Cambodia's Growth Downgraded Amid External Shocks

The Kingdom of Cambodia, faced with a buildup of exogenous shocks, has officially revised downward its economic growth trajectory for the current fiscal year. Set at 5% in the initial 2026 finance law, the GDP growth forecast has been lowered to 4.2% by Prime Minister Hun Manet, as part of the medium-term budgetary framework report published last April. This revision illustrates the persistent fragility of a development model still exposed to external turbulence.

Three Shocks Behind the Recalibration

The Cambodian government attributes this setback to three main factors, whose interplay paints a worrying macroeconomic picture.

The surge in energy prices. Ongoing tensions in the Middle East have caused a sharp rise in global oil and gas prices, directly weighing on a Cambodian economy that remains almost exclusively an energy importer. Inflation, estimated at 2.5% on average in 2025, is expected to accelerate to 2.8% in 2026 according to the Asian Development Bank (ADB), driven by rising fuel prices. The transport, tourism, agriculture, and retail trade sectors are on the front lines.

The border conflict with Thailand. This is undoubtedly the most structural shock. The armed clashes of July 2025 — dubbed the "Five-Day War" — and the subsequent border closure disrupted trade and human flows between the two countries. The closure of the strategic Klong Luek–Poipet border post, a logistics hub handling cross-border trade worth about $4.7 billion annually, paralyzed exchanges. Businesses were forced to reroute their goods via Vietnam and Laos, driving transport costs up by 25 to 40%. Even more serious on the social front: some 780,000 Cambodian migrant workers abruptly left Thailand, causing a sharp drop in remittances, which fell from 6.0% to 4.0% of GDP between 2024 and 2025.

The crackdown on online scams. Anti-scam operations, while necessary to restore Cambodia's international reputation, are exerting immediate pressure on several sectors: construction, real estate, retail trade, and domestic consumption. The government itself acknowledges that these efforts, virtuous in the medium term, create short-term turbulence.

A Macroeconomic Context Under Strain

Beyond the government's revision, major international financial institutions are showing even more cautious projections. The International Monetary Fund (IMF), in its Article IV conclusions published in November 2025, projects growth of just 4.0% for 2026, compared to 4.8% estimated for 2025 — a marked slowdown from the 6.0% recorded in 2024. The World Bank is betting on 3.9%, while AMRO (the ASEAN+3 Macroeconomic Research Office) forecasts 4.3%, amid rising oil prices and weakening tourism revenues.

The ADB, for its part, retains a scenario of 4.5%, betting on an early stabilization of the Middle East conflict. Even in this optimistic scenario, services growth would only rise by 2.3% in 2026, compared to 3.4% the previous year.

The real estate sector, already hit by structural oversupply and weak demand, continues to weigh on bank balance sheets: the non-performing loans (NPL) ratio remained above 8% at the end of 2025. Public external debt, estimated at $14.0 billion for 2026 (about 26.6% of GDP), remains at sustainable levels, but the current account deficit is expected to widen to 6.9% of GDP — compared to 3.5% in 2025 — due to the combined effect of falling remittances and rising imports of capital goods.

Pillars of Resilience

Despite this darkening picture, the Cambodian economy retains several strengths.

The industrial sector remains the main engine, supported by notable diversification of manufactured exports. Shipments of tires, electronic components, and wood products recorded double-digit increases in 2025 (+15.2% for non-textile manufactures). Foreign direct investment (FDI) inflows rose 24% in the first nine months of 2025, reaching $3.9 billion, with 93% of industrial flows directed toward non-traditional activities — a sign of gradual upgrading.

Agricultural exports, driven by cashews and rice, remain solid (+8.4% in 2025), even if rubber and cassava sectors are declining. The agricultural sector should maintain modest growth of 0.9% in 2026 and 2027.

On the fiscal policy front, Phnom Penh intends to maintain "budgetary neutrality" to preserve the viability of public finances, while committing to broaden the tax base, restore taxation rates on petroleum products, and enhance the country's attractiveness through stricter enforcement of anti-fraud measures.

Medium-Term Outlook: Rebound Expected

The Cambodian government has no intention of limiting itself to a defensive discourse. Official projections bet on a rebound to 5% in 2027, and an average annual growth of 5.5% through 2029 — in line with Cambodia's stated ambition to achieve high-income status by 2050.

The ADB shares this conditional optimism, anticipating 5.0% growth in 2027 provided regional tensions ease and the recently inaugurated Phnom Penh International Airport helps relaunch tourism. The new terminal indeed has far greater capacity than the old one, and authorities are counting on a revival of international arrivals to offset the 2025 drop (–16.9% in tourists, despite a 41.5% rise in Chinese visitors).

Among the identified growth drivers for the future: the transition to a digital economy — with 23 million active electronic wallets —, the development of renewable energies to reduce dependence on imported hydrocarbons, and the move toward higher value-added manufacturing.

A Development Model Put to the Test

Cambodia's downward revision of its forecast illustrates a broader reality: Southeast Asia's emerging economies, despite their structural dynamism, remain exposed to multiple and simultaneous exogenous shocks. The conjunction of a regional armed conflict, a global energy crisis, and the normalization of a high macroeconomic-impact illegal sector constitutes an unprecedented stress test for the Cambodian model.

The IMF has indeed warned: risks remain tilted downward, and financial sector vulnerabilities — particularly the concentration of real estate exposures in bank portfolios — deserve sustained attention. The Fund's executive directors have called on Phnom Penh to combine temporary support for vulnerable households with structural competitiveness reforms, particularly in vocational training.

For now, a growth rate of 4.2% places Cambodia above the global average and in the high range of Southeast Asian economies that are slowing. But the trajectory toward high value-added, the only path to long-term resilience, requires deep reforms — and a return to regional stability.