015 This positive performance has been Source: The Cambodian authorities underpinned by improved implementation of import tariffs, anti-smuggling efforts, arrears collection and enhancements in tax Public outlay continues to be characterized by compliance with a focus on tax audits and rising wage bill and declining public taxpayer services, among others. In addition, investment (caused largely by the gradual continued expansion of taxable sectors such as the reduction in externally financed component) while construction and services sectors with their rising the non-wage component receives an initial contribution to economic growth, has also helped. boost this year (Figure 29). 22 For more detailed latest fiscal performance, see http://www.mef.gov.kh/documents/shares/publication/tofe/gfs_an d_tofe_201606_kh.pdf Cambodia Economic Update October 2016 >> 20 investment is needed to improve physical Figure 29: The rising wage bill was offset by infrastructure supporting transport, logistics, declining non-wage and externally-financed capital investment, containing overall spending, education and health services, which will in turn help government outlay, percent of GDP enhance the country’s competitiveness and achieve more balanced economic development. 20 6.2 7.1 7.2 6.9 6.8 7.8 c) Fiscal balance 6.5 15 4.4 4.3 4.6 5.0 5.7 The overall fiscal deficit (including grants) is 7.4 10 2.4 2.6 6.1 projected to remain largely subdued, at 1.2 2.1 2.1 1.9 2.1 2.4 percent of GDP in 2016. Excluding grants, the 5 7.3 8.2 7.0 7.0 6.3 fiscal deficit is projected to reach 2.8 percent of 4.9 4.7 0 GDP against the budgeted deficit of 4.8 percent of 2010 2011 2012 2013 2014 2015 2016p GDP. This is slightly higher than the overall fiscal Donor-financed capital Gov't-financed capital Wage Non-wage deficit (excluding grants) of 2 percent of GDP Source: The Cambodian authorities and Bank staff projections achieved in 2015. The deficit continues to be financed by external funds. Fiscal consolidation While improving, the disbursement rate remains low efforts during the past several years have allowed the during first half of 2016. Public expenditures grew authorities to increase government deposits, which at about 17.6 percent year-on-year in the first half of rose to 10.0 percent of GDP, or US$2.0 billion by 2016 but reached only about 34 percent of the total mid-2016. These deposits can be used as a cushion budgeted expenditures mainly due to slow non- during times of shocks. Cambodia previously wage and capital budget disbursements. introduced a fiscal stimulus, amounting to about 2 percent of GDP, to mitigate the negative impacts of To meet annual budgeted expenditures, the in-year the 2008-09 global financial crisis. Fiscal policy has budget is more often than not allowed to be been largely the sole policy instrument to maintain disbursed in the following year. Slow disbursements macroeconomic stability, as the country’s monetary were also experienced in 2015 due to initial issues policy is constrained by its high level of dollarization. facing the implementation of full program budgeting. The wage bill continued to rise as it is The World Bank/IMF debt sustainability budgeted to reach 7.2 percent of GDP in 2016, analysis (DSA) conducted in 2016 indicates that compared with 6.5 percent of GDP disbursed in Cambodia’s debt distress rating remains low, 2015. This is in order to meet the minimum basic with all debt burden indicators projected to remain monthly salary target of CR 1.0 million (equivalent below their respective thresholds. The results also to about US$250) by 2018. indicate that debt sustainability continues to be vulnerable to shocks to economic growth, exports Sustaining public investment, which has been and the fiscal position, calling for continued shrinking as a percentage of GDP, will be structural reforms to bolster the economy’s crucial. As Cambodia has now reached lower resilience against external shocks and to mobilize middle-income status, development partner- domestic revenues. At the end of 2015, the financed capital budget is steadily declining, estimated stock of Cambodia’s external public debt, shrinking to 4.9 percent of GDP in 2015 from 6.3 including arears, stood at around US$5.7 billion, or percent of GDP in 2014. This is likely to pose a 31.6 percent of GDP. Note that Cambodia’s debt challenge in the future unless domestically financed distress rating has been consistently low since 2011, public investment (as well as spending efficiency) is mainly underpinned by the overriding principle of boosted to compensate for the decline. Public only borrowing only on concessional terms.23 23The concessional terms borrowed are those with a grant element of 35 percent or above. Cambodia Economic Update October 2016 >> 21 Outlook and risks medium-term. Export resilience, however, will increasingly depend on Cambodia’s ability to remain competitive in the mid-term, given rising The outlook remains favorable. Growth is wages, as well as on firms being able to add value projected to be sustained at 6.9 percent in both and introduce product diversification. 2017 and 2018, boosted in part by an increase in government spending during the commune A gradual expansionary fiscal policy started elections in 2017 and the general elections in 2018. this year and is expected to continue in the In the medium-term, growth will likely continue short- to medium term. A rising wage bill, election-related spending and the needs to boost Table 5: Selected economic indicators, projections 2016 – 2018 public investment are likely to keep expenditure 2015 2016p 2017f 2018f on the rise. However, unless there is a review of Real GDP growth, 7.0 7.0 6.9 6.9 the tax and investment incentive system in the at constant market short-term, year-to-year gains in revenue are prices Real GDP growth, 6.4 6.4 6.4 6.4 expected to decelerate gradually over the medium at constant factor term in the absence of any tax policy changes. prices Agriculture 0.0 0.1 0.1 0.1 Industry 3.6 3.7 3.0 2.6 Risks to this outlook include potential uncertainty related to the commune and general Services 2.8 2.7 3.4 3.6 elections in 2017 and 2018, respectively, a sharp Inflation 1.3 3.2 3.4 3.5 (Consumer Price decline in the construction and real estate sector, Index) fallout from a rise in US interest rates, regional Current Account -10.6 -10.2 -10.1 -10.1 Balance, excl. tensions and slower global growth. official transfers (% of GDP) Exports, goods and 7.3 9.0 9.2 8.6 Key messages and policy options services (y/y % change) Imports, goods and 8.2 9.0 9.4 8.5 services (y/y % change) Economic diversification is important through Foreign Direct 1,654.4 1,700.8 1,799.1 1,697.1 reforms to improve competitiveness. The Investment, US$ millions economy remains largely dependent on narrowly Fiscal Balance, incl. -0.1 -1.2 -3.4 -3.4 based exports with garment (and footwear) exports grants (% of GDP) accounting for about 80 percent of total Source: The Cambodian authorities and World Bank staff projections. merchandise exports. Enhancing competitiveness is p = projection, f=forecast therefore key to ensuring Cambodia’s future to be driven by garment exports, tourism and economic success. As discussed in the selected issue services, strategically underpinned by regional on the Garment Sector in Perspective, the garment integration (Table 5). The agriculture sector is industry is exposed to increasing competition from expected to improve marginally due to better Vietnam which has also developed upstream in the weather conditions this year and likely to expand sector together with emerging competition from gradually in the near term, thanks to concerted Myanmar which is opening up to foreign efforts by all stakeholders, in particular the public investment. Due largely to rising wages and US sector. The current account deficit is expected to dollar appreciation, the garment industry is under improve broadly with continued strong exports pressures to cut costs and gradually add value to its and depressed oil prices in the short-term and products by incorporating printing, embroidery and slower imports growth due to gradual adjustments washing and vertically integrating to the extent in the construction sector (and the completion of possible. It will be crucial to reduce energy costs to large power generation projects), as well as allow for manufacturing product diversification continued progress on import substitution in the which tends to be energy intensive and to address Cambodia Economic Update October 2016 >> 22 Cambodia Economic Update October 2016 >> 22 skills gaps (as well as to achieve skills upgrade). Close existing real estate boom is likely to be substantial. collaboration between the public and the private Therefore, risks arising from the construction boom sector will also be necessary to improve Cambodia’s need to be promptly addressed and their negative connectivity to neighboring countries through impacts timely mitigated. Closely monitoring the better logistics, competitive transportation costs and construction sector in order to maintain facilitated trade, while further improving physical macroeconomic stability is crucial. International infrastructure, given that Cambodia hopes to experience shows policy options to contain a boom progressively position itself as a regional logistics (before it reaches dangerous proportions) include hub in view of its strategic location and proximity monetary and fiscal tightening and macro-prudential within ASEAN. In addition, given potentially measures. Positive initial steps have been made to substantive negative impacts of the EU-Vietnam monitor and regulate housing development activity Free Trade Agreement (EVFTA) and the Trans- by the regulators with the introduction of a Pacific Partnership (TPP) on Cambodia’s garment regulation called Prakas on Housing Development exports, it will be important to devise a concrete Management in August 2016. How successful the plan to improve competitiveness and diversifying implementation of the regulation will be remains to export sectors. Structural reforms to make be seen. Cambodia’s tradeable sector more competitive is core to improving competitiveness of the economy. Developing tourism further as growth engine. Given untapped potentials as Cambodia is endowed Promoting local participation in the garment with countless historical, cultural and natural industry will be important including destinations, the tourism sector can be revitalized so encouraging more supporting industries to the that it once again becomes a strong engine of garment sector from locally-owned small and growth. While positive initial steps have been made medium-sized enterprises. Given the “footloose” by establishing more connecting flights from Japan characteristics of its garment industry together with and other countries (and regions), introducing the the existing ownership structure whereby there are “China Ready” initiative aimed at attracting 2 million only a handful of domestic investors, garment Chinese visitors by 2020 and adopting “Two factories can be relocated relatively quickly from Kingdoms, One Destination”, a joint tourism Cambodia to more attractive countries, if they face initiative with Thailand with single visas, a squeeze in profit margins due to rising input costs, diversification of tourist attraction sites beyond the higher taxes, less favorable preferential trade Angkor Wat complex appears necessary and can be treatment, or an economic slowdown in key export supported by public-private sector collaboration. markets. Promoting joint ventures and partnerships between domestic and foreign investors may also be Closing the human opportunities gap. Despite a way forward. the reduction in extreme poverty, the share of non- poor but economically insecure households has Managing risks arising from the construction been growing, with very limited mobility towards boom will be important for maintaining economic security since 2009. This is in part because economic resilience. While continued strong of limited human capital or other assets such as land. activity in the construction activity supports growth, The challenge for Cambodia, is to close gaps in risks associated with the construction boom are human development and build the foundations for rising. Although the boom is not entirely financed a middle-class society, while also investing in by domestic credit, a sharp decline in the programs to promote the resilience of households construction sector could cause major economic and help minimize their vulnerability. disruptions, negatively affecting growth and employment. Exposure of households to the Cambodia Economic Update October 2016 >> 23 Selected Issue – Cambodia’s Garment Sector in Perspective I. An overview of the garment sector Cambodia started exporting garments in the mid-1990s and has withstood the increased competition in world markets following the removal of quota, Multi-Fiber Agreement (MFA) quantitative restrictions in 2005. Underpinned by low wage, abundant labor and a liberal trade and investment regime, the labor intensive industry has thrived in Cambodia and become a major source of foreign exchange. Investors have brought in technology and supervisory personnel from abroad, which has helped overcome Cambodia’s disadvantages in infrastructure and human capital. Given its nascent manufacturing sector, Cambodia’s domestic supply chain and supporting industries for the garment sector are either insufficient or completely missing. The industry therefore uses raw materials, fabric and other inputs imported mainly from China. Frequent dialog and consultation under public-private sector forums have also helped to foster the sector. The garment industry has therefore enjoyed strong production and employment growth, with an annual production level of close to 200 million dozens produced by over 600 garment factors that employ more than half a million workers. Garment products are almost entirely exported, mainly to the European Union (EU) and the United States (US). While export destination diversification has partly been achieved, the sector remains heavily reliant on two main export markets, namely the EU and US markets, which together account for 73 percent of total garment exports. The garment sector has now become the most dynamic driver of economic growth for Cambodia. Last year, the garment (and footwear) sector accounted for one-third of total real growth. Evidence also shows that garment production has moved up the value chain, while Cambodia’s market share is also growing. The garment industry has therefore contributed significantly to economic growth, employment and poverty reduction in Cambodia. However, the sector is facing rising competition from regional low-wage countries, while Cambodia’s minimum wage is rising. Myanmar is one of several emerging low-wage and abundant-labor countries. Myanmar’s minimum wage, which is about two-thirds that of Cambodia, is currently boosting its fast-growing garment industry.24 Meanwhile, anticipation of free trade access by Vietnam under the EU- Vietnam Free Trade Agreement (EVFTA) and the Trans-Pacific Partnership (TPP) is fueling the appetite for investing there, although in some cases, its tariff dismantling periods such as those on textiles and apparel stretch from three to five years.25 Cambodia is currently enjoying “Everything But Arms” or “EBA” preferential treatment under the EU’s Generalized Scheme of Preferences (GSP). When textile and apparel tariff elimination under the EVFTA takes effect, Vietnam will compete with Cambodia for free access to the EU market on an equal footing.26 24 Myanmar’s minimum wage is 3,600 kyat for 8-hour work or about US$89.4 a month since 2015. See http://www.nwpc.dole.gov.ph/pages/statistics/stat_comparative.html 25 Trans-Pacific Partnership aim at eliminating more than 18,000 taxes and other trade barriers among 12 countries: Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, Vietnam, Chile, Brunei, Singapore and New Zealand. The TPP Parties agree to eliminate tariffs on textiles and apparel and most tariffs will be eliminated immediately, although tariffs on some sensitive products will be eliminated over longer timeframes as agreed by the TPP Parties. However, there are specific rules of origin that require use of yarns and fabrics from the TPP region and a textile-specific special safeguard to respond to serious damage or the threat of serious damage to domestic industry in the event of a sudden surge in imports . See https://ustr.gov/about-us/policy-offices/press- office/press-releases/2015/october/summary-trans-pacific-partnership. For EU-Vietnam Free Trade Agreement. EU duties on textile apparel have dismantling periods stretching from five to seven years for the more sensitive items and three years and entry into force for less sensitive goods. Footwear also receives the longest EU staging of seven years for sensitive EU items and three years or entry into force on items which are less sensitive. The EU offered mostly duty-free tariff rate quotas for Vietnamese rice exports. See http://trade.ec.europa.eu/doclib/docs/2016/june/tradoc_154622.pdf. 26 Entry into the EBA is automatic and, unlike other GSP arrangements, the EBA has no time-limit. See http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150983.pdf Cambodia Economic Update October 2016 >> 24 II. Recent developments 1. Garment and textile industry investment and employments a. Investment in the garment sector. Table S1: Garment and footwear FDI position (stock) The garment industry has expanded rapidly with a substantial proportion of FDI inflows directed into Change the sector. Total investment into the sector reached Stock (US$ Year (US$ million) million) % of total US$3.9 billion (Table S1) at end-2014 (latest available 2010 1,548 17.5 data). Unlike Bangladesh, Cambodia’s garment sector 413 is largely invested in by foreign investors, mainly from 2011 1,961 17.7 698 China (Figure S1). From the total of more than 600 2012 2,659 19.0 614 factories, under 7 percent are owned by a majority of 2013 3,273 19.6 Cambodian share-holders and only 5 percent of those 2014 3,950 677 20.5 Source: 2014 FDI survey, National Bank of Cambodia are 100 percent Cambodian owned.27 While Chinese FDI in the garment sector appears large, at US$ 3.6 Figure S1: Ownership of the garment factories, billion as of 2014, it represents less than 0.8 percent in percent of total of total Chinese outward FDI for the sector.28 FDI in Japan the garment (and footwear) sector is still rising. A Singapore Malaysia 0.9% 0.8% Thailand recent survey of FDI (2014) by the central bank also 0.5% 0.9% Cambodia Others found that China’s relocation of some of its garment 1.4% 1.4% factories in Cambodia is the main reason for the Korea increase in net new factories. Given the “footloose” 3.5% characteristics of its garment industry together with their existing ownership structure, garment factories can be relocated relatively quickly from Cambodia to more attractive countries, if the sector faces a squeeze China, Taiwan, Hong in profit margins due to rising input costs, higher Kong and Macau 90.5% taxes, less favorable preferential trade treatment or an Source: GMAC economic slowdown of key export markets.29 b. Employment – jobs created by the sector are important to the economy. The sector created an annual average of 40,000 new jobs or a quarter of total annual job creation in the period 2010-15, while the number of garment factories increased by an average of 60 factories per year in the same period. In 2015, total employments reached 522,000 jobs, while the total number of factories was 626 (Table S2).30 In 2016, employments created by the garment industry has increased further, driven largely by the growing number of subcontractors, although it remains to be established whether the number of garment factories increased during the first half of 2016.31 The garment sector also contributed indirectly to employment generation in retail, trade and transportation. 27 Presentation by Garment Manufacturers’ Association in Cambodia (GMAC) in April 2016. 28 Chinese FDI stocks in garment (and footwear) by end-2014 is estimated at 3.58 billion (3.95 x 90.5%) (Table 1B) or approximately 0.83 percent (3.58/430) of total Chinese outward FDI with total Chinese outward FDI of US$ 430 billion during 2000-11. See the Transformation of the Clothing Industry in China, ERIA discussion paper series (2015). Therefore, including additional Chinese outward FDI during 2012-2014, the share should be even smaller. 29 Based on a March 2016 Synthesis Report, presented by Garment Manufacturers’ Association in Cambodia (GMAC) in April 2016. 30 According to the Ministry of Commerce. However, different data sources provide different numbers of garment workers and factories, for instance, the Ministry of Industry and Handicraft report showed there were 780 factories which employed 747,229 workers in 2015. 31 GMAC said more garment factory closures than opening during the first half of 2016. However, the Ministry of Industry and Handicraft reported in May 2016 that total garment factories is 803 employing 764,818 workers or 17,588 increase during the past 5 months of 2016. Some inconsistencies between employments and garment factory numbers reported by the Ministry of Commerce and those by the Ministry of Industry. Cambodia Economic Update October 2016 >> 25 Table S2: Employments and garment factories 1995 2000 2005 2010 2011 2012 2013 2014 2015 Employment ('000) 18 161 284 319 327 360 418 475 522 Garment factories 20 190 247 262 300 400 469 558 626 Source: The Cambodian authorities 2. Garment exports, products and world market share a. Garment exports Garment production goes mainly towards exports. Garment exports are Cambodia’s largest earner of foreign currency, generating US$ 6.2 billion (Figure S2) or 72 percent of total merchandise exports in 2015. Garment exports continue to grow rapidly, except in 2009 when the global financial crisis hit Cambodia. Garment exports have been expanding at an average year-on-year growth rate of 11 percent in value terms during the period 2010-15. Supported by export market Figure S2: Solid garment export performance (except during global fianncial crisis) continues, US$ million expansion to the EU under “EBA” preferential trade treatment, the return of a relatively stable 7,000 (US$m) y/y % change (RHS) 250.0 labor market and the gradual shift towards 6,000 Global financial 200.0 higher value-added products32 appear to have 5,000 crisis helped the sector expand, overcoming 4,000 150.0 challenges on the domestic front despite the 100.0 appreciation of the US dollar. The volume of 3,000 50.0 garment exports continues to drive export 2,000 growth, while the contribution from rising price 1,000 0.0 has recently started to pick up (Table S3). Rising - -50.0 volume has continued to drive garment exports growth over the past four years, while the Source: Ministry of Commerce contribution from rising prices also drove export growth in 2015, accounting for 28 percent of the increase in total garment exports in that year. During the first half of 2016, while garment exports continue to expand in value and volume terms, the contribution from rising garment product prices disappeared. Table S3: Volume increases contributed 100 percent of the total increase in export in the first half of 2016. Increase due to: 2012 (%) 2013 (%) 2014 (%) 2015 (%) H1 2016 (%) Volume 418.0 149.4 573.5 76.2 561.8 121.3 487.2 71.9 299.0 100.0 Price -138.2 -49.4 178.8 23.8 -98.8 -21.3 190.7 28.1 -0.1 0.0 Total 279.9 100.0 752.3 100.0 463.0 100.0 677.9 100.0 298.9 100.0 Source: The Cambodian authorities Garment exports to the EU—the largest export market—absorbed 42 percent (or US$1.9 billion) of total garment exports and continue to drive Cambodia’s overall garment exports growth. However, garment exports to the US, accounting for 31 percent (US$2.6 billion) of total garment exports, have already peaked. 32 While the garment sector seems to be shifting towards higher value-added products in 2015, it is necessary to examine detailed exported products and prices to confirm this. Cambodia Economic Update October 2016 >> 26 Recently, strong garment exports growth (Figure S3) has been underpinned by the gradual recovery in major high-income countries, in particular in the Euro area and the US. Garment exports performance is expected to remain strong in 2016, given continuing high growth of imports of fabric, the main input for garment production. b. Garment products Unlike Vietnam, the garment industry in Cambodia was not built on earlier import-substituting industrialization in textiles, but was developed almost entirely by an influx of foreign firms.33 The Figure S3: Among the largest garment exports markets, EU lack of the upstream and downstream market is growing (contributing 60% of total increase in 2015) segments of the apparel chain continues to while US market stagnated, US million constrain the industry into focusing on the 7,000 cut-make-trim (CMT) stage of production US EU Japan Others with virtually all inputs imported, most 6,000 commonly from China. So, while Cambodia nonetheless operates within global value 5,000 chains, it mainly assemble imported materials 4,000 and parts into finished products for exports. The CMT stage of production is found to be 3,000 financially and technologically undemanding 2,000 and generally less profitable than other stages.34 In addition, garment products that 1,000 Cambodia exports to the EU and the US are - similar. Eight of top ten major exported 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 products under Harmonized System (HS) codes are the same. Source: The Cambodian authorities  EU imports Table S4: Main garment products exported to the EU market and their shares, percent HS Code Top 10 garment products 2010 2011 2012 2013 2014 2015 6110 Jerseys, pullovers, cardigans, etc. knitted or crocheted 41.4 38.4 28.3 25.7 23.8 22.0 6104 Women's suits, dresses, skirts etc. & short, knit/crocheted 10.6 12.6 12.0 12.7 14.1 15.0 6109 T-shirts, singlets and other vests, knitted or crocheted 11.0 12.0 13.2 11.8 13.1 12.0 6204 Women's suits, jackets, dresses skirts etc. & shorts 0.8 1.4 1.6 10.5 9.8 11.7 6203 Men's suits, jackets, trousers etc. & shorts 3.3 4.5 3.7 10.7 9.7 9.1 6205 Men's shirts 1.4 1.3 1.6 2.7 3.0 2.9 6108 Women's slips, panties, pyjamas, bathrobes etc., knitted/crocheted 1.0 1.0 1.6 2.2 2.7 2.9 6102 Women's overcoat, cape, etc., knitted/crocheted, o/t of hd 61.04 2.8 4.6 6.0 3.5 3.8 2.8 6112 Track suits, ski suits and swimwear, knitted or crocheted 2.6 4.2 8.5 2.3 2.6 2.7 6103 Men's suits, jackets, trousers etc. & shorts, knitted/crocheted 2.9 2.8 2.4 1.8 2.1 2.4 Total share (%) 77.8 82.8 78.9 83.9 84.7 83.5 Source: UN COMTRADE 33 Challenges to the Cambodian Garment Industry in the Global Garment Value Chain (2009), Ritsumeikan Center for Asia Pacific Studies (RCAPS), Ritsumeikan Asia Pacific University. 34 From downturn to recovery: Cambodia’s garment sector in transition, ILO, 2011 Cambodia Economic Update October 2016 >> 27 The top ten products accounting for about 84 percent of Cambodia’s total exports to the EU market are: jerseys, pullovers, cardigans, women’s suits, dresses, skirts, shorts, T-shirts, women’s slips, panties, pyjamas, bathrobes, over-coats, capes, track suits and others (Table S4).  US imports The top ten products accounting for about 80 percent of Cambodia’s total exports to the US market include: jerseys, pullovers, cardigans, women’s suits, dresses, skirts, shorts, T-shirts, women’s slips, panties, pyjamas, bathrobes, over-coats, capes track suits and others (Table S5). Only two products that are among the US market’s top ten, namely babies’ garments (HS code 6111) and men’s underpants, pyjamas, bathrobes etc. (HS code 6107) are not in the EU market’s top ten. Another two products that are in the EU market’s top ten, namely men’s shirts (HS code 6205) and women’s overcoats, capes etc. (HS code 6102) are not among the US market’s top ten. Table S5: Main garment products exported to the US market their shares, percent HS Code Top 10 garment products 2010 2011 2012 2013 2014 2015 6110 Jerseys, pullovers, cardigans, etc. knitted or crocheted 20.3 21.7 20.8 20.8 19.5 18.5 6104 Women's suits, dresses, skirts etc. & short, knitted/crocheted 11.0 11.0 12.0 12.7 13.4 13.4 6111 Babies' garments, knitted or crocheted 3.4 4.1 4.7 6.6 8.2 8.8 6204 Women's suits, jackets, dresses skirts etc. & shorts 13.9 12.6 11.0 8.8 8.0 8.7 6108 Women's slips, panties, pyjamas, bathrobes etc. knitted/crocheted 7.0 7.5 7.2 8.0 8.6 8.7 6203 Men's suits, jackets, trousers etc. & shorts 9.5 9.3 9.5 9.7 7.8 6.7 6109 T-shirts, singlets and other vests, knitted or crocheted 5.4 4.8 5.4 5.0 4.7 5.1 6107 Men's underpants, pyjamas, bathrobes etc., knitted/crocheted 4.0 2.8 2.9 3.3 3.8 4.1 6103 Men's suits, jackets, trousers etc. & shorts, knitted/crocheted 2.5 2.1 2.1 2.5 3.0 3.7 6112 Track suits, ski suits and swimwear, knitted or crocheted 2.0 1.9 2.5 2.5 2.8 2.8 Total share (%) 79.0 77.9 78.0 79.9 79.9 80.4 Source: UN COMTRADE As reflected in the Tables S4 and S5 above, over the past five years the evolution of the top ten products appears to point to a rising share of more sophisticated and higher value added products. Specifically, for both EU and US markets, there has been an expansion in women’s garments (HS 6104) including women’s undergarments (HS 6108) versus less sophisticated articles (HS 6110) serving both men and women. For the EU market, women’s articles favoring knitted or crocheted apparel under HS 61 (consistently identified in Box 1 on Exports of Textile and Apparel Articles – Cambodia is a strong competitor for Vietnam in the EU market) are expanding faster than men’s articles, while for the US market, babies’ garments are rapidly emerging. Retail brands sourcing from Cambodia include H&M, Nike, Levi, Old Navy, Adidas, Calvin Klein, Gap, Puma, Clarks, Marks and Spencer, Tesco, Inditex, N Brown Group, Tchibo, Next, New Look, C&A, Walmart and more.35 35 Cambodia Factsheet, Gillian Kane, Facts on Cambodia's Garment Industry Cambodia Economic Update October 2016 >> 28 3. Wages, output and gender a. Wages The minimum wage in the garment sector has increased rapidly over the past four years, averaging 23.1 percent during 2012-14 as it rose to US$140 a month in 2016 from US$61.0 a month in 2012 (Table S6). The widespread labor unrest that occurred in late 2013 and early 2014 appears to have pressured the minimum wage increases in 2014 and 2015. As a share of per capita GDP, the minimum wage in the garment sector is rising, reaching 133 percent in 2015 (Figure S4). Minimum wages of Vietnam and Bangladesh are also rising but at a slower pace than in Cambodia (Table S7). Minimum wages as a share of per capita GDP in Vietnam and Bangladesh are 78 percent and 67 percent, respectively. The garment sector accounts for the majority of paid employment in Cambodia and is the largest formal sector in the economy. Table S6: The minimum wage in the Figure S4: Cambodia's minimum wage as a share of garment sector rose in 2013-15 GDP capita is also rising, percent 140 Minimum wage Change (y/y, Year (US$/month) %) 120 2008 56 0.0 100 2009 56 0.0 2010 61 8.9 80 2011 61 0.0 60 2012 61 0.0 40 2013 80 31.1 2014 100 25.0 20 2015 128 28.0 - 2016 140 9.4 2011 2012 2013 2014 2015 Source: WDI and the Cambodian authorities Source: Ministry of Labor and Vocational Training It is estimated that the total wages paid to garment workers in the entire country are worth about US$1.2 billion a year. The employment and remittances to their home areas of such a large pool of poorly educated and mostly rural women turned garment workers has had a significant impact in terms of reducing poverty. Table S7: Evolution of minimum wages in Vietnam and Bangladesh US$/month 2010 2011 2012 2013 2014 2015 2016 Vietnam/1 54-72 56-80 65-95 80-112 90-128 96-138 107-156 Bangladesh/2 25 39 39 68 68 68 68 Source: ILO, American Chamber of Commerce Vietnam and others. 1/ All private sector: Vietnam’s minimum wages are classified by four different regions: region 1 is the highest, covering ur ban areas such as Hanoi and Ho Chi Minh City; region 2 consists of suburban areas; region 3 includes provincial areas; and finally region 4 is for the remaining areas (largely rural areas), the lowest. The numbers above represent the lowest (region 4) and the highest (region 1) of the four regions. 2/ Garment sector. In many cases, salary increases effective in October, November or December b. Annual garment export output per worker It is important to monitor productivity in the garment industry. However, productivity is difficult to measure as disaggregate production and employment data are not available.36 Using aggregate export volume (and 36 Incoming Systematic Country Diagnostics Study will try to compute. Cambodia Economic Update October 2016 >> 29 value) as a proxy, productivity can be roughly measured using the total garment products in volume (and in value) terms and the total number of garment workers that produce them. Both volume and value of garment exports per worker trended downwards in the period 2013-15. This may have been partly due to the negative impacts of poor industrial relations with widespread labor unrest occurring in 2013 and 2014, resulting in significant disruption to garment production as well as the reduction in overtime, reported by Garment Manufacturers Association in Cambodia (GMAC).37 c. Gender Figure S5: Garment export volume (and value) per worker has been stagnated since 2011 Thanks to the garment industry, Cambodia 14,000.0 400.0 has been able to incorporate women into the 350.0 productive and formal economy. The 12,000.0 300.0 industry is the main formal sector employer 10,000.0 250.0 bringing hundreds of thousands of informal 8,000.0 200.0 workers, mostly women with limited education 6,000.0 150.0 working largely in the agriculture sector to 4,000.0 100.0 participate in formal manufacturing jobs. 2,000.0 50.0 Women belonging to relatively large families - 0.0 from rural areas migrating to work as garment workers mainly for economic reasons comprise 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 about 90 percent of all total garment workers. US$/worker/year Dozen/worker/year (RHS) Wages provide them with the opportunity not Source: World Bank staff estimates only to increase their incomes and achieve economic independence but also to support their families back in their home villages and to send their siblings to school. The role of women garment workers therefore should not be underestimated. For most women, working in the garment industry is perhaps their first experience of formal employment.38 Understanding working conditions including paid annual, sick and maternity leave entitlements provided by the Labor Law will be important in promoting good industrial relations.39 Living costs in the main cities where garment factories are located appear to be high. While wages are rising, most garment workers still cannot afford to have children living with them due to the high cost of accommodation and childcare expenses. Children are often forced to live with their grandparents back in their home villages. Garment workers with children typically spend about 50 percent more than single workers do on their children’s living and educational expenses.40 Established in 2002, the National Social Security Fund supports garment workers and its members.41 Currently, two main schemes--occupational risk insurance and medical insurance--are operational, with over one million participating members, of whom just under one million are members employed in the garment and garment-related industries. For the occupational risk insurance scheme, employers are required to contribute 0.8 percent of a worker’s average monthly wage, while the medical 37 For more detail, see http://www.gmac-cambodia.org/default-31-12-14.php 38 Women and gender issues in trade unions in Cambodian garment industry (2011), ILO 39 Full time employees get 1.5 days of annual leave a month. This equals 18 days per year. The labor law does not require paid sick leave, however, following the policy of the Ministry in charge of Labor, employers should consider providing paid sick leave as follows: (i) 100 percent of wages during the first month of sick leave; (ii) 60 percent of wages during the second and third months; and (iii) unpaid leave from the fourth until the sixth month. Employers must give employees who give birth 90 days (3 months) of maternity leave. Employers must pay employees who have at least one year of seniority half their wages and benefits during maternity leave of 90 days. See http://betterwork.org/cambodia/wp-content/uploads/2013/05/Cambodian-Labour-Law-Guide-English-2013.pdf 40 Based on interviews with garment workers and unions. 41 NSSF is run by a governing body chaired by a representative from Ministry of Labor and Vocational Training participated by representatives from the Council of Ministers, Ministry of Economy and Finance, Ministry of Health and workers themselves. See http://www.nssf.gov.kh for more details Cambodia Economic Update October 2016 >> 30 insurance scheme receives equal contributions of 1.3 percent of a worker’s average monthly wage from both the worker and the employer. III. Contribution to economic growth Sustained robust economic growth averaging 7.6 percent per year during the past two decades would not have been possible without the substantial contribution by the garment sector, one of the main engines of growth. Specifically, the garment (and footwear) sector contributed an average of 2 percentage points to annual real growth rate in the period 1995-2015 (Figure 7). The sector accounts for about 12 percent of the country’s gross domestic product (GDP) and generates US$6.2 billion in export value (76 percent of total exports in 2015), representing the largest share of Cambodia’s foreign currency earnings. To find out the size of the contribution from the garment sector (as well as the industry sector) to output and employment growth, decomposition is carried out below. 1. Decomposing output growth and employment42 Using the Cambodia-Socio Economic Survey, the national accounts and garment and footwear employment data, decomposition of value added growth and employment by sector is conducted during the period 1995- 2015. Thi is then further divided into three sub-periods, namely 1995-2000, 2000-09 and 2009-15 to look more closely at the evolution of structural changes in each sub-period. As the existing classification in the national accounts does not allow for disaggregation of the garment and footwear sector, the two segments are analyzed as one.43 a. Entire study period covering 1995-2015 The garment (and footwear) sector contributed substantially to real growth, accounting for about 30 percent of real growth during the past 20-year period. It contributed a 2.2 percentage points of the 7.7 percent real growth (Figure S6), while the entire industry sector’s contribution was 2.8 percentage points.44 In terms of employment growth, the garment (and footwear) sector’s contribution was modest, accounting for 0.7 of a percentage point (Figure S7). This represents one quarter of total employment growth during this period which is relatively high at 2.7 percent, while the entire industry sector contributed as much as 1.9 percentage points. b. Sub-periods Strong performance in the 1995-2000 sub-period: the contribution made by the garment sector to real growth was the largest among the three sub-periods. This reflected rapid expansion of garment exports, albeit from a very low base, growing at an average rate of 84 percent a year. During this period, the garment sector accounted for 3.1 percentage points of 7.6 percent real growth. This was above the contribution by the entire industry sector which accounted for only 2.9 percentage points. However, the garment sector’s contribution to employment growth during this sub-period remained modest at 0.8 of a percentage 42 For more details see http://globalpractices.worldbank.org/mfm/Pages/SitePages/Growth%20Analysis%20Tools.aspx 43 The footwear sector was relatively small, with a total export value of less than US$ 100 million a year prior to 2010, while total garment sector export value reached as much as US$ 2.5 billion in 2010. Export value of the footwear sector, however, expanded rapidly, reaching US$ 660 million in 2015. 43 Slightly different periods: 1996-2013 for Vietnam and 1996-2010 for Lao PDR due to non-availability of data of the two countries in WDI. Cambodia Economic Update October 2016 >> 31 point (similar to that of the entire study period) of total employment growth during this sub-period which was the highest at 3.7 percent. Deceleration in the 2000-09 sub-period: the garment and footwear sector contributed the smallest due largely to decelerating garment export performance in the run up to the 2008-09 global financial crisis, at 1.5 percentage points to real growth, while this sub-period witnessed real growth rising fastest, at 8.2 percent. The garment sector also contributed the least, at 0.2 of a percentage point of total 2.6 percent employment growth. Recovery in the 2009-15 sub-period: the garment and footwear sector contributed handsomely at 1.9 percentage points to real growth of 7.6 percent. The entire industry sector, however, accounted for the largest contribution, at 3.3 percentage points, reflecting new emerging sectors such as the construction and other manufacturing sectors which grew rapidly during this sub-period. For employment growth, the garment sector accounted for 0.8 of a percentage point of total employment growth during this sub- period which was 2.1 percent. Figure S6: Decomposition of real growth in value Figure S7: Decomposition of growth in employment, added, percentage points percentage points 2.7 7.7 1995-2015 1.9 1995-2015 0.7 2.2 2.8 3.7 7.6 1995-2000 1.2 1995-2000 2.9 3.1 0.8 8.2 2.6 2000-09 1.5 2.3 2000-09 1.2 0.2 7.0 2.1 2009-15 1.9 3.3 2009-15 2.4 0.8 Real growth 1. Agriculture 2. Industry 2.1 Garment & footwear Employment growth 1. Agriculture 2. Industry 2.1 Garment & footwear Source: World Bank staff estimates 3. Services etc. Source: World Bank staff estimates As discussed above, it is clear that while the garment sector contributes significantly to real growth, it only generates modest growth in employment. Moreover, it is important to note that structural transformation of the economy has led to a steady decline in total employment growth which dropped from 3.7 percent during 1995-2000 sub-period to 2.6 percent in 2000-09 sub-period and 2.1 percent in 2009-15 sub-period while Cambodia’s working age population (15-64 years) grew at an average rate of 2.6 percent per year during the period 2009-14, rising to 10 million persons in 2014 from 8.8 million persons in 2009.45 2. Garment sector evolution - international evidence There may still be some scope for Cambodia’s garment sector to expand further. Cambodia’s real GDP per capita (at constant 2009 US dollar) reached only US$1,055 in 2015 which appears to be below a 45 For a more detail discussion, see Employment, Income and Consumption section (page 11) of April 2016 Cambodia Economic Update Cambodia Economic Update October 2016 >> 32 Figure S8: Cambodia's per capita income and "per “threshold” level of per capita GDP after which per- capita garment exports" remain below the capita garment exports begin to decline (Figure S8).46 "threshold" of between US$ 1,150 to 2,000 Evidence from garment-exporting countries seems to 0.40 point to a “threshold” level of between US$1,150 and (as share of real per capita GDP) US$2,000 real per capita GDP. For instance, real per Real per capita garment exports 0.35 0.30 capita exports of garments in Thailand grew until the 0.25 country reached a “threshold” per capita GDP of between about US$2,000 (in constant 2000 US dollars) 0.20 and around US$1,150 in Sri Lanka. Before reaching Global 0.15 this threshold, a country’s export basket has been finanical 0.10 crisis found to show a relatively diversified mix of basic and 0.05 higher value garments. With its US$1,055 (2009 US 0.00 dollars) per capita, Cambodia is approaching the threshold and its garment exports continue to grow, 427 415 389 340 368 366 382 397 416 457 514 567 646 749 735 773 851 900 958 1,007 1,056 Per capita GDP (at constant 2009 US$) averaging at about 15 percent during the period 2010- Source: World Bank staff estimates 15. Cambodia is experiencing a similar evolution to Thailand, Sri Lanka and the Philippines when their garment exports were diversified before their per capita garment exports began to decline and the subsequent contraction of their garment sectors. Cambodia’s garment sector is experiencing rising wages, the erosion of competitiveness in basic garments and a gradual moving-up the value chain witnessed largely by the recent increase in the average export price of its garments. 3. World market share of Cambodia’s garment exports Cambodia’s share of the world’s garment export markets has edged up steadily, rising to 2.02 percent in 2015 from 0.9 percent in 2011 (Table S8). Similarly, Cambodia’s shares in the EU and US markets have been rising from 2.16 percent and 0.93 percent in 2011 to 5.07 percent and 2.5 percent in 2015, respectively. As Cambodia’s GDP per capita is still below the threshold, its garment export growth may be sustainable at Table S8: Cambodia’s shares of the EU, US and world garment least in the near term. In the medium- exports markets are rising and longer-term, rising competition Cambodia’s share (%) in 2011 2012 2013 2014 2015 from regional low wage countries such as Myanmar and Vietnam will prove the world's garment market 0.90 1.02 1.14 1.14 2.02 more difficult for Cambodia to match. With the TPP and the EVFTA, there are the EU garment market 0.95 1.25 1.52 1.81 2.23 significant risks of investment and the US garment market 0.93 0.82 2.75 2.61 2.50 export diversion away from Cambodia unless key constraints, such as high Source: UN COMTRADE energy costs, regulatory impediments to doing business and infrastructure bottlenecks, are successfully addressed. IV. Opportunities and challenges 1. Opportunities Cambodia is an attractive investment destination, given its strategic location at the center of ASEAN, creating significant opportunities for integration into regional and global value chains. 47 46 Consolidating and accelerating exports in Bangladesh, Bangladesh Development Series (2012), the World Bank. 47 The Investment Climate Assessment 2014 Creating Opportunity for Firms in Cambodia the World Bank Cambodia Economic Update October 2016 >> 33 Foreign investors, in particular those that invest in the garment sector in Cambodia, continue to find political stability, a relatively cheap, young and rising labor force, liberal investment and trade policies and preferential access under the EBA GSP to the EU market as favorable conditions attracting their investment. 48 It is likely that Cambodia will continue to be eligible for EBA preferential access for at least the next 11 years.49 An effective minimum wage-setting mechanism has been established. A tripartite Labor Advisory Committee consisting of representatives from the Ministry of Labor and Vocational Training, employer associations and trade unions has so far been successful in handling annual minimum wage negotiations since 2014.50 This helps maintain good industrial relations after the widespread labor unrest in 2013 and 2014 disrupted the garment sector and had a negative impact on investors’ confidence. All related parties, namely garment workers, unions and factory owners appear to have developed a better understanding of the importance of the garment industry and their mutual interests, as well as the challenges and constraints the industry faces, and as a result, all stakeholders are now working more effectively together to overcome them. A Cambodian Garment Training Institute has been established.51 The Institute will help train Table S9: Electricity tariff in ASEAN Nations (US¢ /kWh) 1/ Cambodian garment workers in order to bridge the existing human resources gap at Country Commercial Industrial middle-management level in the garment Brunei 3.82-15.29 3.82 industry and to improve its Cambodia 11.71-15.85 11.71-14.63 52 competitiveness. An insufficiently skilled Indonesia 5.93-12.19 5.38-10.14 workforce has resulted in many technical Lao PDR 8.80-10.36 6.23-7.34 and mid-management positions being Malaysia 9.67-11.10 7.83-10.88 filled by foreigners. The Institute, located Myanmar 6.17 6.17 in the Phnom Penh Special Economic Singapore 10.95-18.05 10.95-18.05 Zone with the most advanced technology Thailand 5.55-5.75 8.67-9.43 being used in the industry, will train Vietnam 4.38-15.49 2.30-8.32 Cambodia's unskilled garment workers and other Cambodians to undertake higher Source: ASEAN Center for Energy (2011) Poch, K. and S. Tuy (2012), ‘Cambodia’s Electricity Sector in the Context of Regional Electricity Market Integration’ in level jobs in garment factories. Long-term Wu, Y., X. Shi, and F. Kimura (eds.), Energy Market Integration in East Asia: Theories, Electricity Sector and Subsidies , ERIA Research Project Report 2011-17, Jakarta: ERIA, pp.141-172. training (12 months, 240 trainees a year) –technical and supervisory skills training designed for those have just finished secondary education and competed university studies. Trainees will become assistants with the aim of filling skilled jobs that are currently predominantly held by non- Cambodian. This targets four qualification areas: (i) garment construction experts (pattern making and adaptation); (ii) garment production engineers (manufacturing processes); (iii) apparel merchandisers (garment designers); and (iv) quality assurance specialists (quality controllers). 48 Currently, Bangladesh, Cambodia, Lao PDR and Myanmar are among 49 beneficiary countries. See Everything But Arms (EBA) – Who benefits? http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150983.pdf 49 Cambodia’s eligibility under EBA is expected to continue until it is no longer classified as ‘least developed’ by the UN Cambodia is currently classed as “least developed country or LDC” by the United Nations. Graduation thresholds (2015 triennial review): (i) Per capita GNI: $1,242; (ii) Human Asset Index (HAI): 66 and above; and (iii) Economic Vulnerability Index (EVI): 32 and below. (Cambodia was classified as a lower-middle income economy by the World Bank Group. Cambodia’s GNI per capita (Atlas method) for 2015 is estimated at $1,070 above the threshold for Low Income, which is set at $1,025 for Bank’s 2017 fiscal year.) Eligibility for graduation has to be met at two consecutive triennial reviews (2+3) and graduation takes effect three years (3) after the decision by the General Assembly. When Cambodia is graduated from the LDC, the EU will provide a transition period of three years (3), during which time EBA preferences will continue to apply. See http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150983.pdf and http://www.un.org/en/development/desa/policy/cdp/cdp_ldcs_countryfacts.shtml 50 In notification 209 issued on 6 August 2013 by the Ministry of Social Affairs, Veterans and Youth Rehabilitation (MoSAVYR), the Royal Government of Cambodia will be arranging a discussion on the increase of the minimum wage for all workers in 2014 through the tripartite mechanism. For more detail, see http://www.arbitrationcouncil.org/en/post/6/Minimum-wage-determination-in-Cambodia 51 CGIT is initiated and managed (under a training project) by the Garment Manufacturers Association in Cambodia (GMAC) 52 GMAC 2015 Bulletin. See http://www.gmac-cambodia.org/bulletin/2015.pdf Cambodia Economic Update October 2016 >> 34 Short-term courses (less than 3 months, 1,600 trainees a year) – on-the-job technical and supervisory skills training is evening on-the-job training, open to workers paid for by their companies. Three qualification areas are targeted: (i) on-the-job supervisory skills; (ii) specialized skills in the pattern market, design and merchandizing; and (iii) technical skills: cutters, sewing operators, pressers, electricians and mechanics for the garment industry. 2. Challenges Table S10: Cambodia’s minimum wage It appears that the high cost of electricity continue to and regional comparison constrain the development of more sophisticated manufacturing processes, which in turn thwarts Country US$ per month diversification. Electricity remains one of the top ten most severe Cambodia 140.0 constraints based on the findings of the 2016 World Bank Bangladesh 65.8 Enterprise Survey.53 A report published in 2012 also found that the electricity tariff is among the highest in the ASEAN (Table S9).54 Myanmar 89.4 Information from various investors reveals that producing higher Lao PDR 107.5 value added products, which requires moving away from simple assembling processes to product manufacturing is often energy Vietnam/1 156.0 intensive.55 In addition, unofficial fees have been mentioned as Mongolia 96.1 being responsible for high transportation costs and underperforming logistics.56 Pakistan 103.2 Philippines 203.0 Cambodia thus needs to improve its competitiveness by enhancing its connectivity to neighboring countries through better logistics Thailand 251.4 and trade facilitation and by maximizing the policy space China 201.2 surrounding trade and investment to attract and hold these new Source: Cambodia’s Ministry of Labor, Department of Labor, the Philippines, American Chamber of Commerce Vietnam investors while building clusters around new industries. 1/ Region I which has the highest rate. Table S11: National holidays in selected regional The garment industry is under pressures from countries rising wages. Cambodia’s minimum wage is now comparable to Vietnam’s but remains below minimum Country Number of national holidays (2016) wages in China, the Philippines and Thailand. The minimum wage in Cambodia is now higher than those Cambodia 28 in a number of regional countries such as Bangladesh, Myanmar 25 Myanmar and Lao PDR (Table S10). While it is difficult Bangladesh 25 to accurately compare worker productivity in Cambodia Thailand 17 with that of other countries due to the unavailability of Vietnam 16 data, it seems that the number of working days in Lao PDR 12 Cambodia while similar to Myanmar and Bangladesh, is fewer than those in Vietnam, Lao PDR, Thailand and China 11 Source: http://www.officeholidays.com/ China (Table S11) due to Cambodia’s relatively larger number of public holidays.57 53 See http://www.enterprisesurveys.org/data/exploreeconomies/2016/cambodia 54 Poch, K. and S. Tuy (2012), ‘Cambodia’s Electricity Sector in the Context of Regional Electricity Market Integration’ in Wu, Y., X. Shi and F. Kimura (eds.), Energy Market Integration in East Asia: Theories, Electricity Sector and Subsidies , ERIA Research Project Report 2011-17, Jakarta: ERIA, pp.141-172. See http://www.eria.org/Chapter%207- Cambodia's%20Electricity%20Sector%20in%20the%20Context%20of%20Regional%20Electricity%20Market%20Integration.pdf 55 Interviews with investors in Phnom Penh, Manhattan, and Tai Seng Special Economic Zones 56 The Investment Climate Assessment 2014 Creating Opportunity for Firms in Cambodia, the World Bank 57 Assuming that these countries have 8-hour work day and 6-day work week with similar annual leave allowances Cambodia Economic Update October 2016 >> 35 Figure S9: Global trade has been shrinking, along It is important to note also that global trade has with garment exports, US$ billion been shrinking since 2014 (Figure S9). While the 19,500 480 performance of the garment industry has continued to 19,000 improve, defying the reduction in global trade in 18,500 460 garments, it is not certain how long this will last. 18,000 440 Uncertainty surrounding global trade in garments does 17,500 420 not bode well for the Cambodian economy which is 17,000 16,500 400 heavily dependent on garment exports. 16,000 15,500 380 a. EU-Vietnam free trade agreement 15,000 360 2011 2012 Total world exports 2013 The EU-Vietnam Free Trade Agreement (EVFTA) 2014 2015 World garment exports (RHS) Source: UN COMTRADE will give Vietnam a “level playing field” to compete for the EU market with Cambodia which is currently enjoying the EU’s EBA preferential treatment with full duty free and quota-free access for all products. Currently, Vietnam mostly faces 12 percent customs tariff for the same garment products that Cambodia largely exports duty free to the EU. Vietnam still maintains a similar market share, compared with Cambodia’s in the EU market (see Box 1). While rules of origin are still required, once it takes effect, theoretically, the EVFTA will immediately eliminate most tariff lines on garment products under Harmonized System (HS) codes 6104 and 6204 (Table S4) (currently classified under Category A of the EU tariff schedule), which account for about one quarter, or US$700 million of Cambodia’s total exports58 to the EU.59 Let’s assume that Vietnam’s duty free access to the EU market upon ratifying the EVFTA could result in a drop of 12 percent of Cambodia’s EU market share or US$ 350 million (or about half of the export value of the impacted products) of Cambodia’s exports to the EU market.60 In this case, real growth could potentially decline by up to 1.5 percentage points.61 However, potential negative impacts on Cambodia’s garment exports may not fully materialize soon after the EVFTA becomes effective. This may be due to a number of factors which include the time lags in garment supply response by Vietnam while Cambodia already operates within global value chains. Another factor is the rules of origin which are often difficult to qualify (note that Cambodia’s garment exports to the EU have expanded substantially only after 2011 when the EU relaxed EBA’s rules of origin requirements).62 It also depends how competitive Cambodia’s garment sector will be at the time when EVFTA takes effect, given that skills gap may be addressed by the recent establishment of the Cambodian Garment Training Institute. Tariff elimination provided by the EVFTA for other competing products such as those under HS codes 6110, 6109, and 6203 (currently classified under Category B5 of the EU tariff schedule), which cover about three-quarters of Cambodia’s exports to the EU market, will be removed within a seven-year period after the free trade agreement takes effect.63 According to the existing EU tariff schedule, the tariff reduction for 58Cambodia’s total exports are projected to be US$ 6.9 billion in 2016. The EU and the US markets account for 40 percent (or US$2.8 billion) and 30 percent (or US$2.0 billion), respectively 59 Products are considered originating under the agreement if they meet one of the following requirements: (i) wholly obtained in Vietnam; or (ii) products produced in Vietnam incorporating materials which have not been wholly obtained there, provided that such materials have undergone sufficient working or processing within Vietnam. See http://www.vietnam-briefing.com/news/eu-vietnam-fta-understanding-rules-origin.html/ 60 See EU-Vietnam Free Trade Agreement: Agreed text as of January 2016, http://trade.ec.europa.eu/doclib/press/index.cfm?id=1437 61 Arbitrarily assuming that only half of export value of the impacted products may be drop due to Vietnam’s duty free access to the EU market upon ratifying the free trade agreement. Everything else being equal, this will shave off about 1.5-1.8 percentage points from the real growth. However, it may not happen within one year because order and supply responses lag (even though those tariff lines will be immediately zero). 62 See Box I.B.2. Cambodia’s Garment Sector, October 2016 East Asia and Pacific Economic Update, the World Bank Group 63 The EU will also eliminate duties with longer staging periods (up to 7 years) for some sensitive products, especially in the textile apparel and footwear sectors. The elimination of duties, however, will not be an open door for Chinese products to flood the EU market: to benefit from the preferential access, the strict rules Cambodia Economic Update October 2016 >> 36 these products will be implemented in six equal annual stages.64 This will likely allow the garment industry in Cambodia to adjust.65 b. Brexit While the United Kingdom (UK) is Cambodia’s third largest trading partner in the world, after the US and Germany, it absorbs only 10 percent (or US$800 million) of Cambodia’s exports (Figure S10).66 The UK market therefore accounts for about 28 percent of Cambodia’s exports to the EU. Of the total exports to the UK, garment and footwear exports account for 76 percent (or US$600 million) and 17 percent (US$200 million), respectively.67 While it is clear that Cambodia will likely lose some garment (and footwear) market share in the UK market (perhaps to Vietnam), if the UK after leaving the EU, fails to grant Cambodia duty free access to its market (as it currently does as part of the EU’s EBA preferential treatment), it is likely that the negative impacts on Cambodia’s garment (and footwear) exports are likely to be insignificant. Let’s assume that without duty free access to the UK market, Cambodia’s garment exports to the UK could drop by 12 percent or US$70 million. In this case, real growth could potentially decline by about 0.3 percentage point (or about 0.4 percentage point, if potential negative impacts on footwear exports are included). Figure S10: Cambodia's merchandise exports to top 10 countries, percent share In addition, the World Trade Organization’s (WTO) most-favored-nation (MFN) principle requires equal treatment and countries cannot normally discriminate Others, 20.4 US, 23.2 between their trading partners (some exceptions, however, are allowed; for example, countries can set up a Spain, 3.6 free trade agreement that applies only to goods traded Vietnam, within the group — discriminating against goods from 4.6 Germany, outside).68 Bangladesh, Cambodia, Lao PDR, Myanmar 10.4 Thailand, and Vietnam are all members of the WTO and all but 4.7 China, 4.9 Vietnam are beneficiaries of EBA preferential treatment.69 France, 5.0 Canada, 6.0 Japan, 7.1 UK, 10.1 Without any free trade agreements with the UK, these countries will have to compete with each other on an equal footing for the UK market. In this case, potential Source: UN COMTRADE export gains by Vietnam under EVFTA will also decline. c. Trans-Pacific Partnership The Trans-Pacific Partnership (TPP) will place Cambodia at a disadvantage vis-à-vis Vietnam, if ratified. TPP will allow Vietnam to obtain preferential treatment for its exports to TPP members, in particular the US (and Canadian) market, accounting for about US$ 2.0 billion (or 30 percent of total garment exports) which is currently the second largest market for Cambodia’s garment exports, after the EU market.70 of origin for garments will require the use of fabrics produced in Vietnam, with the only exception being of fabrics produced in South Korea, another FTA partner of the EU. See http://europa.eu/rapid/press-release_MEMO-15-5468_en.htm 64 For detailed EU tariff schedule, see http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154200.pdf 65 The EU-Vietnam Free Trade Agreement is reportedly on the course of being legally reviewed before ratification and the entry into force of the Agreement is tentatively foreseen in 2018. See http://www.ambhanoi.esteri.it/ambasciata_hanoi/en/ambasciata/news/dall_ambasciata/2016/06/accordo-di-libero-scambio- eu-vietnam.html 66 US$ 800 million is based on the Balance of Payments data 67 The percentage share follows UN COMTRADE statistics while the nominal merchandise trade data are from the National Bank of Cambodia (as UN COMTRADE statistics provide larger nominal trade data). 68 Principles of the trading system, WTO. See https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm 69 See https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm 70 For more detailed info on TPP, see https://ustr.gov/tpp/ Cambodia Economic Update October 2016 >> 37 While rules of origin and safeguards will still apply,71 the tariff schedule of the US allows for immediate elimination for most of the tariff lines, ranging from 0.9 percent to 28.2 percent, for the HS codes representing Cambodia’s top ten garment products shown in Table S5.72 Unlike under the EVFTA which only about US$700 million of garment exports value will be immediately hit, the TPP will affect almost the entire Cambodia’s garment exports to the US market at once when TPP takes effect. The potential negative impacts will be even greater, if the Canadian market is included. The TPP therefore presents a more challenging threat to Cambodia’s garment industry (and growth) than the EVFTA. Again, potential negative impacts on Cambodia’s garment exports may not fully materialize soon after the TPP takes effect due to similar factors discussed in under the EVFTA above. An additional factor for the US market is safeguards which may help protect the US market against a sudden surge in garment exports from Vietnam. The safeguards may therefore provide Cambodia’s garment industry time to adjust. V. Conclusion Given the “footloose” characteristics of its garment industry together with the existing ownership structure whereby there are only a handful of domestic investors, garment factories can be relocated relatively quickly from Cambodia to more attractive countries, if they face a squeeze in profit margins due to rising input costs, higher taxes, less favorable preferential trade treatment, or an economic slowdown in key export markets. Promoting local participation in the garment industry will therefore be important including encouraging more supporting industries to the garment sector from locally-owned small and medium-sized enterprises. Promoting joint ventures and partnerships between domestic and foreign investors may also be a way forward. There are significant risks of investment and export diversion away from Cambodia unless key constraints, such as high energy and transportation costs and infrastructure bottlenecks are successfully addressed. This will require more attention and facilitation from the public sector.73 The garment industry is exposed to increasing competition from Vietnam which has also developed upstream in the sector together with emerging competition from Myanmar which is opening up to foreign investment. Given potentially large negative impacts of the EVFTA and severe consequences of TPP on Cambodia’s garment exports, it will be important to devise a concrete plan to improve competitiveness and diversifying export sectors. Structural reforms to make Cambodia’s tradeable sector more competitive is core to improving competitiveness of the economy. Current investment which is heavily concentrated in the non-tradeable sectors, namely the construction and real estate sectors may not bode well for Cambodia’s future economic success and policy support could encourage the tradeable sectors to be further strengthened to become more competitive. One further policy option may therefore be oriented towards boosting high value-added garment products by encouraging the garment industry to gradually add value to its products and to vertically integrate to the extent possible. This may also lead to diversification beyond garments as envisaged under the 2015-25 Industrial Development Policy. It is also important to further strengthen and deepen dialog and consultation under public-private sector forums to continue to foster the sector. 71 For detailed rules of origin, see https://medium.com/the-trans-pacific-partnership/textiles-and-apparel-9612f6bd809e#.r2mb5jx5s 72 https://ustr.gov/sites/default/files/TPP-Final-Text-US-Tariff-Elimination-Schedule.pdf 73 GMAC has reported that its membership is stagnant, suggesting that it is possible that additional investment has slowed. Cambodia Economic Update October 2016 >> 38 While the garment sector contributes substantially to real growth, it only generates a modest number of jobs. An important economic policy aimed at creating jobs to absorb a rising number of entrants into the labor force of about 160,000 a year will need to focus on other sectors as well, especially the agriculture sector, given that the majority (70 percent) of the population resides in rural areas. While real growth remains robust, the recent structural transformation has resulted in a steady decline in employment growth, which dropped to 2.1 percent during the period 2009-15, down from 3.7 percent during period 1995-2000 while Cambodia’s working age population (15-64 years) continue to increase, growing at an average rate of 2.6 percent per year during the period 2009-14. It will be important to maintain good industrial relations and avoid the disruption of production and exports. Past experience has shown the costs and negative impact on investor confidence of poor industrial relations and all related parties, namely garment workers, unions and factory owners appear to have better understanding of the importance of the garment industry and their mutual interests, as well as the challenges and constraints the industry faces and all are now working more effectively together to overcome them. Addressing labor issues promptly and at their root cause may be the way forward. Education and awareness programs on important topics such as the Labor Law, corporate social responsibility, macroeconomic conditions, and the roles and responsibilities of unions and workers may also help to promote a better understanding and improved industrial relations going forward. Cambodia Economic Update October 2016 >> 39 Cambodia: Key Indicators 2012 2013 2014 2015 2016p 2017f 2018f Output, Domestic Demand and Prices Real GDP (% change yoy) 7.3 7.4 7.1 7.0 7.0 6.9 6.9 Domestic demand (% change yoy) 9.9 11.3 10.1 8.5 9.2 10.0 10.0 Consumer price index (annual avg, % change yoy) 1.4 2.2 1.7 1.3 3.2 3.4 3.5 Public Sector (% of GDP) Government revenues 15.7 15.1 18.1 18.5 18.8 18.2 18.1 Government expenditures 21.6 21.5 21.6 20.5 21.7 23.2 22.9 Government balance excluding grants -6.1 -6.6 -3.8 -2.0 -2.8 -5.0 -4.8 Government balance including grants -3.4 -2.7 -1.4 -0.1 -1.2 -3.4 -3.4 Foreign Trade, BOP and External Debt - - Trade balance (US$ millions) -1,698.0 2,001.6 2,004.4 -2,333.2 -2,432.0 -2,622.6 -2,758.0 Exports of goods (US$ millions) 5,839.0 6,886.0 7,636.0 8,208.8 9,017.7 9,936.7 10,877.2 (% change yoy) 7.9 17.9 10.9 7.5 9.9 10.2 9.5 Key export (% change yoy) 1/ 7.0 17.6 11.7 14.5 12.0 11.5 10.8 Imports of goods (US$ millions) 7,537.0 8,887.6 9,640.4 10,542.0 11,449.6 12,559.3 13,635.2 (% change yoy) 20.6 17.9 8.5 9.4 8.6 9.7 8.6 - - Current account balance (US$ millions) 2/ -1,063.7 1,753.5 1,840.3 -1,908.4 -2,039.1 -2,219.1 -2,453.0 (% GDP) -7.6 -11.5 -11.0 -10.6 -10.2 -10.1 -10.1 Foreign direct investment (US$ millions) 1,698.0 1,826.2 1,676.6 1,654.4 1,700.8 1,799.1 1,697.1 External debt (US$ millions) 4,547.4 4,925.8 5,363.1 5,715.4 6,306.7 6,993.3 7,764.0 (% GDP) 32.4 32.3 32.0 31.6 31.6 31.7 31.9 Debt service ratio (% exports of g&s) 1.0 1.2 1.4 1.5 1.6 1.9 2.1 Foreign exchange reserves, gross (US$ millions) 3,463.0 3,642.5 4,657.9 5,672.1 6,778.2 7,557.6 8,203.8 (prospective months of imports of g&s) 4.3 4.1 4.9 5.4 5.3 5.6 5.7 Financial Markets Domestic credit (% change yoy) 29.6 28.6 28.4 27.0 25.8 23.0 20.0 Short-term interest rate (% p.a.) 11.6 11.3 11.5 11.7 12.0 11.8 11.5 Exchange rate (Riel/US$, annual average) 4,033.0 4,027.0 4,038.0 4,060.0 4,058.0 4,062.0 4,067.0 Real effective exchange rate (2010=100) 105.4 109.9 113.1 119.8 121.8 124.3 127.4 (% change yoy) 0.5 4.3 2.0 1.3 1.7 2.0 2.5 Memo: Nominal GDP (US$ millions) 14,038 15,245 16,776 18,084.4 19,971.2 22,042.9 24,360.0 Sources: National data sources, IMF, and World Bank staff estimates f = forecast p = projection 1/ Garments 2/ Excluding official transfers. Cambodia Economic Update October 2016 >> 41