Moody's Investors Services has warned that Cambodia’s potential loss of its Everything But Arms (EBA) preferential trade access to the EU would weaken its economic growth and lead to a credit negative, a report released on Saturday says.
It notes that while Cambodia maintained its B2/stable sovereign rating, the country would undermine the price competitiveness of its garment exports unless they are offset by productivity gains.
Moody’s said rising costs will reduce Cambodia’s attractiveness as a production base and could weaken foreign direct investment inflows, which have contributed to economic and financial stability.
“Competition from regional garment manufacturers poses a significant threat to Cambodia’s garment exports,” the report says.
It added that Bangladesh has a 6.5 per cent share of the global apparel market compared with Cambodia’s 1.6 per cent – highlighting the former’s greater ability to scale production in the sector.
Moody’s analyst Matthew Circosta told The Post by email yesterday that a potential EBA withdrawal could affect the economy and impact Cambodia’s competitiveness. However, he said time is needed to see any effects during the period.
“We would need to wait for more details around the timeline and negotiation process to identify the potential impacts on gross domestic product growth [GDP]. As explained in the report, there could be tariff exemptions on some products, for example,” Circosta said.
He said as the report provides its views with the latest information in hand, Moody’s will continue to monitor developments as more information flows in.
Moody’s said Vietnam’s free trade agreement with the EU, which eliminates textile and apparel tariffs, and its inclusion in the recently signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership would also exacerbate Cambodia’s competitive challenges.
The EU is Cambodia’s largest export market and biggest customer for its garments and footwear production – among the economy’s few growth drivers.
Around 40 per cent of Cambodia’s goods exports go to the EU, valued at $4.3 billion last year, or 20 per cent of GDP. Of this, around 90 per cent are sold through the EBA initiative.
The garments and footwear sector employed around 700,000 workers, or around 7.5 per cent of the total labour force.
“Any negative effect on garment employment and wages would weigh on domestic demand, which has supported overall growth in Cambodia,” Moody’s said.
The EU process to withdraw EBA agreement with Cambodia is drawing massive concern from the private sector.
EuroCham and the British Chamber of Commerce in Cambodia are the latest to express their “serious concerns” over the issue, saying it would impact a long-term European investment in Cambodia.
In a letter to the trade commissioner of the European Commission on October 20, the Garment Manufacturers Association in Cambodia (GMAC) also appealed to the EU not to make any decision that will harm the Kingdom’s economy.
“A temporary suspension of the EBA or any short-term unilateral sanctions may have long-term negative impacts on the lives of our workers and their families."
“All the progress that Cambodia has achieved over the past two decades through the efforts of all stakeholders, including development partners like the EU could be destroyed very quickly,” GMAC said.
Emerging Markets Consulting senior consultant Ngeth Chou said the EBA issue is now a sensitive one in Cambodia, especially among the private sector.
“If it happens, it will affect business operations. Investors need to consider if they can survive to operate in Cambodia,” said Chou.
He said not only the garment sector would be impacted. The government will lose revenue and jobs will be lost.
“We need to maintain our investors before they switch to another destination. The government needs to pay more attention to negotiate with the European Union."
It is better than fixing the issue afterwards,” he said.
However, Moody’s said the withdrawal of the EBA could accelerate Cambodia’s efforts to diversify into other manufacturing industries.
Excluding garments, rice and rubber, it said the share of other exports such as bicycles, packaging and electronics rose to more than 20 per cent of total goods exports last year from around two per cent in 2008.
“Over time, further diversifying its export base, particularly to higher-value-added industries, would make Cambodia’s economy stronger,” its report says.