Vaccine rollout lifts spirits but downside risks continue to haunt the economy

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Locals make the most of quiet beaches, laid bare following Covid-19, as seen here in Ochheuteal Beach, flanked by the Sihanoukville skyline. Sangeetha Amarthalingam

Although growth is on the horizon for the Cambodian economy as the inoculation campaign takes off, analysts warn of risks flowing from a trundling global vaccination programme

A glimmer of hope peeks through the crevices of a shattered economy as Covid-19 vaccines are doled out to frontline workers in Cambodia, prompting a growth rebound in 2021.

However, experts have yet to dismiss prevailing risks as the global inoculation programme stays hampered by vaccine hogging and shortage.

According to Bloomberg, 9.04 billion doses reserved so far are adequate to cover more than half the global population. Unfortunately, a majority of the supply deals has been accumulated by rich countries instead.

Comparatively lower than its peers in Southeast Asia at 483 Covid-19 cases and no fatalities, Cambodia is not taking chances.

Out of 600,000 Sinopharm doses donated by China, nearly 12,000 high-ranking government officials, teachers, medical personnel, media practitioners and military staff received the first dose between February 10 and 16.

That comes up to a seven-day average rate of 780 doses daily, which is about 0.0047 doses per 100 people, Bloomberg’s Covid-19 tracker showed. The tracker follows the development of nine of the world’s “most promising vaccines”, out of which seven are available in limited quantities for public use in some 79 countries.

Given the vaccination pace, Moody’s Analytics Inc associate economist Steven Shields warned that risks remain weighted to the downside as the pandemic is likely to continue to disrupt global commerce and travel through at least the first half of 2021.

The US-based financial intelligence and analytical tools provider forecasts a five per cent gross domestic product (GDP) growth for Cambodia this year - a rate, it said, which is still “well away” from the near seven per cent annualised growth achieved over the past decade.

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Tourism remains a greater concern than manufacturing in the near term. Though Cambodia has been largely spared from a health crisis, the pandemic has inflicted significant damage to the sector with international arrivals declining by 78 per cent year-on-year (y-o-y)up to November 30, 2020, Shields told The Post via email.

“A slow vaccination rollout globally, particularly in those countries key to Cambodia’s tourism, has more significant consequences than a slow rollout domestically,” he said.

In 2020, domestic tourism increased significantly as individuals sought close-to-home travel options, which helped reduce the impact of reduced international travelers.

For instance, the Ministry of Tourism’s Lunar New Year holiday data showed “only a modest two per cent”decline in total tourist arrivals, Shields cited, adding that the 6.5 per cent increase in local tourists largely offset a “drastic 86 per cent decline” for international travelers.

In the meantime, a slower vaccination rollout could push back the recovery pace in Cambodia’s labour market.

While the financial sector has been relatively stable through the past year, non-performing loans in the microfinance sector, which was most heavily exposed to layoffs in the garment and tourism sectors, doubled from the end of 2019 but has since retreated.

“This is a promising sign that although a slower vaccination rollout would undoubtedly hinder the labour market recovery, the worst is likely already behind us,” Shields said.

Additionally, he noted that trade fared better than expected throughout the pandemic where exports rose 20 per cent in the first three quarters of 2020 while imports grew eight per cent.

Even though exports of key garment, footwear, and travel goods products declined, exports of bicycles, electrical parts, and vehicle parts and accessories increased.

“The acceleration in exports in 2020 was largely due to a surge in gold exports, which is unlikely to persist this year,” he said.

Shields also stated that the free trade agreement (FTA) with China would offer much-needed support, particularly for agricultural products following the partial loss of EU tariff privileges.

“Despite the contraction in service sector exports as tourism ground to a halt, the improved trade balance for goods resulted in the narrowing of the current account deficit in 2020,” he said.

Echoing Moody’s Analytics outlook, Fitch Solutions Group Ltd projected a continuing gradual normalisation in domestic economic activity over the course of 2021 as the general economic outlook improves on the back of a global vaccination programme.

As for the construction industry, which propped up one third of the economic growth in 2019, Fitch Solutions said the sector’s projects are likely to roll over from 2020, together with real estate projects from previously-approved foreign direct investment (FDI).

It said improving investor sentiment on the back of a recovery should help drive some improvement in construction activity, although a supply overhang will weigh on appetite for new projects over the longer term.

Warning that trade remained uncertain, Fitch Solutions was nevertheless “cautiously optimistic” that export volumes would stay stable compared to 2020 levels.

“Export trends [last year] suggest that global apparel brands may be rerouting their supply chains in the region, [for example] exports to the EU [might be] routed from Vietnam to capitalise on the EU-Vietnam FTA following the partial removal [EU’s trade concession to Cambodia].

“If this is indeed true, a recovery in the US economy would accordingly see US market’s importance grow in prominence in Cambodia’s trade mix,” it said.

In addition, the China-Cambodia FTA, set to take effect in 2021, can increase China’s prominence in Cambodia’s trade mix relative to the present.

It said recent shifts in Chinese FDI trends also suggested a trend of Chinese businesses moving up the value chain by moving lower-skilled production to surrounding economies.

China continues to account for the largest share of approved FDI in Cambodia in the first seven months of 2020, at 56.3 per cent of the total, versus 43.7 per cent in 2019.

“Of this Chinese FDI, the share going to non-garment manufacturing rose to 60.4 per cent ($878 million), up from 8.2 per cent ($95 million) during the same period in 2019.

“The share going to agribusiness also [rose] to 6.9 per cent ($100 million), from 2.9 per cent ($34 million) over the same period in 2019.

“Tourism sector FDI from China, in contrast, plummeted to 1.8 per cent ($26 million), from 43.3 per cent ($500 million) in 2019,” Fitch Solutions said.

Noting scope for time lag between the FDI and an actual impact on economic activity, the UK-based firmstated that the rise in exports to China might not yet accrue significantly in 2021.

Last year, the financial info service provider said a fall in construction activity, merchandise exports and tourism, which together accounted for more than 70 per cent of growth and 39 per cent of total paid employment, would have severely dented economic activity in 2020.

“This is likely to have been exacerbated by weaker domestic activity due to containment measures,” it suggested.

The government’s delay of all public-funded projects till 2021 which have not begun and are not jointly funded with foreign parties to shore up public funds to tackle the Covid-19 crisis, would have weighed on construction sector activity.

Citing World Bank data, Fitch Solutions said the value of approved construction permits fell by 9.3 per cent year-on-year (y-o-y) over the first nine months of 2020, a sharp reversal from a 98.3 per cent jump over the whole of 2019.

Over the past few years, FDI inflows had targeted the construction and real estate sectors, making it a prominent growth driver, with an associated rise in speculative demand also distorting the Cambodian housing market.

“We believe that the fall in approved permits in 2020 can be attributed to the combined impact of a combination of a 20 per cent capital gains tax effective 2022, an online gambling ban which contributed to a plunge in Chinese FDI in Sihanoukville, pre-existing over investment in the property market, and souring risk sentiment due to the pandemic,” it said.

Cambodia’s large external demand concentration in Europe and the US, and its concentration in apparel exports, which represented more than 60 per cent of total exports, a consumer discretionary good, also left its export apparel manufacturers vulnerable to the pandemic economic downturn.

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To be sure, exports to the US increased over the first nine months of the year.

“However, this was not enough to mitigate the decline in exports to Europe on the aggregate picture, which fell 2.5 per cent y-o-y over the first nine months of 2020.

“With reports of apparel order books remaining very weak over the final quarter, the fall in aggregate exports is likely to worsen slightly,” it said.

Fitch Solutions also noted that tourism, accounting for 26.4 per cent of both GDP and employment, collapsed in 2020 due to international flight suspension to contain domestic outbreaks.

Tourist arrivals, having fallen by 74 per cent y-o-y over the first nine months of 2020, took a toll on the economy.

“The resultant household income shock from the collapse and a decline in general economic activity would also have dampened private consumption over 2020, although Apple’s mobility indicator suggests some improvement in activity into the year-end following an easing of containment measures,” Fitch Solutions said.

Moving forward, it revised its 2021 outlook downward to four per cent from five per cent due to dimmer prospects for a tourism restart in Cambodia this year.

A slow global Covid-19 vaccination rollout particularly to emerging or frontier markets like Cambodia, will likely see other countries stay cautious in reducing curbs on leisure travel and increasing flight connections to Cambodia for fear of contagion.

“Without a global policy on recognised vaccines and travel in place, we believe that countries will be reluctant to restart leisure travel, especially as many emerging and frontier markets will struggle to obtain vaccines approved by recognised international bodies, such as the World Health Organisation or the US Food and Drug Administration because higher-income countries currently dominate the vaccine stocks.

“Cambodia has at present only secured Covid-19 vaccines from China’s Sinopharm, which has not been approved for use by recognised international bodies,” said Fitch Solutions.

Separately, Shields of Moody’s Analytics felt that the Kingdom’s economic recovery will remain intact, but the pace of the recovery will ultimately hinge on containment of Covid-19 globally.

He said risks to the outlook mainly stemmed from Covid-19, which could cause deeper economic shutdowns in Europe and North America and would staunch global trade in goods.

“If cases locally and globally are kept under control, the recovery momentum in Cambodia should persist, and GDP will return to pre-pandemic levels late this year or early-2022.

“However, the recovery will be uneven, and tourism will be among the last segments of the economy to recover fully,” Shields added.

And although international arrivals will likely pick up by the second half of this year, a steady recovery in travel is unlikely to take hold until vaccine rollouts gather pace both globally and domestically.

“We forecast GDP growth to return to its pre-Covid pace by 2023,” he said.