The UK-based Fitch Ratings credit rating agency has downgraded Cambodia’s economic outlook below the World Bank’s baseline forecast of 4 percent GDP growth for 2021 as the country continues to struggle with the economic shock of the COVID-19 pandemic.
The credit rating agency revised its 2021 real GDP growth forecast for Cambodia to 2.5 percent, down from its previous forecast of 3.8 percent. Both forecasts are lower than the World Bank and Asian Development Banks forecast of 4 percent GDP growth throughout 2021.
The report “Outlook for Cambodia 2021” published on July 19 provides a more pessimistic outlook for services growth and signs of weak construction activity amid a rise in COVID-19 infections.
“Our downward revision is mainly due to a weaker outlook for services as a result of Cambodia’s continued struggle to arrest its domestic Covid-19 outbreak, which will put persistent strain on and hamper a recovery in its large tourism sector,” the report said.
According to the report, COVID-19 has heavily affected the services sector, which makes up 40 percent of the nation’s GDP. The growing number of positive cases has continued to prevent a rebound in tourist arrivals, as well as still impacting people’s incomes. The country’s construction sector is also suffering from falling investment after an extended period of overinvestment and excess property supply during the pre-pandemic boom. During the first four months of 2021, the report stated, approved construction permit value fell by a significant 41.5 percent year on year.
Despite this more cautious prognosis, the ratings agency still anticipates positive GDP growth led by the industrial sector and somewhat supported by agriculture.
“We continue to expect manufacturing to remain resilient, and agriculture continues to provide some degree of support,” it said.
Following a sharp contraction in 2020, the Cambodian manufacturing sector is slowly recovering. The manufacturing of garment, footwear and travel goods has continued to fall following the EU’s partial removal of its Everything But Arms (EBA) trade privileges to the market starting from August 2020.
Despite this, the overall impact on Cambodia’s manufacturing sector is being offset by growing production of other goods including electronics and vehicle parts, as well as agro-processing.
“We expect manufacturing activity to continue being supported by strong external demand, notably by the US, considering its large fiscal stimulus packages being implemented,” it said. “This will help to counter the fall in exports going to the EU.”
Cambodia has a narrow export base, with the US accounting for 30 percent of Cambodia’s total exports in 2020 and Europe for 23 percent, according to the report.
It said that the agriculture sector has so far been relatively resilient following an increase in investment as a result of the Cambodia-China free trade agreement and the Regional Comprehensive Economic Partnership trade agreement between a number of nations in the Asia-Pacific.
But some argue that the numbers being debated don’t tell the whole story. Hong Vannak, a business researcher at the Royal Academy of Cambodia, said that Cambodia’s GDP forecasting is based on an old fiscal year calculation from 2006 and does reflect the real GDP.
“Cambodia’s fiscal year that is used to calculate GDP growth was out of date, so the current economic growth by the government may not be accurate as it is based on nominal GDP not real GDP,” he said. “For developed countries, they revise the fiscal year every ten years to calculate the real GDP.”
However, he said while the government revenues have fallen and spending has risen, it should be possible to keep the economy afloat.
“Consumer prices continue to rise, especially gasoline prices, so it will certainly put a burden on the economy as small businesses activity and people’s incomes remain down,” he said. “If COVID-19 continues for a long time, the country’s economic situation in 2021 will be hard.”
Meas Soksensan, a spokesman at the Ministry of Economy and Finance, could not be reached for comment.
The World Bank has approved $200 million worth of International Development Association (IDA) credit for Cambodia’s fight against the ongoing COVID-19 pandemic and broader economic recovery. The government has also been providing a cash support program for poor families and vulnerable people through its post-COVID-19 Economic Recovery Plan.
Yun Mom, a garment worker in Phnom Penh, said that her salary has halved since the outbreak of COVID-19.
“We don’t have regular work to do and in this COVID-18 situation, my living conditions are difficult due to the reduced income, while I also need to pay off debts,” she said.