C A M B O D I A E C O N O M I C U P D A T E RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK April 2018 SELECTED ISSUE: SUMMARY FINDINGS OF FUTURE JOBS IN CAMBODIA Photo Cover: © ithinkasia C A M B O D I A E C O N O M I C U P D A T E RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK April 2018 SELECTED ISSUE: SUMMARY FINDINGS OF FUTURE JOBS IN CAMBODIA CONTENTS ACKNOWLEDGEMENTS ....................................................................................................................2 LIST OF ABBREVIATIONS ....................................................................................................................3 EXECUTIVE SUMMARY........................................................................................................................4 SECTION 1: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK.................................................8 1. Recent economic developments.................................................................................. 8 a) The real sector............................................................................................................. 8 b) The external sector................................................................................................... 17 c) Poverty....................................................................................................................... 19 d) The monetary sector................................................................................................ 22 e) The fiscal sector......................................................................................................... 27 2. Outlook and risks............................................................................................................. 32 3. Key messages................................................................................................................. 33 SECTION 2: SELECTED ISSUE FUTURE JOBS IN CAMBODIA.............................................................35 1. Introduction .................................................................................................................... 35 2. Current state of jobs ...................................................................................................... 36 a) Structural transformation......................................................................................... 36 b) Jobs picture............................................................................................................... 38 c) Labor force participation........................................................................................ 39 3. Jobs of the Future........................................................................................................... 41 a) Opportunities and Bottlenecks .............................................................................. 41 b) Firms: Missing middle................................................................................................ 44 c) Trade and FDI............................................................................................................ 46 d) Nonfarm household enterprises............................................................................... 47 e) Workers....................................................................................................................... 48 4. Strategic directions for future jobs – toward better and inclusive jobs.................... 52 a) Sectoral policy options ........................................................................................... 52 b) Cross-cutting policy options ................................................................................... 52 CAMBODIA: KEY INDICATORS........................................................................................................55 APRIL 2018 CAMBODIA ECONOMIC UPDATE 1 ACKNOWLEDGEMENTS The preparation of the 2018 April Cambodia authorities, particularly the Ministry of Economic Update (CEU) was led by Sodeth Economy and Finance and the National Ly, with contributions from Miguel Eduardo Bank of Cambodia for their cooperation Sánchez Martín. The selected issue “Future and support. The report also benefited from jobs in Cambodia,” was prepared by the advice, comments and views of various Wendy Cunningham and Claire Honore stakeholders in Cambodia, including its Hollweg. Linna Ky provided technical and enthusiastic readers and critics. logistical support to the publication, and Runsinarith Phim provided research support. The CEU, produced bi-annually, provides Inputs for the poverty section were provided up-to-date information on macroeconomic by Kimsun Tong. The World Bank Cambodia developments in Cambodia. It is distributed Office Communications Team, comprising and discussed widely including among Saroeun Bou and Sophinith Sam Oeun, Cambodian authorities, development helped with the press release, web display partners, the private sector, think tanks, civil and dissemination events. society organizations and academia. The team worked under the guidance of For information about the World Bank and Deepak Mishra. The team is grateful for the its activities in Cambodia, please visit our advice and comments provided by Ellen website at www.worldbank.org/cambodia. A. Goldstein and Inguna Dobraja. Several World Bank colleagues provided comments To be included in the email distribution list on the draft version including Andy Mason, of the CEU and related publications, please Ekaterine T. Vashakmadze, Ha Minh Nguyen, contact Linna Ky (lky@worldbank.org). For Shabih Ali Mohib, and Sudhir Shetty. questions on the content of this publication, please contact Saroeun Bou (sbou@ The team is grateful to the Cambodian worldbank.org). 2 CAMBODIA ECONOMIC UPDATE APRIL 2018 LIST OF ABBREVIATIONS ASEAN Association of Southeast Asian Nations CPI Consumer Price Index CR Cambodian riel EU European Union FCD Foreign Currency Deposit FDI Foreign direct investment GDP gross domestic product GIR gross international reserves GNI gross national income IDP Industrial Development Policy IMF International Monetary Fund LPCO Liquidity-Providing Collateralized Operation MA moving average MoEYS Ministry of Education, Youth and Sport NCDs negotiable certificate of deposits NFHE nonfarm household enterprises NPL non-performing loan NSDP National Strategic Development Plan PDR People’s Democratic Republic PFM public financial management RGC Royal Government of Cambodia RMS Revenue Mobilization Strategy SDR Special Drawing Rights SMEs small- and medium-sized enterprises SPPF Social Protection Policy Framework TVET Technical and Vocational Education and Training US$ United States dollar VAT Value-added tax WBG World Bank Group YTD Year-To-Date y/y year-over-year APRIL 2018 CAMBODIA ECONOMIC UPDATE 3 EXECUTIVE SUMMARY While the economy continues to expand rapidly in Cambodia, real GDP growth eased to 6.8 percent in 2017 from 7 percent in 2016. Cambodia therefore bucked the regional trend, as most developing countries in East Asia experienced a growth acceleration in 2017. Following some moderation during the first half of 2017, textile and apparel exports rebounded. The tourism and agriculture sectors experienced initial recovery in the last few years after facing gradual moderation. Growth is projected to remain robust, expanding at 6.9 percent in 2018. Downside risks to the outlook include erosion of export competitiveness due to rapidly rising real wages, a buildup of vulnerabilities from a prolonged real estate and construction boom, potential election-related uncertainty, and periodic jolts to the international trade order in the form of protectionism and escalating trade disputes. Recent developments textile and apparel exports to the United States quickly recovered, expanding at 3.7 Growth remains robust, underpinned percent, compared with -3.5 percent during by upbeat external demand. Growth is the same period. Despite rapidly rising real estimated to have eased to 6.8 percent in wages, textile and apparel exports growth 2017, according to preliminary estimates by held up well, rising at 7.7 percent in 2017, Cambodian authorities. Textile and apparel a slight deceleration from 8.4 percent in exports to the European Union (including 2016. Tourist arrivals accelerated to the 11.8 the United Kingdom) accelerated at a percent in 2017, compared with 5 percent healthy rate of 7.4 percent (year-over- in 2016, thanks to the authorities’ efforts to year [y/y]) by December 2017, compared establish more regional flights, including the with -1.0 percent in May 2017. Similarly, introduction of “China-Ready” initiative. 4 CAMBODIA ECONOMIC UPDATE APRIL 2018 The agriculture sector also recovered with by strong FDI inflows. Bank deposits (largely expansion of rice and rubber plantation, in U.S. dollars due to high dollarization) rose, owing to favorable weather conditions growing at 23.3 percent in December 2017. and the gradual recovery of agricultural Gross foreign reserves further accumulated, commodity prices. reaching US$ 8.7 billion or 6.8 months of prospective imports coverage. The Cambodia, however, could not take as Cambodian riel (CR), which is pegged to much advantage of the strengthened global the U.S. dollar, remained stable at CR 4,000 economic recovery as some of its regional per U.S. dollar in March 2018. neighbors. The economies of China, Indonesia, Thailand, and Vietnam witnessed Better-than-expected revenue collection a growth acceleration in 2017. Similarly, helped contain the general government the ASEAN countries as a group grew at deficit which has been under pressure 5.4 percent in 2017 relative to 4.9 percent as the wage bill increases. The fiscal in 2016. Much of their growth acceleration deficit (excluding grants) is estimated to was due to improved export performance. have narrowed to 2.7 percent of GDP in In case of Cambodia, exports did perform 2017, compared to 3.6 percent in 2016. well too, but not at the same level as While the 2018 annual budget continues its regional peers—suggesting deeper to reflect a rising wage bill, which now structural problems facing the Cambodian reaches 8.4 percent of GDP, it is the first economy. time that budgeted public investment received a large boost, amounting to 7.8 Private consumption eased, subduing percent of GDP. Cambodia’s debt distress inflation, as credit expansion decelerated. level remained low as per the 2017 World Inflation declined to 2.2 percent at the Bank/International Monetary Fund Debt end of 2017, compared with 3.9 percent in Sustainability Analysis. 2016. While growth of overall bank credit remained subdued at 19.6 percent in 2017, Outlook well below 25.8 percent in 2016, domestic credit financing the construction and real Cambodia’s high growth trajectory is estate sector accelerated again, growing expected to continue. Growth is projected at 37.1 percent in November 2017, up from to accelerate to 6.9 percent in 2018, 28.4 percent in May 2017, as an appetite underpinned by rising government spending for construction and real estate investment and favorable global conditions, including revived. robust demand in advanced economies. Cambodia’s growth rate is, however, Cambodia’s liberal trade and investment expected to gradually decelerate, if policy continues to attract large inflows of structural problems (for example, loss of foreign direct investment (FDI). Owing to competitiveness) are left unaddressed. It slower imports caused by easing domestic is expected that the announcement of demand, the current account deficit the new Rectangular Strategy after the narrowed to 9.8 percent of GDP, financed elections will revive the reform momentum. APRIL 2018 CAMBODIA ECONOMIC UPDATE 5 Therefore, in the medium term, large FDI (see the selected issue section on future jobs inflows and rising public investment in in Cambodia). Addressing skills constraints, infrastructure are expected to help expand as envisioned in the 2017—25 National the productive capacity of the economy. Technical and Vocational Education and This, together with several structural reforms Training Policy is, therefore, a priority. Greater designed primarily to boost Cambodia’s coordination among public and private external competitiveness, could help entities will be essential to the successful speed up growth momentum in the longer implementation of this framework. term. Addressing the constraints facing small Risks to the outlook remain tilted towards the businesses and enterprises can support downside. Domestically, risks are associated diversification, while promoting job growth. with a prolonged real estate and construction It is important to reduce the costs of firm boom, potential uncertainty related to the formalization, operation, and financing, July 2018 general elections, and declining while providing incentives and access to external competitiveness. Externally, risks are support programs. The introduction of policy associated with uncertain global trade as supports to promote small and medium- protectionism rises. In addition, employment sized enterprises and nonfarm household growth prospects look less certain. As enterprises will help boost job creation. real wages rapidly increase, Cambodia’s Potential policy supports may then include external competitiveness, which primarily skills development for firm owners, and relies on cheap labor, is being eroded. As a development of and access to digital and result, the pace of poverty reduction could internet technologies. Fostering domestic slow in the future. investment, including in agroprocessing, could also help strengthen links to foreign- Key messages and policy options owned businesses and exporters. Invest to develop human capital. A skilled The ongoing construction and real estate labor force helps boost productivity boom needs close monitoring. Credit growth and compensate for rapidly rising growth directed to the construction and real wages, while underpinning ongoing real estate sector has been accelerating structural transformation. To this end, the in recent years. It is therefore necessary success of any policy intervention will likely to develop macro-prudential policies to depend on the effectiveness of incentives reduce the scope for speculative activities. and processes to facilitate the enterprise In the banking and microfinance sectors, it sector’s role in providing, guiding, and is crucial to adopt lending guidelines and advocating for a skills development system ensure adequate monitoring, while revisiting that responds to the demands of industry the non-performing loan classifications. 6 CAMBODIA ECONOMIC UPDATE APRIL 2018 FIGURE ES.1: THE CAMBODIAN ECONOMY AT A GLANCE Growth eased slightly in 2017 Garment exports continued to hold up Contribution to growth (percent) despite real wage increases (US$ million) Agriculture Indus-garment & footwear Indus-construction Serv-real estate Indus-others Serv-trade 35 8,000 Garment exports Serv-others Taxes less subsidies GDP growth growwth rate (RHS) 7,000 30 8 7.1 7.3 7.4 7.1 7.0 6,000 7.0 6.8 25 7 5,000 6 20 4,000 5 15 3,000 4 2,000 10 3 1,000 5 2 1 0 0 0 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 2011 2012 2013 2014 2015 2016 2017/p Agricultural production, especially rice Rising FDI inflows strenthened the external expanded sector, boosting foreign reserves Contribution to production increase (million metric tons) by Land by Yield rice production 10 8 0.8 9 7 GIR (in US$billion) 0.6 8 6 GIR (months of imports, RHS) 7 5 0.4 6 5 4 0.2 4 3 3 0.0 2 2 1 -0.2 1 0 0 -0.4 2010 2011 2012 2013 2014 2015 2016 2017e 2005 2006 2007 2008 2009 2010 20112012 2013 2014 20152016 2017 Short-term interest rates moderated, Public spending boosted, giving rise to facilitating private investment public investment (percent of GDP) 20 7 25 Capital Wage Non-wage Lending rate 18 6 Deposit rate(RHS) 20 7.8 16 7.1 7.8 7.3 7.7 6.2 7.2 6.9 6.7 6 6.3 15 14 4.3 5 4.4 4.6 5.0 8.4 4.8 5.7 6.5 7.2 12 10 7.7 5 10 5 8 4 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 Dec-17 0 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018p Sources: Cambodian authorities and World Bank staff estimates and projections. Note: e = estimates; GIR = Gross International Reserves; p =projections; RHS = right-hand side. APRIL 2018 CAMBODIA ECONOMIC UPDATE 7 SECTION 1: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1. RECENT ECONOMIC DEVELOPMENTS a) The real sector Growth remains robust, underpinned Figure 1: Contribution to real growth (percent) by upbeat external demand. Growth is Agriculture Indus-garment & footwear estimated to have slightly eased to 6.8 Indus-construction Serv-real estate Indus-others Serv-trade percent in 2017, according to preliminary Serv-others Taxes less subsidies estimates by the authorities, slightly below GDP growth 10 7.0 percent in 2016 (figure 1). Following a 7.1 7.3 7.4 7.1 gradual moderation in early 2017, textile 6.1 7.0 7.0 6.8 and apparel exports rebounded in the 5 second half of the year as a broad-based cyclical global recovery got underway (see box 1 on Global and Regional Outlook 0 and Risks), aided by a rebound in foreign investment.1 The tourism and agriculture /p 10 11 12 13 14 15 16 17 sectors continued their recovery, while 20 20 20 20 20 20 20 20 -5 appetite for construction and real estate Source: National Institute of Statistics. Note: P = preliminary. investment remained upbeat. 1 2018 January Global Economic Prospects, the World Bank. 8 CAMBODIA ECONOMIC UPDATE APRIL 2018 Box 1: Global and Regional Outlook and Risks1 Global growth is projected to reach a peak of rate in 2019. The outlook is predicated on broadly 3.2 percent in 2018, as the cyclical momentum stable commodity prices, strong but gradually continues. It will then slightly moderate to an moderating global demand, and a gradual average of 3 percent in 2019–20, reflecting a tightening of global financing conditions. Despite gradual slowdown in advanced economies the projected robust activity in the region in the (figure B1.1). Following a broad-based recovery near term, underlying potential growth—which in 2017, growth in advanced economies is has fallen considerably over the past decade— projected to firm slightly to 2.4 percent in 2018, appears to have declined over the long term, and moderate thereafter toward an average reflecting increasingly adverse demographic of 1.8 percent in 2019–20, as labor market slack patterns and projected slowing pace of capital diminishes and monetary policy accommodation accumulation, which is needed to rein in credit is gradually unwound. growth. Figure B1.1. Real GDP growth (percent) Figure B1.2. Real GDP growth (percent) 6 2017 2018 2019 8 5 Emerging Markets & 4.6 Developing Economies 6 4 3.2 World 4 3 2 2 2.3 Advanced 1 economies 0 EAP EAP ex. China China Cambodia Lao PDR Myanmar Mongolia Vietnam Malaysia Thailand 0 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f Source: Global Development Finance, June 2018 (Forthcoming). Note: f = forecast. Source: Global Development Finance, June 2018 (Forthcoming). Growth in emerging market and developing economies (EMDEs) is expected to reach a five- Figure B1.3. World commodity prices year high 4.5 percent in 2018, and stabilize at an forecast (nominal U.S. dollars, 2010 = 100) average of 4.7 percent in 2019–20. This mainly 140 Energy Metals Agriculture reflects a further cyclical pickup of growth in commodity exporters as the effects of the earlier 120 commodity price collapse dissipate. A gradual 100 slowdown in China is expected to be offset by a modest pickup in the rest of the group reflecting 80 the diminishing role of idiosyncratic factors 60 weighing on activity in some large economies in 2017. 40 20 Growth in the East Asia and Pacific region is 0 expected to gradually moderate from 6.3 percent 1980 1985 1990 1995 2000 2005 2010 2015 2020 in 2018 to 6.1 percent on average in 2019-2020 (figure B1.2). The modest slowdown in regional Source: Global Development Finance, June 2018 (Forthcoming). growth is largely due to the gradual and planned Global trends are expected to become less structural slowdown in China. Activity in the rest supportive over the forecast period. Global trade, of the region is expected to peak at 5.4 percent which accelerated sharply in 2017, benefiting in 2018 and remain steady, around its potential from a cyclical upturn in global manufacturing, APRIL 2018 CAMBODIA ECONOMIC UPDATE 9 Box 1: Global and Regional Outlook and Risks (continued) is expected to remain strong in 2018, but to horizon, as Chinese demand gradually slows. moderate thereafter, as global investment Agricultural prices have increased slightly in growth eases. Overall, growth in global trade the first quarter of 2018, following three years of of goods and services is expected to moderate stability. Stocks-to-use ratios for grains—a measure from 4.8 percent in 2017 to 4.3 percent in 2018. of global supply availability relative to demand— remain high for most grains, which will continue to Global financing conditions, which remained put downward pressure on prices. benign throughout 2017, are likely to tighten in 2018, as monetary policy gradually normalizes Although risks to the global outlook is more in major advanced economies. Inflation balanced than before, important downside risks expectations and prospects of a faster remain. Disorderly financial market movements, normalization of U.S. monetary policy have such as an abrupt tightening of global financing increased. Global interest rates are expected to conditions or a sudden rise in financial market continue rising, as inflation gradually picks up and volatility, could trigger financial turbulence and monetary policy normalizes across advanced potentially derail the expansion. The adverse economies. A continued drawdown of net asset effects of rising borrowing costs could be purchases by major central banks will contribute particularly acute for those EMDEs with large to upward pressure on long-term yields. Capital external financing needs, fragile corporate inflows are still expected to be sustained in 2018, balance sheets, and significant fiscal sustainability assuming continued recovery in EMDE growth. As gaps. In addition, escalating trade protectionism global interest rates continue to increase, EMDE or rising geopolitical risk could also negatively external financing conditions could become affect confidence, trade, and overall economic increasingly challenging in 2018 and 2019. activity. While the aggregate impact of tariff increase announced by the United States and Energy prices, and to some extent agricultural China so far appears limited, the risk of further prices, are expected to moderately firm during escalation exists. Over the longer term, a more the forecast period (figure B1.3). Oil prices are pronounced slowdown in potential output growth expected to average US$60 per barrel in 2018, in both advanced economies and EMDEs would and US$60.8 per barrel in 2019. Metals prices make the global economy more vulnerable have been stable in the first quarter of 2018 and to shocks and worsen prospects for continued are expected to change little over the forecast improvements in living standards. 1. Prepared by Ekaterine T. Vashakmadze, Senior Country Economist, World Bank Group. Main drivers of growth The textile sector. Following a gradual Figure 2: Clothing and other textile products export growth (YTD, y/y percent change) deceleration, textile and apparel exports rebounded during the second half of 2017, 50 US EU (including UK) Total supported by recovering global demand. 40 In 2017, the exports to the European Union 30 20 (EU) market surged, rising from -1.0 percent 10 (y/y) in May, to 7.4 percent in December 0 (figure 2). During the same period, exports -10 to the United States bounced back, moving -20 -30 up from -3.5 percent to 3.7 percent. The -40 share of exports destined to these two major J-06 J-07 J-09 J-10 J-12 J-13 J-15 J-16 A-08 A-11 A-14 A-17 O-06 O-09 O-12 O-15 markets remained at 70 percent in 2017. Source: Cambodian authorities. 10 CAMBODIA ECONOMIC UPDATE APRIL 2018 In 2017, exports of clothing and other textile US$0.9 billion in 2017 or 14.4 percent, slightly products reached US$7.2 billion, registering higher than 13.9 percent in 2016. Unlike the 7.7 percent growth, slightly below 8.4 case of textile and apparel articles, average percent in 2016. The textile and apparel 2 footwear export prices have been steadily sector has adjusted to cope with rising declining during the last few years due to competition by adding value to its products rising competition, dropping to US$6.6 a by incorporating printing, embroidery, and pair in 2017, down from US$7.0 a pair in 2016 washing and vertically integrating to the (figure 4). extent possible. While the effort to climb to higher product prices continued in 2017, the Figure 4: Footwear exports continued to growth in the exports of clothing and other expand, but average prices are easing textile products is reliant largely on volume 120 Value (US$ million) 9 US$/pair (RHS) increase, reflecting intense competition 100 8 7 (figure 3). In volume terms, exports of textile 80 6 and apparel articles grew by 6.6 percent, 5 US$ million US$ / pair 60 compared with 12.3 percent in 2016. 4 40 3 2 Figure 3: Contribution to the gains in clothing 20 1 and other textile exports (in US$ million) 0 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Volume increase Price increase 1.200 Total increase Source: Cambodian authorities. 1.000 Note: RHS = Right-hand side. 800 600 Other non-textile and apparel 400 manufacturing sectors. Exports of bicycles 200 are third largest after textile articles and 0 footwear exports. Bicycle exports reached -200 US$355 million in 2017. In addition, there -400 2011 2012 2013 2014 2015 2016 2017 have been newly emerging high value- Source: Cambodian authorities. added (mostly FDI) manufacturers, especially for electrical appliances and The footwear sector. Footwear exports components, and auto parts. Electrical and continued to expand, but average prices vehicle parts exports combined accounted eased. Attracted by “Everything but Arms” for US$430 million in 2017. Reinforced by preferential treatment provided by the EU, growing interconnectedness between the footwear products have expanded and Cambodian economy and regional value become the second-largest manufacturing chains, electrical and vehicle parts and export after clothing and other textile articles. components produced in Cambodia as Total footwear export value reached almost intermediate goods are being exported 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). APRIL 2018 CAMBODIA ECONOMIC UPDATE 11 to be further processed and/or assembled construction materials, have either elsewhere. As integration deepens, decelerated or turned negative in 2017 Cambodia could be able to move up the (figure 5). value chain. Factories are being set-up to take advantage of the newly introduced Growth of domestic credit going to the tariff-free market access to the United States construction and real estate sector, which for travel goods.3 decelerated since late 2016 until mid-2017, has picked up again (figure 6). The stock of Growth in the construction sector — an domestic credits provided by the banking important driver of growth and a contributor sector to the construction and real estate of job creation — moderated. As depicted sector rose to 36.3 percent at the end of in figure 1, the preliminary estimates by 2017, up from 28.4 percent in May 2017. The Cambodian authorities indicated that in growth rate at the end of 2017 is now back 2017, the contribution of the construction to the average of 36 percent growth during and real estate sector to GDP growth the previous four years. This may partly reflect shrank. Reflecting a disconnect between rising demand fueled by a new but relatively an upbeat investment appetite and the small segment of development projects — easing of construction activity, the value low-price housing projects.4 This follows the (and number) of approved construction boom in landed housing projects and high- projects rose further, expanding at 22 rise residential and commercial construction percent in 2017. Many indicators, however, projects located in prime locations within point to moderation in the construction urban centers. In addition, there has been a and real estate sector. Notably, the new wave of land buying fueled by rising FDI growth of imports of steel and other basic in infrastructure sectors. Figure 5: Construction materials and steel Figure 6: Stock of domestic credit going to imports (y/y, percent change) construction, real estate & mortgage sector (y/y, percent change) 100 Other materials for construction Steel imports Cement imports Cooling equipment 60 80 50 60 40 30 40 20 20 10 0 0 -10 -20 -20 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 -40 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Cambodian authorities. Source: Cambodian authorities. 3 On June 30, 2017, the Office of the U.S. Trade Representative announced a major expansion of trade preferences that stands to bring significant benefits to Cambodia. Under the new changes to the U.S. Generalized System of Preferences, Cambodia and other Least Developed Beneficiary Developing Countries as well as African Growth and Opportunity Act countries producing travel goods such as luggage, backpacks, handbags, and wallets will be able to export those products to the United States duty free. Source: https://kh.usembassy.gov/duty-free-access-travel-goods-made-cambodia/. 4 See https://www.realestate.com.kh/news/Demand-for-Affordable-Residential-Housing-Expected-to-Continue-Throughout-2-0-1-8/. 12 CAMBODIA ECONOMIC UPDATE APRIL 2018 The disconnect between the easing of market, competition has intensified at the construction activity and the upbeat low-price end, with larger discounts and investment appetite with rising domestic lower down payments being offered for credit going to the construction, real estate new purchases to shore up demand. and mortgage sectors is a cause for concern. A buildup of vulnerabilities from speculative The tourism sector — The recovery of the activity may accur. In addition, FDI inflows tourism sector, which started early last year into the sector eased in 2017.5 continued unabated. Underpinned largely by arrivals from China, growth in total Domestic construction activities are tourist arrivals for 2017 reached 5.6 million spreading beyond the traditional major or 11.8 percent, up from 5.0 percent in 2016 urban centers such as the capital city (figure 7). Importantly, tourist arrivals by air of Phnom Penh, Kandal and Siem Reap have increased significantly, rising by 22.5 provinces. Construction activities are percent, the highest in a decade, thanks occurring in key coastal provinces such as to the efforts by the authorities to expand Sihanoukville and Koh Kong, as well as in the and deepen regional connection flights, provinces bordering Thailand and Vietnam especially between Cambodia and China. such as Bantey Meanchey and Svay Rieng. In-land connectivity together with clean and green campaigns to further attract The share of construction and real estate and diversify tourist destinations beyond the in total domestic credit increased to 26 Angkor temple complex is underway. percent in 2017, up from 22 percent in 2016 (see the monetary section below for more Figure 7: Tourist arrivals to Cambodia details). The current share is well above the improved, but lagged behind its neighbor, peak of 23 percent in 2009, when the global Vietnam (y/y, percent change) financial crisis caused the construction 35 Thailand Cambodia Vietnam 30 bubble to burst. 25 20 15 Purchases of low-price houses and small 10 land plots have been made affordable 5 0 by real estate developers for low-income -5 -10 families. The shift toward investing more -15 12 13 14 15 16 17 09 10 11 in affordable homes and small land plots c- c- c- c- c- c- c- c- c- De De De De De De De De De is to serve the low-end market segment Source: Cambodian, Thai and Vietnamese authorities. on the outskirts of Phnom Penh and newly developed areas. This segment of the Accommodated in part by the introduction market until recently was not the focus of of the “China Ready” initiative, tourist many developers. But as large scale, high- arrivals from China now outpace those from end projects have gradually saturated the Vietnam, making them the number one 5 Approved FDI projects (in fixed asset) investing the construction and real estate sector declined to US$150 million in 2017, down from US$700 million in 2016. APRIL 2018 CAMBODIA ECONOMIC UPDATE 13 group to visit Cambodia.6 Chinese tourists Cambodia Economic Update for a detailed accounted for over 1.2 million visitors or 21.6 analysis of Cambodia’s tourism sector). percent of total international arrivals in 2017 or a whopping 46 percent increase. If the Cambodia’s share of the combined tourist rapid growth in Chinese tourist arrivals arrivals to three countries (Cambodia, continues for the next few years, the Thailand and Vietnam) has declined, authorities’ target of reaching 2 million and potential is untapped. Cambodia’s Chinese tourists by 2020 is feasible. Vietnam, neighbors, Thailand and Vietnam combined Lao PDR, Thailand and the Republic of attracted almost 50 million tourists in 2017 or Korea continued to be the main countries an 11.3 percent increase from 2016, while of origin for international tourists after China, Cambodia’s total international arrivals accounting for 14.9 percent, 9.0 percent, were only 5.6 million visitors. Compared to 7.0 percent and 6.2 percent of total arrivals, the combined market of 54 million tourists respectively. Three-quarters of foreign visiting the three countries (Cambodia, tourists visiting Cambodia are from the Asia Thailand and Vietnam), international arrivals and Pacific region, while only 15 percent to Cambodia accounted for a mere 10 are from Europe. percent, and Cambodia’s share is trending downward (figure 8). In 2017, Cambodia’s Arrivals to Siem Reap province, where the neighbor, Vietnam, experienced a record- Angkor temple complex is located, account breaking year for tourism as foreign visitors for almost 60 percent of total international to the country surged 29 percent over the arrivals by air. Together with entrance fee previous year, reaching an all-time high of increases, the recent jump in tourist arrivals 12.9 million (see box 2 on Vietnam Tourism – has significantly boosted revenue collected Untapped Potential). One of the policies to from foreign tourists visiting the temple make inroads into this growing market may complex. The revenue from Angkor temple involve looking at the demand segments complex entrance fees reached over US$ beyond what are being offered in Thailand 100 million in 2017, an increase of about and Vietnam. Cambodia could then 70 percent over 2016. However, tourism develop a strategy to meet those segments. potential remains untapped. Diversifying Potential market segments may include tourist destinations, focusing on ecotourism eco-tourism, in particular, wildlife adventure mostly in the north and northeastern parts of parks and trekking, given Cambodia’s the country, with an introduction of wildlife relatively large share of the land area which adventure parks and trekking activities, is covered by national parks and reserves remains to be realized (see October 2017 with high biodiversity. 6 White Paper on China Ready for Cambodia Tourism (2015), Ministry of Tourism. The China Ready initiative represents Cambodia’s effort to capitalize on the rapid growth in Chinese inbound tourism. The initiative provides Chinese signage, facilitates documents for visa processing, encourages local use of the Chinese yuan, promotes use of the Chinese language, and ensures that food and accommodation facilities are suited to Chinese tastes. The five-year initiative targets 2 million Chinese tourists per year by 2020. 14 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure 8: Cambodia's share in combined tourist arrivials to Cambodia, Thailand and Box 2: Vietnam Tourism – Untapped Vietnam (percent, 3mma) 14 Potential1 13 Vietnam has recently made a significant effort 12 to upgrade tourist infrastructure, improve the quality of tourism services, bolster the sector’s 11 human resources and simplify visa procedures 10 for foreign visitors. The country has set a target of receiving 19 million foreign tourists in 2020. 9 During 2006-16, foreign arrivals to Vietnam 8 increased at an average of 11 percent J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 annually. 2017 was another record-breaking Source: Cambodian, Thai and Vietnamese authorities. Note: 3mma = 3 month moving average. year for tourism as foreign visitors to Vietnam surged 29 percent over the previous year, The agriculture sector — The agriculture reaching an all-time high of 12.9 million (figure B2.1). The country consistently makes it into the sector continues to remain an important “world’s top tourism destination” according to source of growth and jobs for the economy. reputable travel sites and newspapers. Its contribution to GDP growth has partly Figure B2.1: Foreign arrivals (million of people) recovered, thanks to improved weather 15 conditions during the last two years. The 12 agriculture sector experienced continued 9 expansion, especially in rice production. 6 Wet season rice production grew by 5.4 3 percent in 2017 (figure 9), slightly below 6.5 0 percent in 2016, reaching 8.05 million metric 2011 2012 2013 2014 2015 2016 2017e Source: Vietnam's General Statistics Office. tons.7 Total rice production is estimated to have reached 10.4 million metric tons or a The success has been achieved after the Government of Vietnam issued an Action 4.4 percent increase in 2017. Program on developing tourism into forefront economic sector. The Action Program is a far Figure 9: Contribution to annual wet season reaching reform. It looks toward developing rice production increase (percentage points) and finalizing documents guiding the 10 by Land by Yield wet rice production implementation of the 2017 Tourism Law; issuing preferential policies encouraging investment 8 in tourism; prioritizing capital for developing 6 tourism human resources and enhancing tourism promotion work; and reviewing, 4 amending, and supplementing the law on 2 entry, exit, transit, and residence of foreigners in Vietnam, as well as the Investment Law 2014 0 and other relevant legal regulations. -2 The Action Program has set specific goals -4 of renovating the methods and content -6 and ensuring the consistent, professional, 2010 2011 2012 2013 2014 2015 2016 2017e and effective implementation of tourism Source: Cambodian authorities. promotion activities, both at home and abroad; applying technological advances in 7 January 2018 monthly report on agriculture, forestry and fisheries, Ministry the tourism promotion work; and developing of Agriculture, Forestry and Fisheries, dated February 16, 2018. APRIL 2018 CAMBODIA ECONOMIC UPDATE 15 Rice prices have recovered gradually (figure 10). The authorities recently Box 2: Vietnam Tourism – Untapped introduced several initiatives to help Potential (continued) improve competitiveness of the rice sector and reduce the large differences between and positioning the national tourism brand attached with the unique images, which are low farm gate prices and high retail prices imbued with national cultural identities. of agricultural products. To benefit local The Action Program also aims to providing a farmers more, there are plans to improve favorable environment for businesses and the farmers’ access to markets, while cutting community to develop tourism, via creating a transportation and storage (and export) healthy, transparent, and favorable business climate for enterprises, in addition to ensuring costs. The rice sector’s access to relatively security and safety for tourism activities. The low-interest loans including investments in Action Program moves toward supporting building rice storage and drying facilities are tourism startups; encouraging travel agencies to diversify the tourism types, products, and being improved and expanded.8 services; associating tourism with cultural and arts products and handicraft villages; Figure 10: Rice prices have gradually enabling the people to directly participate recovered in tourism development and benefit from tourism; building a civilized and friendly tourism Rice, Thai 5% ($/mt) 700 Rice, Thai 5% (y/y, RHS) 30 community in interacting with tourists; and 600 20 promoting the role of social and occupational 500 10 organizations in developing tourism. 0 400 -10 The direct contribution of travel and tourism 300 -20 to GDP was an estimated US$10.2 billion (4.6 200 -30 percent of GDP) in 2017, according to World 100 -40 Travel and Tourism Council. By the same 0 -50 estimate, the total contribution (direct + Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 indirect) was about US$20 billion – equivalent to roughly 9 percent of GDP. The travel and Source: World Bank. tourism sector has also generated about 3.5 Note: RHS = Right-hand side. million direct and indirect jobs. Rubber production also expanded as prices Figure B2.2 Contribution of travel and tourism to GDP (percent) slightly recovered in 2017 (figure 11). While 30 cultivated areas of rubber expanded by 20 Direct Total a mere 1.2 percent, rubber production 10 reached 193,000 metric tons or a 33 percent 0 increase in 2017. Reflecting its resilience, sia m ar s a re nd os sia ne di na nm po ay La la bo ne pi et ai al ga rubber production has rapidly expanded ya ilip do am Vi Th M M Sin Ph In C during the last several years, although Source: World Travel & Tourism Council. However, the performance of the Vietnam’s rubber prices significantly declined from travel and tourism sector is still far below its their peak in 2011. potential. Vietnam was ranked quite low in term of the contribution (direct and total) of 8 In an effort by the authorities to stabilize agricultural prices, especially travel and tourism to the economic growth rice prices, a special fund with low-interest, amounting to US$50 million among neighboring countries in the region has reportedly been established (and an additional US$15 million will be (figure B2.2). invested in rice storage and drying facilities). The fund is mobilized to provide loans to rice millers so that they can purchase rice during rice 1. Prepared by Viet Tuan Dinh, Senior Economist, Vietnam Country Office, harvesting season. World Bank Group 16 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure 11: Rubber production and price Domestic demand weakened as domestic improved credit growth slowed, containing imports. 250 Rubber (thousand tons) 6 As in the case of the easing of construction 200 Rubber, SGP / MYS ($/ kg,RHS) 5 material imports, imports of key durable 4 consumer goods such as motor vehicles Thousand tons 150 and nondurable goods such as petroleum U.S.$/Kg 3 100 2 products decelerated in 2017 (figure 13). 50 To promote domestic production and jobs, 1 while reducing consumption goods imports, 0 0 the expansion of food and beverage 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 industries serving Cambodia’s growing 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Cambodian authorities and World Bank. tourism sector continued. Note: RHS = Righ hand side; SGP = Singapore; MYS = Malaysia. b) The external sector Figure 13: Durable and consumption goods imports such as motor vehicles and Solid merchandise exports persisted, petroluem eased (YTD, in US$ million) expanding at 9.7 percent in 2017, slightly 1400 Motor vehicles 1,130,4 million eased from 11 percent in 2016. Boosted by 1200 Petroleum products better-than-expected export performance 1000 of clothing and other textile products during 800 884,9 million the second half, total exports held up 600 well in 2017, thanks to an uptick in growth 400 in advanced economies. The exports of 200 main agricultural commodities such as rice, rubber, and sugar also rose (figure 12). 0 1 2 3 4 5 6 7 5 6 7 8 9 -0 -0 -0 -0 -1 -1 -1 -1 -1 -1 -1 -1 -0 ec ec ec ec ec ec ec ec ec ec ec ec ec D D D D D D D D D D D D D Source: Cambodian authorities. Figure 12: Agricultural commodity exports - milled rice and rubber are increasing Thanks to solid merchandise exports and (YTD, in US$ million) subdued imports, the trade deficit narrowed. 350 310.54 The trade deficit is estimated to have 300 Rubber Milled rice 254.44 declined to 10.4 percent of GDP in 2017, 250 down from 11.4 percent in 2016. Similarly, 200 the current account deficit is estimated to 150 have shrunk to 9.8 percent of GDP, down 100 from 10.2 percent in 2016 (figure 14). The 50 deficit was financed by rising FDI inflows, 0 which are estimated to have remained at 5 6 7 8 9 0 1 2 3 4 5 6 7 -0 -0 -0 -0 -0 -1 -1 -1 -1 -1 -1 -1 -1 ec ec ec ec ec ec ec ec ec ec ec ec ec 10.8 percent of GDP in 2017, the same as D D D D D D D D D D D D D Source: Cambodian authorities. Note: YTD = Year-to-date. the level registered in 2016. APRIL 2018 CAMBODIA ECONOMIC UPDATE 17 FDI which has been a key factor behind the Figure 14: Declining current account deficit financed by adequate FDI inflows (percent country’s strong export sector and more of GDP) recently the real estate and construction Current account Exports (y/y change) FDI Imports (y/y change) boom. Net inflows of FDI remain substantially 20 larger than those of regional countries 15 (figure 15). 10 5 Inflation 0 -5 Private consumption has eased, subduing -10 inflation. Moderation of domestic credit -15 2011 2012 2013 2014 2015 2016 2017 growth, which started last year, following Source: Cambodian authorities and World Bank staff estimates. the introduction of an 18 percent interest rate cap, continues to contain private FDI inflows have targeted a broad range of consumption. As a result, inflation declined key economic sectors, but the real estate, to 2.2 percent at the end of 2017, compared construction, and accommodation sectors to 3.9 percent in 2016 (figure 16). combined received almost a third of total inflows. In 2016, FDI invested in real estate, construction and accommodation activities Figure 16: Inflation subdued further as food combined accounted for 30 percent of the prices eased. Contribution to 12-month total FDI inflows. The financial (banking) inflation (percent) sector was next, receiving 28 percent of total Housing & utilities sub-index Transport sub-index Food sub-index Others inflows, followed by manufacturing (16.6 Y/Y 8 percent) and agriculture (10.3 percent). 6 Cambodia’s liberal trade and investment 4 policy continues to attract large inflows of 2 0 Figure 15: Foreign direct investment, net -2 inflows (percent of GDP, 2016) -4 M-16 M-17 M-10 M-11 M-12 M-13 M-14 M-15 J-16 J-17 J-10 J-11 J-12 J-13 J-14 J-15 S-15 S-16 S-10 S-11 S-12 S-13 S-14 Singapore 20.7 Cambodia 11.4 Lao PDR Source: Cambodian authorities. 6.3 Vietnam 6.1 Myanmar 5.2 Malaysia 4.6 Mexico 3.2 The easing of food prices further contributed Philippines 2.6 to lower inflation. This is because the weight Lower middle income 1.9 EAP (excl high income) 1.6 of food items accounts for almost half of the Sri Lanka 1.1 total weight of Cambodia’s Consumer Price Bangladesh 0.9 Pakistan 0.8 Index (CPI) basket. Declining pressure on the Thailand 0.8 prices of rice, fish, pork, and vegetables was Nepal 0.5 primarily responsible for the moderation of Indonesia 0.4 Source: World Develoment Indicators. the food sub-index (43 percent of the total 18 CAMBODIA ECONOMIC UPDATE APRIL 2018 inflation basket weight), which plunged to 1.8 targets (figure 18). Overall, inflation has percent at the end of 2017 from 6.1 percent increased slowly since mid-2017, despite in 2016. The transportation component, rising oil prices, strengthening growth, and however, edged up, with a slow recovery fast credit growth in some countries. Stable in international oil prices, which effectively international food prices and appreciating is passed through to domestic retail gas regional currencies have helped. Among prices. Other sub-indexes representing major regional economies, inflation has restaurant, health care, furnishings, and picked up in the Philippines, China, and clothing components, which are combined Vietnam, while remaining stable at low and classified under “others”, remained levels in Thailand. Despite the recovery in subdued. commodity prices, consumer price inflation is expected to remain low, given generally While inflation moderation in 2017 is partly well-anchored inflation expectations. explained by supply-side improvements, given better agricultural production, Figure 18: Inflation remained benign in the it remained largely a demand-driven region and declining in most countries toward end-2017 (y/y, percent change) phenomenon. The construction boom Cambodia China Vietnam has shown signs of slowing and overall 6 Thailand Malaysia US 6 domestic credit growth has eased; both 5 5 subdued inflation (figure 17). However, rising 4 4 3 3 inflationary pressures are likely to come 2 2 from the recovery in oil prices. Imported 1 1 inflation—with the “pass-through” from 0 0 imported international oil prices to domestic -1 -1 inflation occurs, given Cambodia is an oil -2 -2 importer. Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Ovt-16 Jan-17 Apr-17 Jul-17 Oct-17 Figure 17: Inflation moderated, caused by Source: Cambodian authorities and the economist. weaker consumption as credit growth eased. (Y/Y, percent change) c) Poverty 120 Credit to private sector Inflation (RHS) 40 35 100 30 Structural transformation has been driving 80 25 poverty reduction in Cambodia. In the 20 60 15 rural areas, diversification of income 40 10 sources underpinned by economic and 20 5 0 structural transformation has contributed 0 -5 to rising wage and salary income at the -20 -10 expense of self-employed income (see box Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Cambodian authorities. 3 on Structural transformation — policies, Note: RHS = Right-hand side. strategies and reforms). In 2015, as much Headline inflation in developing East Asia as half of rural household income was from and the Pacific remains subdued in most salary and wage, compared to only 30 countries, although it is getting closer to percent a decade ago (figure 19). APRIL 2018 CAMBODIA ECONOMIC UPDATE 19 Box 3: Structural transformation — policies, strategies, and reforms To facilitate economic structural transformation, of below 60 percent, making achievements several policies, strategies, and reforms have toward diversification beyond the garment and been initiated. However, links among and footwear sector less certain. coherence of those policies, strategies, and reforms are to be further strengthened for Looking forward, for the IDP to be successful, the successful implementation. industrial sector must not only help maintain high growth trajectory but also absorb excess of labor The 2015-25 Industrial Development Policy force shed by the agriculture sector. This will (IDP). The most important policy underpinning require more efforts to promote newly emerging economic structural transformation is the 2015- manufacturing industries (with higher value 25 Industrial Development Policy introduced in added) to compensate for rapidly rising wages. March 2015. The Policy serves as a “new growth At the same time, it is also necessary to spur job strategy” that responds to the ongoing structural creation elsewhere, given the manufacturing transformation, taking advantage of Cambodia’s industries are less labor intensive, compared with strategic location by linking the economy and the garment sector. its industry to the region. The aim of the IDP is to pursue economic (and export) diversification 2017--25 National Policy for TVET. It aims at by leveraging the industrial sector, in particular supporting the implementation of 2015-25 non-garment (and footwear) manufacturing IDP. The TVET policy is envisaged to mainly industries (table B3.1). Performance against the address skills gaps, one of the prerequisites targets envisioned by the IDP, however, is mixed. discussed above for moving up the value In 2017, the share of garment and footwear chains, underpinning economic and export product exports in total merchandise exports diversification as envisaged by the IDP. stood at 72 percent, compared with the target Due largely to an inadequately skilled Table B3.1: Main targets under the 2015-25 Industrial Development Policy workforce, high-value-added and sophisticated manufacturers must invest considerable time Distribution of GDP by sector (at current prices) and resources to train their prospective workers Sector1/ 2015 2020 2025 (before they can be readily employed) to be Industry 26.2% 28% 30% successful in Cambodia. It is because of market -o/w Manufacturing 16% 18% 20% failures (i.e., private cost exceeds private benefit) Services 39.4% 40% 40% that firms don’t invest enough in training their Share of export products in total exports workers when turnover is high (see the selected Sector2/ 2015 2020 2025 issue on future jobs in Cambodia for a more Processed agriculture 8% 10% 12% detailed discussion). The constraints caused by products Cambodia’s inadequately educated workforce Manufacturing have been found to be the second-most-severe Of which obstacle for the operation of manufacturing - Garment & footwear 60% 55% 50% enterprises, according to the 2016 World Bank -Non-garment & foot- 5% 10% 15% Group Enterprise Survey (figure B3.1). Political wear instability (top constraint), transportation (third Source: Cambodian authorities constraint) and electricity (fifth constraint) are 1/ The agriculture sector captures the remaining share also listed among the main concerns. 2/ Covers only targeted export products 20 CAMBODIA ECONOMIC UPDATE APRIL 2018 Box 3: Structural transformation — policies, strategies and reforms (continued) Figure B3.1: Manufacturing sector's top 10 in April 2017 by the central bank. This, together constraints with other constraints challenges expansion of small businesses, especially small- and medium- Vietnam Thailand Cambodia (2016) Cambodia (2013) sized enterprises (SMEs). SMEs in Cambodia Political instability remain under performed. The vital role of the Inadequately educated workforce SME sector is not unique to Cambodia. SMEs Transportation have been found to represent more than 95 Practices of the informal sector percent of registered firms worldwide, account Electricity for more than 50 percent of jobs, and contribute Corruption more than 35 percent of GDP in many emerging Labor regulations markets. Small businesses generate most of Access to nance the new jobs, and help diversify a country’s Tax rates economic base. This high financing cost also business licensing and permits makes productive investments less viable, while Tax administration 0 20 40 partly fueling speculative activities including Source: World Bank Group Enterprise Surveys. those in the real estate market. High transportation and logistics costs need to be The 2016-25 SPPF. To support the increasingly large addressed, given the fact that Cambodian firms are labor force working in the industrial sector, the projected to move 4.1 times more goods by 2030. If National Social Protection Policy Framework (SPPF) current trends continue, exports, measured in 2016 was adopted in March 2017. Ongoing assistance prices, will grow from US$ 10.1 billion in 2016 to US$ programs, especially the health equity fund, 41.5 billion in 2030. To facilitate trade expansion, scholarships and vocational training programs, connectivity such as transportation and logistics are being expanded to support structural upgrade is being identified with the preparation transformation. There have been several initiatives of the National Logistics Masterplan and the to support welfare and reduce cost of living, introduction of the National Logistics Council. In offered mainly to factory workers. These include terms of logistics capabilities, Cambodia is ranked access to free healthcare, increased pay during 73rd in a group of 159 countries, according to maternity leave, financial support for deliveries, the 2016 Logistic Performance Index (LPI). On reduction in utilities tariffs, and free public average, successful exporters of electronics, such transportation. In the longer term, implementing as Thailand and Malaysia are positioned between social assistance programs (emergency, human 21 to 26 ranks ahead. capital development, vocational training, and welfare) will boost mobility and upgrade the skills On the monetary policy, high dollarization set of the industrial workforce. Implementing social constrains the central bank’s ability to conduct security programs (pension, health insurance, routine monetary policy. Access to finance is and workers’ accidental and disability insurance) also found to be the fourth- most-severe obstacle helps ensure welfare, especially once workers are for firm operation in Cambodia, according to out of the labor force. A pension system for the the World Bank Group 2016 Enterprise Survey. private sector is slated to be established in 2019. Cambodia recently experienced rapid financial deepening, facilitating improved access to Effective monitoring and evaluation is key to finance. However, though declining, interest ensure the success of these policies. In this rates remain relatively high, resulting in the high regard, close interagency collaboration will cost of financing (see the monetary sector ensure sequencing, links, and coherence of section for more details) which led to the those policies, strategies, and reforms. introduction of an 18 percent interest rate cap APRIL 2018 CAMBODIA ECONOMIC UPDATE 21 Figure 19: Rising salary and wage income d) The monetary sector of rural households (percent) Wage and Salary Self-employment Transfers Accommodating economic growth, money 100 supply expanded further, but inflation 90 remained low. Expansion of broad money is 80 70 expected to have underpinned economic 60 activity in the real sector. In the context of 50 Cambodia’s highly dollarized economy, the 40 30 expansion continued to be driven primarily 20 by rising foreign currency deposits, boosted 10 by improved confidence. In addition, local 0 2009 2010 2011 2012 2013 2014 2015 currency in circulation has also increased, Source: Socio-Economic Survey. reflecting the central bank’s initial success In line with the positive macroeconomic promoting the use of local currency. developments in the second half of 2017, Domestic credit growth has eased but poverty is expected to have declined. remained elevated, growing faster than Continued expansion of textile and apparel nominal growth in 2017 (see also banking exports, and the recovery of the tourism sector section below). As a result, the (net) and agricultural sectors, especially with a loan-to-deposit ratio declined to 98 percent gradual uptick in agricultural commodity in 2017, down from 100 percent in 2016. prices, have had the positive effect on income of poor households. In addition, a. Monetary aggregates, interest the minimum wage of the garment and rates and exchange rates footwear sector was officially raised to Broad money growth has quickly US$170 per month in 2018 – an increase of accelerated, hitting a two-and-a-half 11 percent from 2017. Wages in the public year high, owing to rising foreign currency sector are also increasing. This together with deposits. Broad money grew rapidly, several initiatives recently introduced by the accelerating at 23.8 percent (y/y) in authorities to reduce the cost of living of December 2017; it was the fastest rate of factory workers, will continue to contribute growth since May 2015. This was boosted to poverty reduction in the coming years. As by fast-growing foreign currency deposits income rises, purchasing power increases, (FCDs) (19.6 percentage points) and an leading to more consumption and spending accelerated expansion of local currency in the rural areas. Successfully implementing in circulation (3.2 percentage points) and social assistance and social security riels deposits (1.0 percentage point) (figure programs, envisaged by the 2016—25 Social 20). In 2016, broad money growth was only Protection Policy Framework, can help 17.9 percent, contributed by FCDs (15.2 prevent rural households from falling back percentage points), riels in circulation (1.1 into poverty. The rural nonfarm (textiles, percentage points), and riels deposits (1.6 services, and remittances) economic percentage points). activities have now become a significant contributor to poverty reduction. 22 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure 20: Foreign currency deposits pressures. As a result, dollar purchases by continued to drive broad money growth the central bank increased further in 2017. Contribution to M2 growth (pecentage Total purchases reached US$914.6 million in points) Riel in circulation Riel deposits Foreign currency deposits 2017, or 11.4 percent growth.9 The demand 45 40 for local currency by commercial banks has 35 increased substantially, absorbing over half 30 25 of the total local currency amount injected 20 15 by the central bank in 2017. 10 5 0 The Liquidity-Providing Collateralized -5 Operation (LPCO) introduced last year -10 to establish a benchmark rate of local Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Jun-14 Dec-14 Mar-15 Jun-15 Dec-15 Jun-16 Sep-16 currency borrowing for the market, is Source: Cambodian authorities. currently promoting the use of local Acceleration of FCD growth indicates currency. 10 This follows the introduction of improved confidence in the banking system Negotiable Certificates of Deposit (NCDs), and healthy capital inflows. This has allowed a short-term interest-bearing debt issued the National Bank of Cambodia to further by the central bank to promote interbank accumulate gross foreign reserves, which lending. The LPCO “sterilizes” excess liquidity reached US$8.7 billion or 6.8 months of when additional volumes of riels demanded prospective imports coverage in 2017 (figure by the market are injected by the central 21). The initial success in promoting the local bank. The LPCO allowed the central bank to currency has allowed for the expansion increase the contribution of riels in circulation of riels in circulation without depreciation in broad money growth to 3.2 percentage points in 2017, up from 1.1 percentage Figure 21: Gross international reserves (GIRs) points in 2016, while maintaining a relatively accumulated further (in US$ billion and stable riel/U.S. dollar exchange rate (figure months of imports) 22). These measures therefore may help 10 8 9 GIR (in US$ billion) Cambodia regain some monetary policy 7 GIR (months of imports, RHS) independence, including short-term interest months of imports 8 6 7 targeting and expansion of the use of local US$ billion 6 5 5 4 currency, currently curtailed by the high 4 3 3 degree of dollarization. 2 2 1 1 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Cambodian authorities. Note: RHS = Right-hand side. 9 2017 Annual Report, National Bank of Cambodia. 10 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 monetary policy based on the market mechanism; (b) promote Negotiable Certificates of Deposits, which then can be used as collateral in interbank market transactions; (c) promote the use of the riel; (d) support agriculture 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. APRIL 2018 CAMBODIA ECONOMIC UPDATE 23 Figure 22: Riels in circulation recently Both short-term (12-month) US dollar expanded without pressuring riel/U.S. dollar lending and deposit interest rates have exchange rate to depreciate (percent change, y/y) slightly eased (figure 24), declining to 11.7 Riel versus US dollar exchange rate percent and 4.42 percent in 2017, down 50 Riel in Circulation (RHS) 4 from 11.9 percent and 4.44 percent in 2016, Riels in circulation (% change, y/y) Riels/U.S. dollar (% change, y/y) 45 3 respectively. This may have resulted from 40 2 35 1 the recently introduced macro-prudential 30 25 0 measures, including the interest rate cap -1 20 regulation. -2 15 10 -3 5 -4 Figure 24: Weighted average short-term 0 -5 (12-month) U.S. dollar interest rates (percent per year) J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 Lending rate Deposit rate (RHS) Source: Cambodian authorities. Note: RHS = Right-hand side. 20 7 18 6 U.S. dollar lending rate U.S. dollar deposit rate The riel/U.S. dollar exchange rate has slightly 16 6 appreciated, reaching CR 4,000 at the end 14 11.9 5 of March 2018, compared with CR 4,037 12 11.7 4.44 in December 2016 (figure 23). The riel also 10 5 4.42 appreciated against the Vietnamese dong, 8 4 but depreciated against the Thai baht. Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13 Apr-14 Mar-15 Feb-16 Jan-17 Dec-17 Against the currencies of its main export markets (besides the United States), the riel Source: Cambodian authorities. Note: RHS = Right-hand side. recently depreciated against the euro, the Canadian dollar, and the British Pound. The decline of short-term (12-month) riel deposit and lending rates that the financial Figure 23: Riel has depreciated slightly sector experienced after the introduction against Thai baht of an interest rate cap in April 2017 have Riels per baht Riel per 1000 dong ceased. As a result, the convergence Riel per US$ (RHS) between riel and U.S. dollar deposit (and 200 4,250 lending) rates has diminished (figure 25). 190 4,200 180 4,150 The differential between riel and U.S. dollar Riels/baht (and 1000 dong) 170 4,100 lending (deposit) rates may now reflect the Riels/U.S.dollar 160 150 4,050 higher cost of borrowing in local currency 4,000 140 vis-à-vis the U.S. dollar under the LPCO 3,950 130 3,900 facility, which requires collateral (NCDs) 120 110 3,850 to obtain the local currency demanded. 100 3,800 The requirement that banks and financial J-12 J-12 N-12 A-13 S-13 F-14 J-14 D-14 M-15 O-15 M-16 A-16 J-17 J-17 institutions increase their riel-denominated Source: The authorites, Bank of Thailand, and Vietnam statistics office. 24 CAMBODIA ECONOMIC UPDATE APRIL 2018 loans, reaching at least 10 percent of their b. The banking sector total loan portfolio by the end of 2019, has recently boosted the demand for riels. This Recent developments in the banking helps stabilize riel/U.S. dollar exchange rate sector are characterized by rising deposits when riels in circulation rose.11 and moderate credit expansion (figure 26). Overall, the banking sector’s credit has substantially moderated, albeit still at Figure 25: Convergence of riel and US elevated levels, thanks to the introduction dollar deposit (and lending) rates have now ceased. (percent per year) of an interest rate cap in April 2017. The banking sector’s credit growth decelerated 6 to 19.6 percent (y/y) in December 2017, 5 down from 25.8 percent in 2016. 4 3 Figue 26: Credit growth has eased, while 2 deposit growth remained strong. (YTD, y/y percent change) 1 Differential (riel and dollar deposit rates) Differential (riel and dollar lending rates) 35 PS deposits Credits to PS 0 30 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 25 Source: Cambodian authorities. 20 15 Lowering lending rates of loans denominated 10 in riels, while maintaining a broadly stable Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 riel/U.S. dollar exchange rate may help the Source: Cambodian authorities. central bank to partly regain its monetary Note: PS = Private sector. policy independence. Cambodia’s monetary policy has traditionally been Improved confidence in the banking system curtailed by high dollarization. Recently, expanded private sector deposits further. NCDs have increasingly become Private sector deposits grew at 23.0 percent an important instrument for liquidity in 2017, up from 19.3 percent in 2016 (and management as they promote interbank 16.6 percent in 2015), suggesting increased markets. In 2017, as demand for NCDs (by attractiveness, thanks to Cambodia’s liberal commercial banks) rose, the (outstanding) economic policy. The loan-to-deposit ratio, amount of U.S. dollar- denominated NCDs however, remained high at 95 percent in issued surged, reaching US$20.8 billion or 2017. 93 percent increase.12 Similarly, the amount Rapid credit expansion during the last of riel-denominated NCDs also climbed, few years has propelled outstanding reaching CR 15.5 trillion (equivalent to credit provided by the banking sector to US$3.87 billion) or 29 percent increase. 11 Prakas, B7-016-334-P-K dated December 1, 2016, National Bank of Cambodia. It took effect December 1, 2016, and will be fully implemented by December 31, 2019. 12 2017 Annual Report, the National Bank of Cambodia. APRIL 2018 CAMBODIA ECONOMIC UPDATE 25 reach over 100 percent of GDP (figure 27). The contribution of the sector to total Similarly, private sector deposits reached credit growth surged, accounting for 8.1 100 percent of GDP in 2017. This means the percentage points (of total 18.6 percent) in financial sector has played an increasingly 2017, up from 6.4 percentage points (of a larger role in supporting growth. In other total 20.1 percent) in 2016. As a share of total words, financial and banking sector policies credit, it accounted for 26 percent in 2017, have now become an important tool for up from 22 percent in 2016. In absolute terms, macroeconomic management. Despite total outstanding credit to construction and rapid financial deepening, the reported real estate and mortgage reached US$4.1 non-performing loan (NPL) ratio for the billion in 2017, up from US$3.0 billion in 2016. banking sector remained at 2.4 percent in 2017, compared with 2.5 percent in 2016. Figure 28: Contribution to domestic credit growth (percentage point) However, the reported NPL ratios may Construction, estate & mortg Manufacturing need to be interpreted carefully. There are Wholesale & retail Hotels and Restaurants Others Agriculture inconsistencies in loan classifications and 50% Total the continuous rolling over and refinancing 40% of loans that may disguise deeper problems. 30% Figure 27: Rapid expansion of the banking 20% sector's credit and deposit (percent of GDP) 10% 0% Dec-16 -10% Dec-14 J-10 F-11 S-11 J-13 J-14 J-17 D-09 A-12 N-12 A-14 D-16 O-15 M-15 M-16 Dec-12 Source: Cambodian authorities. Dec-10 Dec-08 Credits to the private sector Indicating the continued erosion of Private sector deposits competitiveness of the manufacturing and Dec-06 tradeable sectors, the share of domestic Dec-04 0 20 40 60 80 100 120 credit going to trade (wholesale and retail), manufacturing, and hotels (and restaurants) Source: Cambodian authorities. has shrunk. Erosion of competitiveness may In contrast to the recent moderation have made manufacturing and trade in financial sector expansion, credit to activities less attractive for investors and the construction and real estate sector producers. FDI inflows into the manufacturing accelerated further during the second half sector have slowed during the last few years of 2017 (figure 28). Domestic credit directed (figure 29). This may be the result of quickly to the sector grew at 36.1 percent y/y in rising wages and Cambodia’s relatively December 2017, up from 28.4 percent in low rankings in doing business.13 This does May 2017, as the appetite for construction not bode well for sustaining high levels of and real estate investment revived. economic growth. 13 Cambodia’s Doing Business ranking remains low. The country was ranked 131th out of 190 in 2017, compared with 82nd for Vietnam and 46th for Thailand. Starting a business ranked among the lowest (180th) with the time spent to register a business is four times longer than East Asia and Pacific region average. 26 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure 29: Domestic credits financing trade, revenue-to-GDP ratio reached 19.7 percent manufacturing, and hotels (percent of total) in 2017, up from 14.6 percent of GDP in 2013. Manufacturing Hotels and Restaurants 14 Whole and retail (RHS) 36 Of this, tax revenue experienced a Wholesale and retail (% of total) Manufacturing, hotels & restaurants 12 35 remarkable increase, propelling Cambodia 10 34 to be among the best performers in the (% of total) 8 33 region in terms of tax revenue collection as 6 32 a percent of GDP (figure 30). During 2013-17, 4 31 tax revenue rose by more than 4 percentage 2 30 points of GDP, reaching 16 percent of GDP 0 29 2012 2013 2014 2015 2016 2017 in 2017. Regional comparison shows that Source: Cambodian authorities. Note: RHS = Right-hand side. Cambodia’s tax revenue as a percent of GDP in 2017 stood among the best e) The fiscal sector performers. Recent fiscal performance reflects the authorities’ expansionary fiscal policy. The Figure 30: Tax revenue regional comparison authorities’ decision to boost civil servant (percent of GDP) wages increased spending, but its effect on Vietnam Cambodia the fiscal deficit was neutralized by strong Mongolia revenue collection. Exceptionally strong Thailand Singapore revenue collection in 2017, stemming largely Malaysia from increased tax compliance, helped Philippines narrow the deficit. Lao PDR East Asia & Pacific Lower middle income a. Revenue mobilization Indonesia 0 2 4 6 8 10 12 14 16 18 20 Continued strong revenue performance was Source: World Development Indicators and Cambodian authorities. Latest available years. above expectations. General government domestic revenue estimated to have grown The largest component of tax revenue faster than expected, given its prolonged remains indirect taxes, which account for 60 robust performance. In 2017, domestic percent of the total. Led by the value-added revenue growth accelerated to 18 percent, tax (VAT) with a rising share of domestic up from 16 percent in 2016. Domestic VAT as consumption expenditure grows, revenue is estimated to have increased to indirect taxes have expanded significantly, CR 17.6 trillion (US$4.4 billion) or 19.7 percent reaching 9.6 percent of GDP in 2017, up of GDP. This amounted to CR 17.5 trillion or from 8.8 percent in 2016 (figure 31). Indirect US$662 million higher than 2016 collection. tax collection is estimated to have grown Domestic revenue grew rapidly, averaging rapidly, rising to 19 percent in 2017, up from at 15 percent a year during the period 14 percent in 2016. 2013-17, resulting in a spectacular gain of 5 percentage points of GDP when the APRIL 2018 CAMBODIA ECONOMIC UPDATE 27 Figure 31: General government revenue — Main revenue components (except non- main components (percent of GDP) taxes) showed an across-the-board Direct taxes Indirect taxes 20 Trade taxes Non-tax and others increase, which led to an exceptional 18 16 improvement in domestic revenue 14 performance in 2017 (figure 33). This 12 demonstrates to the important role of 10 9.6 8 8.6 8.8 revenue administration—a core pillar of the 8.1 6 5.4 5.7 6.0 6.8 6.8 2014-18 Revenue Mobilization Strategy— 4 2 2.9 3.4 3.6 4.2 which has been behind the success of 1.7 1.7 1.8 2.3 2.5 - 2009 2010 2011 2012 2013 2014 2015 2016 2017e Cambodia’s revenue performance in Sources: Cambodian authorities and World Bank staff estimates. recent years. Although there may still be Note: e = estimates. room for further strengthening of revenue Direct taxes also improved, rising to 4.2 administration, it is likely that the next revenue percent of GDP in 2017, compared with only mobilization strategy, if introduced, will also 3.6 percent of GDP in 2016.14 During 2013- have to target improvements in direct taxes, 17, direct taxes grew fastest at 65 percent, which are currently being constrained by though from a low base effect. Indirect taxes tax incentives including relatively long tax were next, rising by 40 percent. However, as holidays. a share of tax revenue, direct tax increased slowly, accounting for 26 percent in 2017, Figure 33: Contribution to the gain in compared with 22 percent in 2013. Due to domestic revenue collection (percent of GDP) Cambodia’s commitments under ASEAN Direct taxes InD: excises InD: domestic VAT free trade agreement, trade taxes declined 1.4 InD: import VAT Trade taxes Nontax revenue 1.2 to 14 percent, down from 21 percent. 0.1 1.0 0.2 Therefore, Cambodia’s tax system remains 0.8 0.2 reliant on indirect taxes, and regional 0.6 0.3 0.1 0.3 comparisons show that Cambodia’s direct 0.4 0.1 0.1 tax revenue collection in total domestic 0.2 0.2 0.4 0.0 revenue remains relatively small (figure 32). -0.2 2016 2017 Figure 32: Direct tax collection — regional Source: Cambodian authorities and World Bank staff estimates. Note: InD = Indirect taxes. comparison (percent of revenue) Malaysia b. Public expenditures Indonesia Philippines The authorities’ decision to boost civil servant East Asia & Pacific Vietnam wages increased spending. The public sector Singapore wage bill has rapidly expanded since 2013. Thailand Lower middle income It is estimated to have risen to 7.7 percent of Cambodia Lao PDR GDP in 2017. This is to meet the minimum civil Mongolia servants’ wage target of at least 1 million riels 0 20 40 60 Source: World Development Indicators and Cambodian authorities. Latest (equivalent to about US$250) a month by available years. 14 Direct taxes include taxes on income, profits and capital gains. 28 CAMBODIA ECONOMIC UPDATE APRIL 2018 2018. The minimum wages of civil servants in Table 1: Infrastructure quality (2014) 2018 were almost triple the wages in 2013.15 Access to Cost to Port Consequently, public outlay has been rising, electricity export infrastructure reaching 22.3 percent of GDP in 2017, up quality from 21.1 percent in 2015 (figure 34). Malaysia 100.0 525.0 5.6 Singapore 100.0 460.0 6.7 Figure 34: Boosted by rising public wages, Thailand 100.0 595.0 4.5 outlays have been rising since 2015 (percent of GDP) Vietnam 99.2 610.0 3.7 External fin capital Gov't-financed capital Indonesia 97.0 571.8 4.0 Wage Non-wage NSDP (required capital) EAP 96.2 923.5 3.5 25 Philippines 89.1 755.0 3.5 20 7.1 7.3 7.7 7.8 Mongolia 85.6 2745.0 1.7 6.2 7.2 6.9 6.7 6.3 15 LMIC 79.5 1712.2 3.3 4.3 4.8 4.4 4.6 5.0 10 2.6 5.7 6.5 7.2 7.7 Lao PDR 78.1 1950.0 2.6 2.4 2.1 2.1 2.4 5 1.9 2.5 2.5 2.3 Cambodia 56.1 795.0 3.6 7.3 8.2 7.0 7.0 6.4 6.3 5.0 4.8 4.4 Myanmar 52.0 620.0 2.6 0 2009 2010 2011 2012 2013 2014 2015 2016 2017e Source: World Development Indicators. Latest available years. Note: EAP = East Asia & Pacific (excluding high income); LMIC = lower middle- Sources: Cambodian authorities and World Bank staff estimates. income country. Note: e = estimates; p = projections; NSDP = National Strategic Development Plan. Access to electricity (% of population) Total capital investment expenditure as a Cost to export (US$ per container) percent of GDP is on a downward trend, Quality of port infrastructure, World Economic Forum (1=extremely underdeveloped to 7=well developed) caused primarily by the gradual decline in the external-financed component. c. Fiscal balance Capital spending in 2017 is estimated to have remained below the required level, The overall fiscal deficit is estimated to recommended by the 2014-18 National have remained contained, thanks to Strategic Development Plan. While the exceptionally strong revenue collection. current level of public capital investment While the authorities’ decision to boost may have been relatively comparable to civil servant wages increased spending, its that of regional peers, Cambodia’s quality effect on the fiscal deficit was neutralized of infrastructure remains behind, highlighting by continued strong revenue collection. The relatively low public investment efficiency fiscal deficit (excluding grants) is estimated (table 1). Scaling up government-financed to have narrowed to 2.7 percent of GDP capital spending to boost productive in 2017, compared to 3.6 percent in 2016 investments, while gradually improving (figure 35). However, rapidly rising public value for money is therefore needed. sector wages could potentially crowd out government funding for capital projects, exacerbating the dwindling of donor- 15 Press release by the Ministry of Economy and Finance on the adoption financed infrastructure projects. of the draft of 2018 budget by the Council of Ministers, October 27, 2017. APRIL 2018 CAMBODIA ECONOMIC UPDATE 29 Figure 35: General goverment fiscal deficit crisis. The expansion scales up both public continued to remain contained. (percent of GDP) investment and public sector wages. Revenue Expenditures Fiscal balance 25 20 Figure 36: Budgeted drawdown of 15 government deposits for central government 10 (percent of GDP) 5 2018 0 2017 -5 2016 -10 2015 2014 -15 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2013 Sources: Cambodian authorities and World Bank staff estimates. Note: e = estimates. 2012 2011 At the end of 2017, the total amount of 2010 government deposits in the banking system -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Source: Cambodian authorities. grew by 34.6 percent, reaching US$2.8 billion or 12.7 percent of GDP, thanks to For the first time in several years, a significant fiscal consolidation during the last several boost is provided to domestically financed years. Part of the deposits (about 2 percent capital investment in the 2018 budget (figure of GDP) was used by the authorities as 37). The relatively large fiscal expansion lifts a fiscal stimulus to mitigate the negative domestically financed capital spending to effects of the 2008-09 global financial crisis. 3.2 percent of GDP, up from 2.3 percent In Cambodia, fiscal policy remains the in 2017. As a result, total (domestically and only macroeconomic policy instrument, as externally financed) capital spending has monetary policy has been constrained by reached the level recommended in the the high level of dollarization. 2014-18 National Strategic Development Plan (figure 38). The public sector wage bill d. The 2018 budget has also risen, reaching 8.4 percent of GDP, up from 7.7 percent in 2017. For the first time in many years, there is a relatively large fiscal expansion, scaling Figure 37: There has been a large boost in domestically financed capital in 2018 up both current spending and capital budget (percent of GDP) investment in the 2018 budget. The total 3.5 public outlay budgeted in 2018 amounts to 3 24.0 percent of GDP, up from the estimated 2.5 public spending of 22.3 percent in 2017. The 2 expansion is for the most part financed by 1.5 a drawdown of government deposits. The 1 2018 budget targets the largest drawdown 0.5 (figure 36) since the 2-percent-of-GDP fiscal 0 stimulus introduced in 2009 to mitigate 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018b negative impacts of 2008-09 global financial Source: Cambodian authorities. Note: b = budget; e = estimates 30 CAMBODIA ECONOMIC UPDATE APRIL 2018 The overall fiscal deficit is targeted to Figure 38: Relatively large fiscal expansion boosts budgeted capital spending in 2018 increase to 5.4 percent of GDP in the 2018 Domestic fin capital External fin capital budget, up from 2.7 percent in 2017 (figure 30 Non-wage Wage NSDP (required capital) 40). External finance is budgeted to cover 25 4.1 percent of GDP of the 5.4 percent of GDP 20 8.4 fiscal deficit, while the remaining 1.3 percent 7.2 7.7 of GDP is budgeted to be financed by 15 domestic funds—mostly from the drawdown 10 of government deposits at the central bank. As mentioned earlier, total government 5 deposits at the central bank stood at 12.7 2.5 2.3 3.2 0 2016 2017e 2018b percent of GDP at the end of 2017. Source: Cambodian authorities and World Bank staff estimates. Note: e = estimates; b = budget The domestic revenue budgeted in 2018 Figure 40: The drawdown in government deposits is to finance a relatively large appears conservative compared with deficit (percent of GDP) exceptional revenue performance in 2017. 6 The revenue is budgeted to reach only 18.5 Domestically financed Externally financed 5 percent of GDP in 2018, well below the 19.7 4 percent estimated collection in 2017 (figure 4.1 3 39). As discussed above, revenue collection 4.5 4.3 2 which experienced rapid growth during the 1 1.3 last five years, may be moderating. In this 0 1.0 regard, there is a plan to introduce a new -1 -1.6 revenue mobilization strategy for the next -2 2016 2017e 2018b five years. Source: Cambodian authorities and World Bank staff estimates. Note: e = estimates; b = budget. Figure 39: Given exceptional performance The Ministry of Education, Youth and Sport in 2017, the domestic revenue in the 2018 budget appears conservative (percent of (MoEYS) benefits the most from the increase GDP) in capital spending. The MoEYS receives the Direct taxes Indirect taxes 25 Trade taxes Nontax and others largest boost to its 2018 capital investment 20 budget (figure 41) to meet the demand for building additional provincial schools. 15 MoEYS’ capital investment budget reaches 10 CR 420 trillion (or 0.5 percent of GDP) in 5 2018, up from CR 90 trillion in 2017. Project investment funds (not classified under any 0 2016 2017e 2018b ministries) and the capital budget for the Source: Cambodian authorities and World Bank staff estimates. Ministry of Public Works and Transport also Note: e = estimates; b = budget. receive large boosts. APRIL 2018 CAMBODIA ECONOMIC UPDATE 31 Figure 41: Education receives the largest In addition, to meet a rising demand boost in capital investment in the 2018 for public investment, the 2018 budget budget (percent of GDP) 0.8 increases the (concessional) borrowing MoEYS MPWT Investment projects ceiling to 1 billion SDR, up from 0.7 billion SDR 0.7 in 2017. Other important highlights of the 0.6 2018 budget include an amendment to the 0.5 law on taxation to include a fiscal provision 0.4 on petroleum and mining operations. This 0.3 is to clarify the authorities’ fiscal provisions 0.2 for conducting oil and gas and mining 0.1 operations. - 2017 2018 Source: Cambodian authorities. Note: MoEYS = Ministry of Education, Youth and Sport; MPWT = Ministry of Public Works and Transport. 2. OUTLOOK AND RISKS Cambodia’s high growth trajectory is MoEYS’ total budget, which covers both expected to continue. Growth in 2018 domestically financed (current and is projected to accelerate slightly to 6.9 capital budget) and externally financed percent in 2018 (table 2), underpinned by components climbed to 3.52 percent of rising government spending and favorable GDP up from 3.05 percent in 2017 (figure 42). global conditions, including robust demand In absolute terms, the total budget surged, in advanced economies. Cambodia’s reaching CR 3.43 trillion (equivalent to growth rate is, however, expected to US$860 million), representing a 25.5 percent gradually decelerate, if structural problems increase. (for example, loss of competitiveness) are left unaddressed. It is expected that the Figure 42: MoEYS' total budget in 2018 has announcement of the new Rectangular been boosted (percent of GDP) Strategy after the elections will revive the 4 Recurrent Capital External finance reform momentum. 4 0.3 In the medium term, large FDI flows and 3 0.3 0.5 rising public investment in infrastructure are 0.1 3 expected to help expand the productive 2 capacity of the economy. Cambodia’s 2 2.7 2.7 exports are expected to continue to benefit 1 from the most favorable regime available 1 under the EU’s Generalized Scheme of 0 MoEYS (2017) MoEYS (2018) Preferences, namely the Everything But Source: Cambodian authorities. Arms scheme, for years to come.16 This, together with several structural reforms 16 The EBA scheme gives the 47 Least Developed Countries – including Cambodia – duty free access to the EU for exports of all products, except arms and ammunition. See http://ec.europa.eu/trade/policy/countries-and-regions/countries/cambodia/ 32 CAMBODIA ECONOMIC UPDATE APRIL 2018 Table 2: A favorable macro outlook remains, protectionism rises. In addition, employment although growth is easing slightly growth prospects look less certain. As 2018 2019 real wages rapidly increase, Cambodia’s external competitiveness, which primarily GDP growth 6.9 6.7 relies on cheap labor, is being eroded. As Domestic demand (% change y/y) 8.1 9.7 a result, potential negative impacts of the Inflation (% change, average) 3.2 3.4 slowdown of the textile and construction Overall fiscal balance (% of GDP) -5.9 -5.4 sectors on poverty reduction may occur. Government debt (% of GDP) 35.3 36.1 Export growth 10.6 11.8 3. KEY MESSAGES Import growth 9.2 10.0 Investment in developing human capital Current account (% of GDP) -9.4 -9.2 is needed for both traditional and “new” FDI (% of GDP) 10.9 10.6 skills. To this end, the success of any policy Gross foreign reserves (months of 6.9 6.9 intervention will likely depend on the prospective imports) effectiveness of incentives and processes Source: World Bank staff estimates and projections. to facilitate the enterprise sector’s role in providing, guiding, and advocating for a designed primarily to boost Cambodia’s skills development system that responds to external competitiveness could help speed the demands of industry (see the selected up growth momentum in the longer term. issue section on future jobs in Cambodia). Recent reforms to improve quality and A skilled labor force boosting productivity access to basic education may also result growth would help compensate for rapidly in improved learning outcome and better rising real wages and underpin ongoing labor force quality. Poverty reduction is structural transformation. Addressing skills expected to continue with expansion of the constraints, as envisioned in the 2017- services and manufacturing sectors. 25 National Technical and Vocational Education and Training Policy, is a priority. Cambodia’s fiscal performance is expected Greater coordination among public and to remain sustainable. Overall fiscal deficit private entities will be essential to the and public debt, while rising as the authorities successful implementation of this framework. implement the fiscal expansionary policy, will continue to be contained. Lifting the constraints to small and medium- sized enterprises and nonfarm household Risks to the outlook remain tilted toward enterprises can support diversification, the downside. Domestically, risks are while promoting job growth. It is important associated with a prolonged construction to reduce the costs of firm formalization, boom, potential uncertainty related to the operation, and financing, while providing July 2018 general elections, and declining access to incentives and support programs. external competitiveness resulting largely Introduction of policy supports to promote from rising real wages. Externally, risks are small and medium-sized enterprises and associated with uncertain global trade as nonfarm household enterprises will help APRIL 2018 CAMBODIA ECONOMIC UPDATE 33 boost job creation. Potential policy supports may then include skills development for firm owners, and development of and access to digital and internet technologies. Fostering domestic investment, including in agroprocessing, could also help strengthen links to foreign-owned businesses and exporters. The ongoing construction and real estate boom needs close monitoring. Credit growth directed to the construction and real estate sector has accelerated further. It is therefore necessary to reduce the scope for speculative activities. In the banking and microfinance sectors, it is crucial to adopt lending guidelines and ensure adequate monitoring, while revisiting the nonperforming loan classifications including the newly emerging trend of refinancing and rollover of loans. This will also help avoid overindebtedness after years of rapid loan expansion and accelerated rates of penetration of loans in households. 34 CAMBODIA ECONOMIC UPDATE APRIL 2018 SECTION 2: SELECTED ISSUE FUTURE JOBS IN CAMBODIA17 1. INTRODUCTION Shifting trade patterns, a growing Asian middle class, demographic change, Cambodia has been able to sustain technology and rapid urbanization are high economic growth, but the country changing the composition and nature has experienced slowing job growth, of jobs. The current global geo-political especially since 2012. The economy grew environment is shaping the prospects of future by an average annual per capita rate of 5.3 jobs in Cambodia. The process of global percent during 2005–15, ranking among the economic is rebalancing toward Asia, both top 14 economies in the world, propelling to in terms of production and consumption. country to attain the lower-middle income Regional integration efforts such as those status in 2015. With its current population under ASEAN Economic Community (AEC) of 16.1 million, Cambodia’s GNI per capita and Regional Comprehensive Economic is estimated to have reached US$ 1,300 in Partnership (RCEP) are creating momentum 2017. Cambodia continues to pursue its high in the liberalization of trade in goods and growth policy, underpinned by its liberal services that will attract huge investment investment and trade policy, targeting a into the region. Technology is opening real growth rate of around 7 percent a new industries and not (yet) threatening year. As economic structural transformation Cambodia’s export industries. The emerging accelerates and the economy shifts from middle class, especially in China, will agriculture to industry and services, mostly increase the demand for processed goods low-value added jobs are being added. and more services. These developments Two-thirds of new jobs are in construction, will offer Cambodia opportunities to attract hospitality, and other services. So while investments, expand its export markets current policy is creating jobs, it is not through industrial and trade linkages creating the good jobs that underpin as well as its physical and institutional greater productivity and prosperity. connectivity with the regional and intra- 17 The Selected Issue on Future Jobs in Cambodia is a summary of preliminary findings of Cambodia Future Jobs Study led by Drs. Wendy Cunningham and Claire Honore Hollweg. Contributors to the study include Sodeth Ly, Miguel Sanchez, Une Lee, Johanne Buba, Mahesh Shrestha, Marong Chea, Dilaka Lathapipat, Lan Van Nguyen and Anne Lopez. APRIL 2018 CAMBODIA ECONOMIC UPDATE 35 regional production networks and supply One of the findings discussed in the job chains. These mega-trends could generate diagnostic suggests that it is necessary to good jobs if Cambodia puts “jobs” as a key promoting entry and growth of SMEs which national priority. account for about 90 percent of firms. In other words, this pertains to narrowing the Identifying policies and opportunities for gaps in worker productivity, while improving Cambodia’s job success to align with its spillover effects and technology transfers economic success is therefore crucial. Both including managerial and entrepreneurship demand- and supply-side policies play a skills from the modern to traditional sector. mutually reinforcing role. The demand-side policies promote job growth by boosting Investing to develop human capital is a economic activity in those sectors that are priority. To this end, the success of any particularly conducive to good jobs. The policy intervention will likely depend on the supply-side policies seek to improve the job effectiveness of incentives and processes readiness of people entering the labor force to facilitate the enterprise sector’s role in and to support them in finding the right jobs providing, guiding, and advocating for a for their skills level (allocative efficiency). skills development system that responds Macro-policies underpin these policies by to the demands of industry. Development creating the conditions for firms and workers of and access to agile and rapid skills- to invest and engage in markets and with development modules will therefore be each other. necessary. To support policymakers, the World Bank is 2. CURRENT STATE OF JOBS conducting a jobs diagnostic that is intended to identify policies and opportunities to a) Structural transformation improve job quality and inclusiveness in Unlike many aging countries in East Asia, a context of emerging mega-trends. The Cambodia is benefiting from a demographic study is intended to identify the factors that dividend. Cambodia’s working age drive the creation of good jobs and identify population (age 15-64) is growing faster a small set of policies that, when taken than its population—2.4 percent compared together, will lead to better jobs. For the to 1.9 percent during the period 2007-2015— purposes of this analysis, a job is defined as freeing up resources for investment and a legal activity that generates (in-cash or in- family income growth. kind) income while a good job is productive, high value-added, pays well, and provides Given the existing population dynamics, worker benefits and good work conditions the country has a window of opportunity for (within reach of a significant share of the rapid economic growth during the next 30 population in a reasonable timeframe).18 The years, until its working age population starts below summarizes the emerging messages. to decline (figure S1).19 Cambodia’s working 18 This working definition of a “good” job in Cambodia is used for analytical purposes of this report. The definition of a “good” job necessarily differs between workers and firms and likely even by industry, occupation, region, and a myriad of other variables. 19 After the post- Khmer Rouge recovery and “Baby Boom” fertility has started to decline in Cambodia from the early 1990s. See Fertility Trend in Cambodia, Dasvarm and Neupert (2002). 36 CAMBODIA ECONOMIC UPDATE APRIL 2018 age population reached 10.1 million in 2015, Figure S2: Employment by sector (percent) up from 8.3 million in 2007 a larger increase 120 than the net labor force—defined as those Agriculture Industry Services who worked or looked for a job20—that 100 increased by 1.3 million persons over the 80 27 29 27 30 27 30 31 30 33 same period. On average, Cambodia adds 15 16 16 17 19 20 24 60 16 26 164,000 persons to its labor force annually. 40 58 58 54 56 51 49 45 56 42 Figure S1: Projected annual change in the 20 working age (15-64 years) population 0 350,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 300,000 Source: Cambodia socio-economic surveys. Annual change (number of people) 250,000 200,000 150,000 Figure S3: Contribution to job creation 100,000 ('000 jobs) 50,000 800.0 Agriculture Industry 0 645 Services New jobs 600.0 -50,000 400.0 -100,000 284 217 245 1990 2010 2030 2050 200.0 204 116 Source: United Nations World Population Prospects: 2015 Revision. 0.0 -4 As structural transformation accelerates, -200.0 184 Cambodia has experienced a sharp decline -400.0 in the share of the employed population -600.0 2008 2009 2010 2011 2012 2013 2014 2015 working in agriculture (figure S2). The Source: Cambodia socio-economic surveys. steepest decline occurred in 2012 (figure S3). Employment creation supplied by the sector, however, shrank by 5.8 percent a agriculture sector initially grew at 2.8 percent year caused by drought and depressed during 2007-11, driven by agricultural agricultural commodity prices. While the development boosted by rising agriculture agriculture sector contributes about a commodity prices and cultivated land quarter to annual GDP, it is the source 41.6 expansion. In 2009, the agriculture sector percent of all jobs. managed to absorb a large number of laid off factory workers caused by the collapse Instead, the economy has become of the industry sector 21 as the garment and increasingly dependent on the industry footwear sector faltered during the 2008/09 and services sectors, both for economic Global Financial Crisis. During 2011-15, growth and to provide the jobs to absorb employment creation by the agriculture new entrants into Cambodia’s labor force. 20 The definition is based on the Cambodia socio-economic survey where “working” is defined as a person (age 15 and older) who worked for pay (or in-kind) for at least an hour in the week prior to the survey and a person older than age 15 who searched for a job for at least one hour in the previous week (but was not on temporary leave) is defined as “looking for a job.” 21 In 2009, growth of the industry sector’s value added went negative in constant and market prices. APRIL 2018 CAMBODIA ECONOMIC UPDATE 37 As depicted in figure S3, non-agricultural Figure S4: Cambodia’s heterogeneous jobs sectors have been the main source of job picture growth since 2012. This has been driven by an expansion in manufacturing, tourism, Total Employment 7.97million,100% and (more recently) construction. Family farming 2.77 Wage employee Non-farm household million 3.77 million, 47% enterprise 1,41 Since 2011, labor has played a declining role million,18% in GDP growth. While capital continues to Government 0.4 Private sector 3.34 be the driving factor for economic growth, million,5.0% million,42% employment played a significant role (since Domestic Foreign 1993) until 2011. In contrast, labor quality private sector private 2.26 sector 1.08 million,28.3% million,13.5% and total factor productivity increased relative to the period 2007-2011. This can Source: Authors’ calculations. be attributed to the shift out of agriculture, which is labor-intensive and into more skills- which tend to abide by labor laws and have and productivity-intensive manufacturing higher levels of productivity than domestic and services. firms and so could be classified as “good” jobs. But there is no information about the Looking forward, the factors behind quality of the remaining 2.26 million wage Cambodia’s impressive job creation over jobs. Some will be working in registered the past decade are likely not the factors firms and receiving mandated wages and that will drive future growth of quality jobs. benefits while others will be wage earners New mega-trends — global economic on farms, household enterprises, or without rebalancing toward Asia including regional contracts. In 2015, as much as half of integration and growing wealth, a shift Cambodian households’ income (including toward smart production and value chains, rural households’ income) is from salary and newly emerging firms and workers and wage, compared to only 30 percent a with new products and skills will reshape decade ago (figure S5). Cambodia’s jobs picture. b) Jobs picture Figure S5: Rising share of wage and salary employment (percent of total) Cambodia’s jobs picture is heterogeneous. Wage Self-employment 70 Half of jobs are in the traditional sector while 60 another half in the modern sector (figure S4). 50 The traditional sector accounts for at least 40 4.2 million jobs in family farming (one third of 30 all jobs) and nonfarm household enterprises 20 (18 percent). Another 3.3 million people are 10 engaged in wage-employment. One third 0 2009 2015 of them (one million) work in foreign firms, Source: Cambodia socio-economic survey. 38 CAMBODIA ECONOMIC UPDATE APRIL 2018 The foreign (FDI) private sector such as labor force participation rate is among the garment and footwear sector has been highest in region and in the world (figure largely driving Cambodia’s export led S7). This is perhaps not surprising given the growth. In 2015, the garment and footwear important of traditionally “female” industries sectors provided 10.6 percent of GDP and in Cambodia’s economy: garments and 7.3 percent of total employment. This is in tourism. contrast to the fastest growing domestically- owned industries, such as the construction Figure S6: Cambodia has a relatively higher sector, which captures 9.8 percent of GDP participation rate than many of its peers Year 2015 Locally linear fit but contributes only 6.5 percent of total Cambodia trajectory, 2007-2015 employment. 100 To align jobs policies with growth policies, 80 LFP, adults 15+ it is necessary to pay close attention to 60 both domestic and foreign private sectors. Boosting jobs growth provided by the 40 private sector, especially the domestic private sector including small and medium- 20 6 7 8 9 10 11 12 sized enterprises (SMEs) will help to draw Log(GDP per capita, PPP) Source: Authors’ estimates using CSES 2007-15 and WDI. workers out of the traditional sector, mainly family farming (skilled agricultural, forestry and fishery workers). It is equally important Figure S7: Labor force participation rate, female to promote nonfarm household enterprises (percent of female population ages 15+) Rwanda which continue to absorb a large share Madagascar Nepal of employment but are performing below Cambodia Tanzania potential. Lao PDR Vietnam China Singapore c) Labor force participation Thailand East Asia & Pacific United States Myanmar Cambodia’s labor force participation Malaysia Indonesia Euro area rate is high by global standards. Given World Middle income Cambodia’s level of development, labor Lower middle... Bangladesh force participation rates are expected to India Afghanistan be on the trend line in Figure S6; instead, Yemen, Rep. 0 20 40 60 80 100 it is far above the trend line and has been Source: World Development Indicators. for several years. This reflects high female labor force participation in both modern and traditional sectors, especially the garment and footwear, and nonfarm household enterprises. Cambodia’s female APRIL 2018 CAMBODIA ECONOMIC UPDATE 39 Table S1: Employment by main occupation Table S2: 10 fastest growing occupations (percent) Share Share Average Main occupation 2004 2015 2009 2014 growth Armed forces occupations 0.9 0.8 Garment and related 4.4 10.2 1.1 trades workers Manager 1.3 0.9 Building frame and 0.5 2.8 0.7 Professionals 3.8 3.2 related trades workers Technicians and associate 0.6 1.3 General office clerks 0.8 2.6 0.3 professionals Agricultural, forestry 6.3 6.9 0.2 Clerical support workers 0.2 3.6 and fishery laborers Service and sales workers 13.6 16.1 Shop salespersons 5.0 6.0 0.1 Skilled agricultural, forestry and 58.7 33.7 Waiters and bartenders 0.3 0.80 0.1 fishery workers Building finishers and 0.2 0.8 0.1 Craft and related worker 6.1 23.5 related trades workers Plant and machine operators and 6.1 3.9 Tellers, money 0.2 0.7 0.1 assemblers collectors and related Elementary occupations 8.4 12.9 clerks 100 100 Hotel and office 0.1 0.3 0.1 Source: Cambodia socio-economic surveys. cleaners and helpers; Building caretaker Moto-taxi & Tuktuk 1.2 1.5 0.1 The job market has significantly evolved drivers over the past ten years, largely driven by Source: Authors’ estimates using CSES 2009-15 Note: Occupations at the 3-digit ISCO that have an employment share of at structural transformation (table S1). While least 0.1% 58.7 percent of workers were in agriculture, forestry, and fishery in 2004, the share had But quality of work performed by workers declined to 33.7 by 2015. Although this is still needs further improvements. Productivity the most prevalent occupation, it is on the growth of the fastest growing occupations decline. At the same time, a shift toward such as garment and related trades is more productive sectors has led to a rising among the lowest (Figure S8). Productivity shares of services, sale and clerical supports is found to be the highest in the real estate workers. Moving toward industrialization and business occupations due largely to generates demands for more technicians the real estate boom, followed by trade and associate professionals. Occupation- and agriculture (due to shedding labor). specific data show that the top 3 fastest From the worker perspective, although growing occupations are garment and mean wages have increased, particularly related trades, building frame and related for the poor, other shortcomings remain. For trades, and general office clerks (table example, the gender gap in hourly wages S2) while eight of the ten fastest shrinking remains large (figure S9). While further studies occupations are in agriculture, forestry, or may be needed to explain the large gap in fisheries. hourly wages between men and women, 40 CAMBODIA ECONOMIC UPDATE APRIL 2018 education attainment may be one of the Figure S10: Labor force participation rate underlying factors. (15-64 years) by age group, level of education and sex (percent, 2015) Figure S8: Annual productivity growth 40.0 (2007-14) for key sectors remain low 35.0 30.0 25.0 20.0 Real estate and businesses 28.8% 15.0 Trade 8.4% 10.0 5.0 Agriculture 7.6% 0.0 Women Men Women Women Women Men Men Utilities Women Women 5.4% Men Men Men Transport & Communications 5.0% Mining & other manufacturing 0.9% None or Primary Primary Lower Upper Post only some school not school secondary secondary secondary Garment & footwear 0.9% education completed completed completed completed education Other Activities 0.1% Source: Cambodia socio-economic survey, 2015. Construction -3.7% -20% 0% 20% 40% male labor force with “primary completion” Source: Authors' estimates using data from Cambodian authorities. and “lower secondary education” Figure S9: Gender gap in hourly wages accounted for 28.2 percent and 16.3 percent, respectively, compared with 27.3 percent and 11.6 percent for their female 0 counterparts. This mirrors lower proportions Gender gap in hourly wages -05 of female students who complete primary -1 school education and above, compared to those of their male counterparts. -15 -2 3. JOBS OF THE FUTURE 2004 2007 2009 2011 2013 2015 Year Females, relative to males a) Opportunities and Bottlenecks Source: Authors’ estimates using CSES. As discussed above, the demand for The results from Cambodia socio-economic occupations such as skilled agricultural, surveys reveal that a much higher forestry and fishery workers which accounted proportion of female labor force (15-64 for majority of the jobs in the past decade years) has “none or only some education”, and were behind Cambodia’s impressive compared to that of their male counterpart jobs growth, especially during agriculture (figure S10). In 2015, 17% of the female labor commodity price boom are not likely the force had “none or only some education” occupations that will drive future jobs growth. and 34.9 percent had “primary school not Macroeconomic environment, especially completed”, while it was only 10.3 percent the ongoing structural transformation and 30.2 for their male counterparts. The has implications on the nature of jobs in opposite is true when education attainment Cambodia. The upper middle-income status reached “primary completion” and “lower that Cambodia is pursuing during the next secondary education”. The proportions of twelve to fifteen years may further reduce APRIL 2018 CAMBODIA ECONOMIC UPDATE 41 the share of agricultural employment to Other factors such as wealthier Cambodia around 20 percent, down from the current and East Asia countries and shift of trade share of around 40 percent. 22 Therefore, the patterns give rise to other occupations challenge is to identify the sources of new (figure S12). As depicted in tables S1 and jobs. S2, services-related jobs including inter- personal skilled occupations, namely Garment and related trades occupation, shop salespersons, office clerks, hotel/ one of the largest occupations, are office keepers and more are expanding. expected to continue thriving in global As income increases, consumers seek and (increasingly) regional value chains. a widening range of personal and Although minimum wage is rapidly rising recreational services or consume more – and unit labor costs are higher than in services-intensive and processed products, competitor countries in the same industry while producers search for more specialized –, the occupation is likely to continue to and sophisticated inputs and professional strive for years to come, given Cambodia’s advice.23 The regional economy has shown preferential access to the European Union rising contribution by the services sector, market under “Everything But Arms” (figure accounting for about half of its combined S11). In addition, as wages in China rise, GDP and 60 percent of its total foreign direct relocations of factories from China to lower investment inflows in recent years. wage countries will present an opportunity for Cambodia to attract new industries and Figure S12: Factors driving new jobs growth expand/upgrade the existing ones. This gives rise to demand for skilled labor such Macro Wealthier Cambodia and East Asia enviro as technicians and machine operators and nment assemblers. Shifthing Trade Patterns Jobs Rise of Knowledge Economies Figure S11: Exports of clothing and other textile Firms producst (y/y, percent change) (and Workers& Farms) Skills Demographics 50 to EU market to all markets 40 Teahnology 30 Source: Authors’ assessments. 20 10 Shifting in trade patterns whereby China 0 will increasingly become one of the major -10 consumer markets in the world, entails -20 demand for both merchandize and services J-16 J-16 J-17 J-17 S-16 S-17 M-16 M-16 M-17 M-17 N-16 N-17 imports. Cambodia together with regional Source: Cambodian authorities. countries is competing to attract Chinese tourists. Rising demand from retirees in Asia and Europe for customized tours and other 22 The Changing Nature of Work (2019), World Development Report 23 ASEAN Services Integration Report (2015), A Joint Report by the ASEAN Secretariat and the World Bank 42 CAMBODIA ECONOMIC UPDATE APRIL 2018 related activities is another opportunity. Similarly, awareness of climate change Box S1: PassApp Taxi provides a win-win solution for both taxi drivers and environment degradation will increase and their customers demand for eco-tourism, an untapped tourism potential in Cambodia. To serve PassApp taxi is gaining its popularity very quickly in the capital city of Phnom Penh. many aging countries in the region such With one click on PassApp app on your smart as Korea, Singapore, and Australia, aged phone, a taxi will be at your doorstep. Fare is care is expected to become an important much cheaper, especially for three-wheeler taxi rides. This is because: (i) for three-wheelers, occupation which Cambodia can grasp, it is LPG (and gasoline) powered; (ii) drivers can given its a comparative advantage in just wait for a message sent by a passenger English language skills. However, there are using a cell phone (instead of driving around looking for his or her customers); (iii) fare is emerging trends that may have potential transparent which is based on travel distant negative impacts on jobs. These include shown by GPS multiplied by a fixed unit cost slowing growth in global trade and rising per kilometer and shown on cell phones of both driver and passenger. protectionist sentiments in the United States and elsewhere. The wining factor is the transparent ride fare offered by PassApp and shown on phones of both taxi driver and its customer. Traditional The rise of knowledge economies and four-wheelers (motorbike towed carts) development of digital technologies do not have this feature. While taxi meter including internet penetration will system seems to provide similar transparent fare computation, customers may not have command new occupations and change complete confidence in the accuracy of their the nature of jobs in others. Based on current meter system. technological trends, certain sectors will continue to rely on labor as the primary both taxi drivers and their customers). Jobs factor of production. In those sectors, that create technology – such as careers in sectoral growth will lead to job growth.24 But mobile app development – will also grow, many of these jobs, in fact, most of the jobs but these will likely be a minority in the in Cambodia, will increasingly incorporate context of the larger job market. Technology technology into their work. Thus, tasks that is also unlocking current bottlenecks to job may have been done manually instead creation. For example, the expansion of will be relegated to machines, freeing up mobile money systems that Cambodia has time for workers to carry out higher value- experienced during past several years not added tasks that cannot be mechanized. only helps create jobs but also facilitates This is seen daily through ATM machines that transfers of remittances, improves access free time for bankers to work with clients, to credit and increases productivity and computers that allow accountants to work entrepreneurship. more precisely and effectively, or the use of PassApp to call taxis rather than taxis driving While it is not an immediate threat for around in search of passengers (see Box S1: Cambodia, some jobs will disappear due to PassApp Taxi provides a win-win solution for automation. Others will not be created due 24 The Changing Nature of Work (2019), World Development Report APRIL 2018 CAMBODIA ECONOMIC UPDATE 43 to reshoring of manufacturing in advanced The country will, however, need to prepare economies and China due to the rise of for the future of works. Cambodia’s more sophisticated technologies such as education system will need to be updated to advanced robotics, Internet of Things, 3-D build the rights skills for the next generation. printing and more. For instance, the use of And today’s current workers will need to on line services for mobile banking, bookings upgrade skills while working, either through and other travel arrangements as well as on-the-job training or short training courses for obtaining public services facilitated by to learn the skills that will be needed in a e-government negatively impacts medium- technologically-enhanced work place. If skilled, routine-based occupations such as Cambodia is aiming to diversity into higher- tellers and clerical jobs. Wage increases value service exports including high value will speed up the pace of automation, tourism and back-office processing services, Cambodian workers’ skills will need to be it has to prepare their work force to have trained or retrained to align with the factors more foreign language skills in addition to that driving new jobs growth. English and Chinese. It appears however that the current pace of regional integration At the same time, technological progress remains slow as ASEAN countries have, on will create many new jobs that don’t exist average, more restrictive services policies in Cambodia today. New opportunities for than any other region in the world, except entrepreneurship and self-employment are the Gulf States. The share of services in growing rapidly in the digital economy. GDP, accounts for less than half of the GDP, China’s State Information Center estimates compared to more than 60 percent in Latin that the recent boom in the country’s America, Eastern Europe, and the Middle e-commerce sector has created 10 East.26 million jobs in online stores and related services, about 1.3 percent of the country’s b) Firms: Missing middle employment. In Kenya, the M-Pesa digital payment system has created additional The existing composition of Cambodia’s income for more than 80,000 agents. firms is characterized by a missing Samasource and Rural Shores link clients in middle, which significantly challenges job the United States and the United Kingdom growth. More than 80 percent of firms are with workers in Ghana, Haiti, India, Kenya, considered (micro and) small, employing and Uganda. Of global online workers on the less ten employees, while less than a fifth are Elance freelancing platform, part of Upwork, large firms, employing more 100 employees 44 percent are women, and many wish to each, provide as much as half of total balance work and family life. Moreover, ICT employment in the private sector (figure jobs, tend to pay well, and each high-tech S13). The missing middle challenges job job generates 4.9 additional jobs in other creation and indicates large gaps in worker sectors in the United States.25 productivity caused by low spillover effects 25 World Development report (2016): Digital Dividends. 26 ASEAN services integration report (2015): a joint report by the ASEAN Secretariat and the World Bank. 44 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure S13: Distribution of employment (left) Slow productivity challenges job quality. and firms (right) Firms pursue high labor productivity and 1-9 10-19 20-49 50-99 100-499 500+ therefore link pay increases with productivity improvements. However, during the past 100 several years, the minimum wage has increased faster than productivity, resulting 80 in higher unit labor costs in textile firms 60 % in Cambodia than its peers (figure S15). 40 Consequently, there is less room for further wage increases if Cambodia wishes to 20 remain competitive in the garments and 0 Source: Authors’ calculations based on Census and ICES. textiles sectors. Currently, the minimum wage Note: Minimum size1 weights. (excluding allowances) for the garment and and technology transfers from the modern footwear sector is US$170 a month.27 Since to traditional sector. Large, export oriented 2013, the minimum wage has been rapidly firms manage to grow with relatively high rising, increasing at an average of 17.6 productivity, but the majority of small firms, percent per year during the period 2013- serving domestic market are struggling to 17, compared with only 7.4 percent during survive. In garment and textiles, a key growth the period 2008-13. Slow productivity growth engine, job growth vis-à-vis sales growth results in less job quality improvements and is low. Employment elasticity with respect upgrades. to growth is low, owing to weak FDI sector linkages (figure S14). Rising wages have Figure S15: Mean and median for unit made the garment sector, which absorbs a costs (% of value added) of textile firms in comparator countries third of wage workers, less competitive; this is risky for jobs growth. mean of ulc p 50 of ulc 80 Figure S14: Employment elasticity with respect to growth is low 60 Employment elasticity with respect to growth 40 Recall questions All countries Cambodia 20 1.5 0 Banglades cambodia Ethiopia India Myanmar Pakistan Turkey Vietnam 1 Elasticity Source: World Bank Enterprise Survey data. -5 Note: ulc = Unit labor costs (weights, last year of ES available). 0 0 5000 10000 15000 GDP per capita (constant 2010 US$) Source: World Bank Enterprise Survey. 27 News release, October 5, 2017, Ministry of Labor and Vocational Training. Note: coefficients - cross section - p<0,05 APRIL 2018 CAMBODIA ECONOMIC UPDATE 45 c) Trade and FDI However, the labor intensity of exports (wages per USD of gross exports) ranks low Cambodia’s external trade and the foreign when compared to peers. Indirect labor private sector are closely linked. The export content of exports accounts for only one sector, except agriculture commodity fourth, compared with one half in regional trading, comprise mainly the FDI sector. peers (figure S16), implying weak FDI sector FDI inflows underpin not only Cambodia’s linkages and a large gap in productivity export-led growth but also job creation for the country’s labor force. As depicted Figure S16: Direct and indirect labor content in table S3, the export sector, especially of exports Direct LVAX Indirect LVAX garments and tourism has played an important role in job creation. During the past Wearing Apparel Textiles Trade and Transport Services Chemical, Rubber Plastic Products several years, FDI inflows have boosted the Leather Products Other private Services Agr, Forestry, Fisheries construction and real estate sector which Processed Foods Wood Products Transport Equipment in turn drives economic expansion and jobs Manufactures nec Metals nec Beverages and tobacco Products growth. FDI inflows into the manufacturing, Ferrous Metals Machinery and Equipment nec Construction Paper Products, Publishing accommodation, construction and real Metal Products Minerals nec Mineral Products nec estate sectors combined is estimated to Electricty, Gas, Water Energy Extraction Dwellings have reached almost 50 percent in total 0 200 400 600 800 inflows in 2016. 28 Source: World Bank Labor Content of Exports Database. between direct and indirect exporters. Table S3: Depleting jobs in agriculture were only This affects how exports support jobs in partly offset by high jobs growth in garment and Cambodia. Wages and jobs supported construction sectors, leaving lower job creation through indirect linkages with exporters 2004-07 2007-11 2011-15 remain weak. In other words, jobs with Agriculture 433,572 533,124 -945,646 indirect exporters are not allocated to the Textile, leather, 16,477 307,737 335,156 and footwear Figure S17: Percentage of inputs sourced Construction 95,047 -1,190 358,734 domestically Other industry 98,252 -24,162 1,218 Percentage of supplies and Inputs sourced 100 Hotel & 2,710 130,892 132,612 restaurant 80 Trade -3,514 121,663 -6,364 60 Real estate & 137,944 82,003 109,978 professional 40 services 20 Other services -37,345 8,901 274,457 7 9 5 1 3 nm 014 7 8 7 16 5 16 16 09 00 00 01 01 1 00 00 00 01 Total net 743,144 1,158,968 260,145 0 20 20 20 20 h2 m2 ia2 ia2 n2 ia2 y2 n2 h2 m2 ar ar dia am rke ta ta es iop iop Ind na es nm na employment kis kis bo en lad lad Tu Vie Vie Eth ya Eth ya Pa Pa Vi m ng M ng creation M Ca Ba Ba Source: Authors’ computation using CSES. Source: World Bank Enterprise Survey data. 28 Estimates of FDI by sector,the National Bank of Cambodia. 46 CAMBODIA ECONOMIC UPDATE APRIL 2018 most productive firms (unlike with direct this is particularly the case in household exporters). In addition, the percentage of enterprises that operate in wealthier inputs sourced locally is among the lowest communities. However, large distribution of in the region due to underdeveloped income and productivity suggests that half domestic sector (figure S17), pointing out of the enterprises are doing great jobs, while the importance of generating better jobs the other half are underperforming. through domestic firm development. Although household enterprises are linked to d) Nonfarm household enterprises larger firms, they benefit little from the most dynamic industry in Cambodia: garments As discussed above, nonfarm household and footwear. As the Cambodian-owned enterprises currently provide approximately firms multiply and foreign-owned non- 1.41 million jobs or 18 percent of total garment firms enter the market, household employment; thus, promoting them, enterprises are established to serve them especially those that lag behind, is necessary (figure S19, right chart). The linkages to achieve higher job, income and between these very small enterprises and productivity growth. Cambodia’s nonfarm larger firms are not only a source of profits household enterprises are heterogenous. but also of positive spillover that improve the More than half of urban households own standards and processes - and therefore the a small enterprise, as do 23 percent of productivity and earnings – within the small rural households. Half are in retail and the enterprises. In contrast, the expansion of other half provide a range of services and the garment and footwear sector does little manufactured products. A higher share to promote household enterprises to grow of working women (19 percent) than men (figure S19, left chart). Again, this points to (13 percent) own a household enterprise. the weak leakages between this FDI-driven On average, earnings and productivity sector with the rest of the economy. of nonfarm household enterprises are as good as those of wage workers (figure S18); Figure S19: Growth in wage employment and growth in nonfarm enterprises Figure S18: Distribution of income (top) and Log (# enterprise) in Province x rural/urban Linear fit productivity (bottom) by employment type Change in Log(#HH enterprise) Garments & footwear Domestic tourism** 1 Wage -Worker Household enterprise worker Smoothened density Smoothened density 5 0 2 4 6 8 1 -5 0 10 11 12 13 14 15 16 Log(monthly earnings) -1 -1 0 2 4 6 8 1 -5 0 5 1 -1 0 1 Change in Log(wage employment) in Province x rural/ urban Source: Source: Authors’ estimates using 2014 CSES. 3 4 5 6 7 8 Log(hourly productivity) Source: Authors’ estimates using 2014 CSES. APRIL 2018 CAMBODIA ECONOMIC UPDATE 47 e) Workers Small and medium-sized enterprises, where potential job growth remains untapped, Cambodia’s labor force is growing — a mention inadequately skilled labor force golden opportunity to boost growth. Unlike among their top 3 constraints. For large firms, many other regional countries, namely the constraint ranks lower. Singapore, Japan, Australia, Vietnam and China that are rapidly ageing with an Addressing the constraint on inadequately increasing dependency ratio, growth of skilled labor force is further confronted Cambodia’s working age population is by Cambodia’s low rates of return to expected to outpace population growth education (figure S21). Although the latest until 2045, resulting in declining dependency efforts to reform the education system ratio until 2050 and beyond. This means that may have yielded better outcome, based the working population – particularly women on Cambodia socio-economic survey – will have more time to dedicate to jobs conducted in 2015, employers in Cambodia as the number of workers per dependent gave very little value of education below is somewhat high. Once the dependency 12 years. This may suggest that the value rate begins increasing, workers may have addition for each incremental year of less work time or fewer job options as they schooling up to primary completion and increasingly dedicate time to eldercare. even senior high school education is not sufficient for the labor market to reward. However, having a growing labor force alone is not sufficient to attract and create Figure S21: Low rate of return to education good employment, especially when All employers face significant skills shortages. 1 Cambodia’s employers are particularly dissatisfied with the skills that the labor force 8 offers. While many regional countries face 6 the same constraint on “inadequate skilled 4 labor force”, Cambodia has been hit hardest 2 by it, second only after Lao PDR (figure S20). 0 Figure S20: Cambodia’s employers are affected more by inadequately skilled labor -2 force than other countries 1 3 6 9 12 College+ 25 22.9 Year of schooling Source: Author’s calculations using CSES 2014. 20 17.6 15.7 16 14.2 15 Although there has been some recent 10.1 10.8 9.6 10 8.1 progress, education attainment of the labor force remains low. Cambodia’s labor force 5 with primary school completion and below 0 accounts for 67.5 percent of total (figure ... ... ... ... ... ... ... .. .. a. R. m ar s ia sia sh ka ne S22). Improving quality of primary school PD di s na nm de an ne A bo pi o et st la iL ya ilip do La am Ea ng Vi Sr M Ph In education may mean better prepare Ba C Source: Enterprise Survey, 2016. 48 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure S22: Educational attainment of the Figure S23: Cambodia’s job market has labor force (percent, 2015) evolved with the use of different skill sets NR Connitive NR Connitive interpersonal None or only Task intensity, non-subsitence occupations Post secondary some education R Connitive R manual education NR manual NR interpersonal Upper 6% 6% secondary Primary school 2 completed not completed 9% 24% Lower secondary 1 completed 18% school Primaryschool Primary completed completed 0 37% 37% -1 2009 2010 2011 2012 2013 2014 2015 Source: Cambodia socio-economic survey. Year Source: Authors’ calculations. Note: R : routine; NR: non-routine. primary school graduates for the job market, reducing the constraint for job growth. At the educated workforce have been found to same time promoting continued schooling be the second-most-severe obstacle for the to complete secondary education may operation of manufacturing enterprises in attract good jobs. 2016, up from the fifth-most-severe obstacle in 2013 (figure B3.1). More importantly, there However, it will take more than a generation is an increasing share of knowledge-intensive for today’s improvements in the education jobs, meaning jobs that require creativity, system to shift the skills profile of the labor leadership, problem-solving, languages, force. While new entrants bring higher and a myriad of more sophisticated skills. educational attainment rates, there is a The growth in these jobs is not a result of a large stock of current workers – numbering boom in any particular occupation, but 8 million people – who have low education instead it is a quiet and steady expansion levels. It will take time for the less educated of many knowledge-intensive occupations to retire and for a sufficient number of new that are not yet core to the Cambodian graduates to take their places. In fact, if jobs market. Large firms need technical and today’s secondary school completion rates management competencies which are are maintained over the next 20 years, the not offered in higher education institutions. share of the labor force with completed SMEs need a broad range of skills. A variety secondary school will only increase from 18 of skills is demanded by newly emerging percent (today) to 38 percent (by 2040). occupations which include: Skills constraints are likely to become worse • Higher-order cognitive: oral as Cambodia moves toward “knowledge- communication, foreign language; economy jobs”. Occupations in 2015 have • Socio-behavioral: customer service, been found to have a different mix of skills team work, taking initiative; than in 2009 (figure S23). As discussed in box 3 on structural transformation — policies, • Digital literacy: IT literacy, adapting to strategies and reforms, the constraints new equipment/procedures; and caused by Cambodia’s inadequately • Some traditional skills: manual dexterity APRIL 2018 CAMBODIA ECONOMIC UPDATE 49 The education system has a role to play, but Figure S24: Number of course, by skill level can only address part of the challenge. There 2012-13 2013-2014 2014-2015 2015-2016 80000 is a large gap in educational attainment, Number of courses offered, annually 70000 especially when considering that benefits 60000 really accrue after secondary completion.29 50000 The new Education Strategy is expected to 40000 help provide the wide-range of job-relevant 30000 skills to new labor force entrants. But some 20000 skills are not practical to be taught in a school 10000 context. And changing the composition of 0 Short courses/ Certificate level Higher Bachelor the labor force — moving from the current Level1 (I to IV) diploma/ Certificate V stage of labor force development which Source: Ministry of Labor and Vocational Training, 2012-15. comprises largely unskilled to semiskilled and skilled workforce takes time (stocks versus flows). In addition, most of the labor further investigation. Currently, it appears force cannot rely on the education system that there are few opportunities to acquire to upskill. skills, especially once leaving school. Therefore, analysing the supply and demand Alternative sources of skill development for “adult education” in Cambodia will be are technical and vocation education and fundamental for establishing an effective training (TVET). Establishing TVET training skills development system. programs to meet the wide-range of job- relevant skills is however a challenge. In Three important components for successful addition, the current TVET system needs skills development system are strategic further improvements to serve a rapidly framework, system oversight and service evolving jobs picture and could be a delivery. For an effective intervention, it constraint to better jobs and economic is necessary to look at how Cambodia’s diversification, if not addressed in an skills development system (outside of the efficient and cost-effective manner. The first education system) fares relative to best important step is to improve TVET courses as practice including the supply and potential the demand for them has experienced a for private sector skills development services steady decline (figure S24). which are discussed below. Further analysis is required to ascertain what Alternative sources of skill development has caused the decline in TVET courses, are firms. In Cambodia, there is limited skills whether it is related to market demand or training provided by firms. The percentage quality and skills mismatch. For instance, of firms offering formal training is well below the distressing decline in the supply of short- East Asia and Pacific regional average courses, exactly the modalities needed by (figure S25). If informal training is included, an adult labor force is the issue that needs the percentage of firms may be double. 29 2/3 of 6th graders are not proficient in reading or writing (EGRA 2013). 50 CAMBODIA ECONOMIC UPDATE APRIL 2018 Figure S25: In-Firm Training (percent offering Job matching is a challenge as most and percent of workforce trained) preparation for jobs and job search is through informal mechanisms. This proves Percentage of firms offering formal training Within firms offering training, percentage of workforce trained 85 that access to information on study and careers remains an issue. The majority of 60 57 students and employed youth depend on 44 informal channel — advice from friends 25 and parents — for study and careers (figure 22 S27). However, unlike in most countries, Cambodian job seekers use multiple Cambodia, 2016 East Asia and Pacific Lower and Middle Income sources of information, and internet usage is Source: Authors’ analysis using World Bank Enterprise Survey data. quite high. Nearly 60 percent of employed In addition, there has been limited firm- youth searched for information on study TVET collaboration. 30 While for some sectors and careers, especially for job placements, and jobs, high levels of education will be on websites. Even with the multiple sources necessary, others, the skills required are not of information, job turnover is inefficient. necessarily built through formal learning, Turnover is high: 13.7 percent of the wage- but rather on the job. In Cambodia, there is earning workforce left their jobs in 2015 no accounting for learning-by-doing. Data and a large proportion — half of firms (in from Vietnam, however, show that large an 8-industry sample) had a vacancy in proportions of Vietnamese labor force learns 2015 and half of them found it hard to fill new skills while working. The most learning that vacancy. This indicates a labor market occurs among the top occupations, namely where firms and workers do not have the managers, professionals and technicians tools to find each other, and it may also (figure S26). It is therefore crucial to engage signal a shortage of appropriately skilled the private sector to provide, guide and workers that are willing to work for market advocate for skills development. wages. Figure S26: Vietnamese labor force that Figure S27: Source of information on study learned new skills while working, by and careers occupation (percent) Total Students Employed youth At least every 2-3 months At least once months At least once a week Every day Advice from friends 62% 66% and parents 50% 10 47% Websites 43% 59% 0 Articles in newspapers 43% 90 and magazines 43% 42% 80 Vocational training 34% 35% centers 29% 70 Recruitment agents 30% Percent 31% 27% 60 28% Universities 27% 50 35% 24% 40 High school teachers 28% 12% 30 Non-goverment 23% 24% organization(NGOs) 21% 20 22% Career days 21% 25% 10 Government 12% s s s rs 12% ns en ls rs k 0 er or departments ke or na ke 10% ia ag at m sw or ic or sio 11% er fts Employer associations an w hn lw 11% le op es ra al M 14% c sa ua of C Te ric ne 3% Pr d an Others le an 2% hi 4% C M ac e ic M 0% 10% 20% 30% 40% 50% 60% 70% rv Se Source: Bodewig and Badiani –Magnusson (2014). Source: Survey of youth conducted by HRINC Cambodia, March 2011. 30 Skills report (2015), Asian Development Bank. APRIL 2018 CAMBODIA ECONOMIC UPDATE 51 4. STRATEGIC DIRECTIONS addressed; this limits the economy’s ability FOR FUTURE JOBS – to move up and integrate into new value TOWARD BETTER AND chain jobs which often require functional INCLUSIVE JOBS upgrade and introduction of new skills. a) Sectoral policy options Nonfarm household enterprises — introduction of policy supports to promote Small- and Medium-sized Enterprises (SMEs) nonfarm household enterprises will help — promoting jobs growth by broadening boost job creation. An important first step “job base” by addressing missing middle is a is to analyze factors preventing nonfarm priority. The missing middle suggests that there household enterprises to grow, identifying is a lot of room to boost Cambodia’s domestic priority public goods to be introduced in the private sector. Addressing the missing middle short and medium term. This is to enhance means promoting entry and growth of SMEs their productivity and competitiveness. which account for about 90 percent of firms. As discussed above, nonfarm household In other words, this pertains to narrowing the enterprises account for 1.41 million jobs gaps in worker productivity, while improving or 18 percent of total employment. So spillover effects and technology transfers far, limited attention is paid to nonfarm including managerial and entrepreneurship household enterprises and there has not skills from the modern to traditional sector been a lot of policy and program supports — a process called domestic and FDI provided to them. Potential policy supports sector linkages. To this end, identifying and may then include skills development for addressing key bottlenecks on infrastructure firm owners, development and access to investments, business climate and incentive digital and internet technologies which are system hampering domestic private sector to relevant to the current stage of economic grow is the first important step. developments, and brokering to expand linkages to larger industries. Moving up existing value chains and into new value chains will underpin inclusive b) Cross-cutting policy options and better jobs in the short- and medium- term timeframe. Large potential in agro- Invest to develop human capital — this is value chains remains untapped, given rapid for both traditional and “new” skills for the expansion of the tourism sector. This can be short term, given that Cambodia is facing particularly important for rural areas when inadequately skilled labor force than other pursuing inclusive jobs. In this regard, the countries. To this end, the success of any authorities recently introduced a number of policy intervention will likely depend on the initiatives, including the injection of relatively effectiveness of incentives and processes low-interest loans into the rice sector, to facilitate the enterprise sector’s role in investing in building rice storage and drying providing, guiding, and advocating for a facilities. However, inadequately trained skills development system that responds workforce together with relatively high costs to the demands of industry (see also Box of logistics and electricity remains to be S2: Training Levy System: Experiences 52 CAMBODIA ECONOMIC UPDATE APRIL 2018 Box S2: Training Levy System: Experiences from Korea, Malaysia and Singapore To mobilize more resources for various training fund can be used to benefit enterprises that pay programs, some developing countries launched training levies, and training programs can be innovative extra-budgetary programs, such more demand-driven to meet the needs of those as training levies, which imposed semi-taxes enterprises. (0.5%–2.0%) on the wage bills of enterprises. These resources have been channelled mostly Indeed, a greater number of enterprises have to the national training institutions and the benefited from this levy grant system than from disadvantaged groups, the unemployed, and the levy system, and more workers have been small employers. The training levy system became trained on account of the levy grant system. bureaucratic and costly in collecting levies and For example, in Singapore, where the Skills operating training programs. It even became a Development Fund was established in 1979 to source of corruption for public officials when the provide incentives for development of higher- system allowed exemptions or deductions of the level skills needed for economic restructuring, levies for those enterprises carrying out training the number of trained workers tripled and the programs for their workers. number of enterprises benefiting from the fund more than doubled by 1991. To overcome the disadvantages of the training levy system and adjust to the changing needs Also, mobilization of training levies has become of the macroeconomic environment, some more efficient under the levy grant system. developing countries transformed the levy system Corruption and irregularities can be avoided since into a levy grant system (e.g., the Republic of all enterprises are obligated to pay the training Korea, Malaysia, and Singapore). Instead of levy first, irrespective of the existence of their plan channelling the payroll levy revenues into public for training workers and training expenses incurred training programs, the levy fund reimburses or are reimbursed from the training levy fund. No rebates the training costs incurred by enterprises. special exemptions or discounts of training levies The advantage of this system is that it encourages are needed. Moreover, training programs have employers to voluntarily offer in-service/on- become more relevant since they are organized the-job training for their workers, either through or purchased by the enterprises themselves in in-house training programs or external training accordance with their needs. Both public and programs purchased from recognized training private training institutes and programs become institutes, by rebating the enterprise’s training more efficient since they compete in the training expenses as a grant. In this way, the training levy market for the selection by enterprises. from Korea, Malaysia and Singapore). focus on education quality and learning. Development of and access to agile In a nutshell, it is important to build basic and rapid skills-development modules will cognitive skills – both for students in the therefore be necessary. In the medium term, national education system, but also among the economy will benefit from a greater the current workforce. APRIL 2018 CAMBODIA ECONOMIC UPDATE 53 Introduce labor market information systems for job matching — expanding modalities of support to job matching. Establishing labor market information on study and careers for public access by leveraging the use of digital and internet technology is a priority, and can be accomplished within a relatively short period of time. This includes crowding in privately-developed technology for job vacancies, while integrating public and private job search services. Strengthening employment centers and university/school career centers with application of digital and internet technology to provide data on vacancies and job matching. Extract greater value from labor mobility (international and internal) — facilitating return migration to bring back skills and knowhow acquired abroad to create jobs at home. Establishing strategic (and functioning) bi-lateral agreements with countries, especially aging countries that potentially provide (outsourced) jobs including aged care nursing to Cambodia by leveraging Cambodia’s relatively large proportion of English and Chinese speaking workforce. Lower the costs (days and monetary) for legal migration for jobs domestically and internationally to acquire skills and knowhow for job creation in addition to remittances. 54 CAMBODIA ECONOMIC UPDATE APRIL 2018 CAMBODIA: KEY INDICATORS 2015 2016 2017e 2018p 2019f 2020f Output and Economic Growth Real GDP (% change, yoy) 7.0 7.0 6.8 6.9 6.7 6.6 GDP, expenditure shares (%, current prices) Private Consumption 75.4 74.0 72.0 70.5 69.0 68.8 Government Consumption 7.0 7.3 7.4 8.1 7.7 7.2 Gross Fixed Investment 21.4 21.7 21.9 22.2 23.1 23.5 Exports, GNFS 1/ 61.7 61.3 60.7 61.0 62.0 62.8 Imports, GNFS 66.6 65.7 64.2 63.6 63.6 64.0 Domestic demand (% change, yoy) 8.5 9.5 8.4 9.4 9.7 10.1 GDP per capita (US$, nominal) 1,171.0 1,264.9 1,374.9 1,493.0 1,617.9 1,764.4 Money and Prices Inflation, consumer prices (annual %, period 1.3 3.5 3.4 3.2 3.4 3.3 average) M2 (% of GDP) 66.6 70.9 79.5 86.9 93.8 100.8 Domestic Credit to the Private Sector (% of GDP) 75.0 92.0 109.0 120.7 126.7 131.1 Nominal Exchange Rate (local currency per 4,025.0 4,058.0 4,062.0 4,067.0 4,075.0 4,050.0 USD) Real Exchange Rate Index (2010=100) 104.5 105.5 106.7 108.1 109.8 113.8 Short-term interest rate (% p.a.) 11.6 11.8 11.7 11.6 11.7 11.8 Fiscal Revenue (% of GDP) 17.6 18.5 19.7 18.7 18.7 18.8 Expenditure (% of GDP) 21.1 22.0 22.3 24.6 24.1 24.0 Overall Fiscal Balance (% of GDP) -3.5 -3.6 -2.7 -5.9 -5.4 -5.3 Primary Fiscal Balance (% of GDP) -3.2 -3.1 -2.3 -5.6 -5.0 -4.9 General Government Debt (% of GDP) 31.3 32.4 33.8 35.3 36.1 36.7 External Accounts Export growth, f.o.b (nominal US$, annual %) 7.5 9.0 9.4 10.6 11.8 12.1 Import growth, c.i.f (nominal US$, annual %) 8.4 8.2 7.8 9.2 10.0 11.3 Merchandise exports (% of GDP) 45.4 45.5 45.2 44.8 45.2 45.2 Merchandise imports (% of GDP) 57.8 56.9 55.6 55.1 55.0 55.3 Services, net (% of GDP) 7.5 7.0 7.0 7.6 8.3 9.0 Current account balance (current US$ millions) 2/ -2,093.9 -2,041.4 -2,160.6 -2,286.9 -2,452.8 -2,927.6 Current account balance (% of GDP) -11.5 -10.2 -9.8 -9.4 -9.2 -9.9 Foreign Direct Investment (Net, current US$ 1,668.8 2,164.4 2,381.0 2,664.7 2,850.5 3,104.8 millions) Foreign Direct Investment, net inflows (% of GDP) 9.1 10.8 10.8 10.9 10.6 10.5 Gross international reserves (current US$ millions) 5,672.1 6,730.8 8,757.9 9,852.6 10,936.4 12,030.1 (prospective months of imports of g&s) 5.2 5.7 6.8 6.9 6.9 6.8 Memo: Nominal GDP (current US$ millions) 18,241.7 20,020.2 22,095.9 24,355.5 26,777.0 29,614.6 Sources: Cambodian authorities, IMF and World Bank staff estimates and projections e = estimates; f = forecast; p = projection 1/ Goods and Non-Factor Services (GNFS) 2/ Excluding transfers. APRIL 2018 CAMBODIA ECONOMIC UPDATE 55 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