CAMBODIA ECONOMIC UPDATE RESTRAINED RECOVERY SPECIAL FOCUS ADAPTING TO COVID-19 IN AN UNCERTAIN WORLD NOVEMBER 2020 CAMBODIA ECONOMIC UPDATE NOVEMBER 2020 RESTRAINED RECOVERY TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS������������������������������������������������������������������������������������������������������������������������ 7 ABBREVIATIONS������������������������������������������������������������������������������������������������������������������������������������� 8 EXECUTIVE SUMMARY�������������������������������������������������������������������������������������������������������������������������� 9 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK������������������������������������������������������������14 Recent developments��������������������������������������������������������������������������������������������������������������������������14 Economic activity has picked up after being hit hard by the pandemic������������������������������������������������������������������������14 Contraction of Cambodia’s manufacturing exports has continued�������������������������������������������������������������������������������17 Despite the pandemic, manufacturing exports to the United States rose���������������������������������������������������������������������17 Exports of bicycles and electrical and vehicle parts expanded ��������������������������������������������������������������������������������������18 International arrivals have collapsed�����������������������������������������������������������������������������������������������������������������������������������18 Domestic tourists have supported a gradual recovery of the travel and tourism industry ���������������������������������������19 Cambodians are saving billions of dollars on outbound travel, thanks to travel restrictions������������������������������������20 FDI has picked up and shifted to non-garment manufacturing projects����������������������������������������������������������������������20 While it will likely boost trade, the CCFTA alone is not sufficient �������������������������������������������������������������������������������21 The construction sector remained subdued, with excess supply from the pre-crisis boom��������������������������������������22 Increased attention is being paid to agriculture, the sector least affected by the pandemic ��������������������������������������22 Rice exports have rapidly increased, thanks to rising demand ���������������������������������������������������������������������������������������22 Rice cultivation has accelerated �������������������������������������������������������������������������������������������������������������������������������������������24 The pandemic has hurt domestic demand and dampened consumption���������������������������������������������������������������������24 Accumulation of foreign reserves continued �������������������������������������������������������������������������������������������������������������������24 Inflation remained subdued thanks to low inflation in import partners and stable exchange rates�������������������������25 Poverty is estimated to increase�������������������������������������������������������������������������������������������������������������������������������������������26 The central bank has eased monetary policy ��������������������������������������������������������������������������������������������������������������������26 Broad money growth decelerated substantially as foreign currency deposits slowed�������������������������������������������������27 Deposit and credit growth declined as economic activity weakened�����������������������������������������������������������������������������27 Domestic credit for construction activity eased, but credit to agricultural activity rose���������������������������������������������27 Government response to the pandemic is unprecedented����������������������������������������������������������������������������������������������32 The fiscal deficit is projected to widen to 5.6 percent of GDP in 2020 ����������������������������������������������������������������������33 Cambodia’s fiscal support is the fourth largest in the region������������������������������������������������������������������������������������������33 Public debt is expected to rise, but risk of debt distress remains low���������������������������������������������������������������������������34 Cambodia’s public debt stock growth decelerated, but its private sector debt rose����������������������������������������������������35 Outlook���������������������������������������������������������������������������������������������������������������������������������������������� 36 Risks and challenges������������������������������������������������������������������������������������������������������������������������� 37 Policy options������������������������������������������������������������������������������������������������������������������������������������� 38 SPECIAL FOCUS: ADAPTING TO COVID-19 IN AN UNCERTAIN WORLD���������������������������������� 42 1. Introduction����������������������������������������������������������������������������������������������������������������������������������� 42 Firms are reopening, but sales continue to be impacted�������������������������������������������������������������� 42 2.  Firms face continued operational risks, particularly financing���������������������������������������������������� 47 3.  4. Firms’ coping mechanisms to the shock��������������������������������������������������������������������������������������� 49 5. Needed policies reported by firms������������������������������������������������������������������������������������������������ 53 6. Policy recommendations���������������������������������������������������������������������������������������������������������������� 55 Access to finance��������������������������������������������������������������������������������������������������������������������������������������������������������������������57 Cash injections and incentives to SMEs�����������������������������������������������������������������������������������������������������������������������������57 Supporting micro-firms���������������������������������������������������������������������������������������������������������������������������������������������������������59 Bankruptcy, insolvency and the business environment����������������������������������������������������������������������������������������������������59 REFERENCES����������������������������������������������������������������������������������������������������������������������������������������� 60 APPENDIX����������������������������������������������������������������������������������������������������������������������������������������������� 60 Annex. Cambodia’s key indicators�����������������������������������������������������������������������������������������������������61 Bibliography�������������������������������������������������������������������������������������������������������������������������������������� 62 4 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 BOXES BOXES Box 1: Global and regional economic developments, outlook, and risks���������������������������������������������������������15 Box 2: Cambodia – China Free Trade Agreement�����������������������������������������������������������������������������������������������23 Box 3: Impacts of COVID-19 on households – results from the High-Frequency Phone Survey of Households����������������������������������������������������������������������������������������������������������������������������������������������������28 Box S1: World Bank’s Business Pulse Survey—Cambodia and globally�������������������������������������������������������������43 Box S2: Importance of non-farm household enterprises in Cambodia�������������������������������������������������������������51 Box S3: Social protection / policy for the non-farm household enterprise�������������������������������������������������������58 FIGURES Figure ES.1. Cambodia’s recent developments at a glance��������������������������������������������������������������������������������������������12 Figure 1: Cambodia’s Apple mobility trends index �������������������������������������������������������������������������������������������������14 Figure 2: Cambodia’s Google Mobility Trends ��������������������������������������������������������������������������������������������������������14 Figure B1.1: Latest GDP growth data in selected countries�����������������������������������������������������������������������������������������15 Figure B1.2: New export order subindex of Purchasing Managers’ Index (PMI)����������������������������������������������������15 Figure B1.3: Global growth������������������������������������������������������������������������������������������������������������������������������������������������16 Figure B1.4: Level of output relative to January 2020 projections������������������������������������������������������������������������������16 Figure 3: Real GDP growth and contributions to real GDP growth��������������������������������������������������������������������17 Figure 4: Manufacturing exports ��������������������������������������������������������������������������������������������������������������������������������17 Figure 5: Exports of garments, footwear, travel goods and bicycles. ������������������������������������������������������������������18 Figure 6: Cambodia’s top export marketsa ����������������������������������������������������������������������������������������������������������������18 Figure 7: Cambodia’s tourist arrivals ��������������������������������������������������������������������������������������������������������������������������19 Figure 8: Tourist arrivals to Cambodia, Thailand, and Vietnam ���������������������������������������������������������������������������19 Figure 9: Approved FDI by main sector��������������������������������������������������������������������������������������������������������������������20 Figure 10: Approved FDI by sector �����������������������������������������������������������������������������������������������������������������������������20 Figure 11: Imports of basic construction materials ��������������������������������������������������������������������������������������������������21 Figure 12: Approved construction permits������������������������������������������������������������������������������������������������������������������21 Figure 13: Nominal agricultural gross value added ���������������������������������������������������������������������������������������������������22 Figure 14: Milled rice exports – regional comparisons ����������������������������������������������������������������������������������������������22 Figure 15: Cambodia’s international reserves �������������������������������������������������������������������������������������������������������������25 Figure 16: International reserves – regional comparisons ����������������������������������������������������������������������������������������25 Figure 17: Inflation (consumer price index) ���������������������������������������������������������������������������������������������������������������26 Figure 18: Nominal exchange rates�������������������������������������������������������������������������������������������������������������������������������26 Figure 19: Broad money ������������������������������������������������������������������������������������������������������������������������������������������������27 Figure 20: Depository corporation credits�������������������������������������������������������������������������������������������������������������������27 Figure B3.1: Respondent working in the last 7 days�������������������������������������������������������������������������������������������������������28 Figure B3.2: Non-farm business households reporting changes in sales revenues���������������������������������������������������28 Figure B3.3: Migrant households reporting changes in income since mid-March (% of households)�����������������29 Figure B3.4: Migrant households reporting changes in remittances since mid-March (% of households)����������29 Figure B3.5: Changes in household income between May and August, 2020������������������������������������������������������������30 Figure B3.6: Household able to buy medicine in the last 7 days����������������������������������������������������������������������������������30 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 5 FIGURES Figure 21: Riel in circulation and riel versus U.S. dollar exchange rate ������������������������������������������������������������������������31 Figure 22: Government savings ������������������������������������������������������������������������������������������������������������������������������������31 Figure 23: Central government revenue ����������������������������������������������������������������������������������������������������������������������32 Figure 24: Central government expenditure����������������������������������������������������������������������������������������������������������������32 Figure 25: General government operations ����������������������������������������������������������������������������������������������������������������33 Figure 26: General government surplus/deficit and financing ��������������������������������������������������������������������������������33 Figure 27: Fiscal support – regional comparisons �����������������������������������������������������������������������������������������������������34 Figure 28: Government debt - regional comparisons �������������������������������������������������������������������������������������������������34 Figure 29: Contribution to Cambodia’s debt stock growth���������������������������������������������������������������������������������������35 Figure 30: Levels of debt - regional comparisons �����������������������������������������������������������������������������������������������������35 Figure S1: Despite progress on re-opening, impact on sales continues to be high�����������������������������������������������44 Figure S2: Firms’ operational status is on par and sales recovery is faster than in East Asia������������������������������45 Figure S3: Expectations for future six months improving, but still negative on average�������������������������������������45 Figure S4: High impact on sales for MSMEs��������������������������������������������������������������������������������������������������������������45 Figure S5: Recovery appears more even across firm sizes and sectors in Cambodia than in Vietnam��������������46 Figure S6: Tourism-dependent province of Siem Reap has been hit hardest��������������������������������������������������������47 Figure S7: Increasing pressure on cash flow����������������������������������������������������������������������������������������������������������������47 Figure S8: Persisting reliance on family and friends as main mechanism to ease cash flow shortages��������������48 Figure S9: Firms with more severe shock to sales are more likely to use financing to ease cash flow shortages������������������������������������������������������������������������������������������������������������������������������48 Figure S10: Likelihood of using financing and danger of falling in arrears decreasing with firm size����������������49 Figure S11: Persisting reliance on family and friends as main mechanism to ease cash flow shortages��������������49 Figure S12: Large firms more likely to make adjustments to employment at the extensive margin���������������������50 Figure S13: Employment adjustments differ from firms in East Asia����������������������������������������������������������������������50 Figure S14: Almost half of firms have increased the use of digital platforms by September������������������������������52 Figure S15: Digital adjustments to COVID-19 in East Asia���������������������������������������������������������������������������������������53 Figure S16: Tax deferral is most needed policy in September������������������������������������������������������������������������������������54 Figure S17: Mismatch between policy need and access�����������������������������������������������������������������������������������������������54 Figure S18: Large firms are more likely to be aware of and apply for support policy measures��������������������������55 Figure A.S1: Google mobility trends in Siem Reap have not recovered compared to Cambodia��������������������������60 TABLES Table B2.1: Chapters 1 to 10 of Cambodia’s Customs Tariff Schedule��������������������������������������������������������������������23 Table B2.2: Cambodia’s top 7 exported products (HS4) to China and imported products from China�������������23 Table 1: The macro outlook���������������������������������������������������������������������������������������������������������������������������������������36 Table S1: Firms’ financial situation in Cambodia is comparable to East Asia������������������������������������������������������48 Table S2: Share of firms applied for or benefited from government assistance falling in Cambodia��������������55 Table A.S1: Sample distribution���������������������������������������������������������������������������������������������������������������������������������������60 6 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 ACKNOWLEDGEMENTS ACKNOWLEDGEMENTS The November 2020 Cambodia Economic The CEU, produced biannually, provides Update (CEU) was prepared by Sodeth Ly, with up-to-date information on macroeconomic contributions from Claire H. Hollweg, Sarah developments in Cambodia. It is distributed and Hebous, Philippe de Meneval, Trang Thu Tran, discussed widely including among Cambodian Wendy Cunningham, Maheshwor Shrestha, authorities, development partners, the private Wendy Karamba, Kimsun Tong and Ekaterine sector, think tanks, civil society organizations, and Vashakmadze. Linna Ky and Chankesey Heav academia. served as research assistants. Saroeun Bou For information about the World Bank and its helped with the press release, web display, and activities in Cambodia, please visit our website at dissemination events. www.worldbank.org/cambodia. The team worked under the overall guidance of To be included in the email distribution list of Deepak Mishra. The team is grateful for the advice the CEU and related publications, please contact and comments provided by Inguna Dobraja, Chankesey Heav (cheav@worldbank.org). For Mariam Sherman, and Hassan Zaman. Several questions on the contents of this publication, colleagues provided comments on the draft please contact Saroeun Bou (sbou@worldbank. version including Aaditya Mattoo, Ergys Islamaj, org). Ekaterine Vashakmadze, Vera Kehayova, and Duong Le. The findings, interpretations, and conclusions expressed in this report do not necessarily The team is grateful to the Cambodian authorities, reflect the views of the Executive Directors particularly the Ministry of Economy and of the World Bank or the governments they Finance and the National Bank of Cambodia, for represent. The World Bank does not guarantee their cooperation and support. The report also the accuracy of the data included in this work. benefited from the advice, comments, and views The boundaries, colors, denominations, and of various stakeholders in Cambodia, including its other information shown on any map in this enthusiastic readers and critics. work do not imply any judgment on the part of The team also gratefully acknowledges financing the World Bank concerning the legal status of from a Multi-Donor Umbrella Facility for Trade any territory or the endorsement or acceptance Trust Fund for the preparation of the Special of such boundaries. Focus section of this report. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 7 ABBREVIATIONS ABBREVIATIONS ASEAN Association of Southeast Asian Nations CCFTA Cambodia-China Free Trade Agreement CEU Cambodia Economic Update CGT capital gains tax COVID-19 coronavirus disease CR Cambodian riel EAP East Asia and Pacific region EC European Commission EMDEs emerging markets and developing economies EU European Union FDI foreign direct investment FTA free trade agreement GDCE General Department of Customs and Excise GDP gross domestic product GDT General Department of Taxation GMAC Garment Manufacturers Association in Cambodia GVA gross value-added IMF International Monetary Fund LPCO Liquidity-Providing Collateralized Operation NAFTA North American Free Trade Agreement PMI Purchasing Managers’ Index UK United Kingdom U.S. United States US$ United States dollar YTD year-to-date y/y year-on-year 8 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent developments contracted by 34.1 percent and 39.5 percent, respectively, during the first nine months of The COVID-19 pandemic has abruptly 2020. Worker’s remittance inflows declined by interrupted Cambodia’s celebrated growth 4.6 percent, reaching US$550 million during story. The country had averaged 7.7 percent the first six months of 2020. Due largely to the real growth rate during the last two decades. In widening trade deficit, the current account deficit contrast, in 2020, Cambodia’s economy is likely is projected to reach 12.8 percent of GDP in to contract by 2 percent, plunging the economy 2020, up from 10 percent of GDP in 2019. It is into a recession for the first time in three decades. expected to be fully financed by foreign direct The key growth drivers—construction, tourism, investment (FDI) inflows. The gross international and merchandise exports—which together reserves position remained solid, increasing to account for more than 70 percent of growth and US$19.5 billion (about 10 months of imports) in 39 percent of total paid employment, have been June 2020, up from US$18.7 billion at the end of severely affected. 2019. The pandemic has effectively stalled the Broad money growth eased, largely due to construction and real estate boom that the deceleration of foreign currency deposits. relied heavily on foreign investment. Steel Given Cambodia’s highly dollarized economy, and cement imports in the first nine months foreign currency deposits account for more than of 2020 contracted by 41.4 percent and 38.1 70 percent of broad money. Broad money grew percent (year-on-year [y/y]), respectively, as many at 12.3 percent (y/y) in June 2020, compared large development projects were put on hold. to 18.2 percent in 2019, as growth of foreign Cambodia’s exports of manufactured products currency deposits fell, reflecting an easing of which include garments, travel goods, footwear, capital inflows. Growth of currency outside all bicycles, electrical parts, and vehicle parts and depository corporations, however, remained accessories fell by 2.5 percent during the first nine strong, increasing at 28.0 percent (y/y) in June months of 2020. Thanks to travel restrictions and 2020, compared to 32.1 percent in 2019, as the lockdowns, Cambodia’s tourism and hospitality central bank continued to promote the use of sector has collapsed, with international arrivals local currency. Growth of private sector deposits falling by 74.1 percent (y/y) during the first nine decelerated, falling to 10.7 percent (y/y) in June months of 2020. 2020, down from 16.4 percent in December 2019, Inflation remained subdued, thanks to likely reflecting sluggish economic activity that low inflation in import partners and stable negatively impacts liquidity of the corporate sector exchange rates. Headline inflation was 2.9 (and households), thus constraining their ability percent (y/y) in September 2020, down from 3.1 to save. Despite monetary policy easing by the percent in the end of 2019. The riel-to U.S. dollar central bank, growth of depository corporation remained broadly stable at 4,100 in September credit to the private sector eased, decelerating to 2020, compared to 4,075 in December 2019. 18.9 percent (y/y) in June 2020, down from 27.0 percent in 2019, as demand for credit weakened. The current account deficit is expected to widen, but to be fully financed by foreign High-frequency phone surveys of households direct investment inflows. Imports have eased, validated the adverse impact of the pandemic reflecting shrinking domestic demand and the on employment. The share of respondents who stalled construction boom. Passenger vehicles and were working declined from 82 percent before the motorcycles, Cambodia’s key durable imports, COVID-19 outbreak to 71 percent in May 2020, CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 9 EXECUTIVE SUMMARY but remained relatively unchanged in August 2020. November 2020—should begin to flow, starting in The pandemic continued to negatively affect non- 2021. While actual FDI is expected to decline this farm business activities, but less severely compared year, there is some positive sign that FDI inflows to the onset of the pandemic. However, income are picking up and becoming more diversified. losses remained widespread, though the declines As the global economic crisis caused by in household income slowed following the launch COVID-19 continues, the economy in 2020 of a new cash transfer program to assist poor and is projected to contract by 2.0 percent, the vulnerable households. sharpest decline in Cambodia’s recent history. Government support to the affected The partial withdrawal of the European Union’s population has been unprecedented, at (EU’s) “Everything But Arms” trade preferential up to 5 percent of GDP. A broad package of treatment became effective on August 12, 2020, support includes health-related spending and affecting approximately 20 percent of Cambodia’s income assistance, equity injections and loan exports to the EU. The economy is projected to guarantees, development spending, and tax relief. recover in 2021, growing at 4.0 percent. The government’s large fiscal support program is expected to turn the budget from a surplus in Risks and challenges 2019 into a deficit in 2020. Significant uncertainty remains in During the first eight months of 2020, the Cambodia’s growth outlook. Downside risks central government collected 14.3 trillion riels include local COVID-19 outbreaks, a deeper and in revenue, a 14.2 percent (y/y) decline. The prolonged decline in tourist arrivals linked to central government’s outlays, however, expanded a lingering global pandemic and the speed with quickly, reaching 16.2 trillion riels, or a 21.5 which the vaccines become widely available, and percent (y/y) increase. This year’s overall fiscal the possibility of increased global trade tensions deficit is therefore projected to reach a record and protectionism. An overleveraged banking high of 6.2 trillion riels. This represents an overall (and microfinance) sector also represents a risk fiscal deficit of 5.6 percent of GDP, compared to the country’s financial stability. Given the to a fiscal surplus of 0.8 percent of GDP in unprecedentedly large government intervention, 2019. About half of the deficit is expected to be an extension of the social assistance scheme financed by government savings, which stood at beyond the currently planned time frame would 20.2 percent of GDP at the end of 2019, while the put significant pressure on the budget and further remaining half is expected to be financed through reduce the country’s fiscal space. official loans. The unprecedented expansion of Policy options social assistance will substantially (though not fully) mitigate the pandemic’s impact on the poor The most important policy goal must be to and near-poor. urgently regain jobs lost or suspended due to the pandemic. In this regard, full attention must Outlook be paid to boost investment in labor-intensive With the easing of social distancing measures, sectors to generate jobs. This can be done by taking Cambodia’s domestic economic activity is advantages of the quick recovery of domestic gradually returning to normal. Domestic demand for consumer goods, including foods and demand, including internal travel and tourism, domestic services, mainly travel, hospitality, and is picking up. In October 2020, Cambodia and healthcare. For example, ensuring the survival of China signed the Cambodia-China Free Trade firms and businesses that are likely to thrive in Agreement (CCFTA), which is expected to enter the post-COVID-19 period would provide relief into force in 2021. In addition, the benefits of to workers, facilitate a quick recovery, and boost being a member of the Regional Comprehensive growth. Similarly, boosting pro-poor and growth- Economic Partnership (RCEP) —the largest enhancing public investment including cash-for- free trade area in the world, which was signed in work projects will create jobs. Public investment 10 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 EXECUTIVE SUMMARY program initiatives to build physical infrastructure It is imperative to continue to closely in the provincial towns of Sihanoukville and Siem monitor vulnerabilities arising from a Reap will improve the connectivity and underpin prolonged construction and property boom tourism sector development. Doing this will also and the increase of credit provided to the facilitate the authorities shifting their intervention construction and real estate sector. This is from emergency relief and social assistance in particularly crucial, if the pandemic lingers on the form of cash transfers to livelihood support, and damage caused by recent floods turns out to targeting income generation and job creation. be substantial. Such events will further diminish the ability of businesses and households to repay Looking ahead, it is essential to facilitate an loans, putting the financial sector under increased expansion of domestic and foreign investment stress. While the authorities have granted, as part arising largely from recent bilateral and of the COVID-19 response, an exemption of regional free trade agreements. In this regard, the ownership transfer tax for property valued promptly introducing competitive investment law at US$70,000 or less, a 20 percent capital gains and incentive schemes together with the ease of tax (CGT) will be effective in 2022. The CGT doing business are particularly crucial. Immediate levies on a capital gain, the taxable income that benefits of the CCFTA may come from exporting results from the revenue received from the non-rice, high-value (raw and processed) sale or transfer of capital. The CGT will likely agricultural products such as cassava, rubber, and dampen property speculation as it reduces soybean, as China has already provided quotas for speculative demand, helping stabilize Cambodia’s Cambodia’s milled rice and mango exports. Policy, property market, which was booming prior to the technical, and financial support may therefore be COVID-19 pandemic. With influx of FDI inflows provided to expand the production and quality of targeting the construction and real estate sector, these products. In the medium term, nurturing speculative demand rose quickly and has so far integration of Cambodia’s agroprocessing and distorted Cambodia’s housing market. In addition manufacturing value chains into the regional value to collecting more revenue for the government, chains, initially with those in China, Vietnam, and the CGT will likely help contain price volatility. Thailand, will be fundamental. Singapore, the More importantly, the CGT should help redirect Republic of Korea, China, and Japan—the largest investment from buy-and-hold property for capital investors in Vietnam (and Thailand)—are also gains to finance productive and tradable sectors main investors in Cambodia. Therefore, attracting that underpin job creation and boost exports. them to integrate Cambodia into their regional (and global) production chains by improving It is critically important to develop a connectivity, upgrading skilled labor, and reducing COVID-19 vaccine distribution infrastructure, energy costs is a good first step. To this end, it is while identifying potential COVID-19 essential to further facilitate trade and investment vaccine availability and affordability. This (measured against the country’s rankings in is an important time to make sure that any global competitiveness and doing business), while upcoming vaccines will become available to promoting small and medium-sized enterprises Cambodia and will be distributed efficiently and (which account for a majority of the economy fairly. Cooperation has been sought with regional and labor market) through entry and expansion countries developing COVID-19 vaccines such of innovative businesses and to align and link as China to ensure Cambodia has access to the them with the FDI sector. COVID-19 vaccine when it is available. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 11 FIGURE ES.1. CAMBODIA’S RECENT DEVELOPMENTS AT A GLANCE Real growth—hit hard by the pandemic—is …as investment appetite is growing… expected to recover next year… Approved FDI projects (YTD, y/y percent change) Real growth (percent) Historical average (10 years) Approved FDI project value (YTD, y/y percent change) 200 Historical averagge (6 years) 10�0 8�0 150 6�0 100 4�0 50 2�0 0 0�0 -50 -2�0 -4�0 -100 Nov-19 May-19 Aug-19 May-20 Dec-19 Mar-19 Feb-20 Apr-19 Oct-19 Mar-20 Apr-20 Sep-19 Jun-19 Jun-20 Jan-20 Jul-19 Jul-20 …while domestic activity is gradually recovering... …although manufacturing exports have not Cambodia’s mobility trends index by Apple (percent) improved yet. (YTD, y/y percent change) 120 driving (KHM) walking (KHM) 35 YTD, y/y percent change 30 Historical average (10 years) 100 25 80 20 60 15 10 40 5 20 0 0 -5 10/12… 1/13/20 2/24/20 3/16/20 4/27/20 5/18/20 6/29/20 7/20/20 8/10/20 8/31/20 9/21/20 2/3/20 4/6/20 6/8/20 Dec-18 Dec-19 Aug-18 Aug-19 Aug-20 Feb-18 Apr-18 Oct-18 Feb-19 Apr-19 Oct-19 Feb-20 Apr-20 Jun-18 Jun-19 Jun-20 International reserves accumulation continued… …despite shrinking broad money growth. Gross international reserves (months of prospective imports) Broad money liabilities (y/y percent change) GIR (months of prospective imports) 60 YTD, y/y percent change Historical average (10 years) Historical average (10 years) 12 50 10 40 8 30 6 20 4 2 10 0 0 6-m 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sources: Cambodian authorities; World Bank staff estimates and projections. Note: p = projection; y/y = year-on-year; YTD = year-to-date; RHS = right-hand scale; KHM = Cambodia. 12 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Section I Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent Economic Developments and Outlook Recent developments colleges have been allowed to reopen since August 2020 but were closed again during the second and Economic activity has picked up after being third weeks of November 2020. As of November hit hard by the pandemic 14, 2020, there were 302 confirmed cases of The Cambodian economy is gradually Coronavirus, of which 289 have fully recovered, and emerging from the severe shocks triggered the rest are still being treated. The first confirmed by the global COVID-19 pandemic. Domestic case was found on January 27, 2020.1 economic activity is recovering, after lockdowns In the East Asia and Pacific (EAP) region, the and travel restrictions were relaxed in May 2020, efforts to contain the spread of the pandemic thanks to the authorities’ efforts in controlling have led to a significant curtailment of local outbreaks of the virus (figures 1 and 2). economic activity.2 These domestic difficulties The negative impacts of the pandemic which were compounded by the pandemic-induced caused sharp decelerations in most of Cambodia’s global recession which hit hardest those EAP main engines of growth in the first half of 2020 economies that rely on trade and tourism (see have stabilized, mitigated in part by revival of box 1). Country outcomes were generally related domestic economic activity, although external to how efficiently the disease was contained and shocks continue. The value of approved projects how exposed countries were to external shocks. in Cambodia’s real sector financed by FDI which EAP governments have on average committed started to taper in mid-2019, coinciding with a nearly 5 percent of their GDP to improve health ban on online gambling, has recovered since May systems, help households smooth consumption, 2020. There has been an initial shift in (approved) and support firms to avoid bankruptcy. Successful FDI projects from the tourism sector to the non- containment of the disease in some countries is garment manufacturing sector. The downfall of leading to a revival of domestic economic activity. the tourism sector has been partly offset by the But the region’s economy is heavily dependent return of domestic tourists. Construction activity on the rest of the world. Trade will see a revival and manufacturing exports, however, remained as global economic activity gradually resumes, subdued. but tourism will remain subdued. Though short- So far, the country has avoided a health crisis term capital has returned to the region, global thanks to swift action to detect and contain uncertainty still inhibits domestic and foreign local outbreaks by the authorities. Schools and investment. Figure 1: Cambodia’s Apple mobility trends index Figure 2: Cambodia’s Google Mobility Trends (percent) (as of October 18, 2020) Retail & recreation 120 driving (KHM) walking (KHM) +80% Mobility trends for places like -18% +40% restaurants� cafes, shopping centers, Baseline theme parks, museums, libraries, 100 -40% and movie theaters� compared to baseline -80% Sun, Sep 6 Sun, Sep 27 Sun, Oct 18 80 Grocery & pharmacy +80% Mobility trends for places like 60 -15% +40% grocery markets, food warehouses, Baseline farmers markets, specialty food shops, drug stores, and pharmacies� 40 -40% compared to baseline -80% Sun, Sep 6 Sun, Sep 27 Sun, Oct 18 20 Parks +80% Mobility trends for places like -30% national parks, public beaches, 0 +40% marinas, dog parks, plazas, and 10/12/20 1/13/20 2/24/20 3/16/20 4/27/20 5/18/20 6/29/20 7/20/20 8/10/20 8/31/20 9/21/20 2/3/20 4/6/20 6/8/20 Baseline public gardens� -40% compared to baseline -80% Sun, Sep 6 Sun, Sep 27 Sun, Oct 18 Source: Apple mobility trends, Apple. Source: Google Mobility Trends, Google. Note: KHM = Cambodia. 1 Ministry of Health press release, November 5, 2020. 2 World Bank 2020a. 14 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Box 1: Global and regional economic developments, outlook, and risks1 Following a collapse in the first half of 2020, global activity has begun to rebound following a gradual relaxation of lockdown measures, led by China (figure B1.1). The accelerating spread of COVID-19 in some regions, however, is weighing on the nascent recovery in activity. Global output is set to contract sharply in 2020, marking the deepest global recession since the Second World War (World Bank 2020). Global goods trade continues to recover, while trade in services is lagging. Manufacturing new export orders firmed to 51.7 points in September, compared to its nadir of 27.1 points in April (figure B1.2). International tourist arrivals remain more than 90 percent below last year’s levels in many countries. The number of daily commercial flights recovered to about half of last year’s levels by early August but showed no further increase in September and October. The pandemic has taken a severe toll on East Asia and Pacific (EAP). Regional growth slowed to an estimated 0.9 percent this year—the lowest rate since 1967—reflecting the impact of pandemic-related disruptions, lockdowns, and travel restrictions. The depth of the shock on regional economies was uneven and reflected the varying severity of supply-side disruptions and the spillovers from the global recession. In China and Vietnam, which have kept new infections low, GDP is estimated to expand this year. The rest of the region will suffer significant output losses, with GDP contracting by an average of 4 percent. Central banks around the world have aggressively eased monetary policy and provided liquidity support to avoid shortages in credit markets. The Federal Reserve cut its policy rates to close to zero. Capital outflows from emerging market and developing economies (EMDEs), which exceeded the worst period of the global financial crisis at the outset of the pandemic, have subsided. Though yields remain low, sovereign credit ratings have continued to deteriorate, reflecting increasing debt sustainability concerns. Commodity markets have been following diverging trends. Oil prices fell nearly 7 percent in September before stabilizing in October, with the price of Brent crude oil averaging US$40 per barrel. Base metals prices continued to recover in October and are now nearly 6 percent higher than their pre-pandemic peak in January, led by copper. The increase in prices has been supported by the strengthening of global economic activity, particularly in China. Agricultural commodity prices increased by 6 percent in September and are now above their January levels. Latest GDP growth data in selected Figure B1.1:  New export order subindex of Figure B1.2:  countries Purchasing Managers’ Index (PMI) Index, 50+ = Expansion Manufacturing Percent 20Q2 60 60 Services 40 Worst performance during 20 GFC 50 0 40 -20 -40 30 -60 Mexico South Africa United States Euro Area Brazil Japan Indonesia China China (Q3) Turkey UK 20 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Source: Haver Analytics. Note: The figure shows the quarter-on-quarter annualized growth rate for 2020 Q2 for selected countries. The red bar indicates the 2020 Q3 quarter-on-quarter nonannualized growth rate for China. 1 This box was prepared by Ekaterine Vashakmadze, PG CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 15 Global and regional economic developments, outlook, and risks (cont’d) Global outlook1 Global output is projected to contract by 5.2 percent this year, despite unprecedented policy support (figure B1.3; World Bank 2020). This reflects a widespread sudden stop of global activity in the first half of 2020, mirroring the national lockdowns implemented worldwide to contain the spread of the outbreak. Although a moderate recovery is envisioned in 2021, with global growth reaching 4.2 percent, output is not expected to return to its previously expected levels (figure B1.4). The strength and sustainability of a global growth rebound depend on the duration of the pandemic, and on the effectiveness of policy actions in preventing financial meltdowns, restoring global consumer and investor confidence, and resuming global travel. Growth in the East Asia and Pacific region is projected to accelerate to 7.4 percent in 2021, led by a strong rebound in China. This is predicated on the rollout of an effective vaccine starting in early 2021 in major economies and somewhat later in smaller EMDEs. However, despite the subsiding of the pandemic and a recovery of domestic and global demand, regional activity is expected to remain somewhat below its pre-pandemic trend by late 2021, reflecting lasting scars caused by the pandemic. The recovery in the region excluding China is expected to be protracted and expand by 5.3 percent in 2021–22 on average, with significant cross-country variations. Thus far, an extraordinary policy response has prevented the slowdown in activity from becoming a financial crisis. Nonetheless, financial conditions will remain fragile for many market participants. A prolonged disruption to economic activity could exacerbate financial stress, which could lead to widespread financial crises. There is high uncertainty around the global growth forecast. The global recession would be deeper than the baseline forecast if bringing the pandemic under control took longer than expected, or if financial stress triggered cascading defaults. The pandemic is likely to have a durable impact through multiple channels, including lower investment and innovation, erosion of human capital, and retreat from global trade and supply chains. The long-term damage related to the pandemic will be particularly severe in economies that suffer financial crises, and in energy exporters, due to plunging oil prices. For example, in the average EMDE, over a five-year horizon, a recession combined with a financial crisis could lower potential output by almost 8 percent (World Bank 2020) Figure B1.3: Global growth Level of output relative to January Figure B1.4:  2020 projections Source: World Bank. Source: World Bank. Note: Shaded area indicates forecasts. Aggregate growth rates Note: Figure shows the percent difference between the level of output calculated using constant 2010 U.S. dollar GDP weights. Data for in the January and June 2020 editions of the World Bank’s Global 2019 are estimates. Aggregate growth rates calculated using GDP Economic Prospects. EMDEs = emerging market and developing weights at 2010 prices and market exchange rates. EMDEs = economies. emerging market and developing economies. 1 Draws on the World Bank’s June 2020 Global Economic Prospects report. The updated global forecasts will be published in January 2021 Global Economic Prospects. 16 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook The COVID-19 pandemic has abruptly in June 2020 revealed that only 40 percent of interrupted Cambodia’s celebrated growth factories will have (either full or reduced) orders story. The country had averaged a 7.7 percent until the last quarter of 2020, while the rest have real growth rate during the last two decades. as yet received no orders. In addition, price trends Cambodia’s real growth reached 7.1 percent in for new orders in large part have been lower. Only 2019 (figure 3). In contrast, in 2020, the country’s 37 percent of the factories said buyers offered key growth drivers—construction, tourism, and the same prices, while 45 percent of the factories merchandise exports—which together account said buyers offered lower prices. Buyers’ payment for more than 70 percent of growth and 39 terms for new orders seem hardened. Only 45 percent of total paid employment, have been percent of the factories said they were offered severely affected. the same payment terms, while 35 percent said they faced longer payment terms than before. Contraction of Cambodia’s manufacturing In addition, the partial withdrawal of the EU’s exports has continued Everything But Arms preferential treatment, Cambodia’s narrow export base continued which has been effective since August 12, 2020, is to be hit by demand shocks, triggered by the affecting approximately 20 percent of Cambodia’s pandemic. As the global COVID-19 outbreak exports to the EU.3 According to the GMAC, as lingers, the country’s exports of manufactured of July 2020, 400 garment factories had suspended products including garments, travel goods, operation, laying off 150,000 workers.4 In June footwear, bicycles, electrical parts, and vehicle 2020, more than 13,600 factories (of which 1,200 parts and accessories fell by 2.5 percent (y/y) were garment factories) were registered, with during the first nine months of 2020 (figure 4); more than 1.37 million workers (of which 0.83 total manufacturing exports declined to US$8.48 million were garment workers). billion from US$8.69 during the same period Despite the pandemic, manufacturing exports the previous year. The immediate future of to the United States rose garment exports, which account for two-thirds of manufacturing exports, remains uncertain. Unlike its manufacturing exports to other The latest updates from the industry revealed that major markets, Cambodia’s exports to the orders by international buyers in large part remain U.S. market expanded. Exports of garments, uncertain. A survey conducted by the Garment travel goods, footwear and bicycle products to Manufacturers Association in Cambodia (GMAC) the U.S. market rose to US$2.7 billion, expanding Figure 3: Real GDP growth and contributions to Figure 4: Manufacturing exports real GDP growth (US$ million) (percent) Manufacturing exports, US$ million YTD, y/y percent change, RHS Agriculture Industry Services Taxes less Subsidies 1400 35 GDP 1200 30 projection 8�0 25 7�1 7�5 7�1 1000 7�0 6�9 7�0 6�0 20 5�2 800 4�0 4�0 15 600 10 2�0 400 5 0�0 200 0 -2�0 -2�0 0 -5 Aug-18 Dec-18 Aug-19 Dec-19 Aug-20 Feb-18 Apr-18 Oct-18 Feb-19 Oct-19 Feb-20 Apr-19 Apr-20 Jun-18 Jun-19 Jun-20 -4�0 2014 2015 2016 2017 2018 2019 2020p 2021p 2022p Source: Cambodian authorities. Source: Cambodian authorities and World Bank staff projections. Note: RHS = right-hand scale; YTD = year to date; Note: p=projection. y/y = year on year. 3 For more details, please see https://trade.ec.europa.eu/doclib/press/index.cfm?id=2113. 4 Statement by the GMAC, July 8, 2020. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 17 Recent Economic Developments and Outlook at 7.6 percent (y/y) in the first nine months of nine months of 2020. Exports of bicycles to the 2020 (figure 5). Disaggregating the U.S. market U.S., EU, and UK markets rose 190.9 percent, data shows that exports of garment, travel 3.6 percent, and 32.3 percent (y/y), respectively. goods, footwear, and bicycle products grew at Similarly, exports of electrical parts, and vehicle 5.0 percent, 8.0 percent, 4.1 percent, and 190.9 parts and accessories reached US$456 million or percent (y/y), respectively. In contrast, exports a 14.4 percent year-on-year increase during the to the EU (excluding the UK) shrank to US$2.1 first nine months of 2020, of which 60 percent is billion, contracting by 19.8 percent (y/y), of destined for ASEAN members and Japan. which exports of garment, footwear, and travel International arrivals have collapsed goods products contracted by 22.4 percent, 14.6 percent, and 30.2 percent (y/y), respectively, International arrivals contracted by 74.1 while exports of bicycles marginally picked up, percent (y/y) in September 2020, thanks to by 3.6 percent. Similarly, exports to other main international travel restrictions, as well as destinations such as the United Kingdom and general avoidance of (international) travel Japan also contracted, declining by 19.1 and 6.7 globally (figure 7). During the first nine months percent (y/y), respectively. The U.S. market is the of 2020, international arrivals reached only 1.25 largest, accounting for 36 percent of Cambodia’s million, down from 4.8 million during the same total exports of garment, travel goods, footwear, period last year. Siem Reap, Cambodia’s most and bicycle products (figure 6). The EU market is popular tourist destination, experienced a 74.6 second, covering 28 percent. percent (y/y) decline in international arrivals during the first half of 2020. The collapse of Exports of bicycles and electrical and vehicle international arrivals has occurred in Thailand parts expanded and Vietnam as well (figure 8). Tourism (including Demand shocks did not negatively impact all hospitality) is Cambodia’s second-largest growth exported products. While garment, footwear, driver after the construction sector. According the and travel goods products exported to all major official estimates, Cambodia earned US$4.9 billion markets (except the U.S.) declined, exports of in tourism receipts in 2019 and the country is bicycles surged, reaching US$369 million, an projected to lose US$3 billion in tourism receipts increase of 31.6 percent (y/y) during the first this year, thanks to the collapse of international Figure 5: Exports of garments, footwear, travel Figure 6: Cambodia’s top export marketsa goods and bicycles. (percent, 2020) (US$ million) RoW Japan UK EU US 9,000 RoW US 8,000 19% 36% 7,000 Japan 9% 6,000 5,000 4,000 2,686 2,154 EU 3,000 2,569 UK 28% 2,221 2,000 8% 2,584 2,780 1,000 1,465 1,890 0 9m-2017 9m-2018 9m-2019 9m-2020 Source: Cambodian authorities. Source: Cambodian authorities. Note: RoW = rest of world. Note: a. Denotes garment, footwear, travel goods, and bicycle products. RoW = rest of the world.. 18 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook arrivals.5 It is notable that Cambodia’s tourism and Palin provinces), and cultural zones (Siem sector has experienced relatively large foreign Reap, Kompong Thom, Preah Vihear, and exchange “leakage”.6 Leakage factors were Oddar Meanchey provinces), which received earlier estimated to be around 40 percent for 23.1 percent, 23.0 percent, and 17 percent, Cambodia, which indicates that a substantial part respectively. During an earlier Khmer New Year’s of destination expenditure is spent on imports, or holiday covering August 17–21, 2020, there were Cambodia’s supply capacity is too limited to meet 1.5 million tourists, mostly domestic. However, additional and dispersed demand.7 As a result, the number of domestic visitors in 2020 remains income multiplier effects remain low and foreign much lower than the 11.3 million domestic exchange leakage high, resulting in suboptimal tourists recorded in 2019. Unlike foreign tourists, contributions to the country’s economy. who are interested most in Cambodia’s cultural heritage in “cultural zones,” especially the Angkor Domestic tourists have supported a gradual Temple Complex in Siem Reap, domestic tourists’ recovery of the travel and tourism industry most popular destination is coastal zones. In With the lifting of internal lockdown 2019, coastal zones captured 28.1 percent of total measures, domestic travel and tourism domestic tourists, while the capital city of Phnom activities have picked up. Thanks to the return Penh was next, accounting for 21.0 percent. of domestic tourists to the main destinations, Cultural zones, the Battambang zone, and the Cambodia’s tourism and travel sector has, since rest received 20.6 percent, 10.9 percent, and 19.4 the second quarter of 2020, gradually recovered. percent, respectively. Given expected lingering There were 0.6 million and 1.11 million tourists, negative impacts of the pandemic on international mostly domestic visitors, during October 29– travel, the tourism (and hospitality) industry will November 1 and September 16–18, 2020, holiday be dependent almost entirely on domestic travel periods, respectively, according to the Ministry of and tourism activity for the foreseeable future. Tourism. The top three most visited destinations The industry is currently adapting to the post- were coastal zones (Sihanoukville, Kampot, lockdown travel and tourism services demanded Kep, and Koh Kong provinces), Battambang by domestic visitors. zone (Battambang, Pursat, Banteay Meanchey, Figure 7: Cambodia’s tourist arrivals Figure 8: Tourist arrivals to Cambodia, Thailand, (millions of tourists and YTD, y/y percent and Vietnam change) (y/y percent change) Total arrivals International arrivals (Y/Y, RHS) 35 7 40 15 6 20 -5 5 0 4 -25 -20 3 -45 -40 Thailand Cambodia Vietnam 2 -65 1 -60 -85 0 -80 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Jun-20 9-m 2020 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Source: Cambodian authorities. Source: Cambodian, Vietnamese, and Thai ministries of tourism. Note: RHS = right-hand scale; y/y = year on year. 5 Ministry of Tourism (2019), and statement dated November 6, 2020. 6 Leakage occurs when tourism-related goods, services, and labor are imported. 7 See Selected Issue on Maximizing Tourism Potential”, October 2017 Cambodia Economic Update. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 19 Recent Economic Developments and Outlook Cambodians are saving billions of dollars on While China continues to account for the outbound travel, thanks to travel restrictions majority of (approved) project value financed by FDI, there has been a shift of approved Pre-COVID-19 Cambodian outbound FDI projects to finance non-garment travelers are now enjoying in-country travel manufacturing sectors at the expense of the and tourism activity, thanks to international tourism sector. Chinese FDI accounts for 56.3 travel restrictions. There were 2.03 million percent of total (approved) FDI project value Cambodian outbound visitors in 2019,8 of which during the first seven months of 2020, up from one-third traveled by air to destinations around 43.7 percent in 2019. Looking ahead toward post- the world, while two-thirds traveled by land to COVID-19 opportunities, during the first seven neighboring Thailand, which received about a months of 2020, the share of approved FDI project million Cambodian visitors, and Vietnam, which values going to non-garment manufacturing welcomed a quarter of a million Cambodian sectors rose to 60.4 percent (US$878 million) visitors. Cambodian visitors in Thailand alone (figure 9), up from 8.2 percent (US$95 million) spent US$1.15 billion in 2019.9 during the same period in 2019, likely indicating FDI has picked up and shifted to non-garment more realistic investment sentiment. Similarly, manufacturing projects the share of approved FDI project values going to the agriculture sector increased to 6.9 percent While actual FDI inflows to both the financial (US$100 million), up from 2.9 percent (US$34 and real sectors are expected to decline this million) during the same period. Approved year, there are positive signs that the inflows FDI project values going to the tourism sector are returning and more diversified. During the plummeted to 1.8 percent (US$26 million), first seven months of 2020, total approved project down from 43.3 percent (US$500 million), likely value financed by FDI in Cambodia’s real sector indicating the loss of investor appetite due to the rose to US$1.4 billion, or a 25.8 percent year- recent collapse of the tourism sector. During the on-year increase over the same period last year.10 first seven months of 2020, 9.8 percent (US$142 Approved FDI project value tapered since mid- million) of approved FDI projects went to the 2019, coinciding with a ban on online gambling. construction and real estate sector, a marginal Approved FDI project value contracted by 56.0 increase from 9.0 percent (US$104 million) during percent (y/y) in June 2019, after growing at 84.8 the same period in 2019. percent in 2018. Figure 9: Approved FDI by main sector Figure 10: Approved FDI by sector (% of total) (US$ billion, January 2014–July 2020) Tourism Construction and real estate Agriculture & Others Non-garment industry food processing $1�2 Garment Agriculture & food processing Tourism 8% $2�4 Garment 100% 16% $2�6 17% 80% Construction 15�6 and real estate Non-garment $5�0 industries 60% 23�0 $3�3 57�6 34% 60�4 22% 40% 16�1 20% 8�7 5�7 Others 0% $0�4 3% 14 15 16 17 18 19 20 20 20 20 20 20 20 0 -2 7m Source: Cambodian authorities. Sources: Cambodian authorities. 8 Ministry of Tourism 2019. 9 Thailand’s Ministry of Tourism and Sports (https://www.mots.go.th/more_news_new.php?cid=527). 10 According to the central bank, roughly one-third of FDI inflows goes to the financial sector. 20 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook During January 2014 to June 2020, the largest positioned to export to the Chinese market and approved FDI values went to the construction beyond (see box 2 for more discussion on the and real estate sector, accounting for US$5.0 CCFTA). Cambodia’s comparative advantages billion, or one-third of the total approved FDI may include its underutilized and relatively cheap project value (figure 10). The second-largest labor, and its abundant land suitable for production approved FDI values went to non-garment of primary and labor-intensive goods for exports, industries, capturing US$3.3 billion, or 22 percent generating gains through specialization and of the total. The third-largest approved FDI economies of scale. This will potentially help values went to the traditional garment sector, Cambodia expand beyond the established pattern which received US$2.5 billion, or 17 percent of of production heavily dependent on garment total approved FDI. An influx of FDI targeting and footwear, while promoting a more diversified the tourism sector emerged in 2016, coinciding economic structure. with the short-lived introduction of online However, the CCFTA alone may be gambling, and becoming one of the major FDI insufficient to boost Cambodia’s trade and inflow recipients, capturing US$2.4 billion, or 16 economic performance. A key finding of the percent of total approved FDI. study of Mexican imports and exports by Garces- The diversification of FDI inflows is a good Díaz (2001) entitled “Was the North American sign. Approved FDI in agriculture, agroindustry, Free Trade Agreement (NAFTA) Behind the and food processing are also receiving a boost. Mexican Export Boom (1994–2000)?”11 pointed Those industries may be able to take advantage to the really important institutional changes—the of the Cambodia-China Free Trade Agreement abandonment of an erratic trade policy in favor including relocation of supporting industries for of the opening up of the economy following Cambodia’s rapidly expanding travel goods and Mexico’s adherence to the General Agreement on footwear industry. However, challenges facing Tariffs and Trade (GATT) that allowed Mexican connectivity, skilled labor and energy costs remain exporters to take advantage of the favorable a key bottleneck, preventing the expansion and external conditions, and the expansion of the U.S. deepening of Cambodia’s participation in global economy. The study warned that countries should and regional value chains. not indulge in unrealistic hopes when signing free trade agreements. Likewise, the assessment While it will likely boost trade, the CCFTA of U.S.–Mexico trade by the U.S. Congressional alone is not sufficient Budget Office (2003) concluded that NAFTA had The Cambodia-China Free Trade Agreement a very modest effect on bilateral trade flows, and (CCFTA) is expected to attract FDI inflows attributed the growth in Mexico’s exports to the to Cambodia. Sectors such as agriculture, United States after 1994 to the real depreciation agroprocessing, and manufacturing are well of the peso and the sustained expansion of the Figure 11: Imports of basic construction materials Figure 12: Approved construction permits (y/y percent change) (y/y percent change) 80 120 Cement Steel Value Area 60 100 80 40 60 20 40 0 20 -20 0 -40 -20 -60 -40 2017 2018 2019 9m-2020 2017 2018 2019 9m 2020 Source: Cambodian authorities. Source: Cambodian authorities. 11 Lederman, Maloney, and Servén 2003. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 21 Recent Economic Developments and Outlook U.S. economy. A sharp shift in policy in the late Increased attention is being paid to agriculture, 1980s that included market opening measures the sector least affected by the pandemic and economic reforms helped bring in a steady The agriculture sector is benefiting from increase of FDI flows to Mexico.12 NAFTA (and increased labor availability laid off by the its investment provisions) may have encouraged services and industry sectors. As discussed U.S. FDI in Mexico by increasing investor above, the CCFTA is expected to further boost confidence, but much of the growth may have trade and investment in Cambodia for exports occurred anyway because Mexico likely would to the Chinese market. In addition, advanced have continued to liberalize its foreign investment cultivation techniques and new seeds made laws with or without the agreement. possible by technology diffusion via FDI are The construction sector remained subdued, helping boost productivity within major crops. with excess supply from the pre-crisis boom In December 2019, the authorities introduced the 2019–25 Agriculture Sector Development Construction activity has remained weak Strategy, aiming at modernizing the agriculture since the first half of 2020. The value of steel, sector, while targeting agricultural gross value- and cement imports in the first six months of 2020 added (GVA) (in nominal terms) to increase by contracted by 45.1 percent and 8.3 percent (y/y), 4 percent per year, reaching 25,700 billion riels respectively as some large development projects, in 2023, up from 21,913 billion riels in 2018. especially high-rise commercial and residential Modernizing the agriculture sector is an important buildings, were put on hold. As of September step toward accelerating the transformation of 2020, the sharp declines of steel and cement Cambodia’s agriculture sector from subsistence imports continued, contracting by 41.4 percent farming to commercial agriculture. However, and 38.1 percent (y/y), respectively (figure 11). the GVA growth rate of 4 percent a year in As the construction (and real estate) sector had nominal terms does not seem to be an ambitious been the largest engine of growth in recent years, target, given the fact that average agricultural subdued construction and real estate activity GVA growth during the past 5-year and 10-year is damping real growth in the short term. The periods was 3.9 percent and 4.8 percent per year, value of approved construction permits which respectively (figure 13). skyrocketed last year, growing at 98.3 percent, contracted by 9.3 percent (y/y) in the first nine Rice exports have rapidly increased, thanks to months of 2020 (figure 12), possibly reflecting rising demand declining investment appetite as the property During the first nine months of 2020, market experienced overinvestment and excess Cambodia’s milled rice export (of which supply from the pre-crisis boom. Figure 13: Nominal agricultural gross value added Figure 14: Milled rice exports – regional comparisons (y/y percent change) (YTD (volume), y/y percent change) 14 Agriculture gross value added 60 Cambodia Vietnam Thailand (Jasmine) Past 5-year average of GVA growth 12 50 Past 10-year average fo GVA growth 40 10 30 8 20 10 6 0 4 -10 -20 2 -30 Nov-18 Nov-19 May-18 May-19 May-20 Mar-18 Mar-19 Mar-20 Sep-18 Sep-19 Sep-20 Jan-18 Jan-19 Jan-20 Jul-18 Jul-19 Jul-20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Cambodian authorities. Source: Cambodian authorities and Haver Analytics. Note: For Thailand, only jasmine rice is included. 12 Congressional Research Service 2020. 22 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Box 2: Cambodia – China Free Trade Agreementa The Cambodia-China Free Trade Agreement (CCFTA), signed on October 12, 2020, is expected to enter into force in early 2021. The CCFTA represents Cambodia’s first comprehensive bilateral free trade agreement (FTA) with one of its most important trading partners. The CCFTA is also China’s first bilateral FTA with a member of ASEAN. While CCFTA negotiations covered more than 10,800 tariff lines for Cambodia and about 9,530 tariff lines for China, they primarily focused on the tariff lines that were beyond what were offered under the (January 2010) ASEAN-China FTA. In this regard, an additional 340 tariff lines have been agreed (4 percent of total), covering mostly chapters 1 to 10 of Cambodia’s ASEAN Harmonized Tariff Nomenclature (AHTN), ranging from live animals/animal products to meat, fish, and cereals (table B2.1). After the CCFTA takes effect, about 98 percent of China’s tariff lines and nearly 90 percent of Cambodia’s tariff lines will reportedly go to zero tariff rates immediately. Key achievements also include simplification of export and import procedures, clear and transparent dispute resolution mechanisms, and e-commerce arrangements. Cambodia will reportedly open its services sector on research, education, and sea transport in the CCFTA beyond what is already open to China through Cambodia’s World Trade Organization accession and ASEAN-China FTA. China will open its insurance, education, and marketing sectors, among others. China is currently the fourth-largest merchandise export market for Cambodia’s unsophisticated agricultural and low domestic value-added products, capturing 6.8 percent of total merchandise exports (but represents only 0.05 percent of China’s total imports), after the United States (29.8 percent), Japan (7.7 percent), and Germany (7.3 percent), amounting to about US$1.01 billion. In 2019, Cambodia’s imports from China amounted to US$7.58 billion, making China Cambodia’s largest import market, accounting for 37.4 percent of total imports. Cambodia’s exports to China are largely concentrated in unsophisticated agricultural products or products with low domestic value addition. Furskins and artificial fur are Cambodia’s number one exported product, covering 25 percent (or US$252.9 million) of total exports to China (table B2.2). However, Cambodia entirely imports US$202.9 million worth of raw furskins, including heads, tails, and paws from Demark. Similarly, articles of apparel and clothing accessories, knitted or crocheted (HS 61), captures 19.5 percent (or US$197.4 million) of total exports to China, but the country entirely imports knitted or crocheted fabrics (HS60) worth US$1.5 billion (out of US$2.68 billion) from China for processing that mainly involves cut-make-trim. Milled rice is Cambodia’s third-largest exported product to China, accounting for 15.4 percent (or US$156.2 million). Cambodia has become increasingly reliant on Chinese investment flows, largely channeled to the construction and real estate sectors. Of Cambodia’s total international arrivals of 6.6 million in 2019, more than a third (35.7 percent) arrived from China, of which almost half (44.3 percent) came for business purposes. Trade agreements between countries that lower trade barriers on imported goods provide welfare gains to consumers from increases in variety, access to better-quality products, and lower prices, thus creating trade. As China’s first bilateral FTA with any ASEAN country, the CCFTA also has potential to benefit Cambodia through trade diversion from other (ASEAN) countries. According to an official projection, Cambodia’s exports to China are projected to increase by 25 percent, and Chinese exports will increase by 23 percent after the FTA goes into effect. The CCFTA could also make Cambodia a more attractive FDI destination aimed at the China market relative to neighboring countries. Materialization of the potential benefits will depend on various aspects of the CCFTA that are yet to be disclosed. Chapters 1 to 10 of Cambodia’s Table B2.1:  Cambodia’s top 7 exported products (HS4) to Table B2.2:  Customs Tariff Schedule China and imported products from China Cambodia’s exports to China Cambodia’s imports from China 1. Live animals. HS4 Product label Share HS4 Product label Share 2. Meat and edible meat offal (%) (%) 4302 Furskins and artificial fur; 25.0 6004/06 Knitted or crocheted fabrics 20.5 3. Fish and crustaceans, mollusk and other aquatic manufactures thereof invertebrates 6103/04/ Articles of apparel and clothing 19.5 5509/10 Man-made staple fibers 10.2 09/10/11 accessories, knitted or crocheted /15 4. Dairy produce; bird’s eggs; natural honey; edible products of animal origin, not elsewhere specified or 1006 Cereals 15.4 8413/19 Machinery, mechanical 10.0 /28/29/ appliances, nuclear reactors, included 51 boilers; parts thereof 5. Products of animal origin, not elsewhere specified or 8501/04/ Electrical machinery and 7.4 8504/17 Electrical machinery and 8.1 17 equipment and parts thereof; /36/39/ equipment and parts thereof; included sound recorders and 41/44 sound recorders and 6. Live trees and other plants, bulbs, roots, and the like; reproducers, television... reproducers, television... cut flowers and ornamental foliage 6203/04 Articles of apparel and clothing 6.5 5208/09 Cotton 6.8 accessories, not knitted or /11 7. Edible vegetables and certain root and tubers crocheted 6403/04 Footwear, gaiters and the like; 5.1 7304/08 Articles of iron or steel 4.8 8. Edible fruits and nuts; peel of citrus fruit or melon parts of such articles /18/26 7401/02 Copper and articles thereof 3.3 3921/23 Plastics and articles thereof 4.4 9. Coffee, tea, mate and spices /26 10. Cereals Total top seven exported items 82.2 Total top seven imported items 86.3 Source: Cambodian authorities. Source: UN Comtrade. Note: a. Prepared by the Cambodia Macroeconomics, Trade and Investment Global Practice team. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 23 Recent Economic Developments and Outlook fragrant rice accounts for about 80 percent) Weak consumer sentiment held back domestic surged, rising 38.3 percent y/y, reaching demand, which dampened imports. Imports 0.48 million metric tons (figure 14). China is of consumable and durable goods contracted in the largest market, capturing 35.5 percent of the first nine months of 2020. Passenger vehicles Cambodia’s milled rice exports, and the EU and motorcycles, Cambodia’s key durable imports, market is second, accounting for a third of total contracted by 34.1 percent and 39.5 percent (y/y), milled rice exports. Despite the imposition of respectively, while imports of gasoline and diesel EU safeguard measures on Cambodia’s milled were almost flat, rising at 0.3 percent and 2.7 rice exports, exports to the EU market (including percent, respectively. Imports of foodstuff and the UK) reached 150,000 metric tons, reflecting a electronics (mobile phones and televisions) dipped 25 percent year-on-year increase (of which more by 16.8 percent and 45.9 percent, respectively. As than a third was imported by France alone) during the decline in exports more than offset that of the first eight months of 2020. Public, private, and imports, the trade deficit is expected to widen. foreign direct investment inflows into agriculture Worker’s remittances (inflows) declined by 4.6 have been boosted as attention has increasingly percent, reaching US$550 million during the been paid to develop and diversify the agriculture first six months of 2020. As a result, the current sector. In addition to its traditional rice, cassava account deficit is projected to reach 12.8 percent and rubber products, Cambodia’s exports of of GDP in 2020, up from 10 percent of GDP in emerging agricultural products such as bananas 2019, which is expected to be financed by FDI and mangos are showing promising signs. inflows. Rice cultivation has accelerated Accumulation of foreign reserves continued During the first seven months of 2020, rainy Cambodia’s external position remained season rice cultivated area rose to 2.28 million broadly stable, while its accumulation of hectares, or a 7.2 percent (y/y) increase, thanks international reserves continued. Gross to better weather conditions.13 Dry season rice international reserves (which are equal to net harvesting also increased, reaching 0.26 million international reserves, given that Cambodia does metric tons, or a 38.8 percent y/y increase.14 Dry not borrow from the International Monetary season rice yield in 2020, however, declined to 4.2 Fund [IMF]) rose further, reaching US$19.5 metric tons per hectare, down from 4.4 metric ton billion in June 2020, or 21.7 percent growth (y/y) per hectare in 2019. Performance of production (figure 15), equivalent to about 10 months of and exports of other agricultural commodities, prospective imports. Foreign exchange reserves, however, is mixed. During the first seven months which constitute the majority of Cambodia’s of 2020, rubber production decreased to 100,000 gross international reserves (and the value of metric tons, or a 10.9 percent decline. In addition, gold reserves) expanded during first half of 2020, flooding occurred in October that caused loss thanks to continued capital inflows (see more of human life, destruction of crops, damage to discussion on broad money below). As illustrated property, physical infrastructure, and more. in figure 15, during the past decade, there were two episodes that significantly dampened international Crop production, especially rice, continues reserves growth. First, the country’s international to account for the majority (60 percent) of reserves growth decelerated markedly to 2.3 agricultural GDP. Cambodia has been relatively percent (y/y) in July 2009 as the economy was less successful in diversifying agricultural products severely hit by the 2008–09 global financial crisis. to higher-value-added crops, fisheries, and Second, international reserves growth contracted livestock due largely to relatively slow adoption of by 7.7 percent (y/y) in September 2013, triggered modern agricultural technology, including input by political uncertainty after the 2013 general use and irrigation.15 elections. Regional comparisons show that The pandemic has hurt domestic demand Cambodia sustained a stronger accumulation of and dampened consumption foreign reserves than other ASEAN countries. The 13 Weather forecast for 2020, April 14, 2020 and weekly weather announcements, Ministry of Water and Meteorology, 14 July 2020 monthly report on agricultural production, August 4, 2020, Ministry of Agriculture, Forestry and Fisheries. 15 See World Bank 2015a. 24 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook year-on-year growth rate of Cambodia’s foreign factors influence domestic prices in Cambodia. reserves grew faster than those of Thailand, the First, Cambodia is an importer of goods, Philippines, and Indonesia (figure 16). especially consumer goods including foodstuff from its neighbors, Vietnam, Thailand and Inflation remained subdued thanks to low China. Therefore, rising inflation in the country’s inflation in import partners and stable main import partners, often results in increased exchange rates inflationary pressure (imported inflation) at home. Headline inflation remained subdued at 2.9 Subdued inflation in its main import partners percent (y/y) in September 2020, down from helped tame its domestic price pressures. Second, 3.1 percent at the end of 2019. The increase in the nominal values of the Cambodian riel vis-à- food sub-indexes was largely offset by the decline vis the U.S. dollar, Thai baht, Vietnamese dong, in the transports (and telecommunication) sub- and Chinese yuan affect inflation in Cambodia indexes (figure 17). Rising food prices, in particular as domestic suppliers and traders peg against pork, beef, and fish were caused by increased depreciation of the Cambodian riel. Inflation rises demand and disrupted supply, thanks to the when the riel depreciates. Thus, broadly stable pandemic. According to the “Food Price Outlook Cambodian riel to U.S. dollar, Vietnamese dong, 2020” published by United States Department of Thai baht and Chinese yuan exchange rates help Agriculture, prices have been relatively slow to anchor domestic inflation. Inflation in Vietnam retreat from the highs reached as a result of the was subdued at about 3.2 percent y/y in August pandemic. Prices of petroleum products, however, 2020 due to low food prices and weak demand.16 tumbled with travel restrictions. By September In Thailand, inflation retreated into negative 2020, the food and non-alcoholic beverage sub- territory, contracting by 0.5 percent in August index of Cambodia’s inflation basket rose further 2020 due to lower energy and public utility prices. to 4.6 percent (y/y), compared with 3.4 percent In China, headline inflation was 2.4 percent (y/y) in December 2019. During the same period, the in August 2020, down from 4.0 percent in March housing and utilities sub-index eased, declining 2020 as food inflation eased. The economy is to 1.2 percent, down from 1.6 percent, while highly dollarized. So, devaluation of local currency the transport and telecommunication sub-index which often causes inflation to rise is not feasible retreated into negative territory, contracting by 4.5 in any circumstances in Cambodia as it will drive percent, down from 1.7 percent. the economy to full dollarization. Subdued inflation in Cambodia’s main import The riel marginally appreciated against the partners and stable exchange rates helped Thai baht, but depreciated against the U.S. contain domestic price pressures. Two main dollar, Chinese yuan, and Vietnamese dong. Figure 15: Cambodia’s international reserves Figure 16: International reserves – regional (US$ billion) comparisons (y/y percent change) NIR (US$ billion) NIR (y/y percent change, RHS) Cambodia Thailand 25 80 40 Philippines Indonesia 70 35 20 60 30 50 25 15 40 20 30 15 10 20 10 10 5 5 0 0 -10 -5 0 -20 -10 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 -15 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Source: Cambodian authorities. Note: NIR = net international reserves; RHS = right-hand scale. Source: Cambodian authorities and Haver Analytics. 16 World Bank 2020a. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 25 Recent Economic Developments and Outlook The riel-to-baht exchange rate appreciated to 130.5 households have been identified as new poor at the end of September 2020, compared to 136.0 between June and October.17 in December 2019. However, the riel-to-U.S. dollar, The central bank has eased monetary policy the riel-to-yuan and the riel-to-dong exchange rates depreciated to 4,095, 602, and 0.177, from 4,075, To support market liquidity during the 583, and 0.176, respectively (figure 18). COVID-19 pandemic, the central bank reduced the reserve requirement ratios. The Poverty is estimated to increase ratios were reduced to 7 percent for both local The economic and social costs of the currency and foreign currency deposits, down pandemic are being felt widely. A high- from 8 percent for local currency and 12.5 percent frequency phone survey of households shows the for foreign currency deposits, respectively, for six negative impacts of the pandemic on employment. months starting in April 2020. The central bank has The share of respondents who were working reduced interest rates by 0.5 percentage point for declined from 82 percent before the COVID-19 all Liquidity-Providing Collateralized Operation outbreak to 71 percent in May 2020, but remained (LPCO) maturities since March 2020. Through relatively unchanged in August 2020. The the LPCO facility, the central bank influences riel pandemic continued to negatively affect non-farm interest rates, while it cannot influence US dollar business activities but less severely compared to interest rates due to the highly dollarized economy. the onset of the pandemic. However, income As a result, actual average interests of the LPCO losses remained widespread, though the declines facility declined to 2.66 percent, 3.08 percent, and in household income slowed following the launch 3.25 percent for 91 days, 182 days, and 364 days, of a new cash transfer program to assist poor respectively down from 2.94 percent, 3.2 percent, and vulnerable households (see box 3). Firms are and 3.43 percent in 2019, respectively.18 The also facing economic hardship (see Special Focus, central bank also postponed full implementation below). In early June, the Ministry of Planning of the Capital Conservative Buffer to maintain announced that 560,000 households (2.3 million the 50 percent current requirement.19 In March people) were eligible for cash transfers during the 2020, the central bank issued a directive to all COVID-19. As of October, more than 640,000 banks and financial institutions to restructure households (2.6 million people) have received loans in order to maintain financial stability, the cash subsidies – implying that at least 80,000 while easing the burden of debtors facing major Figure 17: Inflation (consumer price index) Figure 18: Nominal exchange rates Contributions to 12-month inflation (percent) Riels per baht Riel per 1000 dong Others Riels per yuan Riel per US$ (RHS) 8 Transport sub-index 700 4,250 Housing & utilities sub-index Food sub-index 4,200 6 600 Headline inflation (y/y) 4,150 4 500 4,100 4,050 2 400 4,000 0 300 3,950 3,900 200 -2 3,850 100 3,800 -4 May-13 May-14 May-15 May-18 May-19 May-20 May-12 May-16 May-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-19 Sep-16 Sep-18 Sep-20 Sep-17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Sep-14 Sep-15 Sep-16 Sep-17 May-18 Sep-18 Sep-19 Sep-20 Sep-11 Sep-12 Sep-13 May-15 Jan-16 May-16 Jan-17 May-17 Jan-18 Jan-19 May-19 Jan-20 May-20 May-11 May-12 Jan-13 May-13 May-14 Jan-15 Jan-11 Jan-12 Jan-14 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. 17 Presentation by the Ministry of Social Affairs, Veterans and Youth Rehabilitation on October 22, 2020. 18 Semi-Annual Report, National Bank of Cambodia, June 2020. 19 The capital conservation buffer is designed to ensure that institutions build capital buffers under normal financial situations that can be drawn down when losses occur. See the Prakas dated February 22, 2018 and the 2020 Semi-Annual Report, the National Bank of Cambodia. 26 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook revenue declines caused by the pandemic.20 As of economic activity weakened July 2020, the microfinance sector restructured Growth of deposits at depository corporations US$1.2 billion in loans with a quarter of a million (banks and microfinance deposit-taking borrowers affected by the COVID-19 pandemic, institutions) decelerated as economic activity according to the microfinance association.21 As of slowed. Deposits grew at 10.7 percent (y/y) in June 2020, the microfinance sector had 2.1 million June 2020, down from 16.4 percent in 2019 (and loans, amounting to US$7.3 billion.22 28.9 percent in 2018). As interest rates on deposits Broad money growth decelerated substantially remained broadly stable, slow deposit growth likely as foreign currency deposits slowed reflects sluggish economic activity that negatively impacts liquidity of the corporate sector (and Reflecting a slowdown in capital inflows, households), thus constraining their ability to growth of foreign currency deposit save (see box 3 and Special Focus). Weak demand decelerated, resulting in the easing of broad for credit further slowed depository corporation money growth. Broad money growth significantly credits to businesses. Credit growth declined to eased to 12.3 percent (y/y) in June 2020, down a two-and-a-half-year low of 18.9 percent y/y in from 18.2 percent by the end of 2019 (and 24.0 June 2020, down from 27.0 percent in 2019. percent in 2018) (figure 19). The contribution of foreign currency deposits (classified under “other Domestic credit for construction activity deposits”) to broad money growth shrank, hitting eased, but credit to agricultural activity rose an 8.5-year low, declining to 9.0 percentage points, Domestic credit financing the construction down from 11.0 percentage points in 2019 (and and real estate sector decelerated as the 20.0 percentage points in 2018). The contribution construction boom has stalled. In June 2020, of riels in circulation to broad money growth, the contribution of construction, real estate, and however, remained at 2.5 percentage points, mortgage loans to credit growth hit a 2.5-year marginally declining from 2.8 percentage points, low, dropping to 8 percentage points (US$8.1 thanks to the central bank’s policy to promote the outstanding credits), down from its peak of 11.0 use of the local currency. percentage points in 2019 (figure 20), according Deposit and credit growth declined as to the central bank’s data on bank credit classified Figure 19: Broad money Figure 20: Depository corporation credits Contribution to broad money growth  (Contribution to credit growth (percentage point) (percentage point) Foreing currency deposits (other deposits) Other 60 Transferable deposits Wholesale & retail Construction, real estate & mortgage Currency in circulation 27% Hotels and restaurants 50 YTD, y/y percent change Manufacturing Agriculture 40 22% 30 17% 20 12% 10 7% 0 2% -10 -3% Nov-17 Nov-18 Nov-19 May-17 Aug-17 May-18 May-19 May-20 Aug-18 Aug-19 Feb-17 Feb-18 Feb-19 Feb-20 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: Cambodian authorities. Source: Cambodian authorities. 20 See Instruction Circular dated March 27, 2020, the National Ban of Cambodia. “Renegotiated loan” or “Restructured Loan” means any loan that has been rescheduled or refinanced in accordance with an agreement setting forth a new repayment schedule on a periodic basis occasioned by weaknesses in the borrower’s financial condition and/or inability to repay the loan as originally agreed. 21 Media interview with the president of the microfinance association, August 31, 2020. 22 Semi-Annual Report of the National Bank of Cambodia, June 2020. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 27 Box 3: Impacts of COVID-19 on households – results from the High-Frequency Phone Survey of Householdsa COVID-19, a respiratory disease caused by a novel Coronavirus detected in 2019, became a pandemic in early March 2020. Cambodia confirmed its first case of Coronavirus on January 27, 2020, and Cambodia has thus far contained the spread of the virus. As of October 25, 2020, there were 287 confirmed cases and zero reported deaths according to the World Health Organization. Cambodia took various measures to curb the spread of the virus that causes COVID-19. These included advising citizens to stay at home, physically distance and reduce unnecessary travel; closing schools; banning mass gatherings; restrictions on international travel; health screening at airports; and closing its borders. COVID-19 has not only been a health emergency; it has also affected the global economy and financial markets, and its impacts have reverberated through domestic economies. While Cambodia has avoided a health crisis so far, the immediate economic cost is significant. The World Bank is projecting a negative growth of 2.0 percent for Cambodia in 2020 due to COVID-19 and for poverty in the region to increase for the first time in 20 years. Governments more than ever need timely and reliable data to monitor and mitigate the social and economic impacts of the crisis on the poor and vulnerable. To monitor the socioeconomic impacts of the COVID-19 pandemic and inform policy responses, the World Bank designed and conducted a nationally representative High-Frequency Phone Survey (HFPS) of households in Cambodia. The survey covers important and relevant topics, including knowledge of COVID-19 and adoption of preventive behavior, economic activity and income sources, access to basic goods and services, exposure to shocks and coping mechanisms, and access to social assistance. Employment remained steady between May and August following an initial shock due to the COVID-19 pandemic. While the share of respondents who were working declined sharply from 82 percent before the COVID-19 outbreak to 71 percent in May under round 1 (figure B3.1), it remained relatively unchanged in August under round 2 at 70 percent. Most respondents remained within the same sector of employment. Only 5 percent of the respondents switched jobs, largely moving from the industry sector into the agriculture sector. The share of respondents who stopped working remained around 10 percent between the two rounds. Among those who stopped working, around 32 percent reported that it was due to seasonality in employment and 21 percent reported it was due to illness.b The COVID-19-related reasons mostly cited in May such as business closures or temporary layoffs had largely disappeared. COVID-19 continues to negatively affect non-farm business activities albeit less severely compared to the onset of the pandemic (figure B3.2). The share of non-farm household businesses reporting less or no revenues declined. Four in 5 households reported earning less or no revenues in April compared to March, while about 3 in 5 households did so in July compared to June. Household businesses reporting that their revenues remained the same doubled, reaching 31 percent in July. Similar trends are observed among IDPoor households although at different magnitudes. The share of households operating a non-farm family business remained relatively unchanged. About one-third (32 to 34 percent) of households in the Living Standards Measurement Study (LSMS) sample operated non-farm family businesses during May–August, and around 16 to 19 percent of the households belonging to the identification of Poor (IDPoor) program did so during June–August. Most of the businesses were in retail sales. Nearly 80 percent of the businesses operating in August were retail sales, compared to 67 percent in May. Respondent working in the last 7 Figure B3.1:   on-farm business households Figure B3.2: N days reporting changes in sales revenues 17% 20% 48% 61% 67% 11% 10% 73% 6% 5% 42% 15% 31% 18% 66% 65% R1 R2 R1 R2 LSMS ID Poor Round 1 Round 2 Higher The same Less No revenue Did not work Currently not working Note: ID Poor = National Identification of Poor Households program; Currently working (change job) Currently working (same job) LSMS = Living Standards Measurement Study; R1 = round 1; R2 = round 2. Note: a. This box was prepared by Wendy Karamba and Kimsun Tong. 28 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Impacts of COVID-19 on households – results from the High-Frequency Phone Survey of Households (cont’d) Weak consumer demand continues to drive the loss or lack of revenues for non-farm family businesses. Among household businesses reporting less or no revenue, about 88 percent reported having fewer or no customers. Lower demand is equally affecting all household businesses across urban and rural areas and among households in the bottom 40 and top 60 percent. Most migrants have lost jobs or wages because of the COVID-19 pandemic (figure B3.3). Pre- COVID-19, 3 in 10 households had a migrant. Since the COVID-19 outbreak, migrants have remained at their destination for 2 in 10 households, while migrants have returned home for 1 in 10 households. Among households whose members are currently away, 80 percent had migrant workers working as wage employees. More than 60 percent of migrant households reported declines in the migrant’s income. About 60 percent of migrant households reported that the income of their migrant members had declined by 47 percent since the COVID-19 outbreak, which in turn reduced the amount of remittances received. ID Poor households reported that the income of their migrant members had declined by 42 percent compared to the pre-COVID-19 outbreak. Among the 1 in 10 return migrant households, most had a migrant return home because of factory closures (36 percent) and lack of work (24 percent). One-third (34 percent) of the return migrant households had a returnee who was currently out of work, but the estimate for the ID Poor households was half that. The other third (29 percent) of the returnees were engaged in family farm activity, while 16 percent worked as wage employees. Conversely, only 16 percent of the return migrant households from ID Poor households engaged in family farm activity, while 58 percent worked as wage employees (probably because poor households are likely to own only small parcels of agricultural land). Wage and job losses among migrants have had an adverse impact on remittance flows, which are an important source of income for rural households (figure B3.4). Over 70 percent of migrant households had received remittances since March. However, migrant households received a median US$50 per month, which was lower than the pre-COVID-19 outbreak. ID Poor households had only received US$30 since the onset of the pandemic. The survey did not inquire about the magnitude of the change. Figure B3.3: Migrant households reporting changes in income since mid-March (% of households) LSMS IDPoor Don't know Don't know Increased Increased 3% 8% 4% 6% Stayed the Stayed the same same 26% 28% Reduced Reduced 65% 60% Note: LSMS = Living Standards Measurement Study. Note: ID poor = National Identification of Poor Households program. Figure B3.4: Migrant households reporting changes in remittances since mid-March (% of households) LSMS ID Poor Increased Increased Don't know 5% 2% 1% Stayed Stayed the the same Reduced same 36% 54% Reduced 41% 61% Note: LSMS = Living Standards Measurement Study. Note: ID poor = National Identification of Poor Households program. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 29 Impacts of COVID-19 on households – results from the High-Frequency Phone Survey of Households (cont’d) Income losses remain widespread, although the decline in household income has slowed since May due to few disruptions to work activities and increased government assistance (figure B3.5). About 3 in 5 households reported a decline in household income in round 2 compared to 4 in 5 households in round 1. The observed decline in income has slowed for income from all sources, but most prominently for income from farming. Only 32 percent of households that derive their livelihoods from farming, livestock, or fishing reported that their income declined in round 2, which is a 30-percentage- point reduction since round 1. The share of households reporting a decline in income from wage employment and non-farm family businesses also fell by 13 to 14 percentage points. Remittances and assistance from family have not deteriorated further, as the share of households reporting a decline fell 17 and 44 percentage points, respectively, from about 75 percent. The share of households reporting an increase in assistance from government and nongovernmental organizations increased tenfold between May and August, from 4 percent to 42 percent. Markets remained functional and able to supply basic necessities despite the COVID-19 pandemic. Virtually all households regardless of poverty status and area of residence were able buy rice, fish or meat, and vegetables or fruit in both May and August when they sought these staples. Similarly, 99 percent of the households that tried to purchase medicine were able to do so in both periods (figure B3.6). Among households that needed medical treatment, virtually all of them were able to access medical services. Female respondents were more likely to report they needed medical treatment for themselves or other household members than male respondents. Children’s engagement in learning activities is rising following initial disruptions brought about by the COVID-19 outbreak. On March 16, 2020, the Ministry of Education, Youth and Sport (MoEYS) directed the closure of all public and private schools and required students to study remotely. Households largely relied on television or radio programs to complement learning at home. Since September 7, 2020, schools have partially reopened and must follow standards recommended by the MoEYS to prevent the spread of COVID-19 including hygiene practices, social distancing, temperature screening, and use of masks. At the time of the survey, a partial reopening had not yet been implemented. Instead, greater adaptations of households and alternatives from schools offered more opportunities for learning at home. The share of households with children aged 6-17 who had been in school engaged in learning activities rose from 63 percent to 75 percent. Despite this improvement, 1 in 4 households with children continue to have few opportunities to learn during school closures.  hanges in household income Figure B3.5: C  ousehold able to buy medicine in Figure B3.6: H between May and August, 2020 the last 7 days 30% 34% 16 15 16 15 16 57% 55% 29 33 29 27 31 83 85 83 84 83 69% 66% 63 61 63 64 61 45% 42% R1 R2 R1 R2 R1 R2 R1 R2 R1 R2 R1 R2 R1 R2 Cambodia Urban Rural Bottom 40 Top 60 LSMS ID Poor Yes No Not try Reduced Stayed the same Increased Note: ID Poor = National Identification of Poor Households program; Note: R1 = round 1; R2 = round 2. LSMS = Living Standards Measurement Study; R1 = round 1; R2 = round 2. 30 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook by business undertaking. Similarly, reflecting circulation rose further (figure 21). Consequently, sluggish domestic business and sales activity, pressure on the exchange rate has increased, likely the contributions of the retail and wholesale, reflecting a slowdown in capital inflows and the and manufacturing sectors to domestic credit decline in Cambodia’s foreign exchange earnings growth shrank to 3.9 percentage points (US$7.0 caused by the downturn in the tourism and export billion outstanding credits) and -0.3 percentage sectors, thus reducing the central bank’s ability to point (US$1.1 billion outstanding credits) in June further accumulate foreign reserves. 2020, down from 6.6 percentage points, and 0.2 During the first half of 2020, the central bank percentage point in December 2019, respectively. purchased US$17 million by injecting 69 billion Agricultural lending rose, boosted by rising riels into the foreign exchange market. The demand for agricultural products during the amount of U.S. dollars purchased represents a 99 pandemic. The contribution of agricultural percent decline (y/y), likely due to the shrinking lending to credit growth rose 1.0 percentage supply of U.S. dollars in the foreign exchange point (US$2.0 billion outstanding credits) in June market. During the same period, the central bank’s 2020, up from 0.5 percentage point in December U.S. dollar purchase from government agencies 2019, despite the overall decline in domestic increased, reaching US$192.3 million, or 25 percent credit growth. The contribution of the hotel (y/y). The central bank intervened in the foreign and restaurant sector to domestic credit growth exchange market to maintain the riel versus U.S. also edged up to 0.6 percentage point (US$1.2 dollar exchange rate, which is one of its key policy billion outstanding credits), from 0.4 percentage tools, aiming at achieving price stability.24 point during the same period. In June 2020, the As the central bank cannot influence interest reported nonperforming loan ratios remained low rates of U.S. denominated loans and deposits,25 at 2.2 percent and 0.9 percent for the banking their interest rates remained broadly stable, sector and microfinance sectors, respectively.23 despite monetary policy easing. The weighted As of July 2020, the microfinance association average of the 12-month U.S. dollar certificate of reported nonperforming loans of 2.5 percent. deposit rates stood at 4.39 percent per year in June In 2019, the reported nonperforming loan ratios 2020, compared to 4.34 percent in December 2019. were 2.2 percent and 1.1 percent for the banking Similarly, the weighted average of the 12-month U.S. sector and microfinance sectors, respectively. dollar lending rates remained broadly unaffected at As the central bank continued to inject riels 9.44 percent per year in June 2020, compared to into the economy, high-powered money in 9.51 percent in December 2019. Figure 21: Riel in circulation and riel versus U.S. Figure 22: Government savings dollar exchange rate (billions of riels) (y/y, percent change) Gov’t savings (billions of riels) Riels/U�S dollar exchange rate (RHS) 40 3 25,000 y/y percent change, RHS 70 Riels in circulation 35 2 60 30 20,000 1 50 25 0 15,000 40 20 -1 15 30 -2 10,000 10 -3 20 5 5,000 0 -4 10 -5 -5 - 0 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Jul-17 Oct-17 Jul-18 Oct-18 Jun-17 Apr-17 Jan-18 Apr-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Sources: Cambodian authorities. Sources: Cambodian authorities. Note: RHS = right-hand scale. Note: RHS = right-hand scale. 23 Semi-Annual Report, National Bank of Cambodia, June 2020. 24 See https://www.nbc.org.kh/english/monetary_policy/exchange_rate_policy.php 25 However, the central bank introduced a lending rate cap at 18 percent per annum in March 2017. See Prakas number B7-017-109 PK dated March 13, 2017. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 31 Recent Economic Developments and Outlook Government response to the pandemic is Revenue collection declined in 2020 thanks unprecedented to the slowdown in domestic economic activity and sluggish imports, caused by the Government intervention to mitigate pandemic. During the first eight months of 2020, the negative impacts of the pandemic is central government revenue reached 14.3 trillion unprecedented, amounting up to 5 percent riels, or a 14.2 percent y/y decline (figure 23).26 Of of GDP. A broad package of support includes the 14.2 percent contraction, the declines of tax health-related spending and income assistance, revenue, other revenues (mainly non-tax revenue), equity injections and loan guarantees, and and grants accounted for 7.9 percentage points, development spending and tax relief. The 2.9 percentage points, and 3.5 percentage points, government’s large fiscal support program is respectively. Tax revenue, which includes taxes projected to turn the budget from a surplus on goods and services; taxes on profits, income, achieved in 2019 (and 2018) into a large deficit in and capital gains; and taxes on international trade, 2020. To close the gap between revenue collection accounts for 85.4 percent of total revenue, while and financing requirements, the authorities are the other revenues and grants accounted for 4.6 dipping into government savings deposited in percent and 10.0 percent, respectively. the banking system. While remaining solid, as of June 2020, growth of government deposits eased, The decline in tax revenue is caused largely decelerating to 14.5 percent (y/y) in June 2020, by weaknesses of taxes on goods services (60 down from 48.4 percent in December 2019 (figure percent of total tax revenue) which shrank by 22), due to a slowdown in revenue collection. In 18.0 percent (y/y) during the first eight months addition, large components of the government’s of 2020. With shrinking imports, revenues from intervention did not begin until late June 2020. the value-added tax, excises, and import duties collected by the General Department of Customs Thanks largely to successes in its public and Excises (GDCE), the largest revenue agency, financial management reform program declined by 23.1 percent (y/y) during the first undertaken since 2005, Cambodia has managed eight months of 2020. In contrast, boosted mainly to greatly boost revenue collection. As a result, by ballooned (profit) taxes filed in April 2020, Cambodia has built up relatively large fiscal space in revenue collected by the General Department the form of government savings, while continuing of Taxation (GDT), the second-largest revenue to maintain prudent fiscal management and stable agency grew at 10.8 percent (y/y) during the macroeconomic performance. At the end of June same period. Nevertheless, domestic collection 2020, government deposits stood at 17.3 percent has been deteriorating steadily toward the end of GDP (or 19.3 trillion riels). Figure 23: Central government revenue Figure 24: Central government expenditure (billions of riels) (billions of riels) Taxes Grants Compensation of employees Use of goods and services Other revenues Total (y/y, percent change, RHS) Interest Subsidies and grants Social benefits Other expenses 18,000 25 Fixed assets Total (y/y, percent change, RHS) 16,000 20 18,000 40 14,000 15 16,000 12,000 10 30 14,000 10,000 5 12,000 20 8,000 0 10,000 6,000 -5 8,000 10 4,000 -10 6,000 4,000 0 2,000 -15 2,000 0 -20 8-m 2017 8-m 2018 8-m 2019 8-m 2020 0 -10 8-m 2017 8-m 2018 8-m 2019 8-m 2020 Source: Cambodian authorities. Source: Cambodian authorities. Note: RHS = right-hand scale. Note: RHS = right-hand scale. 26 Ministry of Economy and Finance August 2020 government finance statistics. 32 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook of the year. Total collection by both the GDCE and social assistance contributed a quarter (or and GDT accounts for about 90 percent of total 5.4 percentage points) of the total expenditure domestic revenues. increase during the first eight months of 2020. In contrast, central government expenditure The fiscal deficit is projected to widen to 5.6 accelerated, rising to 16.2 trillion riels or percent of GDP in 2020 21.5 percent (y/y) (figure 24) during the same In 2020, revenue collection is expected to period, boosted largely by rising government reach only 18.8 percent of GDP, well below invention in response to the pandemic. Of the the estimated collection of 26.3 percent 21.5 percent expansion, the increase of fixed of GDP in 2019. Boosted by government assets (capital spending) contributed the largest, intervention, outlays are rising and expected to accounting for half (or 10.5 percentage points) reach 24.4 percent of GDP in 2020, lower than of the total expenditure increase. Spending the estimated disbursement of 25.5 percent on social benefits, subsidies and grants (to of GDP in 2019. As a result, the overall fiscal subnational levels) combined, is second, capturing deficit (including grants) is projected to widen 8.7 percentage points of the total increase. to 5.6 percent of GDP in 2020 (figure 25). Employee compensation, which was growing Thanks to continued large foreign financing rapidly during the past several years, has finally by development partners, domestic financing eased and contributed only 0.8 percentage point is expected to account for about half of the of the increase. The authorities’ target of having projected total financing requirement, lessening a minimum civil servant’s monthly wage of at the need to drawdown on government deposits. least 1 million riels has been met or exceeded. In Of the 5.6 percent of GDP financing need, addition, responding to the pandemic requires a foreign financing (official loans) is projected to substantial increase in public outlays, reducing the account for 3.0 percent of GDP, while domestic authorities’ fiscal space for raising civil servants’ financing (and debt amortization), a drawdown wages much further. of government deposits, accounts for the Spending on social benefits quickly rose remaining 2.6 percent of GDP (figure 26). thanks to new government policy intervention. Cambodia’s fiscal support is the fourth largest Reflecting rising government intervention, central in the region government spending on social benefits reached 1,737.8 billion riels (equivalent to US$424.3 Cambodia’s total fiscal support of 5 percent of million) during the first eight months of 2020, or GDP is the fourth largest among developing a 70.0 percent year-on-year increase. Spending on East Asia and Pacific economies, behind social benefits which mainly include social security only Thailand, Mongolia, and Malaysia Figure 25: General government operations Figure 26: General government surplus/deficit (% of GDP) and financing (% of GDP) 10�0 Total revenue Total expenditure Foreign financing (net) Projection Projection 8�0 Debt amortization 30 26�3 6�0 Domestic financing 3�4 25�5 24�4 25 0�8 4�0 18�8 1�0 20 0�7 2�0 4�0 15 2�5 3�0 0�0 10 -2�0 3�6 5 5�6 0�8 0 -4�0 -5 -6�0 -5�6 -10 -8�0 2014 2015 2016 2017 2018 2019e 2020p 2018 2019e 2020 proj� Sources: Budget Settlement Laws; and World Bank staff estimates Sources: Budget Settlement Laws; and World Bank staff estimates and projections. and projections. Note: e = estimates; p/proj. = projections. Note: e = estimates; proj. = projections. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 33 Recent Economic Developments and Outlook (figure 27). Despite being the poorest country in Public debt is expected to rise, but risk of the region, the size of Cambodia’s total policy debt distress remains low support, which is larger than those of its wealthier Cambodia’s public debt-to-GDP ratio is neighbors including Indonesia, the Philippines projected to marginally increase to about 31.6 and Vietnam, is a promising sign. Of the total percent of GDP in 2020 (figure 28). The increase 5 percent government intervention, direct fiscal is to finance the country’s widening overall fiscal support (income and revenue support to affected deficit in the short term (see Annex). Although households and firms, and public health support) the debt sustainability analysis conducted in accounts for 2.8 percent of GDP, while loan, 2019 using the joint IMF/World Bank Debt equity and guarantee support captures the rest. Sustainability Framework for Low-Income The intervention has helped ease the economic Countries (LIC-DSF) showed that Cambodia and social distress caused by the pandemic. remained at low risk of external debt distress,28 Cambodia has been able to quickly scale up the baseline has changed. With the fiscal deficit and deepen the nascent cash transfer program estimated at 5.6 percent of GDP in 2020 and 6.1 that was in place in the pre-COVID-19 period. percent of GDP in 2021, financing needs from The large cash transfer program for poor and abroad will increase, while the exchange rate is vulnerable households identified under the coming under pressure. Identification of Poor Households Program (ID Credit to construction, real estate activities, Poor) has been introduced. Starting on June 24, and mortgages grew quickly, averaging 32.1 2020, the program, costing between US$25 million percent per year during 2009–19. The share of and US$30 million a month, reached large numbers credit to construction, real estate activities, and of households: 580,838, 598,512, and 644,655 mortgages in total domestic credit rose to 31.1 households for the first, second, and third months percent in 2019, up from 18.8 percent in 2009. of intervention, respectively.27 For the fourth While decelerating to a 23.1 percent year-on-year month of intervention, starting on September 25, increase in August 2020, down from 39.4 percent 2020, the authorities budgeted 125.1 trillion riels, at the end of 2019, outstanding domestic credit equivalent to US$30.53 million, targeting 689,973 financing construction, real estate activities, and households. However, an extension of the social mortgages reached 34.6 billion riels (US$8.17 assistance scheme beyond the currently planned billion). Disaggregating the outstanding credit data timeframe would put significant pressure on the shows that mortgage financing was the largest, budget. accounting for 14.2 billion riels (US$3.5 billion). Figure 27: Fiscal support – regional comparisons Figure 28: Government debt - regional comparisons (percent of GDP) (percent of GDP) Loans, equity and guarantees Other spending 2019e Projected change in 2020 14 100 12 Additional health-related spending 80 10 Additional spending on income support and revenue measures 60 8 40 6 20 4 0 2 Indonesia Lao PDR Myanmar Vietnam Thailand Mongolia PNG Malaysia China Philippines Cambodia 0 Lao PDR China Myanmar Indonesia Mongolia Philippines Malaysia Thailand Cambodia Vietnam Commodity exportes Commodity importers Source: World Bank 2020a. Source: World Bank 2020a and World Bank staff projections. 27 Media announcement, September 29, 2020, General Secretariat, Council for Social Protection, Ministry of Economy and Finance. 28 IMF staff report for the 2019 Article IV consultation - Debt Sustainability Analysis. https://www.imf.org/en/Publications/CR/Issues/2019/12/23/ Cambodia-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48912. 34 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook Construction financing is next, accounting for second, capturing 25.7 percent. While China is the 10.5 billion riels (US$2.6 billion), followed by real largest creditor with a total outstanding debt of estate financing, which amounted to 9.8 billion riels US$3.7 billion (or 46.8 percent of the total), debt (US$2.4 billion) in August 2020. There is consensus denominated in Chinese yuan covered less than that booms and busts in asset prices can contribute 15 percent of total debt stock. The second- and to financial sector distress and macroeconomic third-largest creditors are the Asian Development imbalances.29 The pandemic has constrained the Bank and the World Bank, accounting for 18.6 ability of households to repay loans, in particular percent and 7.9 percent of total outstanding mortgage loans, which are mostly denominated debt, respectively, followed by Japan, Korea (the in U.S. dollars. So far, financial stability has Republic of), and France. In June 2020, the top six been maintained, thanks in part to pre-emptive creditors accounted for 89 percent of Cambodia’s containment of risks arising from borrowers who total debt stock. have difficulty repaying their loans. Interest rates Cambodia’s public debt stock growth remained unchanged. While under pressure, the decelerated, but its private sector debt rose value of the riel to U.S. dollar remained broadly stable. Accumulation of foreign reserves continued, Cambodia’s debt stock growth decelerated and gross international reserves can now cover up toward 2019 as outstanding debts owed to to 10 months of prospective imports. This has China, the Asian Development Bank, and helped anchor market confidence in local currency Korea eased. Growth of Cambodia’s public debt and in the economy. stock peaked in 2017 with a 13.8 percent increase By June 2020, Cambodia had a total that year, due largely to a sharp increase in Chinese outstanding public debt of US$7.9 billion,30 all loans (figure 29). Chinese loans contributed the of which is external (and in foreign currencies). largest, accounting for 6.7 percentage points Borrowing has been largely for public investment of the total outstanding debt increase in 2017. in physical infrastructure, which accounts for 87.0 Loans from the Asian Development Bank (ADB) percent of the total. The weighted average grant were next, accounting for 2.9 percentage points, element of Cambodia’s public debt improved, while loans from France and Korea contributed reaching 55.8 percent in the first half of 2020, 1.4 percentage points and 1.2 percentage points, compared to 51.6 percent in 2019 and 43.7 respectively. However, debt stock growth has percent in 2018. U.S. dollar outstanding debt is the decelerated since, growing at 8.2 percent in 2019 largest, accounting for 43.5 percent of the total. as contributions of outstanding loans owed Special drawing rights (SDR) outstanding debt is to China, the ADB, and Korea declined to 2.7 Figure 29: Contribution to Cambodia’s debt stock Figure 30: Levels of debt - regional comparisons growth (percent of GDP) (percentage point) 16�0 Domestic debt, 2018 External debt, 2018 China France ADB Japan WB S� Korea ROW 300 14�0 External debt, 1997 Total debt, 1997 250 12�0 10�0 200 8�0 150 6�0 100 4�0 50 2�0 0 0�0 Mongolia PNG Indonesia China Malaysia Vietnam Thailand Cambodia Philippines Myanmar Lao PDR -2�0 2014 2015 2016 2017 2018 2019 June 2020 East Asia Source: Cambodian authorities. Note: ADB = Asian Development Bank; WB=World Bank; Source: Institute of International Finance, World Bank. ROW=Rest of the World. 29 IMF 2001 30 Cambodia Public Debt Statistical Bulletin, Vol. 10, September 2020, Ministry of Economy and Finance. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 35 Recent Economic Developments and Outlook percentage points, 1.5 percentage point, and or on the balance of payments. It is assumed that 0.3 percentage point, respectively. However, as market confidence has been gradually restored as discussed above, public debt is projected to again the outbreak is under control and FDI inflows have increase to finance a widening fiscal deficit caused steadily returned. Private consumption is assumed by the pandemic. to decline moderately, thanks to government fiscal direct support, amounting to 2.8 percent of GDP. Cambodia’s private debt has been rising. The Gross fixed investment remains relatively robust country’s private debt has substantially increased in this scenario as on-going construction projects during the past two decades. It is estimated that are completed with the return of FDI inflows, the country’s total debt stood at 148.4 percent while public investment rises. Exports contraction of GDP in 2018, from 58.3 percent of GDP in is projected to be relatively large but to quickly 1997. Cambodia’s external and domestic debts recover in 2021 (and 2022). Imports contraction were estimated to increase to 62.7 percent of is moderate as consumption has held up, GDP and 85.7 percent of GDP in 2018, up from thanks largely to the relatively large government 51.4 percent of GDP and 6.9 percent of GDP, invention. Agricultural growth is assumed to respectively.31 In the East Asia region, Cambodia’s accelerate fairly quickly as rice production rises, total debt is among the top six countries, after while diversification of other export crops and Mongolia, China, Malaysia, Vietnam, and Thailand livestock and fisheries gradually progresses. The (figure 30). industry sector is expected to moderately decline. Outlook The contraction of garment, footwear and travel goods manufacturing is expected to be partly The economy is projected to contract by offset by the expansion of other manufacturing. 2.0 percent in 2020 and recover in 2021, growing at 4.0 percent (table 1). This is in Externally, the projections assume gradual line with potential growth in the EAP region, recovery of international and regional trade which is expected to decline in the next decade with increased access to external markets by almost 2 percentage points, from 7.6 percent including the Chinese market. Cambodia’s in the last decade (2010–19) to 5.7 percent on underutilized and relatively cheap labor, and average (over 2020–30) regardless of the effects abundant land, can focus on primary and labor- of COVID-19, assuming that each underlying intensive goods for export. component of potential growth (investment, Table 1: The macro outlook human capital, and labor force participation rate) 2020 2021 2022 follows the historical trend.32 With the easing of GDP Growth -2.0 4.0 5.2 social distancing measures, Cambodia’s domestic By expenditure economic activity has been gradually returning to Private -1.4 3.4 4.7 normalcy. Domestic demand, including domestic Consumption travel and tourism, is picking up. The recent signing Government 6.7 8.6 5.8 of the Cambodia-China Free Trade Agreement Consumption (CCFTA) and the likelihood that the CCFTA will Gross Fixed Capital 6.3 6.1 7.1 enter into force in 2021 will help further promote Investment domestic investment and regional trade. In Exports, Goods and -12.6 5.4 5.4 addition, the benefits of being a member of the Services Regional Comprehensive Economic Partnership Imports, Goods and -8.9 5.5 5.4 (RCEP) —the largest free trade area in the world Services that was signed in November 2020—should begin By production to flow, starting in 2021. Agriculture 1.5 0.9 1.0 Industry -1.2 6.9 7.1 Domestically, the projections assume no Services -4.3 2.6 5.1 significant long-term adverse impacts of the Source: World Bank staff projections. pandemic on the corporate or banking sector 31 October 2020 East Asia and Pacific Economic Update, the World Bank. 32 October 2020 East Asia and Pacific Economic Update, the World Bank. 36 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook Diversification of FDI is a good sign financial sector remain. As discussed, private debt has risen significantly, and vulnerabilities, The increase in approved FDI project values including high credit concentration, related party to non-garment industries and agriculture lending risks, lack of consolidated cross-border is encouraging. During the first seven months supervision, and gaps in implementation of risk- of 2020, approved FDI project values for non- based supervision, remain.33 garment manufacturing sectors rose to US$878 million, up from US$95 million during the same Although it is too early to ascertain the period in 2019, while FDI going to the agriculture consequences, flooding that occurred in sector (including the agroprocessing industry) October 2020, has caused loss of human life, increased to US$100 million, up from US$34 destruction of crops, damage to property million during the same period. The newly emerging and physical infrastructure. As of October 22, non-garment sectors include energy, travel goods, 2020, the floods have claimed 39 lives, affected footwear, furniture, building materials, metal, 120,785 households (483,140 people), 115,354 plastic, leather processing, packaging, decorative homes (63 homes damaged), 232,551 hectares products, telecommunications, mechanic of cultivated rice, and 83,918 hectares of other assembly, electronics, vehicle accessories, and crops, according to the National Committee for beverages. If appropriately nurtured, it will Disaster Management. However, it is not known underpin the authorities’ efforts to diversify yet how much of the affected cultivated area of Cambodia’s manufacturing sector. rice and other crops are permanently damaged. Risks and challenges A medium-term strategy for the garment, footwear, and travel goods sector is being Significant uncertainty remains in developed Cambodia’s growth outlook. The economy is small, open, narrowly based, and heavily A 2020–25 garment, footwear, and travel dependent on capital inflows, mainly foreign goods sector strategy serving as a roadmap investment, and external trade. Globally, growing and aiming at strengthening the sector’s tensions among international powers and the value addition and competitiveness is being erosion of multilateral disciplines are generating developed.34 The strategy is being designed to uncertainty that hurt trade and investment flows. target skills upgrades and career paths for factory Domestically, an extension of the social assistance workers, promote high value-added domestic and scheme beyond the currently planned time frame foreign investment, attract the sector’s supporting would put significant pressure on the budget, industries, and diversify export markets. while not extending it will hurt the poor and Establishing the strategy is seen as increased lower domestic demand. Downside risks include attention by the authorities to move this important a second wave of the COVID-19 outbreak, and sector up in regional and global value chains in a deeper and prolonged decline in tourist arrivals garment production as envisaged in Cambodia’s linked to a lingering global outbreak and the speed 2015–25 Industry Development Policy. It is not with which a vaccine becomes widely available. known yet whether government intervention in the The partial withdrawal of the EU’s “Everything forms of competitive energy costs, technological But Arms” trade preferential treatment began upgrades, and upstream textile industry promotion on August 12, 2020, affecting approximately 20 will be forthcoming. Cambodia’s well-established percent of Cambodia’s exports to the EU. garment sector is a labor-intensive and export- oriented. However, the manufacturing sector While the containment of financial risks remains largely engaged in the “cut-make-trim” triggered by the pandemic has helped maintain process, the lowest value-added section of the stability in the banking and microfinance sector, entire value chain for decades.35 the risks accumulated by an overleveraged 33 Staff report for the 2019 Article IV consultation, IMF (https://wxteww.imf.org/en/Publications/CR/Issues/2019/12/23/Cambodia-2019-Article- IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48912). 34 Announcement dated July 28, 2020, Ministry of Economy and Finance. 35 Economic impact of the EU’s suspension of its trade preferences on Cambodia, Research Intelligence, June 2019. In CMT manufacturing, apparel buyer pays the manufacturers for the cut-make-trim process. Pre-production process like the order processing, product development, pattern making and pattern grading, and post-production process such as shipping of goods are handled by the buyer. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 37 Recent Economic Developments and Outlook In an effort to maintain external covering six destinations within Siem Reap competitiveness, decisions have been made province. In September 2020, the government to freeze the monthly minimum wage and approved an allocation of US$150 million to to shorten the paid holiday list in 2021. The develop physical infrastructure, consisting of 38 minimum wage for the garment and footwear roads in Siem Reap to be ready by the end of 2021.38 industry has largely been frozen at US$192 per A similar public investment project, amounting month for 2021.36 The new minimum wage for to US$ 300 million to build 34 roads with a total 2021 will be an increase of only US$2, or 1.1 length of 82.5 kilometers, was approved in 2019 percent from this year’s wage. Prior to 2020, to develop physical infrastructure in the seaside the minimum wage grew quickly, averaging 13.2 province of Sihanoukville. The project was almost percent per year during 2013–20. Similarly, paid completed.39 (official) holidays in 2021 have been cut further to 21 days, down from 23 days in 2020. Prior to Policy options 2020, paid public holidays were as many as 28 The most important policy goal must be to days a year. urgently regain jobs lost and suspended due to A 2020–25 tourism sector roadmap and a the pandemic. In this regard, full attention must 2020–35 Siem Reap masterplan are being be paid to boost investment in labor-intensive developed sectors to generate jobs. This can be done by taking advantage of the quick recovery of domestic A 2020–25 roadmap to restore and develop demand for consumer goods, including foods and the tourism sector is being finalized and will domestic services, mainly travel, hospitality, and consist of three stages: resilient and restart (2020– healthcare. For example, ensuring the survival of 21), recovery (2021–22), and relaunch (2023–25).37 firms and businesses that are likely to thrive in The 2020–25 roadmap, targeting seven million the post-COVID-19 period would provide relief international arrivals, is broadly underpinned by to workers, facilitate a quick recovery, and boost Cambodia’s comparative advantage in tourism. growth. Similarly, boosting pro-poor and growth- However, successfully implementing the roadmap enhancing public investment, including cash-for- will likely require resources. In the foreseeable work projects, will create jobs. Public investment future, financing by the private sector, especially program initiatives to build physical infrastructure FDI, is unlikely to be forthcoming due to the in Sihanoukville and Siem Reap provincial towns collapse of the tourism sector (see the discussion will improve the connectivity and underpin on approved FDI projects below). Unless the tourism sector development. Doing this will also public sector is willing to boost public investment facilitate the authorities shifting their intervention in the tourism sector, the roadmap to jumpstart from emergency relief and social assistance in the sector will likely face resource constraints. the form of cash transfers to livelihood support, Linking with the Siem Reap physical targeting income generation and job creation. infrastructure development plan, the Siem Looking ahead, it is essential to facilitate an Reap tourism development masterplan will expansion of domestic and foreign investment aim at strategically developing Siem Reap as arising largely from recent bilateral and a tourist destination priority. This includes a regional free trade agreements. In this regard, Siem Reap tourism investment strategy, covering promptly introducing competitive investment law infrastructure development and connectivity, and incentive schemes together with ease of doing marketing, environmental protection and human business is particularly crucial. Immediate benefits resource development. In addition, destination of the CCFTA may come from exporting non- management organizations are being established rice, high-value (raw and processed) agricultural 36 Announcement dated September 10, 2020, Ministry of Labor and Vocational Training. 37 Statement dated November 6, 2020, Ministry of Tourism. 38 See a letter dated September 4, 2020 from Siem Reap provincial governor to the prime minister. 39 See news release dated July 17, 2020 by National Committee for Managing and Developing Cambodian beaches. 38 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Recent Economic Developments and Outlook products such as cassava, rubber, and soybean, as loans, putting the financial sector under increased China has already provided quotas for Cambodia’s stress. While the authorities have granted, as part milled rice and mango exports. Policy, technical, of the COVID-19 response, an exemption of and financial support may therefore be provided the ownership transfer tax for property valued to expand the production and quality of these at US$70,000 or less,41 a 20 percent capital gains potential products. In the medium term, nurturing tax (CGT) will be effective in 2022.42 The CGT is integration of Cambodia’s agroprocessing and levied on a capital gain as the taxable income that manufacturing value chains into the regional value results from the revenue received from the sale or chains, initially with those in China, Vietnam, transfer of capital (less allowable expenses). The and Thailand, will be fundamental. This may CGT will likely dampen property speculation as follow the “flying geese paradigm” of economic it reduces speculative demand, helping stabilize integration.40 Singapore, Korea, China, and Cambodia’s property market, which was booming Japan—the largest investors in Vietnam (and before the COVID-19 pandemic. With FDI inflows Thailand)—are also main investors in Cambodia. targeting the construction and real estate sectors, Therefore, attracting them to integrate Cambodia speculative demand rose quickly and has so far into their regional (and global) production chains distorted Cambodia’s housing market. In addition by improving connectivity, upgrading skilled labor, to collecting more revenue for the government, and reducing energy costs is a good first step. To the CGT will likely help contain the price volatility this end, it is essential to further facilitate trade of Cambodia’s property market during the post- and investment (measured against the country’s COVID-19 period. More importantly, the CGT rankings in global competitiveness and doing should help redirect investment from buy- business), while promoting small and medium- and-hold property for capital gains to finance sized enterprises (which account for a majority of productive and tradable sectors that underpin job the economy and labor market) through entry and creation and boost exports. expansion of innovative businesses and to align It is critically important to develop a and link them with the FDI sector. COVID-19 vaccine distribution infrastructure, It is imperative to continue to closely while identifying potential COVID-19 monitor vulnerabilities arising from a vaccine availability and affordability. This prolonged construction and property boom is an important time to make sure that any and the increase of credit provided to the upcoming vaccines will become available to construction and real estate sectors. This is Cambodia and will be distributed efficiently and particularly crucial if the pandemic lingers and fairly. Cooperation has been sought with regional damage caused by recent floods turns out to be countries developing COVID-19 vaccines such substantial. Such events will further diminish the as China to ensure Cambodia has access to the ability of businesses and households to repay COVID-19 vaccine when it is available. 40 The division of labor in the Pacific region has aptly been called the “flying geese paradigm” of development. 41 Letter 1313, Ministry of Economy and Finance, February 25, 2020. 42 Prakas 346, signed April 1, 2020, Ministry of Economy and Finance. The implementation of CGT, however, has been postponed until 2022, according to a GDT letter dated October 22, 2020. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 39 Special Focus: Adapting to COVID-19 in an Uncertain World Special Focus: Adapting to COVID-19 in an Uncertain World Special Focus: Adapting to COVID-19 in an Uncertain World43 1. Introduction exports, Cambodia’s key merchandise export sector. Together, tourism, garment and footwear, The COVID-19 pandemic has triggered what and construction sectors contribute more than a is likely to be the worst global recession third of all paid employment.45 since the Great Depression.44 The pandemic and efforts to contain its spread have led to The Royal Government of Cambodia has significant curtailment of economic activity responded with a variety of policy measures. around the world. Many emerging market and To help monitor the impact of the COVID-19 developing economies are experiencing domestic pandemic and inform policy responses, the outbreaks of COVID-19 and suffering from World Bank designed and conducted a Business international spillovers transmitted through trade Pulse Survey of firms in Cambodia (see box and investment channels. In Cambodia, the local S1). Using findings of the survey from June and COVID-19 outbreak has been broadly under September, this special focus explores the impact control, resulting in a relatively short period of that the COVID-19 pandemic is having on firms business closure in a limited number of sectors that in Cambodia relative to the East Asia and Pacific presented a high risk of COVID-19 transmission, (EAP) region and offers policy recommendations followed in July by increased mobility and gradual to support firm relief and recovery. While the restoration of normal life. But economic activity results show marked signs of improvement in remains weak, as the global demand shock has firm closures and sales, the impact is still being become the main issue alongside heightened felt widely. Firms continue to face substantial uncertainty. hardship through a variety of channels, with a long road to recovery ahead. Cambodia has been significantly affected by COVID-19, and the economic and social Firms are reopening, but sales continue to 2.  costs of the pandemic are expected to be impacted be large. Impacts of COVID-19 on the real economy include disruptions in labor supply, The global COVID-19 pandemic has consumer demand, global trade through global prompted governments around the world to and local supply chains, travel and tourism, as take measures to reduce the spread of the well as sharp disruptions in access to capital and virus. Lockdowns have mandated non-essential finance amplified by plummeting confidence businesses to close or significantly reduce in- of investors. Cambodia’s key growth drivers, person operations, but even in the absence of namely the merchandise export, tourism and mandatory closures revenue and businesses’ construction sectors, have been particularly operations have faced severe consequences affected. COVID-19 has effectively stalled of large negative labor and consumer demand the construction and real estate boom that shocks. Like other countries in the region, in relies heavily on foreign investment. Due to early-April Cambodia ordered closures of a travel restrictions and lockdowns, Cambodia’s range of businesses that presented a high risk of international tourism and hospitality sector has COVID-19 transmission, such as gyms and fitness collapsed. Global supply and demand shocks centers, health spas, cinemas, casinos, Karaoke have led to contractions in garment and footwear bars, and entertainment clubs. With limited local 43 This special focus was prepared by Sarah Hebous, Claire H. Hollweg, Philippe de Meneval, and Trang Thu Tran with valuable inputs from Wendy Cunningham and Maheshwor Shrestha. The authors thank Deepak Mishra for thoughtful suggestions. 44 World Bank (2020b). 45 World Bank (2020a). 42 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Box S1: World Bank’s Business Pulse Survey—Cambodia and globally The World Bank commissioned firm surveys to understand September 29, 2020. Additional rounds of follow-up the impact of the global COVID-19 pandemic on surveys are planned over the next 6 months. Throughout businesses in countries around the world. The questionnaire this note, results from the first round are referred to as June encompasses questions about the firms’ operational status, results and results from the second round as September the channels affecting operations, access to finance, access results. to support policies, and adjustment mechanisms used by The sample of interviewed firms consists of 537 firms in firms. June and 518 firms in September, with a panel of 419 firms, These business pulse surveys (BPS) have been thus far covering firms across all size groups1 in manufacturing or conducted in more than 40 countries globally with ongoing services2 and from five provinces in Cambodia (Battambang, collection of follow-up rounds. In the EAP region, BPS Kampong Cham, Kandal, Phnom Penh, and Siem Reap). surveys have been conducted in Cambodia, Indonesia, The survey was unable to identify the cause of attrition Myanmar, Malaysia, the Philippines, and Vietnam. The BPS between the June and September rounds (e.g. if a firm had surveys are conducted via short phone interviews, including closed permanently or was uncontactable for other reasons). in Cambodia. The vast majority of firms in the sample (94%) are registered with at least one governmental authority, with around 90% In Cambodia, a first round of data collection took place of micro firms being registered with some authorities.3 between June 18 and July 8, 2020, and a second round Around 28% of surveyed firms are female-owned. of interviews was conducted between September 3 and 1 In Cambodia, firms are classified as micro if they have less than 10 employees. Firms with 10-50 employees are classified as small, 51-100 medium and more than 100 employees large. Robustness checks were made for extremely small businesses with three employees or less as well as female- versus male-owned and results hold qualitatively. 2 Sectors include: agro-industry/food processing; textile, garment, clothing; electrical products; other manufacturing; construction or utilities; retail or wholesale; transportation and storage; accommodation or food services; information and communication; financial activities or real estate; education; health; and other services. The survey is not representative at the sectoral level. 3 The questionnaire asks if the firm was formally registered with any government authority at present: national business registration, sector license, local registration, tax registration, social security registration, other. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 43 Special Focus: Adapting to COVID-19 in an Uncertain World COVID-19 outbreak, many of these restrictions limited in their ability to operate. For example, were lifted in July and August conditional that only 55% and 60% of firms in accommodation additional health precautions be put in place. and food services and transportation and storage, respectively, were open in June. With 80% and Consistent with the return of domestic 83% of firms in these sectors open in September, economic activity, the findings of the BPS they have caught up considerable but are still show that firms have continued re-opening below average.48 The education sector had the their businesses since June. The share of lowest share of open firms in September, only firms that were open has risen from an already 64%. high share of 81% in June to 89% in September (figure S1, panel a). In September, 8% of firms Revenues improved but continue to be remained temporarily closed due to the pandemic, significantly affected by the COVID-19 shock. compared to 16% in June. The decision to Although the majority of businesses haven been remain closed is at the firm’s discretion as there open, most businesses continue to experience a are currently no mandated closure restrictions in large, negative impact on sales. The share of firms place.46 At the same time, the share of firms that reporting a decline in sales in the past 30 days has are permanently closed due to the COVID-19 decreased from its June level of 87% but remains pandemic remains stable at 2%.47 high at 71% in September (figure S1, panel b). In June, firms reported an average decline of sales Re-opening progress has not been uniform of 49%. In September, the average change in sales across sectors. While more than 90% of is less severe, but still negative at -30%. businesses were open in sectors such as manufacturing, construction, utilities, wholesale With further reopening, the rate of sales and retail trade, financial activities and health recovery in Cambodia is overall better than in June, businesses in other sectors were very other countries in East Asia and may improve Figure S1: Despite progress on re-opening, impact on sales continues to be high a. Operational status in June and September b. Impact on sales in June and September June 87 100 June September 89 September 80 81 71 80 Share of firms (%) Share of firms (%) 60 60 40 40 20 16 19 20 8 2 2 1 10 10 0 0 3 Open Temp. Perm. Closed 0 closed closed (other) Increased Remained Decreased (Covid) (Covid) the same Note: Businesses were asked to indicate what happened to sales during the 30 days prior to the interview. 46 Karaoke bars have been allowed to reopen but under a different business license as a restaurant. See https://www.thestar.com.my/aseanplus/ aseanplus-news/2020/07/07/phnom-penh-karaoke-bars-to-reopen-as-cambodia-controls-COVID-19. 47 This number may be underreported, as the survey was unable to identify the cause of attrition between the June and September rounds (e.g. whether a firm had closed permanently or was uncontactable for other reasons). 48 As an alternative to categorizing businesses into 13 sectors information on the main product or service can be used to classify businesses. The tourism industry can be linked to 12 products and services (selling souvenirs, entertainment, tourism services, taxi, translation services, drink services, massage, transportation, accommodation services, food services, tickets, wedding venues). The share of open firms in this industry has been 51% in June and 74% in September. 44 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World faster provided the COVID-19 pandemic the next six months. According to September remains under control without further results, firms’ expectations for future sales was on lockdown. An additional 8% of businesses have average -10%, although with many respondents opened between June and September in Cambodia, expecting close to no change in sales (figure comparable to an increase of 9% between May S3). In comparison, in June firms expected the and August in Myanmar (figure S2). Remarkably, change in sales to be -28% on average during the while the initial revenue shock in June was higher following six months. In fact, firms’ expectations and the share of closed businesses in September of the future change in sales in June accurately stayed significantly higher than in Vietnam, captured the actual average change in September revenues for Cambodian firms in September (-30%). have recovered more quickly. The average sales It is important to note however that micro, drop in September for Cambodian firms was small and medium sized firms (MSMEs) 30% compared to 36% in Vietnam. One possible in Cambodia, and across the EAP region, explanation is that sampled firms in Vietnam are have been more affected by the COVID-19 more dependent on external demand, which has pandemic. The impact on sales has been not been improved by domestic reopening alone. significantly higher for MSMEs than it has been for Firms in Cambodia expect the impact of the large firms (figure S4). In June, MSMEs reported COVID-19 pandemic to further weaken over an average decrease in sales of 47-56% compared Figure S2: Firms’ operational status is on par and sales recovery is faster than in East Asia a. Operational status b. Impact on sales Open Closed Philippines Myanmar Indonesia Cambodia Cambodia Vietnam Vietnam (Jul) (April) (Jun) (Jun) (Sep) (Jun) (Sep/Oct) 100% 11% 7% 3% 2% 0% 24% 19% 16% 56% -20% 50% 89% 93% 97% 98% 76% 81% 84% -30% -40% -36% 44% -44% 0% -60% -49% Philippines Indonesia Cambodia Cambodia Myanmar Myanmar Vietnam Vietnam -59% -58% -56% (Jul) (Jun) (Jun) (Sep) (May) (Aug) (Jun) (Sep/Oct) -80% Note: The survey was conducted in June for Cambodia, Indonesia, Vietnam, and July for the Philippines. Monthly sales refer to firm sales in the last 30 days prior to the survey (Cambodia, Indonesia and Vietnam). In the case of the Philippines, the change is between July and April, when Enhanced Community Quarantine (ECQ) was adopted. Figure S3: Expectations for future six months Figure S4: High impact on sales for MSMEs improving, but still negative on average Average change in sales in September (%) .02 0 June September .015 -10 -20 Probability .01 -30 .005 -40 0 -50 -100 -50 -0 -50 -100 Micro Small Medium Large Expectation about growth in sales Note: Businesses were asked to indicate what they expect to happen to sales over the next 6 months. The response rate for this question was 56% in June and 63% in September. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 45 Special Focus: Adapting to COVID-19 in an Uncertain World to 35% for large firms while in September the small firms has only slightly improved compared decrease was 30-37% for MSMEs and under to June (by 11%) but has improved significantly 15% for large firms. This finding is consistent for large firms (by 41%) (figure S5, panel b). across the EAP region, where monthly sales of Similarly, on average, only wholesale/retail SMEs have fallen by 24% more in Indonesia, 9% activities have recovered significantly in Vietnam in Philippines, and 7% in Myanmar.49 This may (figure S5, panel d) whereas the revenue loss for reflect fewer coping mechanisms for MSMEs firms across four broad sectors in Cambodia has than larger firms (discussed below). improved by between 15 to 23 percentage points (figure S5, panel c). While COVID-19 has had a significantly larger impact on sales for MSMEs in Cambodia, The impact of the COVID-19 pandemic is recovery is happening across all firm sizes being felt unevenly across Cambodia. The and sectors, unlike in Vietnam where recovery impact on firms in the Siem Reap province is is mainly driven by large firms in wholesale/ larger, and their recovery is slower, than in other retail sectors. Results between the June and provinces. In June, only a little more than half September survey rounds in Cambodia suggest of businesses in Siem Reap (57%) were open, that large firms have recovered only slightly faster compared to for example 88% in Phnom Penh, on average than MSMEs: the impact on sales but the region has largely caught up on reopening improved by 45% between June and September for in September (80% of businesses reported being large firms, compared to about 40% for MSMEs open). However, the impact on sales remains (figure S5, panel a). This is in contrast to Vietnam, comparably high. Across regions, the average where the drop in sales in September/October for decrease in sales in September is the highest in Figure S5: Recovery appears more even across firm sizes and sectors in Cambodia than in Vietnam a. Cambodia by firm size b. Vietnam by firm size Average change in sales during past 30 days (%) Average change in sales during past 30 days relative to last year (%) June September June September/October Micro Small Medium Large Small Medium Large 0 0 -10 -20 -21 -20 -32 -31 -40 -35 -30 -26 -38 -30 -48 -40 -52 -39 -60 -55 -44 -44 -44 c. Cambodia by sector d. Vietnam by sector Average chamge in sales during past 30 days (%) Average change in sales during past 30 days relative to last year (%) June September June September/October Agro-Industry Manufacturing Wholesale & Retail Other Services Agriculture Manufacturing Retail Other Services 0 0 -10 -10 -20 -20 -23 -30 -27 -30 -27 -29 -40 -35 -38 -40 -42 -43 -43 -42 -50 -50 -45 -46 -49 -50 -51 -47 49 World Bank (2020). 46 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World Siem Reap reaching more than 40%, whereas in For example, in June 34% of firms reported other Cambodian regions it is around 20-30% decreased availability of inputs, compared to 27% (figure S6). Sales recovery has also been slower in September. in Siem Reap than in Phnom Penh, for example Reduced cash flow is increasingly affecting (28% versus 41%). This reflects the severity of firms and is expected to worsen in the next the global demand shock of tourism—where months. After months of below normal sales, international arrivals to Cambodia have fallen by the share of firms that reports a shortage of 71.9% (year-on-year) during the first eight months of 2020—and Siem Reap’s high dependence on cash flow to the extent that it cannot carry out the tourism sector, as home to the famous ruins regular operations has risen from 61% in June to a of Angkor Wat temple complex. worrying 77% in September. This share is equally high for firms across all size groups as well as 3.  Firms face continued operational risks, for male- and female-owned firms. The share of particularly financing firms expecting cash flow shortages in the next 6 months has also risen, from 56% in June to 71% Beyond closures, firms’ operations can in September. be affected through other channels. These include availability of personnel due to changed Firms’ risk of falling into arrears—that is, circumstances; availability, increased costs or unable to meet payment obligations on time— lower quality of inputs due to supply shock- similarly remains high. Nevertheless, the share related delays; and access to financing. When of Cambodian firms at risk of falling in arrears firms are faced with large cash flow shortages, the in September has reduced. About 34% of firms availability of financial services payment deferrals, in June and 25% in September expected to fall in timely payment, and supplier credit become arrears in the next 6 months. This improvement crucial for firms to continue their operations. is in line with resumption of business activities and improvement in revenue observed above. The COVID-19 pandemic continues to Although improving compared to June, the risk of affect firms in Cambodia through these falling into arrears is higher for micro and smaller various channels. Based on the survey results, a firms. For example, 29% of micro and small firms significant share of firms in September reported: reported being in danger of falling into arrears in i) a shortage in the supply of financial services September, compared to 20% for larger firms. that are normally available (43%); ii) a decrease in availability of inputs (27%); and iii) a shortage Cambodian firms are in a comparable position of supplier credit and payment deferrals (22%)— to firms in other countries in the region with although there has been a slight improvement in regard to risk of default. The share of firms that these indicators compared to June (figure S7). expected to fall into arrears in Cambodia (34% in Figure S6: Tourism-dependent province of Siem Figure S7: Increasing pressure on cash flow Reap has been hit hardest 80 77 Average change in sales during past 30 days (%) June September 61 June September 60 Share of firms (%) Battambang Kampong Cham Kandal Phnom Penh Siem Reap 44 43 0 40 34 27 28 22 -20 20 -21 -29 -28 -28 5 1 -40 0 Decrease in Decrease in Shortage Shortage of Cash flow -43 -44 hpurs worked, availability of financial supplier shortage -47 -50 worker of inputs services credit, -54 availability payment -60 delays -61 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 47 Special Focus: Adapting to COVID-19 in an Uncertain World June) was significantly higher than in Indonesia as the main mechanism used to deal with cash (16% in June), but is similar to Myanmar (36% flow shortages). This had changed by September, in May) and below that in Vietnam (48% in June) when this share is almost halved (to 10%) (figure (table S1). S8). Firms do, however, continue to rely on family and friends to bridge cash flow shortages amidst Table S1: Firms’ financial situation in the pandemic (11%), which has remained a stable Cambodia is comparable to East Asia source of emergency finance. Country Already in arrears or Moreover, the share of firms using some sort expected to fall into of financing to deal with cash flow shortages arrears in the next 6 has fallen. This decrease—from 34% in June months to 26% in September—is mainly driven by Vietnam (Jun) 48% the decrease in firms’ use of their commercial Vietnam (Sep/Oct) 43% relationships in the form of supplier credit or payment deferrals mentioned above. While the Indonesia (Jun) 16% survey cannot give a definitive answer as to Cambodia (Jun) 34% whether this decrease is driven by changes in Cambodia (Sep) 25% demand or access to funding, the results show Myanmar (May) 36% a negative relationship between firms’ use of financing in response to COVID-19 and reported Myanmar (Aug) 40% changes to sales (figure S9).50 That is, firms with a more severe shock to sales are more likely to use Formal financial institutions so far have only financing to ease cash flow shortages. played a relatively minor role in easing firms’ cash flow shortages in Cambodia. Additional Overall, larger firms in Cambodia are less likely financing needed to cope with the COVID-19 to use financing and less likely to be in danger impact came mainly from suppliers’ credit and of falling in arrears, which is decreasing with payment delays in June, when firms relied on these firm size. Over half of micro firms are currently commercial relationships more than on other using some sort of financing (54%), while this forms of financing (18% of firms reported these is true for only about a quarter of large firms Figure S8: Persisting reliance on family and Figure S9: Firms with more severe shock to sales friends as main mechanism to ease are more likely to use financing to cash flow shortages ease cash flow shortages 20 June 18 40 Using financing in response to Covid-19 September 15 Share of firms (%) 11 11 35 10 10 30 5 4 4 4 3 1 2 25 0 -80 -60 -40 -20 0 Commercial Non-bank Informal Friends Commercial bank financial lender or relationship Change in sales institution familiy Note: Firms were asked to indicate the main mechanism used to deal Note: This figure is a binned scatterplot: Dividing the change in sales with cash flow shortages since the outbreak of COVID-19. Multiple into 12 bins and plotting the average of change in sales and likelihood answers were possible. Commercial relationships combine supplier of using financing in response to COVID-19 in each bin, controlling credit and payment delays. for firm fixed effects. It uses the panel of firms who responded in round 1 and round 2. 50 While firms’ indication of shortages in supplier credit and payment delays might also help in explaining the decrease in usage, it is worth noting that firms using these commercial relationships are also more likely to indicate a shortage, thereof perhaps reflecting perceived difficulties in the process. 48 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World (27%) (figure S10). Across all size groups, the use been and continues to be high. About 30% of firms of financing and danger of falling in arrears has reported reducing the number of employees in the fallen slightly between June and September but is previous 30 days in June and 31% of firms reduced still high, especially for micro firms. In June, the the number of employees in the previous 30 days share of firms in danger of falling in arrears was in September (figure S11, panel a). In comparison, ranging from 27% for medium firms to 38% for in September, the shares of firms reducing hours small firms. By September, it has fallen to 16% for or wages were lower than in June at 8-14%. medium firms to 29% for micro and small firms. The decision to implement more permanent 4. Firms’ coping mechanisms to the shock measures such as laying off employees compared to more temporary measures such Globally, in the face of limited ability to as reducing hours or wages or granting leave operate and generate revenue, firms are being of absence can be driven by different factors. forced to reduce costs by making adjustments It may reflect firms’ perception of the duration to employment. Firms can make adjustments on of the pandemic and changed circumstances or the intensive margin by granting leave of absence the severity of liquidity constraints. The latter or reducing wages or working hours, or on the is indicated by a strong negative relationship extensive margin by letting go of employees. between the likelihood of laying off workers and In Cambodia, firms have been adjusting by changes to sales (figure S11, panel b). It may also laying off workers and reducing hours or reflect on the flexibility of labor laws and the wages. The share of firms laying off workers has easiness to hire or fire employees across countries. Figure S10: Likelihood of using financing and The ability of firms to retain workers may also danger of falling in arrears decreasing reflect government policy, which in Cambodia with firm size focused on providing unemployment benefits 60 Share of firms (%) for suspended workers. In addition to tourism, 54 using 51 financing the garment, travel goods and footwear sector has using financing in response to also been hit hard by the COVID-19 shock, with 41 40 Covid-19 in danger of exports contracting by 11.5% by August 2020 33 29 29 falling in arrears (year-on-year). The sector employs close to one 27 23 24 million workers in Cambodia. In July 2020, about 20 18 16 20 400 garments, footwear and travel goods factories had suspended their operations, affecting 150,000 workers.51 As part of a package of emergency 0 intervention measures to manage the impact in Micro Small Medium Large Figure S11: Persisting reliance on family and friends as main mechanism to ease cash flow shortages a. Adjustments to employment b. Relationship between change in sales and laying off workers 30 31 -5 30 June Laying off workers September -4 Share of firms (%) 20 14 14 12 -3 10 9 8 7 8 4 -2 0 -80 -60 -40 -20 0 Hired Workers Increase Reduced Reduced Change in sales workers laid off in granted wages hours (net) (net) leave Note: This figure is a binned scatterplot: Dividing the change in sales into 12 bins and plotting the average of change in sales and likelihood Note: Firms were asked to report what happened to employment in the of laying off workers in each bin, controlling for firm fixed effects. It 30 days prior to interview. uses the panel of firms who responded in round 1 and round 2. 51 http://www.xinhuanet.com/english/2020-07/01/c_139180683.htm CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 49 Special Focus: Adapting to COVID-19 in an Uncertain World affected sectors and to ensure economic and social households did so in July compared to June. stability, the Royal Government of Cambodia There are considerable differences in introduced unemployment benefits for suspended adjustments to employment across firm workers in garment/footwear/travel goods sector sizes—with large firms more likely to lay off of $70 per month. Of this, $40 is to be paid by the workers and MSMEs more likely to reduce government and $30 is paid by the factory. working hours or wages or grant leave of These findings of the impact of the COVID-19 absence. In June, 39% of large firms reported pandemic on firms are consistent with the laying off workers compared to 26-29% of results of a high-frequency household survey MSMEs (figure S12, panel a). At the same time, undertaken in parallel by the World Bank. A while 25-28% of MSMEs made adjustments at survey of households in Cambodia undertaken in the intensive margin by reducing hours or wages May and August of 2020 shows that the share of or granting leave of absence, only 15% of large respondents who were working declined sharply firms did so (figure S12, panel b). By September, from 82% before the COVID-19 outbreak to these differences had levelled out. 71% in May, and remained relatively unchanged in August at 70% (see box 3 above). The household Compared to other countries in the region, survey also showed that COVID-19 continues employment adjustments in Cambodia to negatively affect informal non-farm business have continued to be dominated by the activities—an important part of Cambodia’s extensive margin (laying off workers) despite economy (see box S2)—albeit less severely improvements in both real and expected compared to the onset of the pandemic. Four in 5 revenue shocks. The share of firms that laid off households reported earning less or no revenues workers in Cambodia in both June and September is in April compared to March, while about 3 in 5 only lower than that in the Philippines (figure S13), Figure S12: Large firms more likely to make adjustments to employment at the extensive margin a. Adjustments at extensive margin b. Adjustments at intensive margin Micro Small Medium Large Micro Small Medium Large June June 40 39 40 September September 32 32 30 29 29 29 30 26 26 26 28 25 Share of firms (%) Share of firms (%) 22 22 21 20 20 18 15 10 10 0 0 Note: Combined indicator of firms using at least one of the following adjustment mechanisms: increase in granting leave of absence, increase in reduced wages, increase in reduced hours. Figure S13: Employment adjustments differ from firms in East Asia Hired workers Fired workers Granted leave Reduced wages Reduced hours 60% 52% 41% 37% Share of firms (%) 31% 29% 30% 22% 23% 20% 18% 17% 14% 15% 15% 12% 14% 11% 10%12% 8% 8% 9% 8% 8% 10% 8% 5% 6% 1% 0% Cambodia (Jun) Cambodia (Sep) Indonesia (Jun) Philippines (Jul) Vietnam (Jun) Vietnam (Sep/Oct) Note: Employment adjustments refer to the last 30 days prior to the survey (Cambodia, Indonesia and Vietnam). In the case of the Philippines, the change is between July and April, when Enhanced Community Quarantine (ECQ) was adopted. 50 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Box S2: Importance of non-farm household enterprises in Cambodia One in 5 Cambodians work in a non-farm household enterprise (nf-HHE). They are the one-man grocery vendors, the tailor shops, women selling grilled meats at the street markets, and motorcycle repair shops by the roads. They are not employees since they work for themselves or family members and they are not growth-oriented firms that are the hoped-for engine of Cambodian growth. Non-farm household enterprises are a crucial part of the Cambodian economy and labor market. The 1.4 million non-farm micro family businesses provide a range of goods and services that keep the domestic economy moving. They are also the main source of income for 17% of the work force in an economy that is slowly transitioning to modernity. Non-farm household enterprises are found across the country. More than half of urban households own a nf-HHE, as do 23% of rural households. Given the high concentration of the population in rural areas, 60% of nf-HHEs are located in rural areas. They are more concentrated in economic corridors and in wealthier communities, where petty trade and services is the most vibrant. Non-farm household enterprises are small, young, and concentrated in the retail sector. Half of nf-HHEs only employ the owner; another 51% employ at least one family member. Only 6% employ a non-family worker. Nearly half (47%) are in retail trade, with women owning two-thirds of these small businesses.1 Another 14% are in the transport sector (20% in urban zones), which is dominated by men. And 14% are in manufacturing, with a slightly higher share in rural zones and among men. Most (96%) nf-HHEs were started by their current owner, and are quite young, with a mean age of 6.9 years and a median age of 4 years (30% are one year or younger). Though those in the manufacturing sector are over a decade old. The COVID-19 crisis has highlighted the precarious situation of nf-HHE owners and their exclusion from the larger policy framework.2 In May of 2020, 81% of nf-HHE owners reported a reduction in or no income over the previous month, as compared to 62% of family farmers and 63% of employees. Income losses were particularly strong among urban nf-HHE owners (89%), but rural nf-HHEs also disproportionately showed income losses (79%). The finding is consistent across gender of the respondent, education level of the household head, and socio-economic status of the household head. The income loss was attributed to lost customers (70%) and business closure (14%) and was more pronounced for service and industry sectors. Non-farm family businesses have been seriously affected by the COVID-19 outbreak a. Change in revenue from business sales compared to last month b. Reasons for having less or no revenue No revenue Higher 8% 4% No customers/fewer customers 70 The same 15% Usual place of business closed 14 due to Covid-19 Other 7 Can’t travel 4 Can’t get inputs 2 Seasonal closure 2 Usual place of business closed 1 for another reason Ill /quarantined Less 73% 0 10 20 30 40 50 60 70 80 Percent Source: Cunningham and Shrestha (2020). 1 Enterprises that involve physically demanding activities such as transportation, construction, rice milling, repair work are mostly owned or managed by male. Only 38.3% of transportation related enterprises, 28.9% of enterprises engaged in repair and mechanic work, 41.9% construction related enterprises and 48.8% of rice mills are owned by females. 2 The COVID-19 survey of households collects basic information about household experiences during the COVID-19 pandemic. The first (of five) survey wave was collected11-26 May 2020. There were 700 respondents. The sample was slightly more rural (85%) than the general population (74% estimated from the CSES) but nationally representative for gender and poverty level (indicated by IDPoor status). CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 51 Special Focus: Adapting to COVID-19 in an Uncertain World where firms experienced almost a 60% declined in contact-intense environment for employees and sales between April and July, one of the highest rate customers (for example, through e-Commerce). of revenue loss in the region. Cambodia’s trend In Cambodia, firms’ use of digital platforms also contrasts with Vietnam, whose firms were to conduct business practices increased in less likely to lay off workers, grant leave, or reduce response to COVID-19. The share of firms wages and working hours in September/October changing to a different product or service since than in June. The high share of firms firing workers in Cambodia would need to be investigated as it may the COVID-19 outbreak was 10% in June, with an be explained by a number of reasons, from firms additional 5% of firms by September (figure S14, perceiving the shock as more permanent, being less panel a).52 By September, 23% of firms reported financially prepared to retain workers, less stringent having made investment in digital solutions and labor regulations, or stronger bargaining power vis almost half of firms (47%) stated that they had a vis the pool of available workers. increased the use of digital platforms. While initially the uptake of digital solutions was high How well firms cope with the adverse shocks (38%), it has slowed down between June and of the global COVID-19 pandemic will, among September. Among firms who have increased the other factors, depend on their ability to make use of digital platforms, most did so for marketing other types of adjustments to their business and sales purposes (figure S14, panel b). model. Firms may switch to different products or services that are in higher demand (for example, However, the use of digital solutions has not starting to produce medical products) or invest necessarily translated into significant changes in digital solutions in order to facilitate a less in firms’ business model. While the increased use Figure S14: Almost half of firms have increased the use of digital platforms by September a. Adjustment mechanisms b. Use of digital platforms by business function (September) 8 0�76 50 until June 0�63 Iune to September 9 6 40 Share of firms (%) 38 30 4 0�31 0�22 0�23 20 5 2 5 18 0�06 10 10 0 Business Supply Marketing Sale Payment Cross-border 0 Administratio Chain methods trade Repackage Investment in Increased use of Management product mix digital solutons digital platforms Note: Bars represent shares of firms relative to firms who increased Note: Data from panel sample. Firms were asked to indicate the use of digital solutions. adjustments since the outbreak of COVID-19. Firms making adjustments in September indicate additional adjustments after June. The total height of the bars is the cummulative share from both 1st round and 2nd round surveys. d. Remote work c. Digital sales 3�54% No work from home No digital sales 9�181% Work from home not increased 8�893% Digital sales not increased Work from home increased Digital sales increased 22�83% 87�28% 68�28% 52 The share of firms reporting having switched to new products/services in Cambodia in June is similar to that of firms in Indonesia and Vietnam, but much lower than those in Myanmar (26%) and Philippines (26%) in May and July, respectively. 52 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World of digital platforms is one of the key mechanisms to 5. Needed policies reported by firms successfully navigate social distancing requirements, A variety of policy options are being used by it is crucial to understand how well this increase Governments to ease financial pressures on has translated into changes in firms’ operations. firms and support their ability to conduct their Around two third of firms report no digital sales, business in the prevailing environment. Options and among those that do report digital sales, the for support policies include subsidies (for salaries or majority did not see an increase in digital sales fixed costs), payment deferrals or exemptions (rent, (figure S14, panel c). Only around 12% of firms tax, social security), access to finance (investment reported having at least part of their employees grants, [subsidized] loans, credit guarantees), working from home and the majority of these did government purchases or trade reforms. not increase the share of employees working from home (figure S14, panel d). The Royal Government of Cambodia has similarly implemented a range of policies to Relative to other countries in the region, support firms affected by the COVID-19 crisis, Cambodian firms appear to be at a disadvantage in addition to households and workers. These in using digital platforms in response to the include tax relief for firms in the tourism and COVID-19 crisis. Despite an increase in adoption garment/footwear/travel goods manufacturing between June and September that has been sectors (including exemption from paying observed throughput the region, Cambodia still has healthcare contributions to the National Social one of the lowest shares of firms having adopted Security Fund during operational suspensions); or increased use of digital platforms, above only additional capital injection for the Rural Myanmar (figure S15). At the same time, however, Development Bank to support agroprocessing Cambodian firms are also more likely to have made firms; establishment of a new SME Bank designed a new investment in digital solutions—particularly to support SMEs through co-financing and risk services firms in wholesale and retail trade—than sharing with commercial banks; accelerating in most other countries with available data.53 One the implementation of the Entrepreneurship possible explanation is that Cambodian firms were Development Fund through the establishment less digitally ready at baseline, and a substantial share of its operational arm Khmer Enterprise and needed to make new investments to start using the provision of emergency grants to selected digital solutions. This confirms earlier evidence of viable SMEs; measures to inject liquidity into the a nascent adoption of digital technologies by firms financial sector through the temporary lowering in Cambodia. For example, in Cambodia, only 24% of capital and reserve requirements as well as of firms reported having a website or homepage regulatory forbearance; and measures to improve in 2017, compared to the global median of 47%.54 the ease of doing business and trade facilitation. Figure S15: Digital adjustments to COVID-19 in East Asia Increased use of digital platforms in response to Covid New digital investment 59% 60% 53% 52% 48% 47% 38% 34% 30% 20% 18% 23% 19% 14% 12% 5% 0% Indonesia Philippines Vietnam (Jun) Vietnam Cambodia Cambodia Myanmar Myanmar (Jun) (Jul) (Sep/Oct) (Jun) (Sep) (May) (Aug) Note: The share of firms with increased use of digital platforms or making new digital investments in the 2nd round survey in Cambodia and Vietnam is the cummulative share from both 1st round and 2nd round surveys. 53 In Cambodia, 7% of firms in agro-industry, 15% in manufacturing, 31% in wholesale and retail trade, and 27% in other services reported making a new investment in digital solutions in September. Services and agro-industry firms were also more likely to increase use of digital platforms: 55% for wholesale and retail trade, 57% for other services, and 54% for agro-industry compared to 25% for manufacturing. 54 World Bank (2018). CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 53 Special Focus: Adapting to COVID-19 in an Uncertain World Tax deferrals continue to be the policy most government supply in this respect. In September, needed by firms in Cambodia, with access only 3% of firms had applied for loans, while no to loans and subsidies being also flagged as firms had applied for investment grants (reflecting needed. Fifty four percent of firms chose tax government policy towards these types of measures). deferral as one of their three most needed policies This gap is especially pronounced for smaller in September (figure S16). Access to loans, firms (figure S17). Tax deferrals are popular among investment grants, fixed cost subsidies and salary all size groups (around 50% to 60% of firms subsidies are also needed by significant shares of express the need for tax deferrals) but application firms (45%, 28%, 16%, and 13% respectively). It is important to note that while firms across all Figure S16: Tax deferral is most needed policy in size groups have expressed a growing need for September investment grants, investment grants have not yet been offered as a support measure in reaction to Rental deferral 15 Tax deferral 54 COVID-19.55 Other policy measures—such as Fixed costs subsidies 16 trade reforms and government purchases—are Access to loans 45 less likely to be mentioned by firms. Social security exemption 17 Salary subsidies 13 There is a noted mismatch between policy need Government purchase 7 Investment grants 28 and the ability to access the policy measures. Tax Trade reforms 13 deferral is the most needed as well as most applied Others 2 for policy (21% of firms apply for tax deferrals). 0 20 40 60 Demand for loans has diminished slightly in favor Share of firms (%) of subsidies and grants, but there is a noticeable Note: Firms were presented with 10 options and asked to indicate up widening gap between firms’ demand versus to 3 most needed policies. Figure S17: Mismatch between policy need and access a. Tax deferral b. Subsidies or grants Policy needed Policy applied for Policy needed Policy applied for 62 61 61 60 60 54 49 47 45 Share of firms (%) 39 Share of firms (%) 40 40 34 30 29 20 17 20 13 11 2 3 0 0 Micro Small Medium Large Micro Small Medium Large c. Loans Policy needed Policy applied for 60 56 46 Share of firms (%) 40 37 34 20 9 6 3 2 0 Micro Small Medium Large Note: This figure shows the total share of firms who were aware of or applied for or benefitted from support policies from the start of COVID-19 until September. It uses the panel of firms who responded to round 1 and round 2. Salaries and grants bundle fixed costs subsidies, salary subsidies, and investment grants. 55 The Entrepreneurship Development Fund and its operational branch Khmer Enterprise have piloted two rounds of small grants to around 20 SMEs based on viable business plans that can include working capital and investment. 54 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World rates are much lower for micro and small firms Table S2: Share of firms applied for or (17% and 13%, respectively) than for medium and benefited from government assistance falling large firms (30% and 29%, respectively). Larger in Cambodia firms are more likely to need subsidies or grants in Country Large Medium Small Micro All the form of fixed cost subsidies, salary subsidies, firms or investment grants (61% of firms) than MSMEs Cambodia 40% 29% 17% 21% 25% (39% to 47% of firms) but access is also much (Jun) higher with 34% of large firms having applied Cambodia 20% 12% 13% 9% 13% for subsidies or grants but only 2% to 11% of (Sep) MSMEs. Application rates for loans are low among all firm sizes (below 10%) but the need is Myanmar 30% 23% 20% 3% 10% higher for smaller firms. More than half of micro (May) firms list loans as their most needed policy but Myanmar 34% 18% 24% 14% 17% only one third of large firms express the same (Sep) need. Note: This figure shows the total share of new firms who were aware of or applied for or benefitted from support policies from the start of Access to support policies is similarly not COVID-19 until September. It uses the panel of firms who responded homogeneous across types of firms. The to round 1 and round 2. In Myanmar, micro are firms with 1-4 likelihood of being aware of and having applied employees, small 5-9 employees, medium 20-99 employees, and large 100 or more employees. for support measures decreases with firm size (figure S18). Not only are MSMEs the hardest An observed gender gap in access to policy hit in terms of sales, they are all less likely to measures in June seems to be closing. Female- be aware of and benefit from government owned firms were significantly less likely to be support policies compared to large firms. While aware of or have applied for government measures 97% of large firms are aware of government than male-owned firms in June (21% versus 27%). measures and 60% have applied for at least one By September, however, these differences had by September, these shares are at only 74% and disappeared. 30%, respectively, for micro firms. This implies that two thirds of large firms who are aware of 6. Policy recommendations support measures have applied for them, but this Overall, the business pulse survey shows true for 40% of micro firms. that the economic and social costs of the The finding that access to government support decreases with firm size is not Figure S18: Large firms are more likely to be unique to Cambodia. However, unlike other aware of and apply for support policy countries in the region, Cambodia has not made measures improvements in access for MSMEs in the three Micro Small Medium Large 100 months between June and September (table S2). 97 87 Aware of For micro and small enterprises in particular, the 80 78 Applied for or 74 benefitted from share of firms applying for or benefitting from government assistance declined between June and 60 60 September, from 21% to 9% for micro firms and 41 17% to 13% for small firms. This is in contrast 40 30 30 to Myanmar, where overall access to government 20 support has close to doubled between May and August, driven by a marked increase among micro 0 and small sized firms. This is a cause of concerns Note: This figure shows the total share of firms who were aware of given the more limited access to finance and higher or applied for or benefitted from support policies from the start of COVID-19 until September. It uses the panel of firms who responded default risk for MSMEs, as described above. to round 1 and round 2. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 55 Special Focus: Adapting to COVID-19 in an Uncertain World COVID-19 pandemic are being felt widely by be a change in consumer behavior, MSMEs may firms, and by MSMEs in particular. This is need support to adjust business models to the not surprising as MSMEs are the most impacted post-crisis economic environment, for example and can become even more vulnerable as time by making better use of fintech and e-commerce. passes as they are less likely to have capacity to While certain trends may seem clear at present, deal with supply shocks (e.g. resources to set up considerable uncertainty remains about remote work and to adjust production planning) how the post-COVID-19 world will actually and demand shocks (e.g. less cash on hand to use look. While the pandemic has accelerated some as cushion). While the survey does not show that trends that were already in place (e.g. growing female-owned firms are more affected, female digitalization), there are questions about how long workers are more affected as they are over- represented in the informal sector, in the garment some impact will last (e.g. decline in demand for and in the tourism industry. air travel, hospitality and tourism). Early discovery and widespread distribution of pharmaceutical Policymakers will need to adapt the targeting treatments and/or vaccines for the Coronavirus and design of measures and ensure that would hasten global recovery. On the other small and micro firms’ needs are adequately hand, if a successful global recovery depends on addressed. Policy measures must be sufficiently sustained enforcement of mitigation measures flexible to cover the various segments of firms and across countries, in that case it would likely be adapt their targeting to Cambodia’s distribution more protracted and uneven, raising concerns of enterprises. It is particularly important as about international logistics and supply chains. Cambodia has a “missing middle,” with medium- sized enterprises making up only 1.3% of the In this uncertain environment, it becomes roughly 500,000 enterprises covered by the 2011 critical for the government to build the Economic Census. Cambodian-owned enterprises adequate framework and capacity of its have not been able to grow beyond micro- and policy delivery tools. Existing policy tools are small-sized into competitive medium- and large- not designed to deal with external shock such as sized enterprises, mainly due to a large productivity the COVID-19 pandemic. Policymakers should gap. The COVID-19 will likely further widen this innovate and adapt their delivery capacity and gap unless the government focuses on improving firm-level support programs to improve the productivity of entrepreneurs and small firms. survival chances of viable firms and accelerate the adaptation of firms and sectors with growth The survey also shows that the situation can potential to the post-COVID-19 economic evolve rapidly, for better or worse, which creates environment. This requires establishing an additional challenge for policymakers in institutions with transparent processes, effective designing emergency and recovery programs. governance and operational capacity. Responses to the Business Pulse Survey have varied significantly between July and September Cambodia has started to set up and strengthen as the situation has improved markedly. At the several key institutions and programs that can same time, experience in neighboring countries support private sector development. The RGC also shows that the virus can spread again and is notably accelerating the operationalization lead to additional lockdowns that would have a of several complementary support schemes dramatic impact on businesses. In addition, if the for enterprises, facilitating access to loans and transition from crisis to recovery is confirmed, emergency grants, including notably: the Credit the focus of government policy will need to shift Guarantee Corporation of Cambodia (CGCC), the to support adjustments necessary to thrive in a SME Co-Financing Scheme administered by the changed world, support job creation and preserve Small and Medium Enterprise Bank of Cambodia growth-oriented enterprises. This may also (SMEBC) and support provided to startups and involve managing financial restructurings, debt SMEs by the Enterprise Development Fund and resolutions and bankruptcies. As there may also Khmer Enterprise, its operational arm. 56 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World Access to finance finance remains important as the deterioration of firm’s balance sheets increases the financial sector Recent policy moves by the government focus risk aversion when extending new credit. on facilitating access to finance for large firms and SMEs. The RGC has launched a SME Co- Cash injections and incentives to SMEs Financing Scheme which is administered by the Small firms that do not have access to the recently established SMEBC. This program aims traditional financial sector (unbanked SMEs) to provide credits with lower interest rates, equally could benefit from grants and cost reductions. co-financed by the SMEBC and commercial Depending on country context, these can take the banks and microfinance institutions. As the form of small cash injections or reprofiling grants. SMEBC has been recently established, it has SMEs that have access to the financial sector and/ significant institutional building needs to achieve or are integrated into the economy through value full operationalization. Its objective is to reduce chains could benefit from export development the challenge of access to finance for SMEs, or supplier development programs. Larger firms which was a challenge even before the COVID-19 can be encouraged to support MSMEs along their impact due to high risks, collateral requirements, supply chain, for example through incentivizing and absence of proper bookkeeping. partnerships with domestic suppliers via a mix The RGC has also decided to establish CGCC. of matching grants, credit lines, credit guarantees The CGCC will aim to increase availability of and reduced or delayed import tariffs. credit to SMEs by reducing credit risks faced by Looking forward, in the post-COVID-19 financial institutions, especially in the context recovery environment, re-purposing of the COVID-19 crisis. The key objective production lines and modes of delivery, of CGCC is to unlock financing to SMEs adapting to new markets, and investing in through financial institutions by reducing high innovation will be greatly needed, but this risk aversion, high collateral requirements and involves substantial risk and investment. To information asymmetries that financial institutions produce and export new products, to adapt to new in Cambodia face in lending to SMEs. As part market, or to do both, firms have to identify the of Government’s economic recovery program, right target market, product segment, and selling the CGCC focus will be to support both SMEs channel; adapt their products; launch marketing survival during COVID-19 and their recovery and and selling campaign; hire new workers to be diversification during post-COVID-19 phase. ready for the job; and obtain necessary quality and While policy measures facilitating access to standards certification. These activities require finance are critical, the government must significant investments with uncertain outcomes also be mindful that these types of measures and thus are often not financed from traditional may in practice primarily benefit the larger financing sources such as commercial banks. firms and the formal sector. Support extended Considering this challenge, several countries by the government in the form of credit are implementing matching grant programs for injections through soft loans, for example, risks firms to improve their productive capabilities helping large or well-established medium-sized and accelerate the process of economic firms disproportionately since these firms can recovery. Under this type of program, firms access credit from the banking system, unless identified as having viable investment plans can governments enforce strict access criteria for SMEs, benefit from matching grants to reimburse part of in particular those that have remained unbanked. the costs linked to investments. This includes both To be sure, large firms also play an important the soft (technical assistance on technical skills, role in generating high productivity employment, managerial skills, compliance with international including in key sectors that typically are export- standards, etc.) and hard (procurement of oriented. But it is important to acknowledge that machinery, equipment, etc.) recommendations government support to smooth SME’s access to of a business diagnostic. The matching grants CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 57 Box S3: Social protection / policy for the non-farm household enterprise Non-farm household enterprises are largely labor in the policy shadows, and the COVID-19 crisis has highlighted their exclusion from the larger policy framework. Three pillars of policy are necessary to nourish, grow, and protect the household entrepreneurs: Nourish: Policies and interventions to improve productivity of the vast majority of household enterprises. Not all businesses aspire to or have the ability to become a source of jobs for others. However, interventions can be targeted to increasing their productivity. Analysis shows potential success of interventions include those that teach higher-order socio-emotional skills, entrepreneurial mindset, better business practices, mobile and digital technologies for productive use, and of interventions that connect to markets and higher value chains. Care needs to be taken to deliver the interventions in a manner and form suitable to the entrepreneurs. For instance, regular classroom-based training for several weeks may not be feasible as it leads to loss of income as well as time away from care and household activities that the business owners often multi-task from. Additional incentives may also be required to make training attractive to them. Grow: To identify high growth potential entrepreneurs and help them grow. There could be some potential entrepreneurs that could have the potential to grow rapidly if given appropriate financial and non-financial support. Many evaluations of micro-credit and related support programs have found that financial and non-financial support can really drive these ‘gung-ho’ entrepreneurs in a virtuous cycle of growth. However, these ‘gung-ho’ entrepreneurs are hard to identify ex-ante. Having an eco-system where capable microentrepreneurs can select into and compete for large cash grants and business development support could be one potential way. Protect: Policies to provide adequate protection to the microentrepreneurs COVID-19 has shown the vulnerability of these nf-HHE owners as they are one of the worst hit subgroups with their incomes plunging down. They do not have social insurance to protect them during difficult times; they typically would not qualify for social assistance as they are doing well under the normal circumstances. Policy options could be: • Protection against idiosyncratic shocks: extending social insurance coverage to the informal sector; incentivizing nf-HHEs to participate in such a social insurance scheme; • Protection against aggregate correlated shocks: expanding the social registry (IDP registry) to cover a greater share of people with detailed information on income and employment sources; introducing adaptive social protection programs that provides social assistance to those affected by large scale crisis (eg. nf-HHEs during COVID-19). Source: Cunningham and Shrestha (2020). 58 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Special Focus: Adapting to COVID-19 in an Uncertain World phase of the program can be complemented by In order to effectively implement a cross-cutting a match-making program in which firms can be business environment and investment climate connected with financial institutions in putting up reform agenda spanning multiple authorities and their matching contribution. ministries, it will be crucial that a coordination mechanism is in place to ensure that all agencies Supporting micro-firms are working together towards the same goals. Single owners and very small firms (i.e. less Considering the urgency, it is also important that than 5 employees), which account for the there is a designated reform champion with political majority of jobs, are usually best targeted leverage to ensure the reforms are implemented. through social protection, one-time grants, Revisiting the bankruptcy and insolvency microfinance and Fintech solutions.56 The procedures may become a priority. The informal sector dominates non-agricultural deterioration of assets will increase the risk employment. The vast majority of informal of insolvency for many firms, with negative businesses have few or no paid employees, low implications on credit markets, supply chains, productivity, are not linked to the formal economy and worker productivity which will dissipate except through utility and rent payments and only gradually. The government can prepare for are highly dependent on social networks and recovery by creating enabling environments to community-based financing. One-time grants restructure debt and firms, including through can be used but should not be contingent on strengthening insolvency and resolution and legal formalization for tax purposes, in which case frameworks for corporate and consumer debt pickup would be limited. Leveraging fintech restructuring, and out-of-court conciliation and instruments or non-traditional marketplaces to resolution measures. The latter will be particularly provide liquidity to informal players and micro- important to prevent a surge in insolvency, value- small firms may provide new access to finance destroying liquidations and asset fire-sales, helping opportunities. (See box S3 for a discussion of to preserve employment. policies that more broadly support development of the non-farm household enterprise sector.) In conclusion, government policies to support firms can follow several options that are not Bankruptcy, insolvency and the business mutually exclusive and can be implemented environment in phases. Options presented above cover a Finally, Cambodia could further accelerate wide array of financing instruments, such as the reform of its business environment. the provisions of soft loans, credit guarantees, Cambodia lags behind peers in terms of the small grants or matching grants for encouraging ease of doing business. Areas of particular room MSMEs survival and investment to adapt to for improvement include enforcing contracts, the post-COVID-19 environment. They are resolving insolvency, dealing with construction conditioned by Cambodia’s fiscal space to address permits, registering property, and protecting the impact of the crisis on the private sector. minority investors. The investment climate can They are also conditioned by the timing of the also be strengthened further by ensuring investor economic crisis and capacity of government and protection. With the right incentives in place, this institutional stakeholders to deliver effectively the could also support the country to tap into foreign support program. knowledge and facilitate productivity spillovers. 56 This is a subset of micro firms in Cambodia, which is classified as less than 10 employees. CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 59 References References Cunningham, W., and M. Shrestha (2020). “Non-farm Household Enterprises in Cambodia: Moving out of the policy shadow.” World Bank, Washington, D.C. World Bank (2018). Benefitting from the Digital Economy: Cambodia policy note. Washington, D.C.: World Bank Group. World Bank (2020a). Cambodia Economic Update: Cambodia in the time of COVID-19. Washington, D.C.: World Bank Group. World Bank (2020b). East Asia and Pacific Economic Update: From containment to recovery. Washington, D.C.: World Bank Group. Appendix Table A.S1: Sample distribution Micro Small Medium Large Battambang 3.80% 2.66% 1.99% 0.85% Kampong Cham 2.47% 1.99% 1.33% 0.95% Kandal 1.71% 1.14% 0.85% 1.23% Phnom Penh 23.06% 12.43% 12.24% 11.39% Siem Reap 7.87% 4.36% 4.27% 3.42% Figure A.S1: Google mobility trends in Siem Reap have not recovered compared to Cambodia a. Cambodia a. Siem Reap Source: COVID-19 Community Mobility Reports. 60 CAMBODIA ECONOMIC UPDATE | NOVEMBER 2020 Annex. Cambodia’s key indicators Annex. Cambodia’s key indicators 2017 2018 2019e 2020p 2021f 2022f Output and Economic Growth Real GDP growth, at constant market prices (annual %) 7.0 7.5 7.1 -2.0 4.0 5.2 Private Consumption 3.7 3.0 7.0 -1.4 3.4 4.7 Government Consumption 23.5 5.1 10.0 6.7 8.6 5.8 Gross Fixed Capital Investment 6.1 6.1 6.9 6.3 6.1 7.1 Exports, Goods and Services 5.3 5.3 7.8 -12.6 5.4 5.4 Imports, Goods and Services 4.1 4.1 6.0 -8.9 5.5 5.4 Real GDP growth, at constant factor prices (annual %) 6.8 7.4 6.8 -2.0 4.0 5.2 Agriculture 1.7 1.1 -0.5 1.5 0.9 1.0 Industry 9.7 11.6 11.3 -1.2 6.9 7.1 Services 7.0 6.8 6.2 -4.3 2.6 5.1 Money and Prices Inflation, consumer prices (annual %, period average) 3.3 3.1 3.2 3.0 2.5 2.5 Broad money (% of GDP) 88.2 100.7 107.7 111.6 126.1 145.0 Domestic bank credit to private sector (% of GDP) 86.4 99.4 114.2 123.3 132.0 140.0 Nominal Exchange Rate (local currency per US$) 4,062 4,067 4,070 4,100 4,090 4,080 Nominal Effective Exchange Rate (annual %, incr = 0.0 -0.8 1.1 -0.1 0.3 0.3 appr) Real Effective Exchange Rate (annual %, incr = appr) 1.3 -3.4 -0.1 0.5 0.5 -0.1 Short-term interest rate (% p.a.) 11.7 9.7 9.5 9.3 9.0 9.0 Fiscal Revenue (% of GDP) 21.9 23.8 26.3 18.8 18.6 20.8 Expenditure (% of GDP) 22.7 23.4 25.5 24.4 24.6 24.4 Overall Fiscal Balance (% of GDP) -0.8 0.4 0.8 -5.6 -6.1 -3.5 Primary Fiscal Balance (% of GDP) -0.4 0.8 1.2 -5.1 -5.6 -3.0 General Government Debt (% of GDP) 30.3 30.0 29.0 31.6 32.0 32.7 External Accounts Exports, GNFS (nominal US$, annual %) 9.4 12.3 9.5 -18.5 8.0 9.0 Imports, GNFS (nominal US$, annual %) 7.8 9.3 9.0 -17.8 7.1 8.1 Current account balance (current US$ millions) -2,140.5 -2,180.1 -2,703.9 -3,477.2 -3,814.1 -3,890.5 Current account balance (% of GDP) -9.7 -8.9 -10.0 -12.8 -13.1 -12.4 Foreign direct investment, net inflows 2,673.1 3,088.8 3,561.0 2,092.1 3,040.8 2,981.3 (current US$ millions) Gross international reserves (US$ million) 12,200.6 14,629.1 18,763.3 19,291.2 19,169.4 18,949.4 (prospective months of imports) 7.0 7.0 10.0 10.0 9.0 9.0 Memo: Nominal GDP (US$ millions) 22,114.9 24,476.1 27,030.5 27,135.4 29,128.2 31,420.7 GDP per capita (US$, nominal) 1,376.1 1,500.5 1,633.2 1,616.7 1,712.1 1,822.9 GNI per capita, Atlas method (current US$) 1,230.0 1,380.0 1,480.0 Sources: Cambodian authorities; and World Bank staff estimates and projections. 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