By Jessica Huang
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| Cover Image Attribute: Independence Monument/ážœិមានឯករាជ្áž™. It stands on a roundabout in the intersection of Norodom Boulevard and Sihanouk Boulevard in the center of Phnom Penh, the capital of Cambodia. |
In recent months, a debate has sharpened over Cambodia’s economic trajectory. Some see a country enduring external headwinds yet preserving coherence in its growth model, while others warn that a deeper rebalancing is overdue if it is to avoid stagnation. The tone across recent expert commentary varies—from cautious optimism to frank concern—but the assessments, drawn from the same evidence base, do not diverge wildly. Yet they diverge enough to force a more careful, nuanced reading of where Cambodia stands and where it might go. The country's period of rapid expansion has reached a stage where endurance alone will not suffice; structural adjustment has become essential.
A recent forecast from the Asian Development Bank (ADB), a major regional development lender has adopted a cautiously optimistic tone, revising its forecast for Cambodia’s 2025 GDP growth downward from 6.1 percent to 4.9 percent, and for 2026 from 6.2 percent to 5.0 percent. The justification lies in a mix of external pressures and domestic constraints. Still, ADB notes that recovery in tourism, stable foreign direct investment, and robust industrial activity provide buffers against a deeper slowdown. The bank frames the transition not as a crisis but as a recalibration, a tempering of over-ambitious expectations without collapse.
An international financial publication article (Global Finance Magazine/GfMag) takes a more critical lens. Cambodia, it argues, has relied too long on a “cut-make-trim” model in textiles, wherein imported materials are assembled into finished goods for export, rather than cultivating upstream capacities of its own. With rising costs of electricity, weak logistics, insufficient mid-level technical labor, and a limited domestic market, the country now competes with numerous low-cost producers—Bangladesh, Myanmar, parts of Africa—on terms less favorable than before. The new U.S. tariff regime on Cambodian goods, though mitigated, pressures exporters to rethink value chains and escape a trap of dependency on low-end assembly.
An additional report, issued by a well-known geopolitical affairs outlet (The Diplomat) and drawing upon the World Bank projections, paints a grimmer baseline. The Bank has trimmed Cambodia’s 2025 growth outlook to just 4.0 percent (down from 5.5 percent previously), pointing to falling demand, trade uncertainty, and rising financial sector stress. Non-performing loans (7.9 percent in the banking sector, 9.0 percent in microfinance in 2024) loom as potential accelerants of fragility. Loss of remittance flows and tourism disruption—exacerbated by border tensions with Thailand—add further jeopardy to macro stability.
Taken all three together, it sketches a tightrope: Cambodia is neither sliding into crisis today nor comfortably coasting into tomorrow. The country preserves some structural strengths, yet margins are thinning. Overreliance on narrow export sectors, limited institutional depth, and financial vulnerabilities constitute the dark side of outward-facing growth.
First, the momentum in textiles and footwear remains substantial. Cambodia’s exports to the United States, for example, rose by 27 percent year-on-year in the opening months of a recent year, reinforcing the sector’s ongoing importance. The U.S. represented 37 percent of Cambodian exports in the prior year, with garments and footwear forming a major share. Yet export concentration carries acute risks. A sudden shift in global demand or tariff policy reverberates directly through large swathes of Cambodia’s industrial base.
The U.S. imposed a 49 percent tariff on Cambodian imports (later reduced to 19 percent), which spurred concern in policymaking circles. The imposition compelled firms to assess whether their business models needed to evolve. In response, some analysts argue that the revised tariff of 19 percent could push firms to upgrade into higher value-added manufacturing. But such an outcome is no guarantee; it demands complementary reforms, investments, and institutional adjustments. The GfMag piece quotes Caroline Wong, of BMI/Fitch, as saying: “we think this will prompt Cambodian firms to move up their value chains and potentially transit from basic assembly to value-added manufacturing.” That sentence reflects a hope rather than a certainty.
Second, the banking and finance arena deserves close scrutiny. The World Bank’s concern about worsening macrofinancial stability is not idle fear-mongering. Regulatory forbearance has permitted banks to restructure loans twice (through December 2024) without reclassifying them. This accommodates distressed borrowers temporarily but may mask deeper strains. The possibility that hidden trouble will emerge once forbearance ends is real. For financial stress to spill into the real economy—by choking credit for firms—would reverse gains in growth and employment.
Third, logistical inefficiencies and trade costs impose a constant drag. A recent study (cited in the GfMag article) finds that Cambodia’s average trade costs fell by 35.43 percent between 1993 and 2019, with declines accelerating after 2004. That decline was faster in corridors tied to the Belt and Road Initiative, compared to other trading routes. Yet even as gains have been realized, Cambodia’s distance—and regulatory frictions—from major export markets remain larger than ideal. When a country competes on low-cost thresholds, even modest cost disadvantages reduce margins sharply.
Fourth, the labor skill base and technological capabilities lag behind aspirations. The existing workforce often lacks the advanced technical skills required for higher value sectors. Without credible investments in mid-level vocational education, Cambodia may struggle to support any large-scale industrial upgrading. In effect, firms seeking to design, prototype, or integrate electronics, machinery, or more complex goods may find their labor pool inadequate.
Fifth, external and geopolitical risks loom. Border tensions with Thailand have led to border closures, restrictions on goods and cross-border electricity or internet connections. Given that hundreds of thousands of Cambodians work in Thailand and remit earnings home, repatriation of workers would weigh on growth. Tourism, too, could suffer spillover from regional volatility. Cambodia’s export exposure remains sensitive to developments in the U.S. and global demand more broadly. Inflationary twists, commodity price volatility, or disorder in global trade rules could exacerbate stress.
The picture is not without hope. If Cambodia manages to draw even a portion of its financial, logistical, and institutional efforts toward deepening competitiveness, it might preserve growth paths that are more sustainable and inclusive than repeat episodes of boom and retrenchment. But the transition is not assured; many countries have ambitions of structural upgrading while being constrained by legacy systems.
A credible scenario forward would require simultaneously managing the downside while seizing upside levers. On the downside, Cambodia should begin to wind down regulatory forbearance in banking, step up oversight, and prepare resolution frameworks so distress does not metastasize. The objective would not be austerity for its own sake, but discipline in credit allocation and risk control. At the same time, government and private actors must move toward enabling conditions for firms to ascend into higher value niches: lowering logistics and trade facilitation costs, expanding capital markets so that firms do not rely solely on bank debt, and improving multilateral or regional trade linkages to reduce overdependence on single markets.
Furthermore, investment in skills and technology must rise. Even the best firms cannot transcend labor constraints without a pipeline of technical training, apprenticeships, and support for R&D. Education and skills policy should align with industrial strategy; otherwise, training follows past demand, not shaping future capacity.
To be clear, none of this is simple. Trade-offs loom: tighter financial discipline could slow growth in the near term; redirecting capital away from legacy garment models might unsettle vested interests; upgrading infrastructure and logistics demands fiscal space and institutional coordination. But the alternative—stagnation in low-value growth—has its own costs. As the World Bank puts it, “economic diversification is critical for Cambodia to sustain growth and job creation amid uncertainty, especially by moving beyond its reliance on construction and garment exports and promoting higher value-added manufacturing and services.” That admonition is not novel, but the urgency it carries given recent adjustments is more stark than in prior years.
It is tempting to frame Cambodia’s path as a binary: growth or collapse. Neither extreme seems defensible based on the evidence. The more convincing scenario is one of deceleration, internal tension, and gradual reengineering. The ADB’s revised growth forecasts reflect a more modest baseline. The World Bank’s downshift underscores what might happen if shocks accumulate. The GfMag piece helps orient us to what policy and structural turns might alleviate pressure.
In the end, Cambodia must manage perceptions as much as fundamentals. Investors and firms will judge whether policy is coherent, stable, and credible. If the state signals discipline, transparency, and willingness to reform, it may sustain necessary capital flows. But if uncertainty festers, capital could hesitate or flee; worse, firms may hesitate to invest in upgrading. That too becomes a self-fulfilling drag.
Cambodia in 2025 finds itself not in crisis, but in transition. Growth continues, but with less room for error. The choices made now—on banking, trade logistics, skills, capital markets—may determine whether the next decade is marked by value upgrading or value stagnation. The opportunity is not absent, but narrow, and the path forward demands more than ambition: it requires coordination, discipline, and a measure of institutional courage.
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