Cambodia: an economy under strain, caught between external shocks and banking fragilities

After a surprisingly resilient 2025, Cambodia is heading into 2026 with growth slowing sharply. Surging oil prices, the prolonged closure of the Thai border, and rising bad loans in the banking sector are combining to paint a more mixed macroeconomic picture, according to the latest Annual Consultation Report from the ASEAN+3 Macroeconomic Research Office (AMRO), published in July.

Phnom Penh

A 2025 resilience that already belongs to the past

The figure is striking: 5.3 percent growth in 2025, even as US reciprocal tariffs, border tensions with Thailand and the reputational fallout from online scam crackdowns pointed to a sharper slowdown. The garment sector, buoyed by robust global demand and relatively favourable US tariffs (19 percent), pulled the economy along, while tourism and construction lagged behind.

But that picture already belongs to the past. For 2026, AMRO projects growth easing to 4.2 percent, before rebounding to 4.9 percent in 2027. The reason: an energy shock originating in the Middle East, pushing oil prices toward USD90-100 a barrel under the institution's baseline scenario — with a downside scenario of USD120 a barrel that would push growth below 4 percent, and an upside scenario of USD80 a barrel that would lift it to 4.5 percent.

Imported inflation, the economy's Achilles heel

Cambodia illustrates a well-known structural vulnerability of highly dollarised economies dependent on fuel imports: the near-instantaneous transmission of oil shocks to domestic prices. Fuel prices are recalculated every ten days based on the Singapore benchmark (MOPS), which explains why inflation, contained at 2.5 percent in 2025, is expected to jump to 4.5 percent this year, with swift second-round effects on food and core inflation.

The kingdom has no significant strategic oil reserve, and private commercial stocks covered only around 21 days of consumption before the Middle East conflict erupted. AMRO explicitly recommends diversifying the energy mix — liquefied natural gas, renewables, strategic reserves, storage — to reduce this exposure.

A widening current account deficit, reserves inflated by gold

The current account balance, which shifted to a deficit of 3.7 percent of GDP in 2025, is projected to deteriorate sharply to 8.5 percent of GDP in 2026, driven by the oil import bill and a decline in remittances — roughly one million migrant workers having returned from Thailand since border tensions began.

The report devotes an entire box to discrepancies in gold trade statistics. Mirror data (drawn from trading partners' customs records) suggests the real current account deficit was closer to 9.8 percent of GDP in 2025 — more than double the official figure — reflecting substantially under-reported gold imports. AMRO recommends tighter customs inspections and stronger know-your-customer requirements for gold traders, in coordination with Thailand and Singapore.

The banking sector, the main source of concern

This is arguably the report's most sensitive chapter. The non-performing loan ratio at deposit-taking institutions reached 8.3 percent at end-2025, up from 7.1 percent a year earlier, with retail trade peaking at 21.4 percent. The liquidation, in January and February, of two banks — Prince Bank and Panda Bank — amid US sanctions targeting their shareholders, shook confidence among some depositors. A deposit-withdrawal incident at a third institution in March, fuelled by unverified social media rumours, required swift communication from the National Bank of Cambodia (NBC) to restore trust.

A reverse stress test conducted by AMRO shows the banking system as a whole retains adequate capital buffers — able to absorb a non-performing loan ratio of up to 24 percent before the capital adequacy ratio would fall to the 15 percent regulatory minimum. But the exercise also reveals pockets of vulnerability: several small banks, with limited room to manoeuvre, would see their capital come under pressure much sooner.

In response, the NBC has launched several initiatives: revising the emergency liquidity assistance framework, planning asset management institutions to purchase bad loans, introducing a framework for domestic systemically important banks, and preparing a deposit protection scheme — whose rollout will need to be carefully calibrated so as not to inadvertently undermine confidence at an already fragile moment.

An expansionary but temporary fiscal stance

The 2026 budget envisages a wider fiscal deficit of around 4 percent of GDP — which AMRO scales back to 2.6 percent given the administration's limited capacity to execute spending. This expansion, deemed appropriate in the face of the oil shock, rests on temporary VAT and customs duty exemptions on fuel, alongside targeted cash transfers to vulnerable households via the IDPoor system. AMRO stresses that these measures must remain strictly temporary, given that their cost disproportionately benefits wealthier households.

Public debt, meanwhile, stays contained at 27.6 percent of GDP in 2026 — a level assessed as low-risk under the debt sustainability analysis, well below the 70 percent alert threshold.

Electricity, a structural bottleneck to industrial upgrading

One of the report's more original contributions concerns the link between electricity costs and Cambodia's inability to climb the global value chain. Cambodian industrial tariffs are among the highest in ASEAN — roughly double those in Vietnam. Yet AMRO's analysis shows that higher value-added production stages (textile weaving, semiconductor manufacturing, automotive stamping) are markedly more electricity-intensive than the simple assembly work in which the kingdom remains largely confined.

The rapid rise in tyre exports, which nearly quadrupled between 2023 and 2025 thanks to dedicated power supply in the Sihanoukville Special Economic Zone, illustrates conversely what reliable electricity can enable. Expanding solar power — already 10.2 percent of electricity delivered in 2025 — and strengthening grid infrastructure stand out as priority levers as the kingdom approaches its graduation from Least Developed Country status, scheduled for 2029.

Source: AMRO, "Annual Consultation Report – Cambodia 2026", ASEAN+3 Macroeconomic Research Office, July 2026.