• Increased exports of footwear helped Cambodia's economy to remain robust – but growth is projected to ease slightly to 6.8% in 2017, compared with 7.0% in 2016, says a new World Bank report.
  • The rising share of non-textile product exports are helping Cambodia climb up manufacturing value chains.
  • The report says Cambodia is being constrained by declining unit prices caused by rising competitiveness from other supply countries, as well as rising real wages and high logistics costs.
Cambodias textile and apparel exports have moderated this year

Cambodia's textile and apparel exports have moderated this year

The potential negative impacts of the slowdown in clothing and textile exports from Cambodia need to be closely monitored, according to a new report, which also claims footwear is one of a few products helping the country's economy remain robust.

Cambodia's real growth reached 7% in 2016, according to research from The World Bank: 'Cambodia Climbing up the Manufacturing Value Chains'. Yet this is expected to ease to 6.8% in 2017, with a moderation in clothing and textile exports one of the contributors.

As one of the country's main growth drivers, textile and apparel exports grew 5.4% year-on-year to US$3.3bn in the first six months of 2017. However, this is down from 8.4% in the same period of 2016. In volume terms, exports have also eased, increasing by 3.6%, compared with 12.3% during the same period last year.

The report blames declining unit prices caused by rising competitiveness from other supply countries. It also says Cambodia is being constrained by rising real wages and high logistics costs.

"Exports are facing increased competition. Real wages are rising, while productivity improvement remains modest. As a result, the prices of exported garment products have been declining," The World Bank says.

At present, Cambodia's minimum wage for the garment and footwear sector is $153m per month, set to increase to $170 per month in January 2018. The World Bank says the country's minimum wage has been rapidly increasing at an average of 17.6% per year during the period from 2013 to 2017.

"The textile sector is under pressure to cut costs and gradually add value to its products by incorporating printing, embroidery, and washing and vertically integrating to the extent possible," it says.

Partly offsetting this growth deceleration has been the export of electrical machinery, equipment and auto parts, together with footwear exports – which have all picked-up.

Figures from The World Bank show footwear exports have continued to grow steadily. Total footwear export value reached almost $0.5bn during the first six months of 2017, a rise of 19.3% year-on-year, up from 15.6% in 2016. Reflecting increased competition, average footwear export prices have been steadily declining since early 2016.

Cambodia's government has introduced a number of initiatives to prop up the apparel and textile industry in order to maintain its competitiveness, including a skills upgrade for factory workers, access to lower utilities tariffs, and provision of free health insurance, pensions, and transportation.

The European Union (EU) continues to be the most important market for Cambodia's garment exports. Together with the UK, it absorbs around 45% of the country's clothing and textile exports. The US is the second largest, accounting for a quarter, while Japan accounts for 9%.

Despite the challenges, however, Cambodia has been able to increase its share in the world's exports of textile and apparel articles, reaching 1.7% in 2016, up from 1.1% in 2011.

While Cambodia appears to be on the verge of climbing up the manufacturing value chains – from garments to electronics – further efforts are needed to facilitate investment, the World Bank says.

"This is necessary, given the recent slowdown in FDI. As real wages rapidly increase, Cambodia's external competitiveness, which primarily relies on cheap labour, is gradually diminishing. It is therefore imperative to further improve ease of doing business and the investment climate by eliminating regulatory impediments to bring down the costs of starting and operating businesses, as well as logistic costs."

The findings echo that of a recent trade policy review published by the World Trade Organization (WTO) that showed Cambodia still faces a number of constraints including a narrow economic base largely dependent on the garment industry.

Cambodia too dependent on the garment industry