As Cambodia braces for the worst of COVID-19, the government needs to brace the economy for the short-term impacts and consider what recovery could look like in the post-pandemic world.
By Dora Heng
For a country that shares close ties with China, Cambodia has reported a suspiciously low number of official COVID-19 cases. As of April 3, the number of confirmed cases was 114. Despite rhetoric by Prime Minister Hun Sen downplaying the severity of the virus, Cambodia doubtlessly needs to brace itself for the full-blown impact of the oncoming crisis as Thailand, Malaysia and Singapore already anticipate the second-wave of the pandemic spread.
The impacts of COVID-19 in Cambodia may cause GDP to drop by US$283-711 million
The Asian Development Bank (ADB) recently forecasted that the economic impact of COVID-19 in Cambodia will lead to a 1.2-2.9% drop in GDP—a loss of US$283-711 million. Cambodia’s economy is extremely vulnerable to both demand-side shocks from the decline in tourism and supply-side shocks from heavy dependence on upstream linkages with China.
Source: Asian Development Bank
On the demand side, Cambodia’s economy is heavily dependent on tourism. In 2018, tourism contributed 32.8% of GDP. In the same year, 33% of total tourist arrivals come from the People’s Republic of China.
Government figures from March show the number of tourists arriving from abroad has already dropped by more than 60%. In addition, Cambodia has put in place strong travel restrictions to curb the spread of the virus. As a result, the ADB estimates tourism revenues will decline by 1.4-3.5% of GDP—a loss of US$345.7-856.5 million.
On the supply side, Cambodia is seeing supply-chain disruption from China’s COVID-19 response. Cambodia’s garment sector is tightly dependent on China for raw materials, with more than 60% of raw material for the apparel industry sourced from China. As Cambodia’s factories start running out of raw materials, authorities estimate that 200 of Cambodia’s factories will suspend up to 160,000 workers in the coming weeks.
Source: World Bank
Cambodia urgently needs economic stimulus to jumpstart recovery in key sectors
The government has already announced a COVID-19 stimulus amounting to 3% of GDP ($2 billion). The package provides suspended workers with income, co-funded by their employers, and offers tax relief to the tourist industry. The government is also extending low-interest loans to small and medium-sized enterprises (SMEs).
While these are proactive steps in the right direction, the most vulnerable groups may be left unprotected. Cambodia has a large informal sector—an estimated 95% of SMEs are not officially registered and will not be eligible for the stimulus. The government will need to thread a fine line between encouraging small businesses to register, so they can gain access to support, while not forcing them to pay the increased costs that come with formalizing their companies.
The crisis offers an opportunity for long-term reforms to increase resilience and transform the economy
The pandemic has exposed the cracks in our global supply chains but offers an opportunity for ASEAN countries like Cambodia to position themselves as a supply chain alternative to China.
Retailers are learning lessons about the necessity of diversifying their manufacturing hubs to make them more resilient in the face of shocks. Several textile companies, such as Levi Strauss and Adidas, have recently increased their US imports from Cambodia. In the last 3 months, Levi Strauss had a 81.7% increase in shipments while Adidas had a 28.9% increase in imports from Cambodia. Now is the time for Cambodia to capitalize on this pivot and accelerate their manufacturing sector.
The pandemic has also led to widespread displacement of workers, creating an opportunity for the government to invest in the human capital of workers. The government is providing retraining and upskilling programs for displaced workers to support their reintegration. The move is timely and falls into the broader narrative of preparing the ASEAN labor market for job losses, already anticipated pre-COVID-19, due to existing threats such as automation.
The COVID-19 pandemic is an unprecedented crisis and Cambodia, a country dependent on tourism and supply chain links to China, is faced with heavy economic losses and an urgent need to strengthen public health capabilities. The government needs to respond quickly and decisively to stem the short term economic losses while ensuring that the most vulnerable groups are protected.
But the crisis also creates an opportunity for Cambodia to re-examine its long term priorities. By placing strategic bets on supply chain diversification and investment in human capital, Cambodia can emerge stronger in the post-pandemic world.