CAMBODIA ECONOMIC UPDATE CAMBODIA CLIMBING UP THE MANUFACTURING VALUE CHAINS October 2017 Selected Issue: CAMBODIA CALLING: Maximizing tourism potential CAMBODIA ECONOMIC UPDATE CAMBODIA CLIMBING UP THE MANUFACTURING VALUE CHAINS October 2017 Selected Issue: CAMBODIA CALLING: Maximizing tourism potential CONTENTS ACKNOWLEDGEMENTS................................................................................................................... 2 SECTION I: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK............................................... 5 EXECUTIVE SUMMARY..................................................................................................................... 5 RECENT ECONOMIC DEVELOPMENTS............................................................................................ 12 The real sector................................................................................................................................ 12 a) Main drivers of growth....................................................................................................12 b) Newly emerging manufacturing industries.................................................................17 c) Structural transformation...............................................................................................20 Poverty..............................................................................................................................................21 The external sector..........................................................................................................................22 Inflation..............................................................................................................................................24 The monetary sector........................................................................................................................25 a) Monetary aggregates, interest rates and exchange rates.......................................26 b) The banking sector.........................................................................................................28 The fiscal sector.............................................................................................................................. 29 a) Revenue mobilization....................................................................................................29 b) Public expenditures........................................................................................................30 c) Fiscal balance.................................................................................................................30 d) Government savings and public debts.......................................................................31 OUTLOOK AND RISKS...................................................................................................................... 35 KEY MESSAGES AND POLICY OPTIONS.......................................................................................... 38 SECTION II: SELECTED ISSUE: CAMBODIA CALLING: MAXIMIZING TOURISM POTENTIAL........... 41 Introduction......................................................................................................................................41 Industry performance......................................................................................................................42 Tourism sector organization............................................................................................................46 Enabling environment.....................................................................................................................52 Policy and initiatives........................................................................................................................53 Key messages..................................................................................................................................54 ANNEX 1: The challenge of creating an inclusive tourism system; the case of attracting investment in Lombok, Indonesia..................................................................................................61 ANNEX 2: The importance of destination-level management...................................................64 Cambodia: Key Indicators..............................................................................................................67 October 2017 CAMBODIA ECONOMIC UPDATE 1 ACKNOWLEDGEMENTS The preparation of the 2017 October Economy and Finance and the National Cambodia Economic Update was led by Bank of Cambodia for their cooperation Sodeth Ly, with contributions from Miguel and support. The report also benefited from Eduardo Sánchez Martín. The selected the advice, comments and views of various issue “Cambodia calling: Maximizing stakeholders in Cambodia, including its tourism potential” was prepared by Wouter enthusiastic readers and critics. Schalken. Linna Ky served as research assistant, and Runsinarith Phim, short-term The CEU, produced bi-annually, provides consultant, provided inputs to the selected up-to-date information on macroeconomic issue section. The poverty section was developments in Cambodia. It is distributed prepared by Kimsun Tong. The World Bank and discussed widely including among Cambodia Office Communications Team, Cambodian authorities, development comprising Saroeun Bou and Sophinith Sam partners, the private sector, think tanks, civil Oeun, helped with the media release, web society organizations and academia. display and dissemination events. For information about the World Bank and The team worked under the guidance of its activities in Cambodia, please visit our Deepak Mishra. The team is grateful for the website at www.worldbank.org/cambodia. advice and comments provided by Ellen A. Goldstein and Inguna Dobraja. Several To be included in the email distribution list World Bank colleagues provided comments of the CEU and related publications, please on the draft version including Shabih Ali contact Linna Ky (lky@worldbank.org). For Mohib, Sudhir Shetty, Congyan Tan, Lan van questions on the content of this publication, Nguyen, and Jean-Pascal Nguessa Nganou. please contact Saroeun Bou (sbou@ worldbank.org). The team is grateful to the Cambodian authorities, in particular the Ministry of 2 CAMBODIA ECONOMIC UPDATE October 2017 List of abbreviations Abbreviations and acronyms Meaning ASEAN Association of Southeast Asian Nations CPI Consumer Price Index CR Cambodian Riel EU European Union FCD Foreign Currency Deposit FDI Foreign Direct Investment IDP Industrial Development Policy IMF International Monetary Fund GDP Gross Domestic Product LPCO Liquidity-Providing Collateralized Operation GIR Gross International Reserves MMA Monthly Moving Average NCD Negotiable Certificate of Deposits NPL Non-Performing Loan NSDP National Strategic Development Plan TVET Technical and Vocational Education Training PDR People’s Democratic Republic RGC Royal Government of Cambodia SPPF Social Protection Policy Framework y/y or yoy Year-on-Year UN United Nations UNESCO United Nations Educational, Scientific and Cultural Organization US$ United States Dollar WB World Bank YTD Year-To-Date October 2017 CAMBODIA ECONOMIC UPDATE 3 4 CAMBODIA ECONOMIC UPDATE October 2017 SECTION I: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK EXECUTIVE SUMMARY Growth remains robust, but is projected to ease slightly to 6.8 percent in 2017, compared with 7.0 percent in 2016. Exports of clothing and other textile products have moderated and the construction sector is showing signs of easing. Offsetting deceleration in the exports of clothing and other textile products, is the rising share of non-textile product exports, especially the exports of electrical machinery, equipment and auto parts, attracted by improved connectivity and access to a more reliable energy supply. Efforts to increase tourism potential seem to be paying off with a marked increase in the arrival of foreign tourists. Real growth is projected to remain strong, expanding at 6.9 percent in 2018. The medium-term outlook remains positive, boosted by export diversification and underpinned by healthy inflows of foreign direct investment (FDI) and an improving global outlook. A possible slowdown of the regional economy, especially China, and potential election-related uncertainties pose downside risks to the outlook. RECENT DEVELOPMENTS of exports grew at 5.4 percent year-on- year (y/y), down from 8.4 percent in 2016 Growth remains robust, although signs of with declining unit prices caused by rising slight moderation are evident. In 2016, real competitiveness from other textile exporters. growth was 7.0 percent. During the first six Cambodia’s external competitiveness is months of 2017, exports of clothing and being constrained by rising real wages other textile products continued to expand, and high logistics costs. Partly offsetting this reaching US$3.3 billion . However, the value 1 growth deceleration, exports of electrical 1 Articles of apparel and clothing accessories, knitted or crocheted (Harmonized System, HS code 61) and Articles of apparel and clothing accessories, not knitted or crocheted (HS code 62). October 2017 CAMBODIA ECONOMIC UPDATE 5 machinery, equipment and auto parts, Inflationary pressures, built up during together with footwear exports, have the latter-half of 2016, have now eased. picked-up. The share of the newly emerging Moderation in import growth during the exported products (excluding footwear) first half of 2017 reflected softer domestic rose to 8.7 percent of total exports in 2016, up demand. There are signs that construction from less than 2 percent in 2010—indicating activity, which had fueled domestic demand that Cambodia is at the cusp of climbing up until recently, is easing. Inflation moderated to the next stage of manufacturing value to 2.6 percent in August 2017, down from 3.9 chains. Authorities’ efforts to attract foreign percent at the end of 2016. The Cambodian tourists seem to be paying off. Tourist arrivals riel (CR) has slightly depreciated against the accelerated to 12.8 percent growth (y/y) US dollar, the Thai baht, and the Vietnamese during the first six months of 2017, compared dong. The riel/U.S. dollar exchange rate rose with 5 percent in 2016. to CR 4,053 in September 2017, up from CR 4,037 in December 2016. The financial sector, which has experienced exceptionally rapid growth in recent years, Cambodia’s fiscal position remains stable has shown healthy moderation. Credit and broadly supportive of growth. In 2016, growth has slowed, decelerating to 18.2 strong revenue collection continued as percent (y/y) in mid-2017, from 25.8 percent domestic revenue is estimated to have in 2016. Bank deposits, however, remained increased by almost 1 percentage point of strong, growing at 20 percent (y/y) by GDP. Rising current expenditure fueled by mid-2017, reflecting healthy capital inflows a growing wage bill was more than offset and improved confidence in the banking by a decline in capital spending. The fiscal system. Rising foreign currency deposits deficit (excluding grants) is estimated to have contributed to the expansion of broad have narrowed to 3.0 percent of GDP in money, which grew by 19.7 percent (y/y) by 2016, down from 3.5 percent in 2015. The mid-2017, compared with 17.9 percent in grants component of the budget, however, end-2016. continue to fall. Domestic revenue is likely to get a boost from oil revenue in the Cambodia’s external position remains coming years following the signing of the strong, underpinned by continued robust Petroleum Agreement for Offshore Oil Field export growth and rising inflows of FDI. Development in Block A. Cambodia’s With solid exports and lackluster imports, debt distress rating, as per the latest the current account deficit is estimated to World Bank/International Monetary Fund have narrowed to 10.2 percent of GDP in Debt Sustainability Analysis conducted in 2016, compared to 11.5 percent in 2015. September 2017, is categorized as low. Continued strong inflows of FDI supported Cambodia has maintained a low debt the rapid accumulation of foreign reserves, distress rating since 2011, thanks to the which reached almost US$7.8 billion (or six authorities’ prudent fiscal management and months of prospective imports) in mid-2017. the overriding principle of borrowing only on concessional terms. 6 CAMBODIA ECONOMIC UPDATE October 2017 Poverty reduction continued, driven mainly The tourism sector is recovering, largely due by income diversification of rural households to ongoing efforts to attract international from remittances, non-agricultural wages tourists, especially from China with new and household businesses. The growth regional direct flights and the “China Ready” deceleration in the textile and construction initiativeThe policy options suggested in the sectors is expected to affect the income selected issue entitled “Cambodia calling– earnings of the poor in terms of less overtime maximizing tourism potential” will enhance working hours or days. The most recent the tourism sector’s readiness to reap more preliminary quarterly survey of garment benefits from the recent increase in tourist workers in Phnom Penh confirmed that arrivals. daily income earnings of garment workers declined in May 2017, compared to February Downside risks to this outlook include 2017. Consequently, remittances originating a slowdown in the Chinese economy, from these sectors could possibly decline. gradual loss of external competitiveness, This will tighten household budgets and and potential election-related uncertainty. decrease expenditure in education, health, Given Cambodia’s increased dependency and investment in agricultural activities in on Chinese FDI and tourist arrivals, a sharp the rural areas, if the current trend persists. slowdown in the Chinese economy could negatively impact growth prospects. OUTLOOK Cambodia’s external competitiveness is currently being threatened by rising real The growth outlook continues to be wages, a strong dollar and emerging favorable. Real growth is projected to remain cheap labor competitors such as Myanmar. strong, at 6.8 percent in 2017. In 2018, growth FDI inflows into the textile industry have is expected to pick up marginally, reaching declined. Facilitating structural reforms to 6.9 percent, largely due to rising election- accelerate Cambodia’s transition to higher- related spending. In the absence of deeper value-added manufacturing products is, structural reforms (see policy section below), therefore, critical. The general elections are trend growth is likely to slope downward in scheduled to be held in mid-2018, which 2019 and beyond. Growth will continue to in the past have been associated with a be propelled by export diversification and period of heightened uncertainty, adversely underpinned by healthy inflows of FDI. Rising affecting investor’ sentiment. government spending including public investment is also expected to drive growth. Poverty is expected to further decline over The recovery in global trade is expected the next few years. This is underpinned to strengthen. There are promising signs by continued expansion of the services of diversification in the manufacturing and manufacturing sectors, together with sector, with the entry of high-value-added increases in remittances. However, there is a manufacturers, especially for electrical potential negative impact of the slowdown appliances and components, and auto of the textile and construction sectors. parts. Relatively high electricity and logistic The impact, if materialized, might reduce costs, however, remain key bottlenecks. job and income opportunities available October 2017 CAMBODIA ECONOMIC UPDATE 7 for migrant workers, and consequently, sector will require time, in the near-term it is diminish poverty reduction performance. necessary to review electricity tariffs to bring With sluggish agriculture growth, the rural them closer to their regional comparators. nonfarm (manufacturing, services and remittances) economy has so far been a It is also necessary to promote and improve significant contributor to poverty reduction the skills and quality of graduates coming and shared prosperity. An effort by the out of the education and vocational authorities has been made to stabilize programs. Identifying skills gaps to design agricultural prices (and to invest in rice courses that address such gaps, as targeted storage and drying facilities), especially rice under the 2017-25 National Technical and prices, with an introduction of a special fund Vocational Education and Training Policy, is for low-interest loans for rice purchases. also a priority. Further efforts are needed to facilitate KEY MESSAGES AND POLICY investment in the manufacturing sector. This OPTIONS is necessary, given the recent slowdown in Cambodia appears to be on the verge FDI in the tradeable sectors, especially the of climbing up the manufacturing value textile sector. As real wages rapidly increase, chains—from garments to electronics and Cambodia’s external competitiveness, which auto parts. It is crucial to nurture the newly primarily relies on cheap labor, is gradually emerging high-value-added manufacturing diminishing. It is therefore imperative to further industries. Promoting export diversification improve ease of doing business and the beyond textile (and footwear) products is a investment climate by eliminating regulatory priority. Supporting and further attracting on- impediments to bring down the costs of going and future FDI in high-value-added starting and operating businesses, as well as products, especially electrical appliances logistic costs. Relatively low costs will promote and components, and auto parts is critical and facilitate investment, especially FDI in to this transformation. In this regard, manufacturing as envisaged by the 2015-25 addressing the high electricity and logistic Industrial Development Policy. Cambodia’s costs together with skills constraints, which Doing Business ranking remains low. The remain key bottlenecks, is the first important country was ranked 131th out of 190 in step. In this regard, reforming the electricity 2017, compared with 82nd for Vietnam sector to provide competitive prices to and 46th for Thailand. Starting a business industries is an imperative. Cambodia has ranked among the lowest (180th) with the made rapid strides in providing access time spent to register a business is four times to electricity, improving availability, and longer than East Asia and Pacific region becoming nearly self-sufficient. However, average. This calls for further improving the price of electricity remains relatively high regulatory environment. It is also important compared to neighboring countries. It is due to reduce cost to export per container, to lack of a competitive energy generation which remained high. In 2014, it was US$795 sector, and fragmented transmission and for Cambodia, significantly higher than that distribution systems. While restructuring the in Thailand (US$595) and Vietnam (US$610). 8 CAMBODIA ECONOMIC UPDATE October 2017 Mitigating measures are necessary to the labor-intensive textile sector, have support rural households, which have been absorbed a large proportion of the rural hard hit by continued low agricultural prices. labor force shed by the agriculture sector The recent initiative to mobilize financial as structural transformation accelerates. resources readily for rice purchases during Successfully implementing the two main the rice harvest seasons and improving pillars-social assistance and social security, access to markets by remote farmers will envisaged by the 2016-25 national social certainly help. In addition, the potential protection policy framework will help negative impacts of the slowdown of textile prevent rural households from falling back and construction sectors will need to be into poverty. closely monitored. Both sectors, especially October 2017 CAMBODIA ECONOMIC UPDATE 9 FIGURE ES.1: THE CAMBODIAN ECONOMY AT A GLANCE Strong growth continued in 2016... ...dynamism in the tourism sector has (Contribution to growth, percent) returned... 8.0 7.3 7.4 Arrivals by air (% of total) Total visitors (y/y, RHS) 7.1 7.1 7.0 65.0 30.0 7.0 6.8 7.0 6.0 25.0 60.0 5.0 4.0 20.0 55.0 3.0 15.0 2.0 50.0 1.0 10.0 0.0 2011 2012 2013 2014 2015 2016 2017/p 45.0 5.0 Agriculture Indus-garment Indus-construction Serv-real estate 0.0 40.0 Indus-others Serv-trade Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Serv-others Taxes less subsidies GDP growth ...and there are signs of export Gross foreign reserves rapidly accummulated diversification (% total merchandise exports) on the back of healthy FDI inflows... 18 9,000 8.0 Electronic & rquip & parts (64) GIR (current, million USD) 16 Vehicles and parts (87) 8,000 7.0 GIR in months of imports (RHS) Footwear (64) 14 7,000 6.0 12 6,000 5.0 5,000 10 4.0 4,000 8 3.0 3,000 6 2.0 2,000 4 1.0 1,000 2 0 0.0 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 0 2010 2011 2012 2013 2015 2016 ... while credit has eased, returning to a more Strong revenue collection helped contain sustainable growth path. (y/y, % change) the fiscal deficit (General government fiscal 45 deficits as a percent of GDP) 40 0.0 35 -2.0 30 25 -4.0 20 -6.0 15 -8.0 10 Credits to the private sector 5 -10.0 0 Deficits (incl grants) Deficits (excl grants) -12.0 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 2009 2010 2011 2012 2013 2 014 2015 2016e 2017p Sources: Cambodian authorities, UN Camtrade, and Bank staff estimates and projections. Note: e = estimates; GIR = Gross International Reserves; p=projections; RHS = right-hand scale. 10 CAMBODIA ECONOMIC UPDATE October 2017 October 2017 CAMBODIA ECONOMIC UPDATE 11 RECENT ECONOMIC DEVELOPMENTS THE REAL SECTOR Figure 1: Cambodia's exports of clothing The level of economic activity in the real and other textile products continue to sector remains strong, while there are signs moderate (y/y, % change) of moderation in the exports of textile and 50 apparel articles and in construction activity. 40 Partly offsetting this moderation, exports of 30 electrical machinery, equipment, and auto 20 parts have picked up, and the authorities’ 10 efforts to attract international tourists seem 0 to have paid off, with double-digit growth in -10 Fabric imports Clothing and other textile products international tourist arrivals. -20 05 06 07 08 09 10 11 12 13 14 15 16 017 20 20 20 20 20 20 20 20 20 20 20 20 2 6-m a) Main drivers of growth Source: Cambodian authorities. The manufacturing sector-the exports of Exports are facing increased competition. textile and apparel articles. During the Real wages are rising, while productivity first six months of 2017, exports of clothing improvement remains modest. As a result, and other textile products reached US$3.3 the prices of exported garment products billion2. Exports grew at 5.4 percent (y/y) have been declining. Currently, the during the first half of 2017, down from 8.4 minimum wage (excluding allowances) for percent in 2016 (figure 1). In volume terms, the garment and footwear sector is US$ exports have also eased, increasing by 3.6 153 a month and is expected to increase percent (y/y), compared with 12.3 percent to US$ 170 a month in 20183. Since 2013, during the same period last year. the minimum wage has been rapidly 2 Articles of apparel and clothing accessories, knitted or crocheted (Harmonized System, HS code 61) and Articles of apparel and clothing accessories, not knitted or crocheted (HS code 62). 3 Articles of apparel and clothing accessories, knitted or crocheted (Harmonized System, HS code 61), and 12 CAMBODIA ECONOMIC UPDATE October 2017 rising, increasing at an average of 17.6 percent per year during the period 2013- Box 1: Export performance of Bangladesh and Vietnam in 17, compared with only 7.4 percent during apparel and clothing the period 2008-13. The textile sector is therefore under pressures to cut costs and Bangladesh and Vietnam are two major exporters of articles of apparel and clothing gradually add value to its products by accessories, accounting for 7.7 percent incorporating printing, embroidery and (US$33.5 billion) and 5.7 percent (US$24.6 washing and vertically integrating to the billion) of the world market share, respectively. Both countries have been able to robustly extent possible. In addition, annual FDI maintain their export share, especially after inflows into the sector have slowed recently. the 2008-09 Global Financial Crisis, growing Productivity of the textile (and footwear) at an average rate of around 14.5 percent and 16.0 percent during the period 2010-16, sector grew at a modest average rate of 1 respectively. percent a year during the period after the For Bangladesh, the share of the exports of 2008--09 global financial crisis. This followed articles of apparel and clothing accessories a rapid expansion of the sector before the in the country’s total exports continued to end of the Multi-Fiber Agreement in 2004. increase, rising to 86 percent in 2016, up from 75 percent in 2004. Bangladesh has retained its In 2016, Cambodia’s real GDP per capita cost competitiveness by maintaining relatively (at constant 2010 U.S. dollars) reached stable and low minimum wage which is US$1,0784. Evidence from garment-exporting reviewed only every five years. Currently, Bangladeshi minimum wage is BDT5,300 countries suggests the “threshold” range (equivalent to US$ 68) effective since 2013, to be between US$1,150 and US$2,000 real compared to Cambodia’s US$153. per capita GDP associated with decline in Success in export diversification has allowed per-capita garment exports (see Box 1 for Vietnam to reduce the share of the exports of experience of Bangladesh and Vietnam).5 articles of apparel and clothing accessories in the country’s total exports. The share of exports dropped to 11.5 percent in 2016, down from To prop up the textile industry and maintain 15.6 percent in 2004. Unlike Bangladesh and its competitiveness, several initiatives Cambodia, Vietnam is not a recipient of the and measures are being introduced. An “Everything But Arms” scheme which grants full duty free and quota free access to the important step is upgrading the skills of textile EU Single Market for all products. Vietnam’s factory workers through on-the-job training GDP per capita (constant 2010US$) reached with the establishment of Cambodian US$1,770 (2016), while its minimum wage remains relatively comparable to that of Garment Training Institute located in the Cambodia. Phnom Penh Social Economic Zone. Other initiatives recently introduced that are Minimum wage (US$) 2010 2015 2016 2017 Bangladesh 25 68 68 68 helping contain living costs of factory workers Vietnam 54-72 96-138 107-156 113-165 include access to lower utilities tariffs; and Cambodia 61 128 140 153 provision of free health insurance, pensions, Sources: ILO, American Chamber of Commerce in Vietnam, and Factsheet Clean clothes campaign. and transportation. 4 For more details, please see the selected issue entitled “the Garment Sector in Perspective”, October 2016 Cambodia Economic Update. 5 News release, October 5, 2017, Ministry of Labor and Vocational Training. October 2017 CAMBODIA ECONOMIC UPDATE 13 The European Union (EU) continues to be slowing down. Many indicators point to the most important market for Cambodia’s moderation of the construction and real garment exports. The EU together with the UK estate sector, although the number and absorbs about 45 percent of the total exports value of approved construction projects of clothing and other textile products. The during the first half of 2017 remains upbeat. US market is the second largest, accounting Imports of basic construction materials for a quarter of Cambodia’s exports, while which grew rapidly during the last four Japan accounts for 9 percent. Despite the years fueled by the post 2008/09 global challenges, Cambodia has been able to financial crisis construction boom, have increase its share in the world’s exports of recently decelerated. Notably, the growth textile and apparel articles, reaching 1.7 of imports of steel and cement, which are percent in 2016, up from 1.1 percent in 2011 basic construction materials, have either (figure 2). decelerated or turned negative during the first half of 2017 (figure 3). Figure 2: Cambodia's exports of apparel Figure 3: Imports of basic construction and clothing accessories (% of global meterials (steel and cement) have moderated trade in HS 61 and 62) and declined (y/y % change) 1.7 140 Steel 1.5 120 Other materials for construction 1.3 1.2 100 Cooling equipment 1.1 Cement 80 60 40 20 0 -20 2012 2013 2014 2015 2016 -40 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 Source: UN comtrade. Source: Cambodian authorities. Footwear exports continue to grow steadily. The majority of on-going construction activity The exports of footwear products, largely in urban areas pertain largely to completion of destined for the EU market, are second modern high-rise commercial and residential after clothing and other textile articles. Total building projects, which were begun several footwear export value reached almost years ago. This is reflected in rising imports US$0.5 billion during the first six months of 2017 of fixtures and furnishings materials and or 19.3 percent (y/y), up from 15.6 percent equipment including cooling appliances, in 2016. Reflecting increased competition, while the imports of the basic building average footwear export prices have been materials have shrunk. steadily declining since early 2016. Growth of domestic credits going to the The construction sector—a key driver of construction and real estate sector has also growth and job creation—appears to be slowed. Domestic credits provided by the 14 CAMBODIA ECONOMIC UPDATE October 2017 banking sector to the construction and real Figure 4: Camobodia's international estate sector declined to 28.6 percent (y/y) arrivals by air has increased markedly Arrivals by air (% of total) growth in mid-2017, down from an average 90 30 of 36 percent (y/y) growth during the last 80 four years. The share of construction and real 70 25 estate in the total domestic credit, however, 60 20 50 peaked, reaching 24 percent in mid-2017 40 Cambodia 15 (see the monetary section below for more 30 Thailand 10 20 Vietnam details). 10 Cambodia's total int'l arrivals (y/y, RHS) 5 0 0 D-10 D-11 D-12 D-13 D-14 D-15 D-16 A new but relatively small segment of Source: Tourism authorities (Cambodia, Thailand and Vietnam). construction development projects-- affordable housing projects -- seems to be Tourist arrivals from China now outpace those emerging. This is happening following the from Vietnam, making them the number boom in landed housing projects and high- one group to visit Cambodia. Chinese rise residential and commercial construction tourists accounted for 20 percent of total projects located in prime locations within international arrivals by mid-2017, up from urban centers. Recently, there has been 16.6 percent in 2016 (figure 5). Arrivals (mostly a shift toward investing more in affordable by air) from China skyrocketed, rising by 40 homes to serve the low-end market segment percent (y/y) or 0.52 million tourists by mid- on the outskirts of Phnom Penh and newly 2017, up from 12.4 percent during the same developed areas. For this segment, a period last year. It is likely that Cambodia larger discount and lower (and even zero) could receive as many as 1 million Chinese down payments are being offered for new tourists by the end of 2017. If the rapid purchases (of “to be built” homes or “being Chinese tourist arrival growth continues for built” homes) to prop up weak demand. the next few years, the authorities’ target of reaching 2 million Chinese tourists by 2020 Efforts to attract international tourists, seems feasible. especially from China, by the authorities Figure 5: Chinese tourists are rapidly seem to be paying off, with a swift recovery increasing (% of total) of tourist arrival growth. During the first six 25 Arrivals from China (% of total) months of 2017, total tourist arrivals reached 2.6 million, growing at 12.8 percent (y/y), up 20 from a mere 5.0 percent increase in 2016 15 (figure 4). Importantly, tourist arrivals by air 10 have increased significantly, rising by 23.1 percent (y/y), a record high since a decade 5 ago. - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Cambodian authorities. October 2017 CAMBODIA ECONOMIC UPDATE 15 During the first half of 2017, Vietnam, Lao PDR, While there has been progress in diversifying the Republic of Korea, and Thailand were destinations, especially to the coastal the main countries of origins for international region, the potential for ecotourism remains tourists after China, accounting for 14.7 untapped. Tourist destination diversification percent, 8.4 percent, and 6.3 percent of total efforts have successfully boosted foreign arrivals, respectively. While Asia continues to visitors to coastal areas, receiving 15 percent be the major source of tourists, arrivals from of the total international arrivals, up from 10 Western Europe and North America have percent a year ago. Ecotourism is incipient, picked up, rising by 24.7 percent and 18.4 with only a 2 percent share of total arrivals, percent, respectively. although there is a large potential. There is a plan to promote eco-tourism mostly in the Despite of initial success in diversifying north and northeastern parts of the country destinations, the Angkor temple complex with an introduction of wildlife adventure remained the main attraction site in parks, trekking and more. Cambodia (figure 6). Arrivals to Siem Reap province where the temple is located In addition, given the recent construction account for 60 percent of total international expansion, helping other emerging urban arrivals by air. Together with entrance fee areas (beyond Phnom Penh and Siem Reap) increases, the recent jump in tourist arrivals to become more tourist-friendly destinations has significantly boosted revenue collected by improving tourism infrastructure, facilities, from foreign tourists visiting the Angkor and accessibility, would help support Wat temple complex. The revenue from diversification in tourism destinations. There Angkor Wat entrance fees has reached are several new and rising attraction sites US$ 60.3 million during first seven months of such as Sihanoukville, Battambang, and 2017, an increase of 68 percent over the Kampot (see the selected issue entitled corresponding months last year. “Cambodia calling– maximizing tourism potential” for details). Figure 6: Angkor Wat remains the main attraction site, although initial success has Improved weather conditions have been made in diversifying tourist destinations underpinned agriculture sector expansion, (3mma, y/y) especially rice production. Rice production grew by 5.7 percent in 2016, reaching 9.8 35 Cambodia 30 Visitors to Angkor Wat million metric tons. Favorable weather 25 conditions also extended during rainy 20 15 season rice production in 2017. Contribution 10 to growth by agriculture subsectors such 5 as livestock and fisheries also improved 0 -5 last year. The agriculture sector remains an important sector for the economy although its share shrank to a quarter of GDP in Source: Cambodian authorities. 2016, down from 48 percent two decades ago. The sector provides 44 percent of 16 CAMBODIA ECONOMIC UPDATE October 2017 total employment or 53 percent of rural b) Newly emerging manufacturing industries employment. 6 There are some promising signs of However, most agricultural commodity diversification in the manufacturing sector, prices continued to remain low. International beyond the garments and footwear prices of rice and rubber briefly picked up industry. The entry of high value added (FDI targeted) manufacturers, especially during the second quarter of 2016, but have for electrical appliances and components, declined since (figure 7). To stabilize local and auto parts is encouraging. Sustained rice prices during the incoming harvesting macroeconomic stability and continued season, the authorities recently introduced liberal investment and trade policy, a number of initiatives, including the motivated by regional integration, are injection of relatively low-interest loans into attracting new breeds of foreign direct the rice sector and investing in building rice investors. While Cambodia had in the past storage and drying facilities.7 The authorities succeeded in attracting significant inflows also plan to improve farmers’ access to of foreign investments, they were largely markets, while cutting transportation and concentrated in footloose industries, mainly storage (and export) costs. This likely will textile and clothing that require low skills help reduce the large differences between and simple manufacturing processes such low farm gate prices and high retail prices as cut, make, and trim (CMT). of agricultural products, and benefit local farmers more. During the last several years, however, long-term and high-quality investments Figure 7: Agricutural commodities prices, have been growing. In addition to the in particulary rice and rubber prices energy sector, the construction, physical continued to be subdued infrastructure and high-value-added/ 700 7 sophisticated manufacturing sectors have 600 6 been receiving large and rising FDI inflows. 500 5 Recently, the presence of non-textile 400 4 industries which include manufacturers 300 3 of electronic appliance parts, earphone, 200 2 automobile parts, wire harnesses, electrical Rice, Thai 5% ($/mt) 100 Rubber, SGP/MYS ($/kg, RHS) 1 parts, optical parts, metal building materials, construction materials, and connectors are 0 0 rising. These newly emerging high-value- Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 added manufacturers are expanding, Source: World Bank. in terms of numbers and share of total manufacturers (Table 1).8 Accordingly, their export share has expanded (figure 8). 6 Cambodia Socio-Economic Surveys 7 In an effort by the authorities to stabilize agricultural prices, especially rice prices, a special fund with low-interest, amounting to US$ 50 million has reportedly been established (and an additional US$ 15 million will be invested in rice storage and drying facilities). The fund is mobilized to provide loans to rice millers so that they can purchase rice during the forth-coming rice harvesting season. 8 The Phnom Penh Special Economic Zone has witnessed a rapid expansion of non-textile manufacturing sectors. Of the 75 (ongoing and incoming) export manufacturers with total approved investment figure of more than half a billion US dollar during 2008 – 16 in the Phnom Penh Special Economic Zone (SEZ), only 7 are producing of apparel and clothing. From over a dozen countries, notable manufacturers include Minebea, Denso, Sumi Wiring Systems, Tanaka Foresight Inc., and Nikko Kinzoku. Companies located in other SEZs and other venues include Izumi Electronics (Cambodia) Co. in Sihanoukville Special Economic Zone, SC Wado Component (Cambodia) Co. (Cambodian-Thai border), Hyundai’s car assembly plant in Koh Kong province, and a Ford vehicle assembly facility located in Sihanoukville Port . October 2017 CAMBODIA ECONOMIC UPDATE 17 Table 1: Rising number (and share) of nontextile and footwear manufacturers in Cambodia Figure 8: Cambodia's export product diversification (beyond clothing) is 2012 2017 (Aug) expanding (percent of total exports) Industrial Classification Facto- Share Facto- Share (ISIC, Rev. 4) ries (%) ries (%) 10 9 Machinery (HS 84) Food, Beverages & 8 74 8.2 140 8.3 Electrical (HS 85) Tobacco (10-11-12) 7 Vehicles & parts (HS 87) 6 Textile, Wearing Apparel 673 74.2 1,110 65.5 5 & Footwear (13-14-15) 4 3 Paper & Paper Products 17 1.9 46 2.7 2 (17) 1 Chemical, Rubber and 0 60 6.6 124 7.3 2008 2009 2010 2011 2012 2013 2014 2015 2016 Plastics (20-22) Source: UN Comtrade Other non-Metallic 15 1.7 33 1.9 Manufacturing (23) and components produced in Cambodia Metallic, Electronic, Electrical, Machinery, as intermediate goods are exported to Motor Vehicle, other 46 5.1 121 7.1 be further processed and/or assembled Transport Equip (24-25-26- 27-28-29-30) elsewhere. It will be further enhanced Furniture (31) 12 1.3 82 4.8 by progress under regional integration, the ASEAN Economic Community. As Other Manufacturing (32) 10 1.1 39 2.3 integration deepens, Cambodia may be 907 100.0 1,695 100.0 able to move up from its production of Source: Cambodian authorities. nondurable consumer goods (clothing Note: International Standard Industrial Classification (ISIC), Rev.4 and footwear) to durable consumer goods (electrical machinery, machinery, and The new industries, if successfully nurtured, vehicle parts) and then to capital goods will enable Cambodia to further integrate industries, according to the famous “Flying into regional value chains with horizontal Geese” model of economic development. division of labor. Supporting growing interconnectedness of the Cambodian Including footwear, exports of non-textile economy and regional countries’ manufactured products already reached economies, electrical and vehicle parts 16 percent of total exports in 2016, based 18 CAMBODIA ECONOMIC UPDATE October 2017 on international trade statistics database Figure 10: Electricity tariff, country comparisons (figure 9). While quickly growing, Cambodia 9 25 remains far behind Vietnam and Thailand in having diversified manufactured products, 20 especially for exports machinery, electrical 15 cents / kWh machinery, and vehicles and parts. 10 Figure 9: Export diversification - regional comparison (% share, 2016) 5 100 90 0 80 1 Cambodia Philippines Vietnam Myanmar Thailand 70 8 60 Large Industry Customers Residential 50 Sources: Electricity Authority of Cambodia, 2015; Philippines Energy Regulatory 40 78 Commission, 2016; Vietnam Ministry of Industry and Trade, Decision No. 2256/ 30 66 43 QD-BCT, 2015; Myanmar Ministry of Electric Power, 2015; Thailand Energy 44 Regulatory Commission, 2016; De Ferranti et al., 2016. Latest available data. 20 10 0 11 1 the 2015-25 Industrial Development Policy Cambodia Cambodia Vietnam Thailand (2014) (2016) (IDP) (Table 2). It appears, however, that the Others Mineral fuel & meat prep Rubber and plastics (HS 39+40) Footwear targeted electricity tariffs remain relatively Machines/elect/vehicles (HS 84+85+87) Clothing expensive, when compared regionally. Source: UN Comtrade. Table 2: Electricity tariff reduction schedule Key bottlenecks to attract and expand the newly emerging and energy-intensive industries Source of connection 2018 2019 2020 include high electricity and logistic costs, and Sub-stations 0.126 0.126 0.126 growing skills constraints. Access to electricity P. Penh main network 0.165 0.163 0.162 has substantially improved since 2014, when the Investment Climate Assessment Provincial main network 0.164 0.163 0.162 found that electricity was the most severe Source: 2015-25 Industrial Development Policy. constraint.10 Cambodia has made rapid Promoting high-value-added manufacturing strides in providing access to electricity, will require a skilled workforce. Due largely to improving availability, and becoming nearly insufficient skilled labor, high-value-added self-sufficient. and sophisticated manufacturers must However, the costs of electricity remain among invest considerable time and resources to the highest in the region (figure 10) due to lack train their prospective workers (before they of competitive bidding in energy generation, can be readily employed) to be successful. and fragmentation in transmission and However, not many manufacturers are distribution, making addressing these costs willing to substantially invest in training, given the possibility that their workers may an important next step. To address the high be poached by others after being trained. costs of electricity, the authorities have Those not willing to make considerable targeted electricity tariff reduction under 9 http://www.intracen.org/ 10 http://documents.worldbank.org/curated/en/251591468236679212/Cambodia-The-investment-climate-assessment-2014-creating-opportunities-for-firms-in- Cambodia October 2017 CAMBODIA ECONOMIC UPDATE 19 investments in skills for their workforce have c) Structural transformation not been successful in improving worker Economic activity of the real sector sustained productivity. robust expansion, resulting in acceleration The World Bank Group Enterprise Survey in of Cambodia’s economic transformation. 2016 found that an inadequately educated Thanks to sound economic policies, workforce is the third most severe obstacle for accommodative financial conditions, and firm operation. The perceived constraint of healthy FDI inflows, Cambodia has recently an inadequately educated workforce (12 experienced accelerated economic percent of respondents) is behind only the structural transformation. The contribution constraint due to informal sector practices of agriculture to gross domestic product (28 percent of respondents) and political (GDP) has shrunk. Contribution by industry, instability (16 percent) (figure 11). Access a higher-productivity sector, has expanded. to transportation was the fifth most severe Agricultural growth flattened, declining from obstacle for firm operation. As discussed an average rate of 4.1 percent during 2006- above, while electricity is no longer listed 13 to 0.8 percent during 2014-16. In 2016, among the main concerns—most likely due agriculture’s share in GDP11 declined to to improvements in reliability of supply, costs 26.3 percent, down from about one-third remain high, especially for energy intensive a decade ago. Its share is now below manufacturers to compete. industry’s share of 31.3 percent. The services sector’s share in GDP remained relatively Figure 11: Obstacles to firm operation (Percent of firms) unchanged, accounting for the remaining 28.3 42.4 percent. This has contributed to the Practices of the informal… Political instability 16.1 robust economic and productivity growth Inadequately educated… 11.7 witnessed over the past two decades. Access to finance 7.6 Transportation 7.3 Accelerated structural transformation may Corruption 6.7 have contributed to achieving two of the targets Tax rates 6.3 under the 2015-25 Industrial Development Access to land 5 Policy.12 These targets are (a) increasing the 3.3 Business licensing and… GDP share of the industrial sector to 30 Electricity 2.4 1.6 percent by 2025, and (b) increasing exports Crime, theft and disorder Labor regulations 1.5 of manufacturing products (nontextile Tax administration 1.4 2016 2013 2007 products) to 15 percent of total exports by Courts 0.6 2025. With the recent construction boom, 0.2 Customs and trade… the official national account statistics show 0 10 20 30 the GDP share of the industrial sector has Source: World Bank Group Enterprise Surveys. reached 29.5 percent at current prices or 32.1 percent at constant 2000 prices in 2016. 11 GDP at current factor prices 12 The 2015–25 Industrial Development Policy introduced in August 2015 strategically aims to (a) attract investment, (b) modernize small and medium-sized enterprises, (c) improve the regulatory framework, and (d) coordinate supporting policies. Key targets include (a) Increasing the GDP share of the industrial sector to 30 percent in 2025 from 24.1 percent in 2013 while increasing annual manufacturing sector growth to 20 percent in 2025 from 15.5 percent by 2013; (b) Increasing exports of manufacturing products (nontextile products) to 15 percent of total exports by 2025 (from 1 percent in 2013) and increasing exports of processed agricultural products to 12 percent by 2025 (from 7.9 percent in 2013); and (c) Officially registering 80 to 95 percent of the country’s small and medium-sized enterprises by 2025, of which 50 to 70 percent will also have accurate accounts and balance sheets. 20 CAMBODIA ECONOMIC UPDATE October 2017 As discussed above, including footwear, exports of non-textile manufactured products Box 2: 2017-25 National Policy for already reached 16 percent of total exports Technical and Vocational Education in 2016. and Training (TVET) However, the recent economic structural The TVET policy adopted in June 2017 serves transformation seems biased toward as a roadmap, aimed at (a) strengthening the quality of TVET under national standards construction. In the industrial sector, to meet market demands, (b) providing equal construction has quickly expanded to opportunity to obtain TVET for employment, (c) become one of main drivers of growth encouraging public-private partnerships, and during the last decade. Within the industrial (d) improving governance of TVET systems. sector, the share of the construction sector The TVET policy also intends to create synergy of TVET programs and trainings provided the increased partly at the expense of the public sector, nongovernmental organizations, manufacturing sector. The construction and the private sector. sector as a percentage of GDP doubled To achieve the aims above, the National Policy to about 12 percent in 2016, up from for TVET is envisaged to set up a coordination about 6 percent in 2006, while that of mechanism to establish a national fund for skills the manufacturing sector declined to 16 developments, among others. New initiatives percent in 2016 from 18 percent in 2006.13 include introduction of TVET parks (and career centers) in main special economic zones, To support 2015-25 IDP implementation, the research centers to study new skills, and authorities introduced in June 2017, 2017-25 collaboration with employers to improve skills National Policy for Technical and Vocational developments and avoid skills mismatch. In addition, establishing “single window” offices at Education and Training. The policy is aimed TVET training centers including TVET awareness at mainly addressing skills gaps, supporting programs is also envisaged. TVET graduates export diversification to move up the value are encourage to become entrepreneurs and chain (see Box 2 for more details). part of the skilled workforce for labor mobility. A supportive and regulatory legal framework, including TVET law, is to be established. POVERTY The NPTVET was developed under the leadership of and coordination by the Ministry Poverty reduction continued, driven mainly of Labor and Vocational Training. by income diversification of rural households– earnings from remittances, nonagricultural wages, and household businesses. Sustained Source: The 2017--25 National Policy for Technical and Vocational economic growth has boosted household Education and Training. income and consumption. Household durable goods ownership, an important indicator of the overall welfare of the poor, has shown significant improvement.14 During the past two decades, household durable 13 The share increases to 18 percent when the real estate sector (classified under services) is included. 14 As they become more prosperous, households and individuals tend to engage in purchasing of more durable goods and long-term assets than basic consump- tion commodities. October 2017 CAMBODIA ECONOMIC UPDATE 21 goods ownership in the rural areas of days. The most recent preliminary quarterly Cambodia has been catching up fast. Rising survey of garment workers in Phnom Penh rural household ownership of cellphones, also confirmed that daily income earnings motorcycles, and personal computers has of garment workers declined in May 2017, been impressive. In 2004, only 5.7 percent compared to February 2017. Consequently, of rural households owned cellphones, and remittances originating from these sectors 22.3 percent owned motorcycles (table 3). could decline, tightening household budgets By 2015, 75 percent owned cellphones and and decreasing the expenditure on 67 percent owned motorcycles. Ownership education and health, and on investment of televisions (and personal computers) in agricultural activities in rural areas, if the has also markedly improved. As of 2015, 61 trend continues. percent of rural households own televisions Successfully implementing the two main compared with only 40 percent a decade pillars--social assistance and social security, ago. envisaged by the 2016--25 National Social Table 3: Selected items of durable goods Protection Policy Framework (SPPF) can help owned by households by geographical prevent rural households from falling back classification (percent) into poverty (see box 3 for more details on SPPF). Given continued sluggish agricultural 2004 2015 growth, the rural nonfarm (textiles, services, and remittances) economy has so far been a Cambodia Cambodia Other rural Other rural significant contributor to poverty reduction. A slowdown in the labor-intensive textile Items sector will therefore be a challenge for jobs, Radio 36.1 34.9 32 32 income and poverty reduction. TV 46.3 39.8 68 61 Satellite dish 0.5 0.4 3 3 THE EXTERNAL SECTOR Stereo 23.5 18.7 13 11 Cambodia’s external position strengthened Cellphone 14.1 5.7 77 75 further as the trade deficit narrowed. With Bicycle 63.1 65.6 64 66 solid exports and lackluster imports, the Motorcycle 29.1 22.3 71 67 current account deficit is estimated to have Car 3 0.8 4 2 narrowed, and continues to be financed by PC 2 0.2 8 5 rising FDI inflows. Source: Cambodia Socio-Economic Surveys. Merchandise exports remained solid during However, there is a potential impact on poverty the first half of 2017 despite slight easing reduction, if the textile and construction sectors from last year. Merchandise exports are experience a sharp decline. The deceleration estimated to have expanded at 10 percent of the textile and construction sectors could (y/y) in 2016, up from 8.4 percent in 2015. somewhat affect the income earnings of Although exports of clothing and other the poor in terms of less overtime hours or textile products have moderated, non- 22 CAMBODIA ECONOMIC UPDATE October 2017 textile exports including exports of footwear More importantly, Cambodia’s share in The 2016-25 BOX 3:rose. products National The exports Socialthe of footwear, global trade continued to rise (figure 12). Protection Policy second-largest Framework category (SPPF) after clothing and other textile product exports, grew by 19.3 Figure 12: Cambodia's export share in The SPPF adopted in March 2017 envisages two percent of global trade rose percent (y/y) main pillars: (a)tosocial mid-2017, compared assistance (emergency, with (% of global trade) 15.6 percent human in 2016. capital Exports of development, electrical vocational 0.07 training, and welfare), machinery, equipment, parts, security and (b) social bicycles 0.06 (pension, health insurance, and workers’ and auto parts (HS 85 and 87 combined) 0.05 accidental and disability insurance). New social increased percent by 30.8envisaged assistance programs to (y/y) in 2016, be introduced 0.04 albeit from a low base. Notwithstanding are cash transfers (child malnutrition disability 0.03 and elderly), while the existing assistance continued low international commodity 0.02 programs, namely, the health equity fund, food prices, exports reserve, nutrition, rubber almost ofscholarships doubled, and vocational 0.01 increasing are to be(y/y) 95.4 percent training programs in mid-2017. expanded. Social 0.00 2012 2013 2014 2015 2016 security schemes are aimed at moving toward Source: UN Comtrade. universal coverage of health insurance, pension schemes and unemployment insurance. For As the construction sector has shown signs poor and vulnerable people who cannot afford of moderation, imports growth slowed. to contribute to the social security schemes, the Royal Government of Cambodia will consider all Steel and cement imports have declined. possibilities of contributing on their behalf. Moderated construction activity has also To achieve the above objectives, the SPPF calls cooled domestic demand. As a result, for a review of the institutional structure and clear imports of key durable consumer goods division of labor including establishment of a such as motor vehicles and nondurable National Social Protection Council, introduction of a social security regulator, and integration goods such as petroleum product imports of all social security operators including the declined during the first half of 2017 (figure National Social Security Fund (NSSF), an NSSF 13). In addition, imports are being curtailed for civil servants (NSSFC), the National Fund for by expansion of domestic industries. Those Veterans (NFV), and a Persons with Disabilities Fund (PWDF). domestic industries have expanded their It is also envisaged that contribution to the consumable goods production, especially Social Security System serves as a source of for food and beverage products, partly domestic financing which can be used to invest substituting imported products. in government bonds. This enables the Royal Government of Cambodia to use this source of Figure 13: Imports of durable goods and financing for public investment. This mechanism petroleum products have declined helps reduce the dependency on foreign (YTD, Y/Y % change) financing and promote the development of the 60 domestic securities market. 50 40 The SPPF was developed under the leadership 30 and coordination of the Ministry of Economy 20 and Finance and in consultation with other 10 0 stakeholders including the Ministry of Social -10 Affairs, Veterans and Youth Rehabilitation, and -20 the Ministry of Labor and Vocational Training. -30 Passenger cars Diesel Gasoline Motocycles -40 Source: The 2017--25 National Policy for Technical and Vocational Education -50 and Training. Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 Source: Cambodian authorities. October 2017 CAMBODIA ECONOMIC UPDATE 23 Cambodia’s external position has further Figure 15: Gross foreign researves rose further improved. Continued solid merchandise exports and subdued imports have narrowed GIR (% private deposits, RHS) GIR (months of imports) 7.0 140 the trade deficit. The current account 6.0 120 deficit is estimated to have declined to 5.0 100 10.2 percent of GDP in 2016 down from 4.0 80 11.5 percent of GDP in 2015 (Figure 14). The 3.0 60 deficit was financed by rising FDI inflows, 2.0 40 which are estimated to have reached 10.8 1.0 20 percent of GDP in 2016, compared with 9.1 0.0 0 percent in 2015. Source: Cambodian authorities. Note: GIR = GIR stands for; RHS = right-hand side. Figure 14: Cambodia's overall external position improved. Trade balance, FDI INFLATION and current account deficit (% of GDP) Trade balance FDI Current account balance Inflationary pressures which had built up 15.0 in late 2016 eased by mid-2017 (figure 16). 10.0 Moderation in import and credit growth 5.0 reflected softer domestic demand as the construction boom is showing signs of 0.0 slowing. Domestic credit growth has also -5.0 decelerated. Inflation moderated to 2.6 -10.0 percent (y/y) in August 2017, down from 3.9 -15.0 percent at the end of 2016. 2012 2013 2014 2015 2016 Source: Cambodian authorities. Figure 16: Inflation declined as food prices moderated with easing demand. Capital inflows and an improved current Contribution to 12-month inflation (percent) Others Transport sub-index account position have contributed to Food sub-index Housing & utilities sub-index rising international reserves, which reached Y/Y US$7.8 billion (equivalent to six months of prospective imports) by mid-2017 (figure 15). This occurred as accumulation of net foreign assets of the central bank accelerated, expanding at 30 percent (y/y) in mid-2017, up from 23.6 percent y/y in 2016. However, Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 as a percent of private sector deposits (net Source: Cambodian authorities. of unrestricted foreign currency deposits), the level of foreign reserves remains below The easing of food prices was primarily 100 percent. responsible for the recent decline in inflation. 24 CAMBODIA ECONOMIC UPDATE October 2017 The food sub-index, the main component Regional inflation has also eased slightly. having 43 percent of the total weight in After experiencing an uptick in late 2016 and Cambodia’s inflation basket, has eased early 2017, inflation in several countries in since the beginning of 2017. The sub-index the East Asia and Pacific region moderated decelerated to a 2.5 percent y/y increase slightly during the second quarter of by mid-2017, down from 6 percent during 2017 (figure 18). Despite the recovery in the same period in 2016. Pressures on the commodity prices and the increase in prices of fish, meat, poultry, vegetables, producer price inflation, consumer price and fruits have subsided. The transportation inflation is expected to remain low across component, however, has edged up with most of the region, given generally well- a slow recovery in international oil prices. anchored inflation expectations and Subdued food prices may have also held relatively low pass-through. 15 down restaurant, health care, furnishings, and clothing components, which are Figure 18: Inflation is benign in the region and declined in most countries toward combined and classified under “others.” mid-2017 (y/y, percent change) 18% Inflation moderation during the first half of 16% 14% 2017 may be explained by softer domestic 12% 10% demand as the construction boom has 8% 6% shown signs of slowing and domestic credit 4% 2% growth has eased (figure 17). This has 0% -2% resulted in softer domestic demand, which -4% Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 subdued import growth during the first of six Oct-13 Oct-14 Oct-15 Oct-16 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 months of 2017. However, if the recovery in Cambodia Lao PDR Myanmar Mongolia Timor-Leste oil prices is gaining momentum, it is likely that Source: October 2017 East Asia and Pacific Economic Update. imported inflation—with the “pass-through” from imported international oil prices to domestic inflation—may occur. THE MONETARY SECTOR Figure 17: Inflation moderated, caused by Broad money growth accelerated, driven weaker consumption as credit growth eased primarily by rising foreign currency deposits (Y/Y, % change) and boosted by improved confidence 120 Credit to private sector 40.0 in the banking system. Domestic credit 35.0 100 Inflation (RHS) 30.0 has however, moderated, returning 80 25.0 20.0 to a more sustainable growth path, as 60 40 15.0 lending to the tradeable sectors eased 10.0 20 5.0 (see banking sector section below). After 0.0 0 -5.0 several years of rapid financial deepening, -20 -10.0 it is the first time that the banking Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 sector’s credit growth has moderated Source: Cambodian authorities. to below 20 percent (y/y). As a result, 15 Regional Economic Outlook, Asia and Pacific, April 2017. October 2017 CAMBODIA ECONOMIC UPDATE 25 the (net) loan-to-deposit ratio declined to local currency may have contributed to 95.7 percent by mid-2017, down from 100 the increase. A newly established facility percent at the end of 2016. called the Liquidity-Providing Collateralized Operation (LPCO) aimed at establishing a) Monetary aggregates, interest rates a benchmark rate of local currency and exchange rates borrowing for the market, is currently under implementation.16 This follows the Broad money growth has accelerated, introduction of Negotiable Certificates thanks to rising foreign currency deposits of Deposit (NCDs), a short-term interest-- (FCDs). It grew at 19.7 percent (y/y) during bearing debt issued by the central bank the first half of 2017 (or 72.6 percent of GDP to promote interbank lending. Due to the coverage), up from 17.9 percent (or 71.3 highly-dollarized economy, any increases in percent of GDP coverage) at the end of riel in circulation often put the riel/U.S. dollar 2016. Boosted by improved confidence in exchange rate under pressure (figure 20). the banking system, rising FCDs contributed Introduction of the LPCO helps “sterilize” the most, accounting for 16.5 percentage excess liquidity when additional volumes of points by mid-2017 (figure 19). Rapidly riels are injected. These measures may help rising FCDs also reflects healthy capital Cambodia regaining some monetary policy inflows, which allow the National Bank of independence, currently curtailed by the Cambodia, Cambodia’s central bank, to high degree of dollarization. further accumulate gross foreign reserves. Figure 19: Foreign currency deposit Figure 20: Contribution by riel in circulation continued to drive broad money growth. to broad money (M2) growth and riel/US$ Contribution to broad money growth exchange rate (Pecentage point) 10 Riel in circulation (percentage point) 4250 9 4200 35 Riel in circulation Riel deposits Foreign currency deposits Riel/US$ exchage rate (SA, RHS) 8 7 4150 30 6 25 4100 5 20 4050 4 15 3 4000 2 10 3950 1 5 0 3900 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 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 0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: Cambodian authorities and World Bank staff computation. Source: Cambodian authorities. Note: SA = Seasonally Adjusted; RHS = Righ-Hand Scale. The contribution to broad money growth The riel/US dollar exchange rate has from riel in circulation has also increased recently depreciated, reaching CR 4,053 during the first half of 2017. The contribution in September 2017, compared with CR rose to 2.1 percentage points, up from 1.1 4,037 in December 2016 (figure 21). The percentage points in 2016. The policy of riel also depreciated against Thai baht the central bank to promote the use of and Vietnamese dong. However, the 16 According to the National Bank of Cambodia, the purpose of LPCO is to (a) establish a benchmark rate for the market so as to serve the conduct of the mon- etary policy based on the market mechanism; (b) promote Negotiable Certificates of Deposits, which then can be used as collateral in interbank market trans- actions; (c) promote the use of Riel; (d) support agricultural sector development; and (e) contribute to lowering the current high interest rate in riel. The LPCO interest rate is currently set at 3 percent per year. For more details, see https://www.nbc.org.kh/english/news_and_events/news_info.php?id=230. 26 CAMBODIA ECONOMIC UPDATE October 2017 depreciation of riel against US dollar and central bank may have yielded positive regional countries’ currencies witnessed results, at least in the short-term. The policy lately seems to be partly the result of measures are the interest rate cap (at 18 seasonal factors. The depreciation does percent per year),17 and the introduction not seem to be caused by the expansion of of LPCOs to supply riels at a lower interest local currency in circulation, which rose to rate, among others. NCDs are issued to mop an 18.3 percent y/y growth in June 2017, up up excess liquidity. On the demand side from 8.9 percent in 2016 as a result of the for riels, there is a requirement that banks central bank’s initiative to promote the use and financial institutions increase their riel- of local currency. denominated loans, reaching at least 10 percent of their total loan portfolio by the Figure 21: Riel has depreciated slightly against the dollar, baht and dong end of 2019.18 190 4,250 180 4,200 As the interest rates of riel-denominated 170 4,150 loans were much higher before, the cap 160 4,100 150 4,050 brought it down significantly. Thus, riel and 140 Riel per Baht 4,000 130 Riel per 1000 dong 3,950 U.S. dollar deposit (lending) rate differentials Riel per US$ (RHS) 120 3,900 have narrowed significantly since early 2017 110 3,850 (figure 22). Underpinning the policy measures 16 6 6 6 16 16 17 7 7 -1 -1 l-1 -1 -1 n- p- v- n- is the slowdown of overall domestic credit ar ay ar ay Ju No Ja Ja Se M M M M Source: Cambodian authorities. growth, thanks mainly to moderation of Both lending and deposit interest rates have lending to the tradeable sectors. With these declined. This may result from the recently measures in place, the central bank may introduced macro-prudential measures be able to promote loans denominated in including the interest rate cap regulation. riel, while maintaining the interest rate of More importantly, short-term (12-month) riel riel-denominated loans only slightly higher deposit and lending rates have significantly dropped, declining to 5.99 percent per year Figure 22: Riel and US dollar deposit (and lending) rates have started to converge and 14.42 percent per year in May 2017, (Percent per year) down from 6.91 percent and 17.35 percent 6.00 in December 2016, respectively. During the 5.00 same period, short-term (12-month) US dollar 4.00 deposit and lending rates experienced only a slight decline to 4.4 percent per year and 3.00 11.73 percent per year, down from 4.44 2.00 percent and 11.9 percent, respectively. Differential (riel and dollar deposit rates) 1.00 Differential (riel and dollar lending rates) The sharp decline in riel deposit and lending 0.00 rates may suggest that the recent measures Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 targeting short-term interest rates by the Source: Cambodian authorities. 17 Effective April 1, 2017, See Prakas B7017-109 PK dated March 13, 2017, National Bank of Cambodia 18 Prakas, B7-016-334-P-K dated December 1, 2016, National Bank of Cambodia. It takes effect from December 1, 2016 and to be fully implemented by December 31, 2019. October 2017 CAMBODIA ECONOMIC UPDATE 27 than (or even comparable to) that of U.S. may have partly helped to slow domestic dollar-denominated loans. This may also credit growth. Outstanding credit provided help underpin the central bank’s policy to to the private sector rose in absolute terms to promote the use of local currency. US$15.0 billion by mid-2017, up from US$14.0 billion in 2016. The central bank’s ability to lower lending rates of loans denominated in riels, while As a percent of GDP, outstanding credit maintaining a broadly stable riel/U.S. dollar declined to 68.1 percent of GDP, down exchange rate is crucial for conducting from 70.0 percent of GDP during the same countercyclical monetary policy. Cambodia’s period. The non-performing loan (NPL) ratio monetary policy has currently been curtailed for the banking sector remained at around by high dollarization. So far, Cambodia 2.5 percent in mid-2017, similar to that of has had only fiscal policy at its disposal for 2016. However, the reported NPL ratios may tempering business cycles. need to be interpreted carefully. There are inconsistencies in loan classifications and b) The banking sector the continuous rolling over of loans that may disguise deeper problems. The banking sector’s credit growth has moderated after several years of rapid Private sector deposits rose further on the credit growth. This is consistent with the signs back of rising FDI inflows owing to improved of easing of the construction and real estate confidence in the banking system and sectors and more importantly, moderation the economy. Private sector deposits of lending to the tradeable sectors. The accelerated to 19.7 percent (y/y) in June banking sector’s credit growth decelerated 2017 (63 percent of GDP coverage), to 18.2 percent (y/y) by mid-2017, down from compared with 19.3 percent and 16.6 25.8 percent in 2015 (figure 23). As discussed percent in 2016 and 2015, respectively. The above, the macro-prudential measures loan-to-deposit ratio, however, remained recently introduced by the central bank high at 95 percent in June 2017. Figure 23: Credit growth has eased, while The shift in the allocation of domestic credit deposit growth has edged up (year-to-date, y/y % change) toward non-tradable sectors continued. The share of domestic credit going to the 35.0 PS deposits Credits to PS construction and real estate sector peaked 30.0 at 24 percent of the total by mid-2017 25.0 (figure 24). It is now higher than 23 percent 20.0 recorded in 2008, in the run up to the global 15.0 financial crisis when a housing bubble 10.0 eventually burst. Nevertheless, domestic Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Jun 2017 credits provided by the banking sector to the construction and real estate sector Source: Cambodian authorities. Note: PS = Private Sector. declined to 28.6 percent (y/y) growth in mid- 2017, down from an average of 36 percent 28 CAMBODIA ECONOMIC UPDATE October 2017 Figure 24: The share of domestic credits THE FISCAL SECTOR going to construction and real estate rose further to 24 percent (% of total credits) Recent fiscal performance is characterized 30.0 Manufacturing Hotels and Restaurants Construction & real estate by continued strong revenue collection, 25.0 thanks to successful implementation of the 20.0 2014--18 Revenue Mobilization Strategy. 15.0 On the expenditure side, a rapidly rising 10.0 public sector wage bill has been offset by 5.0 the steady decline in capital spending. - The overall fiscal deficit, therefore, continued to be contained. Source: Cambodian authorities. (y/y) growth during the last four years. a) Revenue mobilization The share of credit going to manufacturing Revenue collection remained strong, and hotels and restaurants, however, has estimated to have grown at 15 percent shrunk. This trend may reflect reduced (y/y) in 2016. Domestic revenue is estimated competitiveness of the main tradeable to have increased to 15 trillion riel (US$3.7 sectors, namely garments and tourism. billion) or 18.4 percent of GDP, up from 17.6 percent in 2015 (figure 26). Of this, tax Investors and producers may be shifting revenue contributed 15 percent of GDP investment toward nontradable sectors, in 2016, up from 14.4 percent in 2015. The especially the construction and real estate largest component of tax revenue is indirect sector serving the demands in the country taxes which accounted for 60 percent of rather than for exports. This does not bode the total. Led by the value added tax (VAT), well for sustaining high levels of economic indirect taxes have expanded further, growth. Contribution to domestic credit reaching 8.8 percent of GDP in 2016, up growth from wholesale and retail have from 8.4 percent of GDP in 2015. Direct taxes recently declined, reflecting the easing of also improved, rising to 3.6 percent of GDP domestic consumption (figure 25). in 2016, up from 3.3 percent in 2015. Figure 25: Lending to tradable sectors Figure 26: General government revenue - eased (Contribution to credit growth main components (Percent of GDP) by business undertaking [percentage point]) Construction, estate & mortg Manufacturing 20.0 Direct taxes Indirect taxes Trade taxes Non-tax and others Wholesale & retail Hotels and Restaurants 18.0 50% Others Agriculture Total 16.0 40% 14.0 12.0 30% 10.0 20% 8.0 8.8 8.4 8.1 10% 6.0 6.8 6.8 5.4 5.7 6.0 4.0 0% 2.0 3.3 3.6 2.3 2.5 2.9 1.7 1.7 1.8 -10% - Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 2009 2010 2011 2012 2013 2014 2015 2016e Source: Cambodian authorities and World Bank staff estimates. Source: Cambodian authorities Note: e = estimates October 2017 CAMBODIA ECONOMIC UPDATE 29 The good progress in revenue collection Figure 27: Outlay was contained, as rising has been primarily supported by successful wage bill was offset by declining capital implementation of the 2014-18 Revenue spending (percent of GDP) Mobilization Strategy. The strategy Non-wage Wage Gov't-financed capital External fin capital appropriately emphasizes the importance 25 NSDP (required capital) of revenue administration, while keeping 20 revenue policy largely unchanged. 15 However, domestic revenue as a percent 4.3 4.8 4.4 4.6 5.0 5.7 of GDP may have plateaued at around 18 10 2.4 2.6 2.1 2.1 6.3 7.7 2.4 percent, after rising rapidly during the last 5 1.9 2.5 2.4 7.3 8.2 7.0 7.0 6.4 6.3 several years. The next revenue mobilization 4.9 3.9 0 strategy, if introduced, will have to review the 2009 2010 2011 2012 2013 2014 2015 2016e existing revenue policy including tax incentives, Source: Cambodian authorities and World Bank staff estimates. Note: e = estimates; NSDP = National Strategic Development Plan. while further strengthening revenue In 2016, capital spending was below the administration. required level, recommended under the 2014-18 National Strategic Development Plan b) Public expenditures (NSDP). Scaling up government-financed Driven largely by a rising wage bill, the capital spending to boost investments, authorities’ fiscal position was budgeted to especially in physical infrastructure, is expand in 2016, after several years of fiscal therefore needed. To raise potential growth, consolidation. However, the latest estimates expansion of public infrastructure investment show that public outlay may have reached is crucial. It will promote output growth by only 21.4 percent in 2016, compared to the boosting aggregate demand in the short budgeted outlays of 22.3 percent of GDP term, and expand the productive capacity (figure 27). Despite the rapidly rising wage bill, of the economy with a higher infrastructure public outlays remained largely contained stock in the longer term. due to the decline in capital spending. As illustrated in figure 27, the public sector c) Fiscal balance wage bill has rapidly expanded since 2013. It is estimated to have risen to 7.7 percent The overall fiscal deficit is estimated to have of GDP in 2016 to achieve the minimum civil remained contained. The rising public sector servants’ wage target of at least 1 million riels wage bill was largely offset by the decline (equivalent to about US$250) a month by in capital spending. With rising revenue 2018. Meanwhile, total capital investment collection, the impact of rising wage expenditure is on a downward trend, was muted and the overall fiscal deficit is caused primarily by the gradual decline estimated to have remained at around 3 in the external-financed component (as a percent of GDP in 2016, slightly below that percentage of GDP). of 2015 of 3.5 percent of GDP (figure 28).19 19 Fiscal data for 2016 general government operations are preliminary. 30 CAMBODIA ECONOMIC UPDATE October 2017 Figure 28: The fiscal deficit continued to (figure 29); this represented almost 80 gradually decline (Percent of GDP) percent of total public investment. By 2016, 25 external financing in the annual budget of 20 general government operations declined 15 to less than one-fifth of the total budget 10 5 (or 62 percent of total public investment).21 0 The dependency will continue to decline -5 as the authorities continue to improve -10 Revenue Expenditures Fiscal balance domestic collection. However, rapidly -15 2010 2011 2012 2013 2014 2015 2016e rising public sector wages could crowd out Source: Cambodian authorities and World Bank staff estimates. Note: e = estimates. government funding for capital projects, exacerbating the dwindling of donor- Domestic revenue collection is likely to financed infrastructure projects. be boosted somewhat by a new source of revenue – oil revenue in the coming Figure 29: Cambodia's dependency on years, if a final investment decision on an external financing mainly for public offshore oil field development is made. The investment has signficantly declined Petroleum Agreement for Offshore Oil Field External finance (% of total public outlay) 35.8 Development in Block A was signed in August 32.3 32.7 29.1 2017. 20 After a final investment decision, 23.9 putting in place necessary infrastructure for 18.6 the oil field development under stage 1A will take 24 months before crude oil starts to flow. Production of crude oil amounting 2011 2012 2013 2014 2015 2016 8,000 barrels a day is expected. In addition Sources: Cambodian authorities and World Bank staff estimates. to revenues from profit taxes, royalties and others, the government retains 5 percent d) Government savings and public debts share. Continued fiscal consolidation during Cambodia’s dependency on external the last several years has contributed to funds to finance its annual budget has been substantial accumulation of government reduced significantly during the last few savings. By June 2017, the total amount of years. This is largely due to the authorities’ government deposits at the banking system success in mobilizing domestic revenue reached 11.6 percent of GDP or US$2.5 which has been growing rapidly. In addition, billion (figure 30). During the 2008-09 global budgeted development-partner-financed financial crisis, about 2 percent of GDP of the public investment relative to GDP has government deposits was used as a fiscal steadily declined. In 2011, development stimulus. In Cambodia, fiscal policy remains partners helped finance as much as one- the only macroeconomic policy instrument third of the general government budget as monetary policy has been constrained 20 Press Release on the Official Signing Ceremony of the Petroleum Agreement for Offshore Oil Field Development in Block A, Cambodia Between Royal Government of Cambodia and KrisEnergy, August 23, 2017. 21 The amount of total external financing in the annual budget is smaller than that in the Cambodia Overseas Development Assistance (ODA) database published by Council for the Development of Cambodia. The ODA database includes assistance that is not part of the annual budget. October 2017 CAMBODIA ECONOMIC UPDATE 31 Figure 30: Goverment's deposit has which covers principal, interest and other increased (Percent of GDP) fee amounted to US$186 million. 14 12 Cambodia’s debt distress rating in the latest 10 World Bank/International Monetary Fund 8 Debt Sustainability Analysis conducted 6 in 2017 remained low. Cambodia’s debt 4 distress rating has been consistently low 2 since 2011, primarily underpinned by the - 2013 2014 2015 2016 June 2017 authorities’ prudent fiscal management. Source: Cambodian authorities. Cambodia continues to maintain its by the high level of dollarization. overriding principle of borrowing only on concessional terms.23 Under annual budget The “Cambodia Public Debt Statistical law, only the Ministry of Economy and Bulletin” reveals that, at the end of 2016, Finance is allowed, with the authorization the Royal Government of Cambodia had by the head of the government’s executive a total outstanding public debt of US$5.8 branch, to contract public debt. The billion, or 29.3 percent of GDP.22 China is by annual budget law, which stipulates far the largest creditor (figure 31); almost half annual borrowing ceiling, is adopted by the of Cambodia’s outstanding debt is owed parliament. to China. The second- and third-largest creditors are multilateral, namely the Asian Cambodia has not started to tap into its Development Bank and the World Bank, domestic saving resources to finance its accounting for 19 percent and 9 percent public investment needs. Currently, almost of total outstanding debt, respectively. In all outstanding debt is public external 2016, public sector debt service payment debt.24 This means the majority (62 percent) public capital investment remains financed Figure 31: Outstanding debt by creditors by external borrowing, although domestic (US$ million, % of total) savings resources are expanding as income Other WB, 518 , multilateral, grows. Household final consumption as a 9% 94 , 2% share of GDP has steadily declined during ADB, 1,129 , 19% the last two decades, allowing domestic China, 2,818 , 48% household savings to increase (figure 32).25 Old debt, Given the country’s vast public investment 635 , 11% needs, tapping into the growing pool of Other domestic savings to fund productive pro- South bilateral, Korea, 280 Japan, 208 poor and pro-growth investment projects 181 , 3% , 5% , 3% may help. Cambodia continues to maintain Source: Cambodian authorities. 22 “Cambodia Public Debt Statistical Bulletin”, Volume 3, March 2017, Ministry of Economy and Finance. 23 The concessional terms borrowed are those with a grant element of 35 percent or above. 24 Public domestic debt accounts for only 0.05 percent of the total outstanding public debt. 25 Tradeable sectors, namely the textile and footwear sectors (and to some extent the tourism sector) remains to be largely funded by FDI. Domestic household investment seems to concentrate on the construction and real estate sector which may be less growth enhancing. 32 CAMBODIA ECONOMIC UPDATE October 2017 its liberal investment policy. Therefore, Figure 32: Cambodia's domestic saving mobilizing domestic household savings to is rising but remains relatively low. boost public capital investment is not likely Gross domestic saving (% of GDP) to crowd out private investment. In contrast, 60.0 50.0 it may serve as a catalyst, attracting 40.0 additional private capital as Cambodia 30.0 increasingly integrates into the regional and 20.0 10.0 global value chain. This will further facilitate 0.0 economic structural transformation which is -10.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 currently taking place. Cambodia Philippines Malaysia Singapore Thailand Vietnam Source: World Development Indicators, the World Bank. October 2017 CAMBODIA ECONOMIC UPDATE 33 34 CAMBODIA ECONOMIC UPDATE October 2017 OUTLOOK AND RISKS The growth outlook remains favorable. While tourists, especially from China with new slightly easing, real growth is projected to regional direct flights and the “China Ready” remain strong, at 6.8 percent in 2017. In 2018, initiative. The policy options suggested in the growth is expected to pick up marginally, selected issue entitled “Cambodia calling– reaching 6.9 percent, largely due to rising maximizing tourism potential” will enhance election-related spending before slowly the tourism sector’s readiness to reap more trending downward in 2019 and beyond benefits from the recent increase in tourist (see Cambodia: key indicators). Growth arrivals. will continue to be boosted by export diversification and underpinned by healthy In the medium-term, growth is projected to inflows of FDI. Growth will also be bolstered remain favorable. Underpinned by healthy in part by rising government spending rise in FDI inflows, export diversification will including public investment. Global trade is accelerate, while the construction sector is expected to progressively recover. expected to adjust. This will further improve Cambodia’s external position. Adjustments There are signs of diversification in the in the construction sector after the post- manufacturing sector with the entry of global financial crisis boom will ease import some high-value-added manufacturers, growth in the short-term. Gradual progress especially for electrical appliances and in fostering domestic production will also components, and auto parts. Relatively help substitute the imports of basic and high electricity and logistic costs, however, consumption goods in the medium term. remain key bottlenecks towards the formation of new manufacturing clusters. The expansionary fiscal policy is likely to The tourism sector is recovering largely due continue in 2018 and beyond. A rising public to continued efforts to attract international sector wage bill (and election-related October 2017 CAMBODIA ECONOMIC UPDATE 35 expenditures) in the short term and a need labor competitors such as Myanmar. FDI in to boost public investment in the medium the textile industry has declined. Potential term, are likely. As the adjustments of the election-related uncertainty may also result construction and real estate sector resulting in more cautious new investment (and in softer demand for domestic consumption business expansion) decisions during and and imports take hold, the robust revenue shortly after the general elections, which are gains that Cambodia experienced until scheduled to be held in mid-2018. recently may slowly diminish. To avoid a significant rise in the fiscal deficit, a new Poverty reduction is expected to continue revenue mobilization strategy would need over the next few years. This is underpinned to be introduced to expand the domestic by continued expansion of the services tax base, further strengthen revenue policy and manufacturing sectors, together with and enhance revenue administration in the increases in remittances. However, there is a short and medium term. potential negative impact of the slowdown of the textile and construction sectors. The Downside risks to this outlook are a sharp impact, if materialized, may reduce job and regional slowdown, especially in China, income opportunities available for migrant erosion of competitiveness in traditional workers; consequently, diminishing poverty exports, and potential election-related reduction achievements. With sluggish uncertainty. Given Cambodia’s increased agricultural growth, the rural non-farm dependency on Chinese FDI and tourist (manufacturing, services and remittances) arrivals, a sharp slowdown in the Chinese economy has so far been a significant economy could negatively impact contributor to poverty reduction and shared growth prospects. Cambodia’s external prosperity. An effort by the authorities has competitiveness is currently being curtailed been made to stabilize agricultural prices by rising real wages and emerging cheap (and to invest in rice storage and drying facilities), especially rice prices, with an introduction of a special fund for low-interest loans for rice purchases. 36 CAMBODIA ECONOMIC UPDATE October 2017 October 2017 CAMBODIA ECONOMIC UPDATE 37 KEY MESSAGES AND POLICY OPTIONS It is crucial to nurture the newly emerging of skills and quality of graduates coming out high-value-added manufacturing industries. of the education and vocational programs. Promoting export diversification beyond Identifying skills gaps to design courses that textile (and footwear) products is a priority. address such gaps as targeted under the Supporting and further attracting ongoing 2017-25 National Technical and Vocational and future FDI in high-value-added products, Education and Training Policy will be critical. especially electrical appliances and components, and auto parts is crucial. In this Further efforts are needed to facilitate regard, addressing the high electricity and investment in the manufacturing sector. This logistic costs together with skills constraints, is necessary, given the recent slowdown which remain key bottlenecks, are the first in FDI in the tradeable sectors, specially important steps. Cambodia has made rapid the textile sector. As real wages increase, strides in providing access to electricity, Cambodia’s external competitiveness improving availability, and becoming which primarily relies on cheap labor, nearly self-sufficient. However, the price of is gradually diminishing. It is therefore electricity remains relatively high compared imperative to further improve ease of doing to neighboring countries, and is due lack of business and the overall investment climate. competitive bidding in energy generation, This is to bring down the costs of starting and fragmentation in transmission and and operating businesses as well as logistic distribution. While restructuring the sector will costs to facilitate firm establishment and require time, in the near-term it is necessary growth, attract FDI in manufacturing, while to review electricity tariffs to bring them promoting investment in high-value-added closer to their regional comparators. It is also manufacturing industries as envisaged by necessary to promote and improve the level the 2015-25 Industrial Development Policy. 38 CAMBODIA ECONOMIC UPDATE October 2017 Cambodia’s doing business ranking remains harvest seasons and improving access to relatively low.26 The country was ranked markets by farmers living in remote areas 131st out of 190 in 2017, compared with will certainly help. In addition, the potential 82nd for Vietnam and 46th for Thailand. negative impacts of the slowdown of textile “Starting a business” ranked amongst the and construction sectors will need to be lowest (180th) with the time spent to register closely monitored. Both sectors, especially a business is four times longer than the East the labor-intensive textile sector, have Asia and Pacific region average. This calls for absorbed a large proportion of the rural further improving regulatory environment. It labor force shed by the agriculture sector is important to also reduce cost to export as structural transformation accelerates. per container which in 2014 was (US$795), It will be a challenge for employment significantly higher than that in Thailand creation, if expansion of the textile sector (US$595) and Vietnam (US$610). has slowed. Successfully implementing the two main pillars--social assistance and social Mitigating measures are necessary to support security-- envisaged by the 2016-25 National rural households that have been hard hit by Social Protection Policy Framework will help continued low agricultural prices. The recent prevent rural households from falling back initiative to mobilize financial resources into poverty. readily for rice purchases during the rice 26 For more details, please see http://www.doingbusiness.org/data/exploreeconomies/cambodia October 2017 CAMBODIA ECONOMIC UPDATE 39 40 CAMBODIA ECONOMIC UPDATE October 2017 SECTION II: SELECTED ISSUE CAMBODIA CALLING: MAXIMIZING TOURISM POTENTIAL IINTRODUCTION opportunities for tourism. Millennials travel more than any other generation, including It is essential to enhance the tourism sector’s baby boomers, and they will likely travel readiness to reap more benefits, taking more as their incomes and financial advantage of the recent surge in tourist standings grow.27 Moreover, the number arrivals discussed in Section I above. The of Chinese households able to afford tourism sector is one of the largest industries international holiday/leisure travel is growing in the world and a vehicle for job creation rapidly. The spread of internet access and and shared prosperity. As a source of foreign mobile technology has empowered travel investment, tax revenue, job creation, and consumers and spawned a new sharing economic growth, tourism may offer an economy, while cheap computing power alternative to traditional export-led sources has allowed tourism suppliers to improve of growth and addresses poverty reduction services and marketing by harnessing big directly. The sector generates jobs and data. Increased awareness of climate opportunities along its value chain, including change and of tourism’s potential the primary sector, which occupy most of environmental, social, and cultural impacts the region’s poor. Moreover, tourism can has made sustainability a central concern be a tool to develop lagging regions where for many travelers and businesses. There opportunities for industrial development are are now segments of the travel market often limited. willing to pay more to visit destinations that demonstrate responsible practices. Demographic, economic, and technological shifts are fueling growth and creating To realize the developmental effects of 27 Millennials are the generation aged 15 to 34. October 2017 CAMBODIA ECONOMIC UPDATE 41 those trends, countries need to improve the rate of 12.2 percent per year during the competitiveness of their tourism markets. period after the 2008–09 global financial The 2017 World Economic Forum’s Tourism crisis. Its “open sky” policy has attracted and Travel Competitiveness Index highlights considerable investment in international some of the challenges faced by the travel and tourism. Siem Reap and Phnom sector in the region. The region hosts only Penh, centers of Cambodia’s cultural and one of the world’s top 20 markets, with historical heritage are the most popular China ranked 15th, followed by Malaysia destinations, but tourism in the coastal zone (26th) and Thailand (34th). But the region is also growing, capturing about 15 recent also suffers from poor performance on of total arrivals. Leisure is the main purpose environmental sustainability, health and of visits, followed by business and visiting hygiene, tourism service infrastructure, friends and relatives. The forecast remains transport infrastructure, and ICT readiness, positive, although certain challenges among others. remain. The performance of the industry is best presented by analyzing where visitors Cambodia has globally significant resources come from, how long they stay, and how for tourism that are diverse and well placed to much they spend, as well as the industry’s be a pillar for socioeconomic development value to Cambodia’s general economic as identified by the government. Key performance. attractions include the world heritage site of Angkor Wat, religious and cultural sites, a. Source market performance and wildlife, and pristine beaches and islands. But international arrivals Cambodia was ranked low, at 101st, on the competitiveness list. Although tourist arrivals After steadily decelerating during the last exhibit a stable pattern of travel through few years, international arrival growth regional hubs in Thailand, Vietnam, and has rapidly recovered since early 2017. China, there are some worrying trends that Continued efforts by the authorities to could threaten the chances for developing attract international tourists, especially tourism as a central pillar of an inclusive from China, with new regional direct flights economy. Value captured per tourist has and the “China Ready” initiative, seem not changed much in the last decade— to have paid off. International arrivals to from US$585 in 2005 to US$655 in 2016—low- Cambodia reached 5.01 million visitors in end businesses have mushroomed, stays are 2016. During the first six months of 2017, total short with limited repeat visits, and there are tourist arrivals reached 2.6 million, growing signs of overcrowding and degradation of at 12.8 percent (y/y), up from a 5.0 percent the key assets at the Angkor temples. growth in 2016 and therefore well on its way to surpassing the 2016 total. As with many INDUSTRY PERFORMANCE destinations across Asia, arrivals from China are now highest, outpacing arrivals from Cambodia experienced a rapid expansion Vietnam and accounting for 20 percent of of the tourism sector until recently, thanks the total international arrivals by mid-2017, mainly to its historical and cultural heritage. up from 16.6 percent in 2016. Vietnam, Lao International arrivals grew at an average PDR, the Republic of Korea, and Thailand 42 CAMBODIA ECONOMIC UPDATE October 2017 Table S1: Contribution to tourist arrivals growth by country of origin during the last six years (percent) 2011 2012 2013 2014 2015 2016 Asia 80.1 84.1 83.7 84.6 84.2 62.0 Vietnam 26.7 23.1 20 19.6 20.9 -11.6 China 18.6 14.5 16.8 19.2 25.5 56.0 Lao PDR 9.7 15 18.9 18.4 13.8 -14.9 Thailand -8.7 4.9 4.2 6.5 8.9 19.9 Europe 14.3 11.3 12.3 11.2 10.1 20.4 Americas 4.9 4.2 3.8 3.9 5.1 15.5 Africa 0.4 0.1 0.1 0.1 0.2 0.8 Middle East 0.3 0.3 0.2 0.2 0.3 1.2 Total 100 100 100 100 100 100 Source: Bank staff calculations using the data from Cambodian authorities. are the main countries of origins after China, and ensure that food and accommodation accounting for 14.7 percent, 8.4 percent, facilities are suited to Chinese tastes. and 6.3 percent of the total arrivals, respectively. International tourists visiting Cambodia are multinational, but Asian tourists continue to Chinese tourists contributed to more than be the largest group, accounting for about half (56 percent) of total international arrival two-thirds. China and Vietnam are the top growth in 2016 (table S1). Contribution by two countries of origin, together accounting Vietnamese and Lao tourists, however, for more than a third of total arrivals. Visitors declined, dropping by 11.6 percent and 14.9 from these countries are, like all Asian percent, respectively. Arrivals from Europe, tourists, particularly interested in cultural especially from the United Kingdom, France, heritage and historical sites. Western tourists and Germany, picked up, contributing 20.4 also show strong demand for nature-based percent of total international arrival growth adventures and exploration. Asian tourists in 2016. are increasingly demanding higher-end hospitality services as a standard throughout Due to the authorities’ policy to facilitate their travels, where Western visitors (still) visits by Chinese tourists after the enjoy local experiences and do not mind introduction of “China Ready” initiative, “roughing” it a few nights. Both the Vietnam arrivals from China are now number one. and China market are characterized by Chinese tourists account for 20 percent of weekend trips that keep visitors almost the total international arrivals by mid-2017. The initiative provides Chinese signage and exclusively at their hotels, located close to documents for visa processing, encourages the border. local use of the Chinese yuan currency, Cambodia, as well as several regional promotes the use of Chinese language, October 2017 CAMBODIA ECONOMIC UPDATE 43 countries that are newly “open” to tourism still the main destination (see also Annex 1 and in transition to market economies, on the challenge of creating an inclusive received only small fractions of total regional tourism system and attracting investment arrivals in 2015. Cambodia received only 2.4 in Lombok, Indonesia). In 2016, repeated percent of total visitor inflows to the region, visits accounted for only a quarter of total while Vietnam received 4 percent. More arrivals. Average daily spending declined established destinations, namely China, to an average of US$92.5 a day in 2016, Thailand, and Malaysia, obtained 29 percent down from US$120.7 per day in 2013 (table (56.9 million), 15.2 percent (29.9 million), and S2).29 The decline may relate to the fact 13.1 percent (25.7 million), respectively.28 that tourists visiting Cambodia as Free Over 85 percent of tourists visiting emerging Independent Travelers (FIT) have been East Asia come from within the broader East increasing with rising arrivals from Asia Asia region. and by road. Limited success in tourism destination and product diversification may b. Spending have contributed to declining spending by While the country continues to attract Group Inclusive Travelers (GIT). In addition, a growing number of international the share of international arrivals by air tourists, average daily spending across declined to around 50 percent during the all international overnight markets has period after the 2008–09 global financial crisis declined. Tourism product and destination in 2016, down from over 60 percent before diversification has been lagging, with the the crisis. In 2016, FIT travelers accounted Angkor temple complex (and Phnom Penh) for 82.6 percent of total international Table S2: Average daily tourist spending has declined 2013 2014 2015 2016 Market share FIT GIT FIT GIT FIT GIT FIT GIT (%) 41.5 58.5 41.5 58.5 23.2 76.8 82.6 15.1 Average expenditure per tourist (in US$) Accommodation 148.57 N/A 127.5 N/A 129 N/A 125 N/A Food & beverage 84.42 N/A 119.43 N/A 123.5 N/A 120 N/A Local transport 80.04 N/A 65 N/A 64.5 N/A 73 N/A Package tours 983.46 N/A 345 N/A 355 N/A 342.5 Shopping 94.35 180.11 90 120 88.7 118 85 115.4 Others 79.03 101.07 80 100 79.5 101 75.5 95.5 Total 486.4 1,264.6 481.9 565.0 485.2 574.0 478.5 553.4 Average daily 120.8 93.5 95.1 92.5 spending Source: Annual Tourism Statistics Reports, 2013-16, Ministry of Tourism. Note: FIT: Free Independent Travelers, GIT: Group Inclusive Travelers. 28 October 2017 East Asia and Pacific Economic Update, the World Bank, Washington, DC. 29 This is, however, in contrast with the (estimated) increase in tourism receipts reported in the 2016 Tourism Statistics Annual Report, Ministry of Tourism. 44 CAMBODIA ECONOMIC UPDATE October 2017 arrivals, compared with only 41.5 percent and 4.7 days, respectively. The improved in 2013. During the same period, the share and expanded flight connections to these of GIT travelers declined to 15.1 percent, two hubs, Phnom Penh and Siem Reap, are down from 58.5 percent (based on 2016 seen as an influencing factor making it easier for visitors to arrive, visit, and leave within a government statistics). In 2016, GIT travelers short period of time. International airports spent US$553.40 per visit on average, or 15 in Phnom Penh, Siem Reap, and Preah percent more than FIT travelers.30 Sihanoukville together receive 54 percent of c. Length of stay and seasonality total international visitor arrivals; 43 percent enter the country through overland borders The average length of stay of foreign and 3 percent enter by water. tourists visiting Cambodia has also gradually While there have always been large declined. The 2016 Annual Tourism Statistics differences in visitor arrivals between the Report indicates the average length of stay peak months of December/January and the decreased to 6.3 days per visitor in 2016, low season months of May/June, Cambodia down from 6.7 days in 2013. This is the case exhibits much wider variation. Variation for both FIT and GIT travelers (table S3). For in Cambodia is as high as 47 percent FIT visitors, length of stay declined to 5.8 compared to its peers, namely Vietnam days for Phnom Penh and 5.4 days for Siem (38 percent), Myanmar (41 percent), and Reap, down from 6.1 days and 6.0 days, Lao PDR (27 percent). This irregular demand respectively. Similarly, length of stay for GIT causes cash flow problems for hotels, travelers declined to 4.1 days for Phnom guesthouses, and tour operators, which Penh and Siem Reap, down from 4.9 days often leads to seasonal layoffs that can make Table S3: Average length of stay 2013 2014 2015 2016 Average Phnom Siem Phnom Siem Phnom Siem Phnom Siem length of Penh Reap Penh Reap Penh Reap Penh Reap stay per tourist (days) FIT 6.1 6.0 5.8 5.5 6.2 5.9 5.8 5.4 GIT 4.9 4.7 4.2 4.1 4.5 4.3 4.1 4.1 Source: Annual Tourism Statistics Report, 2016, Ministry of Tourism. Note: FIT = Free Independent Travelers; GIT = Group Inclusive Travelers. 30 2016 Tourism Statistics Annual Report, Ministry of Tourism, Cambodia. October 2017 CAMBODIA ECONOMIC UPDATE 45 employment in the subsectors less attractive. percent in 2013, 7.0 percent in 2014, 6.1 The major constraints in Cambodia appear percent in 2015, and 5.0 percent in 2016. to be insufficient public and private funding, weak coordination among tourism industry TOURISM SECTOR stakeholders, and low capacity to design ORGANIZATION and implement effective destination marketing campaigns. 31 a. Enterprises and ownership To accommodate rising international d. Contribution to GDP arrivals, the number of accommodations including hotels and guesthouses and travel The direct and indirect contribution of agents has increased significantly during tourism to Cambodia’s GDP is reportedly the last decade. The number of hotels and substantial. The tourism sector’s direct hotel accommodations doubled, reaching contribution as a percentage of GDP is 12.2 760 hotels and 40,160 rooms, respectively in percent (Cambodia’s own statistics show 2016 (figure S2). The number of guesthouses an even higher contribution of 16 percent Figure S2 : Number of hotels, guesthouses of GDP) which is much higher than that of and travel agents many other countries, including Thailand where a more developed tourism sector has 2500 50,000 existed for decades (figure S1). However, 2000 40,160 40,000 34,619 32,463 Figure S1: International tourism receipts - 1500 28,660 30,000 direct contribution (% of GDP) 1000 24,393 20,000 17,914 18 15,321 500 9,166 10,000 16 1,087 2,229 2,170 351 742 382 440 507 668 632 760 665 14 0 0 13.6 13.5 13.5 13.3 2006 2010 2015 2016 12.8 12 12.2 Hotel (LHS) Guesthouse (LH) 10.7 11 10 Cambodia (MOT) Travel Agent (LHS) hotel room (RHS) guesthouse room (RHS) 8 Cambodia (WTTC) 6.7 Thailand (WTTC) 6 Source: Annual Report on Tourism Statistics 2016, Ministry of Tourism. Vietnam (WTTC) Note: LHS = Lelf-Hand Scale; RHS = Right-Hand Scale. 4 China (WTTC) 2 1.4 and their capacity experienced even higher 0 1995 2000 2005 2010 2011 2012 2013 2014 2015 2016 growth, tripling to 2,170 in 2016 from 742 in Source: Ministry of Tourism (MOT) 2016 & World Travel Tourism Council 2006, and the number of rooms to 32,463 (WTTC) 2017. from 9,166 during the same period. The the sector’s contribution in percent of GDP number of registered travel agents serving has been declining since 2013. This seems to the tourism sector almost doubled, with their be consistent with the gradual deceleration main source of business still outbound travel of international arrival y/y growth, which and benefiting from increased income and declined from 24.4 percent in 2012 to 17.5 interest of residents in traveling. 31 Experience Mekong: Greater Mekong Subregion Tourism Marketing Strategy and Action Plan 2015–2020, Mekong Tourism Coordinating Office, Bangkok, 2015. 46 CAMBODIA ECONOMIC UPDATE October 2017 Hotels are predominantly present in the four such as Kompong Cham, Svay Rieng, and urban hubs of Phnom Penh, Siem Reap, Kandal are provincial towns benefiting Sihanoukville, and Battambang zone. 32 As from tourism growth. The construction much as 83.4 percent of hotels and 86.1 and real estate boom that Cambodia is percent of hotel rooms are concentrated currently experiencing is also likely to boost in the hubs. Phnom Penh accounts for the the capacity of the hospitality industry in largest shares of hotel numbers (38.3 percent) urban centers with serviced apartments and hotel rooms (36.4 percent), followed by appearing and shared-economy initiatives Siem Reap (27.8 percent of hotels and 33.3 such as Airbnb hosts (375 in October 2017) percent of hotel rooms), and Sihanoukville establishing themselves further. (8.4 percent of hotels and 8.5 percent of However, the growth of accommodations hotel rooms) (figure S3). Battambang zone such as hotels and guesthouses and travel accounts for 8.9 percent of hotels and 7.9 agencies has eased gradually in line with percent of hotel rooms. Guesthouses are the overall tourism sector development more disperse; the hubs capture only 57 downward trend (figure S4). This is also percent of guesthouses and 65 percent of reflected in a slowdown in private investment guesthouses’ rooms. in the sector. Figure S3 :Tourism services intensity Figure S4: Growth of tourist arrivals, and international visitor arrivals accommodation and travel agents 70 70 is decelerating Phnom Penh Siem Reap Preah Sihanoukville 60 60.0 Rooms (y/y % change) 53.1 53 50.0 Tourists (y/y % change) 46.9 40.0 Travel agents' offices (y/y % change) 43.1 30.0 36.4 33.3 20.0 10.0 0.0 8.4 -10.0 6.4 2.4 -20.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Share of int'l visitor Share of int'l tour Share of hotel room Hotel occupancy arrivals (n= 4.5 campanies (n= 604) (n= 32,660) rate (%) million) Source: Annual tourism statistical reports, Ministry of Tourism. Sources: Annual Report on Tourism Statistics 2016, Ministry of Tourism & New Crossroads Asia. 2015. Although real data are missing, there is substantial anecdotal evidence that there is Except for several international hotel chains, little formal integration by tourism enterprises most hotels and guesthouses are owned by along the vertical value chain. Destination domestic investors. The rapidly rising number management companies operating or of guesthouses across the country reflects owning accommodation and transport that the benefits of tourism development companies do not exist, and at most, tourism are spreading more widely, which is likely to enterprises have two outlets (Phnom Penh be followed by hotel operation, if growth is and Siam Reap), often managed as a single sustained. Newly emerging urban centers entity. This reflects the way Cambodia is 32 The ministry of Tourism classifies “Battambang zone” as covering five four provinces, Battambang, Banteay Meanchey, Pailin, and Pursat. See 2016 Annual Tourist Statistics Report. October 2017 CAMBODIA ECONOMIC UPDATE 47 being offered to visitors, with limited overland during the last several years, the country travel and product development by exhibits insufficient connectivity to operators around established destinations. secondary destinations. Road density in Cambodia (proportionate to its land b. Connectivity and capacity size), while improving, remains less than those of its neighbor countries (figure S5).35 Cambodia’s “open sky” policy has Quality infrastructure is essential for attracted considerable investment tourism and should include not only good in international travel and tourism. To connection and quality environmental meet growing air traffic demand, the infrastructure, but also services (waste and Phnom Penh and Siem Reap airports were wastewater, piped clean water supply, expanded to double passenger capacity and access to reliable electricity). In in 2016. The extension and renovation of Cambodia, infrastructure improvements Sihanoukville airport is supporting booming and service delivery in secondary growth, with a 66 percent increase in air destinations has not kept pace with traffic in 2016. By 2018, the capacity of the demand, mainly due to funding and airport’s existing terminal will be expanded capacity constraints for construction and to accommodate 0.5 million passengers per maintenance, low population density year, tripling its current annual capacity. in rural areas, and limited decentralized The three international airports witnessed a planning. Thus, Cambodia lags behind total passenger growth rate increase of 8.5 Asia-Pacific benchmarks for infrastructure percent in 2016, with arrivals and departures competitiveness and health and hygiene totaling 7 million. In 2016, Phnom Penh, Siem (Table S4). Reap, and Sihanoukville airports handled 3.48 million, 3.47 million, and 0.15 million Figure S5: Road density in selected passengers, respectively.33 ASEAN countries 0.78 In Cambodia, both demand and 0.67 investment spending grew at a broadly comparable rate over the last decade, 0.38 but the quality of infrastructure is still 0.3 regarded as short of most ASEAN 0.11 0.1 0.06 destinations.34 Connectivity infrastructure, 0.05 especially, one of the key enabling Cambodia (2014) Thailand (2009) Vietnam (2009) Philippines (2009) facilities supporting tourism development, Road Network Density NR Network Density is insufficient in Cambodia. While the Sources: “Overview of Transport Infrastructure Sector in the Kingdom of Cambodia,” MPWT (2015); and “A Study on National Road Traffic Safety road network has significantly expanded Master Plan in the Social Republic of Vietnam Until 2020,” JICA (2009). Note: NR = National Roads 33 For more details, please see http://www.vinci-airports.com/en/supporting-long-term-growth-cambodia and http://www.cambodia-air- ports.aero/en/our-business/traffic-data. 34 “Travel & Tourism Investment in ASEAN,” World Travel & Tourism Council, October 2016. 35 Road density is the ratio of the total road network length of the country to 100 square kilometers of the country’s land area. 48 CAMBODIA ECONOMIC UPDATE October 2017 Table S4: Competitiveness Rankings for Infrastructure, Health, and Hygiene Air Transport Ground and Ports Tourist Servicesa Health and Hygienea Valueb Rankc Valueb Rankc Valueb Rankc Valueb Rankc Cambodia 2.1 103 2.6 116 2.9 108 3.9 112 Lao PDR 2.3 89 3.0 96 3.2 97 4.3 108 Myanmar 2.0 115 2.2 132 2.1 137 4.4 101 Vietnam 2.7 68 3.1 87 2.9 105 5.0 83 Asia-Pacific 3.58 3.83 3.68 5.14 Average Source: The Travel and Tourism Competitiveness Report 2015, World Economic Forum, Geneva, 2015. Note: a. Tourist services infrastructure includes hotels, resorts, and other facilities developed, especially to respond to visitor demand. Two of six indicators for health and hygiene are concerned with sanitation and clean water supply. b. Value range = 1–7, with a higher number indicating better performance. c. Rank = 1–141, with lower number indicating better performance. Insufficient transport infrastructure and shortages of piped clean water, and traffic weak environmental services hold back congestion. sustainable and more inclusive tourism growth, as many secondary destinations c. Employment and skilled labor force are unable to attract private investment in quality tourist service infrastructure. This Tourism is a labor-intensive industry, and discourages visitors from venturing off Cambodia has benefited substantially from the beaten track and keeps driving the the rapid expansion of the industry more imbalanced growth around Siem Reap than its regional peers. The tourism industry and Phnom Penh. As discussed above, currently generates almost 1 million in these sites account for about 70 percent direct employments. If direct, indirect and of Cambodia’s total accommodation induced employments are combined, the stock and more than half of the country’s industry provides up to 2.2 million jobs (table international visitor arrivals. In comparison, S5). It is projected that with continued rapid the seaside town of Kep—with good tourism growth in tourists, nearly 700,000 additional potential but lacking a piped water supply new direct jobs will be created by 2027.36 and adequate sanitation—has received The new jobs are largely created by diverse only 1.1 percent of international visitors small and medium-sized enterprises that to date. Inadequate transportation and provide goods and services consumed by environmental services can also be quickly visitors.37 However, as discussed above, overwhelmed by a surge in visitor arrivals, there are large variations in tourist arrivals leading to incomplete collection and between the peak months of December/ treatment of solid waste and wastewater, January and the low season months of May/ 36 2017 World Travel and Tourism Council. Across Cambodia, Lao PDR, Vietnam, and Myanmar, roughly US$4,600 in tourism expenditure sustains one job. 37 See Travel and Tourism Economic Impact Reports for Cambodia, the Lao PDR, Myanmar, and Viet Nam, World Travel & Tourism Council, London, 2015. October 2017 CAMBODIA ECONOMIC UPDATE 49 Table S5: Jobs generated by the tourism sector (2016) Direct contribution Total contribution Country Jobs % share Jobs % share Cambodia 988,000 11.4 2,252,500 25.9 Lao PDR 118,000 3.7 397,500 12.4 Vietnam 1,959,500 3.6 4,003,000 7.3 Thailand 2,100,000 5.5 5,739,000 15.1 China 23,680,500 3.1 69,527,500 9.0 Source: 2017 World Travel Tourism Council. June, which has rendered irregular demand Figure S6: Education, training, and literacy that causes cash flow problems for hotels, in selected ASEAN (%, most recent years guesthouses, and tour operators. This often available) leads to seasonal layoffs that can make Thailand Public spending on Education (% of GDP) employment in the subsectors less attractive. Tertiary Gross Enrollment Indonesia Rate (total) Female Share of TVET Industry stakeholders report that the need Viet Nam Enrollment for quality human resources far outstrips Enrollment in TVET as a Share of Secondary Myanmar Enrollment supply, and the lack of well-trained workers Secondary Net Enrollment Rate is one of the main barriers to improving Lao PDR Primary Net Enrollment Rate tourism service quality and competitiveness. Cambodia Literacy rate, ages 15+ Selected indicators for education, training, 0 50 100 150 and literacy substantiate these concerns. Sources: United Nations Educational, Scientific and Cultural Organization Cambodia (as well as Lao PDR and (UNESCO) Institute for Statistics. Table adapted from International Labour Organization; and ASEAN Community 2015: Managing integration for better jobs and shared prosperity, Asian Development Bank, Bangkok, 2014. Myanmar) shows substantial deficiencies Note: TVET = Technical and Vocational Education and Training. in secondary and tertiary enrollment Industry stakeholders report that the need for quality human resources far outstrips supply, and the lack of well-trained workers is one of the main compared to other ASEAN countries (figure barriers to improving tourism service quality and competitiveness. Selected indicators for education, training, and literacy substantiate these concerns. TVET = Technical and Vocational Education and Training. S6), as well as low enrollment in technical and vocational education and training (TVET). As Cambodia has more favorable processes for employing foreign staff, a disproportional increase of immigrant labor can occur (see also Box S1: Siem Reap paradox). This will lead to increased leakages in the tourism accounts and increasing the barriers to entry by nationals.38 38 Consultant’s Report, TA-6179: “Greater Mekong Subregion Tourism Sector Strategy,” Asian Development Bank, Manila 2005. 50 CAMBODIA ECONOMIC UPDATE October 2017 Although a number of universities operate in Box S1: Siem Reap paradox Siem Reap Province alone, their curriculums do not seem to match the needs of the growing private sector. Thus, migrant workers from Siem Reap Province is an illustration of the neighboring countries with higher qualifications challenge of creating the links between an occupy more qualified positions. While some engine of growth, such as tourism, and the investment in training and customer services is local economy. While the tourism revenues being undertaken to increase the qualifications from the Angkor temple complex represent of Cambodians involved in the tourism the lion’s share of the total tourism revenues industry, more needs to be done to improve of Cambodia, Siem Reap is the eighth-poorest access to job markets for people of Siem province in Cambodia out of 25. In 2014, 23.3 Reap, especially youth. Another challenge is percent of Siem Reap Province’s population to strengthen the links of the tourism sector to of 1,042,286 was living below the national other sectors, particularly the agriculture sector, poverty line, a figure significantly higher than on which more than 80 percent of Siem Reap’s the latest estimated national average of 18.8 population rely. percent. Existing studies recognize that although tourism The economic benefits of tourism have limited has been significant for economic growth, impact on the socioeconomic development its impacts on the local communities and of the whole province, with communities living poverty reduction have been limited. Those in the vicinity of Siem Reap temple sites among studies also found that benefits from tourism the main beneficiaries of job opportunities are concentrated in the communities living in offered by tourism and subsectors such the vicinity of the Angkor temple complex, and as construction. However, these same the best benefit for the poor is nothing more communities often do not have the required than low-paid employment. This is due to their skills, education, or social networks to reap the limited capital, social networks, required skills, or full benefits of the growing tourism. education to access better-paid employment. October 2017 CAMBODIA ECONOMIC UPDATE 51 d. Supply chain Box S2: Maldives - Low national Even more important is the composition participation increases leakages of influence of international tourism expenditure on Cambodia’s economy. Tourism is the largest sector of the economy in Where substantial parts of destination the Maldives. However, it seems also to have expenditure are spent on imports or the largest tourism leakage since eighty cents where Cambodia’s supply capacity of the of every dollar spent on tourist inputs accrued destination economy is too limited to meet to foreign companies.1 Maldives’ tourism does additional & dispersed demand, income not generate a high overall multiplier effect multiplier effects will remain low and foreign instead, the high rate of imports, the large number of expatriates employed in tourism exchange “leakage” high, resulting in industry, and the prominent role that foreign suboptimal net income contributions to the investors play in the ownership, management country’s economy.39 Foreign exchange and operation of tour companies. This is leakage factors were earlier estimated at largely due to all major goods for developing 40 percent for Cambodia (equal to Lao and maintaining tourism services and facilities PDR, and Myanmar), higher than Vietnam are imported, including building materials at 35 percent. 40 This is mainly due to the and equipment for the construction of tourist hotels and resorts. Acknowledging countries’ relatively early-stage tourism this issue, improving the linkage between development, less-diverse economies, tourism and domestic industries has received and underdeveloped local value chains attention from the Maldives’s government. (see also box S2: Maldives – Low national Maldives Third Tourism Master Plan emphasis participation increases leakages). on increasing linkages between tourism and other supporting sectors, namely fisheries, Enabling environment agriculture and handicrafts, was a strategy to reduce these leakages of tourism revenue.2 Cambodia’s preparedness for and competitiveness in tourism is modest, which implies unfulfilled potential. Revenues Based on Cambodia’s Travel & Tourism Taxes and Competitiveness Index, which measures the Govemment Touristic concession concession islands revenues factors that make it attractive to develop Public business in the travel and tourism industry, services and subsidies the ranking for Cambodia remains low. and jobs Local While Cambodia rose by four places, in 2017, communities it was still ranked 101st out of 136 countries globally. During the last three years, the tourism sector has made some progress, especially on ITC readiness and national 1 http://shodhganga.inflibnet.ac.in/ resources, but potential improvements in bitstream/10603/72940/8/chapter%204.pdf 2. http://www.tourism.gov.mv/downloads/ttmp.pdf many aspects are yet to be tapped (figure S7). 39 For each dollar of direct visitor spending on tourism-linked activities (travel, accommodation, tour services), a portion goes toward imported goods and services. This portion is called “leakage,” which means that its direct contribution to GDP is generally less than one-for-one. 40 The estimates were done in 2005. See “Tourism sector assessment, strategy, and roadmap for Cambodia, Lao PDR, Myanmar, and Vietnam (2016–2018),” Asian De- velopment Bank, Manila; https://www.adb.org/sites/default/files/institutional-document/227186/clmv-tourism-sector-assessment.pdf. 52 CAMBODIA ECONOMIC UPDATE October 2017 Figure S7: Cambodia’s successes and overall tourism competitiveness ranking gaps ranked by Travel & Tourism of 101st is behind Lao PDR, Vietnam, and competitiveness index in 2015 and 2017 Thailand, which are ranked 94th, 67th, and Business 34th, respectively. environment Cultural resources 6 Safety & security & business travel Natural resources 4 Health & hygiene The tools used to measure competitiveness Tourist service 2 Human resources within specific market segments show infrastructure 0 & labour market mixed results for Cambodia. The country is Ground and port infrastructure ICT readiness home to two UNESCO cultural heritage sites Air transport - Prioritization of (one being the Angkor archaeological site infrastructure Travel & Tourism Environmental International within the destination of Siem Reap), but no sustainability Openness Price competitiveness Thailand 2017 natural heritage sites. Regarding adventure Vietnam 2017 Cambodia 2017 tourism, Cambodia ranked 96th among 163 Cambodia 2015 ASEAN 2017 countries in the Adventure Tourism Source: Travel & Tourism Competitiveness Index 2015 & 2017. Note: Score varies from 0 (worst) – 7 (best). Development Index (ATDI) in 2015.41 This, however, represents a notable improvement from its ranking of 107th in the first edition Currently, the main drivers underpinning of the ADTI in 2008. As for the meetings Cambodia’s travel and tourism market, Cambodia placed 87th in the 2015 competitiveness are the authorities’ International Congress and Convention overall policy and strategy. Those include Association (ICCA) rankings, having hosted its prioritization of travel and tourism nine major international meetings that (ranked 29th), price competitiveness year, below Vietnam (55th) and Thailand (51st), international openness (58th), (27th). Finally, cruise tourism has increased natural resources (62nd), and cultural dramatically in Cambodia over the last resources (76th). Nevertheless, Cambodia’s three years (by 118.8 percent). Yet the total performance lags behind in environmental number of port calls it received in 2016 (35) sustainability (130th), business environment was still the lowest among the East Asia (125th), human resources and labor market Pacific economies featured in the Cruise (110th), health and hygiene (109th), ground Lines International Association’s Asia Cruise infrastructure (108th), and tourist service Trends study. infrastructure (102nd). A comparison of travel and tourism Policy and initiatives competitiveness across several regional countries indicates that Cambodia is behind Underpinning the importance of tourism its peers, although the country is endowed development, regional and national with natural and cultural assets. While in terms strategic plans have been adopted. A 10- of natural and cultural resources Cambodia year ASEAN Tourism Strategic Plan was is only second to Vietnam, Cambodia’s adopted in 2015,42 which lays out two 41 For more details, see http://www.adventureindex.travel/downloads.htm. 42 This plan envisions that “By 2025, ASEAN will be a quality tourism destination offering a unique, diverse ASEAN experience, and will be committed to responsible, sus- tainable, inclusive and balanced tourism development, so as to contribute significantly to the socioeconomic well-being of ASEAN people.” October 2017 CAMBODIA ECONOMIC UPDATE 53 strategic directions. The first is to enhance that Cambodia will receive at least 1 million the competitiveness of ASEAN as a Chinese tourists by the end of 2017. Clearly, single tourism destination by intensifying continued successful implementation of promotion, diversifying products, attracting this initiative will enable the authorities to investments, and raising human capital reach 2 million Chinese tourists, or nearly a with the implementation of ASEAN tourism third of the total projected 7.5 million visitors standards. The second is to ensure that by 2020. The initiative discusses steps to ASEAN tourism is sustainable and inclusive by facilitate visits by Chinese tourists, such as upgrading local communities and public- providing Chinese signage and documents private sector participation, and ensuring for visa processing, encouraging local use the safety/security/protection of heritage of the Chinese yuan, and ensuring that food sites and the environment. Cambodia is and accommodation facilities are suited to actively driving the rollout of ASEAN tourism Chinese tastes.43 standards as a national agenda and as lead member across the ASEAN community. The Clean City initiative aims at improving awareness of the importance of sanitation At the national level, Cambodia has and hygiene in everyday life for urban formulated the Tourism Development residents. It was introduced to help change Strategic Plan 2012–2020. Promoting the urban dwellers’ behavior on generating, “Cambodia: Kingdom of Wonder” and reusing, recycling, and disposing of waste “Clean City, Clean Resort, Good Service” to make homes, cities, and communities campaigns is one of its objectives. Improving clean. The initiative also supports tourism by and developing tourism infrastructure to allowing visitors to explore more and stay help drive the industry forward (roads, longer. “Clean City, Clean Resort, Good airports, water supply, electricity) is critically Service and Best Hospitality” is the theme of important. To take advantage of regional Cambodia’s Clean City Program.44 integration, the national strategy also is envisaged to endorse ASEAN tourism Key messages agreements, especially visa exemption agreements between Cambodia and Based on recent and expected ASEAN. demographic, economic, and technological trends, tourism growth will only accelerate The China Ready initiative represents in the coming years. This should generate Cambodia’s effort to capitalize on the increased opportunities to develop tourism rapid growth in Chinese inbound tourism. destinations and capture the economic The five-year initiative targets 2 million benefits of tourism. At the same time, this Chinese tourists per year by 2020. With the growth, if not properly managed, will place recent surge in Chinese tourists, it is likely greater pressures on the sector’s economic, 43 For more details, see http://www.adventureindex.travel/downloads.htm. 44 This plan envisions that “By 2025, ASEAN will be a quality tourism destination offering a unique, diverse ASEAN experience, and will be committed to responsible, sustainable, inclusive and balanced tourism development, so as to contribute significantly to the socioeconomic well-being of ASEAN people.” 54 CAMBODIA ECONOMIC UPDATE October 2017 social, and environmental sustainability. There are considerable opportunities a. Therefore, Cambodia must address key for the development of new markets, market and policy failures to properly products, and services. As stated above, manage and benefit from the expected other countries with similar portfolios for growth. tourism have emerged from conflict and shown two- and three-fold increases in There is room to maximize the potential the value of their tourism industry in the 5 contribution of Cambodia’s tourism sector to to 15 years following the end of conflict. the economy. Note also that the total GDP This indicates the potential to expand the multiplier of tourism is found to be highest sector over a relatively short time frame, among service sectors.45 Given Cambodia’s notably in the following segments and relatively low average expenditure per visitor subsectors: compared to its peers (table S6), increasing length of stays and average expenditure • Protected area tourism: There is per day is feasible. However, doing this considerable potential to develop will require additional tourism products to nature tourism; despite the fact that entice more tourist daily expenditures, and a large percent of the land area diversification of tourism sites to prolong is covered by national parks and length of stays. Cambodia’s total (public reserves, the vast majority of visitors and private) investment in the tourism are currently focused on only a small sector may also need to be boosted, while number of these areas. reducing leakages due to the fact that a large proportion of tourism products and • Domestic tourism: Little attention is services are imported. paid to domestic tourism in Cambodia but, given that its contributing value There are several areas that require active across ASEAN is estimated to be at intervention or close monitoring if Cambodia least equal to international tourism, is to fully capture its socioeconomic it also offers a potential source of development potential from tourism. growth. In 2016, Cambodia’s domestic Table S6: Tourism’s contribution highlights (latest available years) Cambodia Lao PDR Thailand Viet Nam International visitor expenditure ($ billion) 2.44 0.69 44.6 8.29 Direct contribution to GDP (%) 12.2 4.3 9.30 4.6 Tourism investment ($ billion) 0.6 0.6 7.0 5.5 Average expenditure per visitor ($) 655.5 191.7 1488.9 925.3 Average length of stays (days/nights) 6.3 4.8 9.8 11.3 Average expenditure per day ($) 92.5 76.5 148.1 126.0 Sources: World Travel & Tourism Council. 2017 and World Tourism Organization. 45 Combined indirect, direct, and induced impacts of international visitor spending (less leakage) on output, income, and employment are called the “multiplier effect.” The WTTC estimates the total GDP multiplier of the tourism sector to average 3.2 globally, the highest among service sectors and second only to automotive and chemicals manufacturing, according to the World Bank’s October 2017 East Asia Economic Update. October 2017 CAMBODIA ECONOMIC UPDATE 55 tourism statistics showed Cambodian management, national investment, and and foreign visitors accounted for the environment for high-value services. 10.6 million and 6.0 million visitors, If action is taken on these, the sector respectively. can guarantee growth and inclusion by better development and protection of • High-value products: There is space for key assets, and through improved use the development of high-value tourism and redistribution of tourism revenues. products. For example, areas are By doing this, Cambodia creates a solid suitable for development as wildlife diversity of source markets. While the viewing destinations, and high-value recent recovery of international arrivals, services can be established around boosted largely by arrivals from China, is existing products. encouraging, it is crucial to maintain the momentum in other markets to reduce • Business and events tourism could be seasonality and reliance, and to attract developed in several areas, building higher-paying visitors. on the steady flows currently witnessed. All areas with good air access would Given c. Cambodia’s very low score be ideal destinations, if destination and ranking on ground infrastructure, facilities could be improved. addressing infrastructure and connectivity deficiency is a priority. • The internet is having a major impact Growing urbanization and tourism as a source of information for tourism. mean that the city needs to have better Internet-based electronic commerce infrastructure and transportation in place offers considerable opportunities for to accommodate needs, curb potential firms to expand their customer base traffic issues, and build resilience. and enter new product markets in more Transforming emerging urban areas cost-effective ways.46 The potential resulting from a construction boom to for e-commerce development is become more tourist-friendly destinations significant in Cambodia.47 The number by improving tourism infrastructure, of citizens with regular internet access facilities, and accessibility will support is projected to almost double to 9.5 destination diversification. Connecting million (60 percent of the population) those destinations with each other and by 2020.48 with the main urban centers (“hubs”) b. It is important to improve destination- that act as gateways to other tourist level management if these markets are destinations will enhance connectivity.49 to be tapped. Annex 2 presents a matrix This can be developed by employing two on the importance of destination-level possible approaches from a destination perspective: 46 “E-business for Tourism, Practical Guideline for Tourism Destination and Business,” World Tourism Organization, Madrid, 2001. 47 “Cambodia: Rapid e-Trade Readiness Assessment,” United Nations Conference on Trade and Development (UNCTAD), Geneva, 2017. 48 According to the Ministry of Posts and Telecommunications. Despite recent progress, however, Cambodia ranked only 115th out of 144 in the UNCTAD B2C E-commerce Index 2017. 49 Hub-and-spoke and circuit models have been used to promote the tourism industry in India. See Rahul Chakravarty and Pragyal Singh, “Tourism Infrastructure: The Roles State Play,” 2015 (http://ficci.in/spdocument/20610/Report-Tourism-Infrastructure.pdf). 56 CAMBODIA ECONOMIC UPDATE October 2017  Hub-and-spoke. First, enhance access  Circuits. An alternative approach to and mobility in and around the involves developing multidestination urban centers, or hubs. Then develop itineraries that integrate a variety of the “spokes”—rural locations closely visitor experiences across a region or linked to the urban hubs that represent zone, based on a variety of themes great tourism potential. This approach and primary travel motivations. As establishes new itineraries for tourists in with the hub-and-spoke model, any a way that disperses tourism-related connectivity issues that might exist socioeconomic benefits to people in between destinations within a circuit areas currently bypassed by tourism. are addressed. For instance, a circuit For instance, Cambodia’s main may include Siem Reap, a cultural tourism hubs may include Phnom and religious site of the Angkor Wat Penh, Siem Reap, and Sihanoukville. temple complex, which can be linked Establishing spokes for each hub to nature-based and ecotourism sites will allow tourists to explore more in Tonlesap region (Kompong Thom than one area surrounding the hub. and Kompong Chhnang provinces), In this regard, linking (packaging) Mekong region (Stung Treng and Kratie attractive destinations in Preah Vihear, provinces), and historical sites (the Battambang, Banteay Meanchey, capital city of Phnom Penh) (panel B and Pailin provinces to Siem Reap hub in figure S8). (panel A in figure S8) can be one of the several options to attract tourists to stay longer. Figure S8: The “hub-and-spoke” approach aims at enhancing access to and mobility in and around the urban centers, while “circuits” targets multidestination itineraries that integrate visitors’ experiences Panel S8-A: Hub-and-spoke Panel S8-A: Hub-and-spoke Oddar Meanchey Oddar Meanchey Banteay Stung Treng Ratanakiri Banteay Stung Treng Ratanakiri Meanchey Meanchey Siem Reap Preah Vihear Siem Reap Preah Vihear Battambang Battambang Pailin Kampong Thom Pailin Kampong Thom Kratié Mondulkiri Kratié Mondulkiri Pursat Pursat Kampong Kampong Chhnang Kampong Chhnang Kampong Cham Cham Tboung Khmum Tboung Khmum Kampong Speu Phnom Kampong Speu Phnom Koh Kong Koh Kong Penh Penh Kandal Kandal Prey Prey Veng Veng Svay Rieng Svay Rieng Takéo Takéo Preah Kampot Preah Kampot Sihanouk Sihanouk Kep Kep October 2017 CAMBODIA ECONOMIC UPDATE 57  More road networks, while improving the existing ones, are needed to Box S3: Thailand/Vietnam—the improve the backward and forward value of food as destination links across economic sectors and brand ambassador provinces. The industry sector and the service industry, including In recent years, food tourism has grown the tourism sector, would further considerably and has become one of benefit from public investment in the most dynamic and creative segments road infrastructure. Without proper of tourism. Both destinations and tourism destination management, this will companies are aware of the importance of put future tourism growth at risk and gastronomy to diversify tourism and stimulate cause environmental degradation, local, regional, and national economic development. Food has a particularly economic losses, and inconvenience important role in the development of tourism for residents.50 As discussed, Cambodia services and in alleviating poverty, because it has the highest dependency on tourism often comprises 30 percent or more of tourist as part of its GDP (12.2 percent), so any expenditure, and this money is regularly spent fluctuation in tourism arrivals, length directly in local businesses.a of stay, and expenditure will impact Many countries in the region have been the country more severely than its using food to promote tourism, both directly neighbors. and indirectly. Thailand, for instance, has consistently attempted to promote Thai Addressing tourism leakages can be d. cuisine internationally. Thailand launched initiated by assisting producers (and its first culinary diplomacy initiative in 2002 providers) of food, crafts, and other to increase the number of Thai restaurants local goods (and services) to access worldwide by providing loans and training for tourism value chains, which could boost entrepreneurs seeking to open Thai restaurants overall spending in destinations. For overseas, creating the “Thai Select” certification program that encouraged the example, the souvenir market in Siem use of ingredients imported from Thailand, and Reap, where imported items account for promoting integration among Thai investors, the majority of its inventory, generates Thai Airways, and the Tourism Authority of about US$50 million to US$70 million per Thailand with Thai restaurants overseas.b year. However, tourists report they would spend an additional US$60 million per Similarly, Vietnam launched a “Vietnamese Kitchen” project to bring Vietnamese cuisine year if Cambodia-made products that to the world by promoting the freshness and match market demand were available healthfulness of the food. In 2006, MSN’s travel for purchase. It is also important to website selected Hanoi as the third best city in adopt an eco-sustainable approach— the world for delicious dishes.c organic and low-water-dependent crops (vegetables instead of rice), 50 Economic Impacts of Sanitation in Southeast Asia, World Bank, Jakarta, 2008; Economic Impacts of Sanitation in Lao PDR, Water and Sanitation Program, World Bank, 2009. 58 CAMBODIA ECONOMIC UPDATE October 2017 while protecting wildlife to increase the natural attractiveness of the tourist In order to use food and tourism as an economic development strategy, it is destinations. Establishing associations important to encourage visitors to stop, among farmers and food processers to spend, and stay longer. Short-, medium- supply domestically produced foods to and long-term strategies include a range hotels will be necessary (see also Box of options and relationships (with local S3: Thailand/Vietnam—the value of businesses and organizations as well as with food as destination brand ambassador). other regional stakeholders), and develop This will help Cambodia generate and intellectual capital to enhance the regional knowledge base and create engaging food retain more income from tourism, better experiences.c balancing the distribution of benefits. By reducing large foreign exchange leakages51 (compared with Thailand, Note: where this is only 5 percent!), there is a. “Global Report on Food Tourism,” World Tourism Organization, 2012. excellent potential for an enhanced b “Food Tourism in Thailand.” Pipaboon Kururatchikul, 2014. net income contribution of tourism by 2020 under two scenarios (table S7). The first assumes no further reductions in the foreign exchange leakage factor during 2015–20 (benchmarked at 24 percent). The second assumes leakage drops to 18 percent in 2020, resulting in US$270 million more in net income for Cambodia. Table S7: Potential net income contributions from tourism in 2020 Projected Projected Projected Income Projected Income international expenditure with 24% Foreign with 18% Foreign visitor arrivals Exchange Leakage Exchange Leakage Factor (U$ billion) Factor (U$ billion) Cambodia 7,000,000 4.50 3.42 3.69 Lao PDR 4,700,000 0.80 0.61 0.66 Myanmar 7,500,000 10.10 7.68 8.28 Vietnam 19.00 14.44 15.58 Sources: Tourism sector assessment, strategy, and roadmap for Cambodia, Lao PDR, Myanmar, and Vietnam (2016–2018), Asian Development Bank; https://www.adb.org/ sites/default/files/institutional-document/227186/clmv-tourism-sector-assessment.pdf. 51 Domestic producers and service providers are expected to supply goods and services to international tourists. In the case of foreign exchange leakages, imported goods and foreign services are supplied. October 2017 CAMBODIA ECONOMIC UPDATE 59 e. Expanding and upgrading skilled Hospitality”. In this regard, leveraging workers, while strengthening public- the 2017–25 National Policy for Technical private partnerships. A set of intervention and Vocational Education and Training measures could be introduced in (TVET) and public-private partnerships to main hubs such as Siem Reap and provide and improve access to quality Sihanoukville. In this regard, the Ministry of training for youth and women from poor Tourism has introduced training programs communities to get the right skills and on hospitality including adoption of the knowledge and maximize their potential ASEAN standards for tourism professionals for employability will help. Improved in close partnership with the private sector, collaboration among (better-trained and mainly tourism-related associations. Those well-organized) local workforces, farmers, include building human resources and small and medium-sized enterprises, skills developments such as tour guides, and tourism-related associations such massage service providers, service as the Cambodia Association of Travel experts at restaurants, hotel services, Agents, Cambodia Hotel Association, and travel services, aiming at improving and Cambodia Restaurant Association, service quality and proper hospitality will underpin resilient tourism and, in in line with the campaign “Clean City, particular, reduce leakages. Clean Resort, Good Service and Best 60 CAMBODIA ECONOMIC UPDATE October 2017 ANNEX 1 The challenge of creating an inclusive tourism system; the case of attracting investment in Lombok, Indonesia The Government of Indonesia is actively • The destination’s lack of critical mass, targeting an inclusive growth of its tourism which is deterring potential investors sector by creating well-planned destinations who have spent time researching as alternatives to Bali. These efforts are Lombok and who have identified the coordinated by the highest authority (the beach demographic to suit their target vice-president’s office) and are aimed at the market. They are waiting to see how attraction of private sector investment. The the destination develops further before challenges of enticing development away making the investment. from the country’s main attraction (Bali) are • The majority of possible investors similar to what Cambodia experiences with canvassed had no interest investing Angkor Wat. in Lombok, seeing it as “hype and no At present, the development of additional substance,” which indicates they think subnational destinations able to that Lombok lacks depth as a destination. attract different (longer-staying/higher- Lombok, as stated above, has been spending) markets is further influenced by discussed and debated since the 1990s, characteristics similar to Cambodia: with very little investment or development. It is no wonder, therefore, that potential • Lombok is too close to Bali and Bali has investors are concerned about the more to offer visitors. destination having no substance, as it has been given the spotlight but has not • The quality transportation links are seen yet shined. as a positive point for Lombok, which is placed alongside Borobudur as a • Domestic investors have not pursued the potential destination for investment in the destination due to issues of culture (“it is future. October 2017 CAMBODIA ECONOMIC UPDATE 61 tough to do business in Lombok, we are can learn from the situation in Lombok and not sure it’s worth the pain”), and the the impact on the supply and demand for slowness in the general development of tourism infrastructure: Lombok. They prefer to wait several years until Lombok has had more time to grow. • Investment is occurring in Lombok, but predominantly in the more established/ • Development in Lombok has stalled. It key tourism areas, as is the case in needs a kick-start, which can only be Cambodia with Siem Reap. initiated by the government, which has been lacking to date. • Outside the tourism nodes, investments remain relatively small scale, with no Lombok therefore wants to establish itself investors willing to invest large sums in as a distinctly different destination. Like an anchor development that could Cambodia, different parts of Lombok are help push Lombok into a new phase of at different stages of the development investment/development. cycle. There are mature, well-known destinations internationally and regionally • Small-scale investment and small-scale that are currently enjoying relatively developments do not help increase air lift good levels of investment with new hotels or road improvements, which is a limiting opening, properties under renovation, and factor for the further development of chain owners accumulating additional Lombok. properties. Performance is relatively strong The positioning of the destination is essential, for tourism services and assets including and market value is found in (Lombok) hotels, restaurants, and travel agencies and being the unspoiled paradise. This fosters guides. This constitutes the profile of Angkor the development of sustainable and Wat, although chain development is not different key tourism areas offering various found in Cambodia. options to appeal to diverse market sources Other areas are at the development stage, of tourism demand. It should not develop a including a long, new hotel pipeline along single identity, such as halal or ecotourism the south coast with the potential for large- (although they can be components). scale hotels and restaurants, and supporting Destinations include: a tourism service infrastructure comparable • Senggigi and Gili Islands: largely luxury to Cambodia’s coast, as well as infancy or high-end beach destinations that are destinations where restaurants, homestays, expected to develop further organically. and smaller nonstar hotels have begun to Target markets: Australia, Europe. open with small investment levels, some aimed at niche adventure visitors. The • Kota Mataram: business driven, mid-tier. supporting infrastructure is currently only Target markets: Domestic, Malaysia. minimal, with a one-night length of stay. • Mount Rinjani and surroundings for nature- The accelerated growth of development based, niche tourism. Small/low impact. and infancy destinations across Cambodia Not a principal focus, but identified as a 62 CAMBODIA ECONOMIC UPDATE October 2017 secondary alternative. Target markets: Europe, China (niche). • Southwest Coast, including Selong Balanak, low-density beach destination to cater to high-yielding visitors, surfers, and divers, particularly along the coast. Facilities should match this demand. Target markets: United States, Europe (France), Australia, Japan, Germany, Singapore. • Central South Coast, including Mandalika, developed as a high-density mass market tourism area. Close to airport. Multiple hotels, all price points, greater variety of facilities. Target markets: China; Malaysia; Singapore; Australia; the Middle East; meetings, incentives, conferences, and events (MICE) countries. The Lombok example confirms that Cambodia can benefit from:  An active role of government driving tourism development Enabling  anchor developments of appropriate scale  Developments that target specific source markets  Creating a distinct destination image outside the well-established attractions. October 2017 CAMBODIA ECONOMIC UPDATE 63 ANNEX 2 The importance of destination-level management The importance of destination-level management, national investment, and the environment for high-value services, along with the associated drivers and constraints, need to be recognized, and recommendations are needed on the most promising entry points for action. If action is taken on these, the sector can guarantee growth and inclusion by better development and protection of key assets, and through improved use and redistribution of tourism revenues. Destination-level National-level connectivity Barriers to high-value management and investment services There is a lack of concerted There is poor national-level There are a series of problems Key problems action to manage and management of, and hindering businesses from develop areas, including public investment in, tourism providing high-quality inadequate services, destinations, with the most services or catering to high- problems with installing small urgent aspect being poor value clients. and medium infrastructure, connectivity. Problems with The investment climate and poor planning and an inadequate last-mile road allows for overcrowding zoning for tourism. network are reported, and in similar segments and there are too few airports Related to this, there is spatial destinations. and limited air connectivity also poor management Tourism businesses also in support of diversified of tourism attractions, with face additional challenges itineraries, reducing the early signs of degrading and associated with missing skills ability to develop new areas overutilization. These factors among the local population for tourism and increasing also hamper the ability to for higher-end and pressure on existing develop new products and specialized market segments. destinations. compound the pressure This reduces value captured on the existing attractions, in the tourism system for which especially at Angkor Wat. no adequate (targeted) tax 64 CAMBODIA ECONOMIC UPDATE October 2017 and/or revenue base exists. With growth stagnating, pressure is put on the room capacity that has been created, and (even more important), the capacity that is being planned and under construction, possibly impacting capital markets (loan defaulting). The foundations for The distribution of public The tourism sector is Drivers and constraints destination-level investment in general and affected by the legacy of management are set by transport infrastructure conflict, and by continued public sector interventions in particular reflects the mistrust. Although there is a shaped by economic political geography of cadre of bright, innovative concessions in the forest Cambodia, with only sparse young entrepreneurs, sector. Private sector investment outside the real overall a “copycat” incentives relating to estate growth centers. mentality prevails as a destination development way to ensure tourism is a The tourism industry has not are under discussion, but solid additional livelihood formed an effective lobby, there are no regulated strategy. owing to fragmentation and factors that push businesses few corporate ventures. The history of poor relations toward making important Interministerial coordination between government contributions to the local is reported as challenging, and business hinders the area, and neither joint with tourism potential not ability of the government ventures nor tourism usually a consideration, to catalyze and lead the concessions in support of and there is a lack of sector, and perceptions of conservation of tourism (economic) information on unethical business practices resources. areas of high potential. A become a self-fulfilling The management of strengthening economic prophecy. tourism is more frequently lobby in government could The high level of Asian characterized by limited (at represent an opportunity group travel keeps best informal) partnership to promote tourism-related itineraries short and among key players, with a investments. restricted, whereas the fragmented appreciation The potential value independent travelers fit the of problems faced and (revenue, investment, lower-spending segment a lack of platforms for employment, and tax) challenging value growth. building shared solutions. of tourism is neither Some of the knowledge The agreement on documented nor well and experience required labor movement from understood, and is to facilitate action on local neighboring Mekong states therefore unable to act problems is available, but might create an inflow of as a convincing driver for there is insufficient technical semiskilled foreign labor investment in much-needed capacity, and challenges in the hospitality sector, enabling infrastructure. relating to politicization. crowding out the unskilled local labor force. October 2017 CAMBODIA ECONOMIC UPDATE 65 Recommendations Prospects for improving A direct approach to A considerable difference destination management improving national-level would be made by vary, but there are genuine public investment in tourism improved regulation opportunities for expansion is unlikely to succeed in that drives diversifying and for introducing new the short term, but there the quality scope of products and places. are other entry points. the product offering. Central aims should be Efforts should be made Impact assessments and securing the involvement of to facilitate coherent community monitoring tourism businesses in local private sector leadership for tourism-related levies destination establishment of the sector, “crowding could catalyze product and growth, and in” investment anchored upgrading, with the right strengthening local services to comprehensive long- support, and instruments with sectoral cross-benefits. term plans, catalyzed by should be explored that public seed funding and can help small businesses encouraging FDI. This would respond more constructively help the tourism industry to opportunities in spatial drive the development of development. larger-scale infrastructure (possibly planned as public-private partnership) projects. Improved economic data (collection) and analysis of the value of tourism destinations and products are also worthwhile national-level investments. 66 CAMBODIA ECONOMIC UPDATE October 2017 CAMBODIA: KEY INDICATORS 2014 2015 2016 2017p 2018f 2019f Output, Domestic Demand, and Prices Real GDP (% change, y/y) 7.1 7.0 7.0 6.8 6.9 6.7 GDP, expenditure shares (%, current prices) Private consumption 76.6 75.4 74.4 72.3 70.9 69.5 Government consumption 6.1 7.0 7.0 7.3 7.0 7.1 Gross fixed investment 20.9 21.4 21.7 22.4 23.3 23.6 Exports, GNFSa 62.3 61.7 61.3 61.4 61.7 62.6 Imports, GNFS 66.7 66.6 65.7 64.6 64.0 63.9 Domestic demand (% change, y/y) 10.1 8.5 9.5 8.5 9.4 9.6 Consumer price index (annual avg, 1.7 1.3 3.5 2.9 3.2 3.5 % change y/y) Public Sector (% of GDP) General government domestic 16.8 17.6 18.4 18.4 18.5 18.8 revenues General government expenditures 21.8 21.1 21.4 23.0 23.8 23.9 Overall fiscal balance excluding -5.0 -3.5 -3.0 -4.5 -5.3 -5.1 grants Foreign Trade, Balance of Payments, and External Debt (US$ million unless specified otherwise) Trade balance -2,023.5 -2,261.9 -2,276.0 -2,273.8 -2,464.5 -2,602.8 Exports of goods 7,636.0 8,280.2 9,115.2 9,989.5 10,925.1 12,103.1 (% change y/y) 10.9 8.4 10.1 9.6 9.4 10.8 Key export (% change, y/y)b 8.8 10.9 13.6 5.5 4.0 3.5 Imports of goods 9,659.6 10,542.0 11,391.2 12,263.3 13,389.6 14,705.8 (% change y/y) 8.7 9.1 8.1 7.7 9.2 9.8 Current account balancec -1,899.7 -2,093.9 -2,041.4 -2,106.4 -2,222.5 -2,382.4 (% GDP) -11.3 -11.5 -10.2 -9.6 -9.2 -8.9 Foreign direct investment 1,679.9 1,668.8 2,164.4 2,418.8 2,662.3 2,853.7 External debt 5,351.2 5,732.7 6,522.4 7,427.6 8,551.3 9,535.9 (% GDP) 31.8 31.4 32.6 33.8 35.3 35.7 Debt service ratio (% exports of g&s) 1.2 1.5 1.6 1.9 2.1 2.2 Foreign exchange reserves, gross 4,657.9 5,672.1 6,730.8 8,175.4 9,594.3 9,144.7 (prospective months of imports of 4.6 5.2 5.7 6.3 6.8 5.8 g&s) Financial Markets Domestic credit (Net, % change y/y) 28.4 28.6 25.8 16.5 15.2 20.8 Short-term interest rate (% per year) 11.5 11.6 11.8 11.7 11.5 11.2 Exchange rate (riel/US$, annual 4,030.0 4,025.0 4,058.0 4,062.0 4,067.0 4,075.0 average) Memo: Nominal GDP (millions US$) 16,809 18,241.7 20,020.2 21,985.2 24,216.2 26,690.5 Sources: Cambodian authorities, IMF, and World Bank staff estimates and projections. Note: a. Goods and Non-Factor Services (GNFS). b. Garments. c. Excluding transfers. f = forecast; g&s = goods and services; p = projection. October 2017 CAMBODIA ECONOMIC UPDATE 67 The World Bank Cambodia Country Office Exchange Square Building Floor 10th IBRD and 11th IFC Streets 51-61 and Streets 102 -106 Sangkat Wat Phnom, Khan Daun Penh Phnom Penh, Cambodia Website: www.worldbank.org/cambodia