ADB Expects Service Sector to Shrink by 1.7 Percent Amid Global Pandemic

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Authorities close down bars on Street 308 in Phnom Penh’s Tonle Bassac district on March 17, 2020, following government orders to shut a number of venues in an effort to limit the spread of the Covid-19 respiratory disease (Christopher Rompre)
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Cambodia’s service sector will be hit hard by the global economic shock of the Covid-19 pandemic, contracting 1.7 percent for the year, the Asian Development Bank said in its latest forecast.

In its biannual report released on Friday, the bank also projects that Cambodia’s GDP growth will decrease to 2.3 percent this year, as the country’s main drivers of growth — tourism, garment manufacturing and real estate — will be weighed down by slowdowns in foreign markets. 

The economic shockwaves triggered by Covid-19 — which has now infected more than 1 million people worldwide — are expected to disrupt supply chains and reduce demand in the real estate sector and drastically cut the number of foreign arrivals.

The industries that contribute most to Cambodia’s GDP growth are “subject to serious downside risks,” the bank wrote in its latest Asian Development Outlook, citing both the impact of Covid-19 on global demand and reduction of preferential trade benefits. It also warned of potential economic instability due to increased bank lending for real estate projects despite the expected coronavirus-related slowdowns.

Earlier this week, the World Bank projected GDP growth could drop to 2.5 percent this year, though some economists think Cambodia could face a larger burden than the bank predicted.

The ADB’s report projects the service sector’s output to shrink by 1.7 percent for the year as tourism dries up.  “COVID-19 will hit services hard by reducing foreign visitor arrivals,” the report says.

Tourism cratered this year because of global travel concerns in a pandemic and the Cambodian government restricting travel. Growth in real estate is also expected to slow, according to the ADB report.

The ADB predicts that growth in the industrial sector — including construction — will slow to 6.5 percent, down from 11.3 percent growth in 2019. The sector is expected to be weakened both by the fallout of Covid-19 and the removal of duty-free export access to E.U. markets for some products through the “Everything But Arms” scheme due to political and human rights concerns.

Growth in the agriculture sector is expected to be low at 0.5 percent. The bank attributes the low growth to rising temperatures and reduction in rice crops during the dry season.

The ADB had projected growth in the government’s domestic revenue would grow to 23.5 percent of GDP this year, up from 20 percent in 2019, but it now suggests the loss of trade and tourism due to Covid-19 could decrease the government’s earnings from tax collection.

Nevertheless, government expenditure is expected to grow from 22.4 percent of GDP in 2019 to 26.3 percent, reflecting plans for a “significant stimulus to offset the short-term impacts of COVID-19 and lost trade preferences,” the report says.

“Increased bank lending connected to real estate continues to pose risks to financial and macroeconomic stability, particularly under a slowdown linked to COVID-19,” it adds.

Because of the sudden slowdown in tourism, Dam Sophat, president of the Union Federation of ASEAN Tourism Employees, said that multiple hotel unions under his organization are currently negotiating reduced schedules and hours. Sophat said some Phnom Penh hotels are telling workers they can only pay them for a couple of days per month, and he had heard from colleagues in Siem Reap that a majority of hotels have closed temporarily.

“All over, the situation is bad,” Sophat said. When asked how long he expects the tourism sector to take a hit, he said, “I’m not sure yet because the situation is very uncertain.”

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