As 2020 drew to a close, Cambodia officially recorded zero deaths from the coronavirus pandemic. But while Cambodia has seemingly avoided a high death toll and widespread public health crisis, the economic impact of COVID-19 is being acutely felt by citizens and the state. Cambodia’s main engines of growth—tourism, manufacturing exports and construction—experienced sharp declines in 2020 and this will likely result in the country’s slowest recorded growth since 1994.
In 2019, some 6.6 million foreign tourists visited the Kingdom and the tourism and hospitality sector contributed about 18.7% of Cambodia’s real GDP growth. Foreign tourism has been steadily increasing since the government introduced a “China ready” initiative in 2016, which has successfully secured China as the country’s largest foreign tourist market. With international travel restrictions and domestic lockdowns characterising much of 2020, the sector as a whole won’t recover for some years.
However, deepened bilateral ties between Phnom Penh and Beijing may provide some security for the sector that Chinese tourists will return in healthy numbers ‘post-COVID’.
The significant decline in international visitor arrivals officially forced 3,000 businesses to close and 45,000 workers into unemployment in 2020. The government sought to give the tourism employees a much-needed lifeline with the announcement of a USD$30 a month wage subsidy in its third round of COVID-19 response measures. Roughly 13% of Cambodians are employed in the tourism sector and 30% work in related industries. These figures do not however reflect the many Cambodians engaged informally in the sector.
The construction and real estate sector have been the country’s largest engine of growth in recent years, contributing more than a third of GDP growth in 2019. The industry is mostly financed by foreign direct investment (FDI) inflows, with 40% coming from mainland China.
In the first two months of 2020, the sector recorded a 47% increase in total investments at USD$2 billion—translating to a 28% increase in construction permits from the previous year.
With many large foreign investment projects paused by the coronavirus, construction materials and steel imports dropped, and construction activities slowed. The construction and real estate sector provide roughly 200,000 jobs, so the slowdown is unlikely to have a significant social impact compared to job losses in the garment industry. Locally funded projects have been able to continue with little impediment, maintaining some economic and employment stability.
A sharp drop in orders from Europe and North American led to one-third of Cambodia’s garment, footwear and travel goods factories closing in the first half of 2020. Prior to the pandemic the garment industry employed some 940,000 people. The sector is the country’s largest employer and according to research each factory worker supports three other people on their one salary. By July 2020, 400 factories had formally suspended operations, leaving over 150,000 workers unemployed. Added to this were supply chain disruptions to Cambodia’s manufacturing export industries. Many of the workers laid off lack the skills to work in other sectors and are also competing against returning migrant workers from neighbouring countries.
The pandemic has seen working conditions decline and trade unions struggle to achieve higher wages for employees.
Minimum-wage demands continue to be highly political in Cambodia. This is a result of many in the sector forming the voting base of the now banned main opposition party, the Cambodia National Rescue Party (CNRP) and the CPP’s efforts to gain support, as well as the government’s poverty reduction response. Between 2013 and 2020 the minimum monthly wage in the garment industry rose from US$80 to $US190.
In August 2020 negotiations, trade unions petitioned for a US$11.59 increase per month, while employee representatives lobbied to lower the $190 minimum by $17 given the sharp downturn in production. A two-dollar increase to USD$192 per month was secured for 2021 after intervention from Prime Minister Hun Sen. Despite improvements in the minimum wage, it remains relatively low when compared to Myanmar and Thailand, and wage adjustments have done little to alleviate household expenses and reduce inequality in the Kingdom.
In response to the “deterioration of democracy, respect for human rights and the rule of law” in Cambodia, on August 12 the European Commission (EC) moved further on its withdrawal of tariff preferences under the Everything But Arms (EBA) scheme.
Certain goods are now be subject to the European Union’s (EU) most favoured nation duty rate instead. This will affect selected garment and footwear products, all travel goods and sugar and amount to roughly 20% of Cambodia’s yearly exports to the EU market. The projected impact is said to be a loss of around USD$1.1 billion of Cambodia’s annual USD$5.8 billion in exports to the EU. The suspension will no doubt have an impact on the country’s textile industry which has kept the economy growing at a steady rate and helped lift millions out of poverty.
Cambodian officials are however expecting Brexit to boost trade with the United Kingdom.
In response to the partial loss of tariff-free exports to the EU and in an effort to diversify export markets, Cambodia signed its first bilateral free-trade agreement in October 2020 with natural partner, China. The Cambodia-China Free Trade Agreement (CCFTA) was signed October 12 (initially scheduled to be signed the same day as the EBA trade privileges were withdrawn) and is expected to increase exports to China by at least 20% annually and for bilateral trade to reach USD$10 billion in 2023. There is however some scepticism around the deal given Cambodia’s more than USD$6 billion trade deficit with China. Added to this is the fact that China is Cambodia’s largest source of foreign direct investment and holds half of the Kingdom’s debt, valued at USD$7 billion in 2018.
The global shock caused by the COVID-19 pandemic has triggered a slowdown in Cambodia’s main engines of economic growth. There is serious concern that those households dependent on income from the tourism, construction and garment sectors will fall back or further into poverty. Rising unemployment and economic downturn have put the Kingdom’s rising microfinancing debts back in the spotlight. Cambodia has the world’s highest average microloan debt per borrower.
Roughly 2.2 million Cambodians have an outstanding microcredit loan, with an average debt of USD$3,320—roughly twice the country’s annual GDP per capita.
Research supports that one only one-third of microfinance loans go towards financing economic activities, with the remainder going towards other essential services like household spending, loan and interest repayments and healthcare expenses. With a number of garment factories still closed or producing smaller orders, migrant workers unable to send money to their families and the tourism industry crippled, household debt has ballooned. Human rights groups called for Hun Sen’s government to put a freeze on repayments and the release of more than one million land titles held as collateral by lenders.
The government has been largely responsive to the COVID-19 outbreak. Cambodia was praised for its swift lockdown and national action plan, and the introduction of key economic and social policy measures was generally well received.
Social protection schemes in the form of cash transfers to poor and vulnerable households and wage subsidies have provided some base level of security for many Cambodians—although won’t continue forever.
Tax relief for the tourism and manufacturing sectors will play some role in reducing the direct and indirect impact on citizens and businesses. These measures along with structural reforms, improved agricultural performance and increase in bicycle and electronic exports will support Cambodia’s economic recovery post-pandemic, with the Asian Development Bank forecasting growth to rebound to 5.9% in 2021.
Dr Lucy West is a senior research assistant with the Griffith Asia Institute.