Thailand
Cambodia’s economic recovery takes a knock with prevailing oil price shock
Cambodia is now weathering an oil price shock, just as the economy had started to recover amid a rollback of COVID-19-related restrictions.
The country imports 100 percent of its oil products, and its terms of trade have worsened quickly as oil prices surged. Unlike last year, when the current account deficit widened significantly because of a surge in gold imports, this year’s negative terms of trade shock, caused by oil price increases, is likely dampening consumer confidence and corporate profitability, impacting aggregate demand.
Negative impacts of the oil price shock are amplified by Cambodia’s already large external imbalances. The country’s refined oil imports amounted to 6.2 percent of 2021 GDP – larger than in most other East Asia and Pacific economies – and around 11 percent of total imports.
The trade deficit initially narrowed, as gold imports declined. However, higher oil prices partially are offsetting the decline, placing upside risks to the current account deficit.
Moreover, financing the deficit by capital inflows is being constrained by the zero-COVID-19 policy in China, which is the largest source of foreign direct investment (FDI) for Cambodia. While Cambodia’s international reserves remain relatively high, covering up to about 8 months of prospective imports, external pressures will likely continue.
Rising food and energy prices have eroded household purchasing power. International oil price increases are passing directly through to domestic prices. Increases in fertilizer and food prices further stoke inflationary pressures.
The relatively high weight of the transport component of 12 percent of the country’s Consumer Price Index (CPI) consumption basket exacerbates these negative impacts. Headline inflation quickly accelerated to 7.2 percent year on year (y/y) in May 2022, hitting a 13-year high, up from 3.0 percent during the same period last year.
Vulnerable and poor households in Cambodia are bearing the brunt of these increases, with limited recourse to savings.
Therefore, the cash transfer program, which has been the largest component of the government’s fiscal support package, will continue to be needed.
As of February 2022, the program covered 690,000 households (2.7 million individuals) or approximately 19 percent of households. The program has disbursed $593 million since the launch in June 2020, thus far helping to mitigate the negative impacts for poor and vulnerable households.
Higher commodity prices triggered by the war in Ukraine are expected to lead to sizable fiscal impacts. First, additional budgetary spending may be needed to mitigate the impacts of commodity price movements, particularly on vulnerable households and firms.
Second, reduced revenue collections are expected due to the negative growth impacts of high inflation and dampened aggregate demand.
Third, while the annual budget for 2022 envisages countercyclical fiscal support with a projected fiscal deficit of 6.6 percent of GDP, achieving the objectives and targets of the budget is increasingly challenging as costs of goods and services increase. Public investment project cost overruns are likely amid surging inflation, and rising costs of inputs such as building materials, labor, and machinery.
The higher deficit is expected to be financed by drawdowns of government deposits (fiscal reserves), which stood at 17.0 percent of GDP in February 2022, down from 22.5 percent during the same period last year and additional external borrowing.
Meanwhile, the “living with COVID-19” strategy has enabled a reopening of the economy since late last year. International mobility has been further facilitated by the reinstatement of the Visa on Arrival program and the removal, in March 2022, of the requirement for a negative COVID-19 test before arrival in Cambodia.
The roll back of restrictions was enabled by the country’s successful vaccination program. As of June 17, 2022, about 85 percent of the population have received two doses of coronavirus vaccine. The resurgence of infections caused primarily by the Omicron variant has receded since April 2022.
The economic recovery remains uneven. Traditional growth drivers, especially the garment, travel goods, and footwear manufacturing industries, continue to expand.
Exports of the top three manufactured products, covering 65.4 percent of total merchandise (excluding gold) exports, grew at 25.1 percent in March 2022.
The electrical, electronic, and vehicle parts manufacturing industries are rebounding slowly. Production of rice, Cambodia’s main crop, accounting for close to 60 percent of agricultural GDP, rose by 9.3 percent during the 2021‒22 rice production year, reaching 12.2 million metric tons.
The service sector, especially the travel, tourism, and hospitality industries, is recovering, underpinned initially by a revival of domestic demand and domestic tourism but remains below per-COVID-19 levels.
The construction sector, which was one of growth drivers during the pre-pandemic period, also remains under pressures.
In March 2022, the value and area of approved construction permits plummeted, contracting by 66.0 percent and 67.9 percent, respectively. During the same period, cement, and steel imports, mainly used for the construction industry, contracted in volume terms by 71 percent and 15.6 percent, respectively.
Monetary conditions continued to be accommodative. Broad money growth eased, growing at 13.8 percent in March 2022, declining from 20.3 percent during the same period last year. Private sector deposit growth continued, expanding at 15.3 percent.
Supporting economic recovery, domestic credit growth accelerated to 22.4 percent in March 2022, up from 21.1 percent during the same period last year.
Supported by central bank open market operations, the nominal exchange rate continued to be broadly stable, hovering at riel 4,100 per U.S. dollar. Gross international reserves increased marginally, reaching US$20.3 billion (8 months of imports) in March 2022, down from US$20.2 billion during the same period last year.
Cambodia’s real growth is projected to reach 4.5 percent in 2022. The relatively subdued growth projection reflects anticipated impacts of the negative terms of trade shock caused by rising oil prices, a cyclical slowdown in the United States and China, Cambodia’s main trading partners.
In addition, the path of the economy continues to depend on the course of the virus. Thanks to continued progress on vaccinations, further relaxations of travel restrictions support continued gains in economic activity and employment.
Domestic economic activity and agricultural commodity exports are expected to remain robust, contributing to economic recovery.
Over the medium term, the economy is expected to trend back to potential, growing at around 6 percent.
The new Law on Investment, together with the newly ratified Cambodia-China Free Trade Agreement and Regional Comprehensive Economic Partnership, is expected to boost investment and trade in the coming years.
Similarly, trade and investment will be further boosted when the Cambodia-Republic of Korea free trade agreement is ratified. However, the negative impacts of the coronavirus on jobs and welfare are expected to continue as the services sector, especially the travel, tourism, and hospitality industries, continue to face persistent headwinds. World Bank, Cambodia Economic Update