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Business trends

Cambodia's garment industry finds temporary relief in US

Rise in wide range of exports helps offsets loss of EU trade privileges

Cambodia's garment factory is under pressure from the coronavirus pandemic and a loss of EU trade privileges. (Photo by Nikkei)

PHNOM PENH -- Robust exports to the U.S. are giving Cambodia's garment industry -- and its wider economy -- breathing room in the face of the coronavirus pandemic and a loss of key European trade privileges.

The Asian Development Bank announced this week it has revised upward its economic projection for Cambodia, forecasting gross domestic product would contract by 4% this year, rather than the 5.5% forecast in June.

Garment industry sources said American brands have helped sop up excess capacity left after European customers began to cut ties with Cambodia, while the ADB pointed to an increase in non-garment exports and improved agriculture output in its revised outlook.

According to the ADB's Asian Development Outlook 2020 Update, Cambodia's agricultural exports rose 17% on the year in the first six months of 2020, while "strong demand" for work-from-home electronics had boosted exports from Cambodia and other Asian countries.

Cambodia's non-garment, non-footwear and non-travel goods exports increased some 30%.

ADB Country Director for Cambodia Sunniya Durrani-Jamal said the agency foresees a relatively strong economic recovery for Cambodia, which has avoided an uncontrolled outbreak of coronavirus cases.

"We expect growth to rebound to 5.9% in 2021, boosted by supportive government policies, social assistance for the poor, and financing support for small and medium-sized enterprises," she said.

The U.S. market has played a major role in keeping Cambodia's economic engine turning over amid the pandemic and trouble with Europe.

In the first seven months of the year, Cambodia shipped $3.4 billion worth of goods to the U.S., up from $2.7 billion for the same period in 2019. For comparison, the U.S. accounted for 26.8% of Cambodia's exports last year, slightly more than the EU's 25%, according to World Bank data, a gap that looks set to widen in 2020.

The top three exports to the U.S. through July this year were garments, travel goods and footwear. Electronics, responsible for about $118 million in export value in the first seven months, saw the largest growth, soaring more than 1,000% year on year.

The boost in non-garment exports provided a bright spot for the country, as its $9.5 billion apparel sector saw a "sharp drop in orders" from Europe and North America, the ADB noted.

The stronger performance in the U.S. market followed the decision by the European Union to partially suspend Cambodia's duty-free access to the bloc over human rights violations.

A garment industry insider in Cambodia said the departure of some European brands amid the European trade preference review had freed up capacity for U.S. manufacturers, who had also been looking for new production sites to avoid President Donald Trump's China tariffs.

"If the tariffs stay, this shift could become the new normal, but if not, it could very much be a short-term trend," the person said, adding that Cambodia still had many weaknesses.

"Productivity and quality is lower in Cambodia, and you have to ship in management," they said.

The U.S. boost, meanwhile, has not been enough to fully mitigate the Covid-19 hit. A local garment manufacturers group says more than 400 factories have suspended work this year, impacting some 150,000 jobs.

International tourism, which brought Cambodia $5 billion last year, has been all but wiped out by the pandemic.

The ADB noted that 3,000 service sector businesses, employing some 45,000 workers, had shut. Construction, a major contributor to Cambodia's economic growth, had also slowed.

The bank warned several risks remained on the horizon including prolonged weakness in garment demand, a sluggish construction sector and the potential for poor harvests following low rainfall.

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