Can Cambodia navigate amid tariffs, border tensions and rising debt?

Can Cambodia navigate amid tariffs, border tensions and rising debt?

Cambodia’s 2025 economic growth story is blighted by trade frictions, regional tensions, and rising domestic financial vulnerabilities. This is of particular concern as Cambodia, for years, has remained one of the strongest economies of Southeast Asia. By any measure, this is no ordinary accomplishment. But then here comes a twist in the story: The IMF in its latest projection has scaled down the growth to 4.8 percent in 2025 from 6 percent in 2024. The slowdown is largely due to the impacts of geopolitical tensions, along with border disputes, which are not only difficult to quantify but also potentially more damaging. In the IMF’s own admittance, the 4.8 growth outlook is lower than what it predicted last year, but it was partly mitigated by Cambodia’s deft diplomacy in reducing the tariff rates. Also, the National Bank of Cambodia’s proactive measures to modernise its framework and advance de-dollarisation efforts could go a long way in providing the much-needed cushion. In the course of navigating a transition, as one expert tells Khmer Times that Cambodia would need to combine targeted fiscal support with structural reforms to safeguard stability and boost competitiveness

Cambodia’s economic growth, long one of Southeast Asia’s strongest, is forecast to slow to 4.8 percent in 2025 from 6 percent in 2024, as the country contends with a challenging external environment marked by trade frictions, regional tensions, and rising domestic financial vulnerabilities, according to the International Monetary Fund (IMF).

The projection was unveiled after an IMF mission led by Kenichiro Kashiwase visited Phnom Penh from August 20 to September 2 for its annual Article IV consultation. Over nearly two weeks, the team held extensive discussions with senior government officials, the National Bank of Cambodia (NBC), business leaders, and development partners. While such consultations are routine for IMF members, they often serve as an early warning system for macroeconomic pressures and policy gaps.

Momentum moderates after strong rebound

“Cambodia’s economy performed strongly in 2024, supported by a robust rebound in garment and agricultural exports and a recovery in tourism,” Kashiwase said during a press conference on September 3. “This momentum carried into early 2025, but growth is now expected to moderate as trade tensions and the border dispute with Thailand – despite the ceasefire – begin to weigh on external demand, tourism, and remittances.”

Inflation is forecast to rise moderately to 2.8 percent, while downside risks dominate. The IMF identified two primary external shocks threatening the outlook: trade policy uncertainty and the ongoing border dispute with Thailand. Although Cambodia successfully negotiated a reduction in proposed tariffs from an initially punitive 49 percent to 19 percent, exporters are still expected to shoulder much of the burden.

“We recognise the government’s efforts in securing a more favourable rate,” Kashiwase told Khmer Times. “Nineteen percent is far lower than what was originally announced, and broadly in line with regional peers. Still, exporters will likely bear part of the cost, and that will affect corporate income growth.”

On geopolitical tensions, he cautioned that the impacts are harder to quantify but potentially more damaging. “Border tensions are an emerging risk. Reductions in remittance inflows and tourism earnings are two major factors already considered in our revised projections. The 4.8 percent growth outlook is lower than what we projected last year, but it is partly mitigated by the government’s success in reducing tariff rates.”

External shocks collide with domestic vulnerabilities

The IMF’s analysis warns that an escalation in either trade or border frictions could further undermine exports and tourism, both central to Cambodia’s economy. Domestically, the financial sector presents another source of concern. Non-performing loans (NPLs) have risen sharply, surpassing 7 percent, particularly in real estate and tourism-linked sectors.

“This ratio is high by regional standards and has increased compared with last year,” Kashiwase said. “The risk is that high private sector debt and rising loan defaults could weigh on household consumption and corporate investment, creating broader financial stress.”

He added that the NBC has been proactive. “The central bank has been strengthening supervisory frameworks and drafting action plans to deal with these risks. Their efforts are commendable, but the situation remains fluid and requires careful monitoring.”

The IMF outlined a multi-pronged policy response. In the short term, fiscal policy should provide targeted support to households and firms directly affected by the shocks. This includes displaced workers in border areas, indebted households hit by falling remittances, and businesses exposed to tariffs or declining tourism. Over the medium term, however, fiscal consolidation will be critical.

“Gradual, growth-friendly fiscal consolidation is essential to rebuild buffers and ensure long-term debt sustainability,” Kashiwase said. “A credible revenue mobilisation strategy—focused on reducing tax exemptions and improving compliance—will create fiscal space for social protection, education, health, and infrastructure.”

On monetary policy, the IMF welcomed the NBC’s efforts to modernise its framework and advance de-dollarisation but urged agility in navigating uncertainties. Meanwhile, financial policies should prioritise stability by addressing NPLs, phasing out regulatory forbearance carefully, and enhancing crisis management and bank resolution frameworks.

Structural reforms vital ahead of LDC graduation

Beyond short-term policy measures, the IMF stressed that Cambodia must accelerate structural reforms if it is to maintain competitiveness and prepare for graduation from Least Developed Country (LDC) status by 2029. “Reforms to improve governance, strengthen the rule of law, secure property rights, and combat corruption are vital,” the IMF mission stated. “Investments in human capital will support employment, attract foreign investment, and facilitate a shift toward higher value-added industries.”

Kashiwase underscored that tariff relief alone is insufficient. “Nineteen percent is lower than feared, but it is not a reason to pause. In fact, it is more important than ever to push through structural reforms—enhancing institutions, governance, and the business environment—to attract FDI and diversify growth drivers. That is how Cambodia can build resilience against shocks.”

Asked which sectors are most vulnerable to the projected downturn, he highlighted tourism and real estate as immediate concerns, with secondary impacts on indebted households. “Tourism has already shown signs of slowing as regional tensions deter visitors. The real estate sector, where many loans are concentrated, is also under pressure. At the household level, reduced remittance inflows will weigh on debt-servicing capacity, particularly for families already burdened by high private sector debt. These vulnerabilities could converge into broader economic stress if not managed carefully.”

Opportunities in a shifting global economy

Despite the difficult outlook, the IMF sees opportunities for Cambodia to reposition itself within global value chains. With multinationals continuing to diversify away from China, Cambodia’s relatively competitive tariff regime and low labour costs could make it an attractive investment destination.

“While the economy faces challenges, there are opportunities in this new environment,” Kashiwase said. “By accelerating reforms, strengthening human capital, and improving the investment climate, Cambodia can attract quality FDI and build more dynamic growth engines.”

The IMF pledged to continue supporting Cambodia through technical assistance, particularly in improving the quality of macroeconomic data and strengthening inter-agency information sharing, which will enhance policy-making capacity. The mission concluded with appreciation for the Cambodian authorities’ “warm hospitality and productive discussions,” reiterating its commitment to help the country navigate its current challenges while preparing for long-term sustainable growth.

Government response and policy alignment

Deputy Prime Minister Aun Pornmoniroth, Minister of Economy and Finance, in September 2 chaired a wrap-up meeting at the ministry with the IMF Article IV Mission Team to conclude discussions on the “Results of the Assessment of the Macroeconomic and Public Finance Situation of Cambodia for 2025.”

Expressing gratitude and high appreciation for the IMF team’s assessment, Pornmoniroth welcomed the alignment of findings with the Royal Government’s outlook on Cambodia’s growth trajectory. The IMF has projected Cambodia’s economy to expand by 4.8 percent in 2025, with solid performance across key sectors, though some differences remain in the scale of expectations for the medium term.

He underlined that the Royal Government is preparing a package of targeted and timely intervention measures, particularly to support families affected by the Cambodia-Thailand border conflict and returning migrant workers. At the same time, he stressed the government’s continued commitment to addressing long-term structural challenges, including boosting productivity, enhancing labour skills, strengthening governance, improving the investment climate, and diversifying export markets.

“Transforming current challenges into opportunities” is the government’s watchword, he said, echoing the IMF’s call for balanced policy.

Private sector perspective: resilience and reform

Cambodia’s economy is expected to grow by around five percent in 2025, driven by its competitive investment environment, continued export diversification, and digital transformation, according to economist Darin Duch.

Speaking to Khmer Times, Darin noted that while the United States has imposed a 19 percent tariff on Cambodian goods, the move has not discouraged investors. Instead, he said, it has reinforced Cambodia’s reputation as a stable and cost-effective production base.

“Cambodia is a fast-growing economy with GDP growth estimated at five percent in 2025. At the same time, the US move to levy a 19 percent tariff on Cambodia has actually prompted investors to keep locating production and jobs here. Many factories see Cambodia as a stable, low-cost base compared with alternatives. This dynamic is supporting jobs, preserving export capacity, and demonstrating Cambodia’s reliability as a partner in global value chains,” he explained.

Darin underlined the importance of broadening Cambodia’s export base beyond garments and footwear, pointing to emerging strengths in electronics, bicycles, agro-processing and food products. He added that infrastructure improvements aimed at enhancing logistics efficiency would reduce export costs and help keep Cambodian products competitive in the global market.

“Another part is financial stability. Cambodia maintains macroeconomic stability that is conducive to keeping investors’ confidence in the economy,” Darin said. “Digital transformation is also an accelerator, enabling companies to grow in the years to come. Broader e-commerce platforms and digital payment systems will allow Cambodian businesses to connect with new buyers and markets faster.”

He also highlighted the role of skills development, saying that sustained investment in vocational education and digital capabilities will prepare the workforce for higher value-added production and services. “With ASEAN integration and supply-chain migration in the region, Cambodia has a chance to focus not only on assembly, but also on a wider range of manufacturing and service activities,” Duch added.

“By leveraging RCEP and ASEAN trade avenues to source intermediate goods more flexibly, Cambodia can continue to enjoy preferential access to significant export destinations. I hope that, along with promoting investment in Special Economic Zones, this development will attract industries relocating from elsewhere and ensure job creation and wage growth for Cambodian workers,” he said.

Balancing with long-term competitiveness

Against this backdrop, Arnaud Darc, Chairman and CEO of Thalias and Co and Co-Chair of the Government-Private Sector Forum (Working Group D), told Khmer Times that the Kingdom was “navigating a transition” and would need to combine targeted fiscal support with structural reforms to safeguard stability and boost competitiveness.

“Growth this year is projected around 4 to 5 percent, down from 6 percent last year, with pressures from tariffs, rising private debt, and the Thailand border disruption. Yet the fundamentals remain sound: public debt is only about 26 percent of GDP, reserves cover seven months of imports, and tourism and FDI are recovering even if unevenly,” he said.

Darc recommended that fiscal support remain “precise and temporary,” suggesting the use of the IDPoor registry for targeted cash transfers in provinces most affected by the border closure and small public works programmes to create quick jobs. “At the same time, Cambodia must keep its deficit near 3 percent and rebuild buffers by tightening tax compliance, rationalising exemptions and gradually broadening the tax base,” he added.

On the financial sector, Darc warned that reported non-performing loans already exceed 7 percent. He said the priority over the next 12–18 months was to “enforce time-bound recognition and provisioning, establish a functional bank resolution and deposit insurance framework, and tighten lending standards in real estate.” Greater transparency in credit reporting and stronger consumer protection, he argued, would help to reduce household debt stress.

Turning to longer-term drivers of growth, Darc called for “predictable rules, faster decisions and stronger people.” This included streamlining customs and licensing through a genuine single window, improving contract enforcement with a well-resourced commercial court, and making tax administration less burdensome and more transparent. He also urged acceleration of the digital economy, fintech, e-commerce, and digital payments to boost competitiveness and inclusion.

“In parallel, investing in human capital is essential—scaling vocational training linked to employer demand, raising STEM and secondary education quality, and broadening digital and English skills,” he said. Supporting small and medium-sized enterprises with finance and lighter compliance would strengthen resilience and job creation.

Darc noted that Cambodia should leverage ASEAN and RCEP integration over the next two years to diversify markets and position itself for green growth and climate-resilient investment.

“Renewable energy, sustainable agriculture and eco-tourism are increasingly prioritised by international partners,” he said.

“These are practical steps that combine short-term stability with long-term competitiveness,” he concluded.

The road ahead

The IMF’s message is clear: Cambodia cannot rely solely on external demand and a few traditional sectors to drive its growth in the years ahead. While 4.8 percent is still a respectable pace, the slowdown underscores the economy’s exposure to external shocks and domestic vulnerabilities.

The key challenge for policymakers will be to strike a delicate balance—cushioning households and firms in the near term while pushing through politically difficult reforms needed to sustain long-term growth. Cambodia’s successful negotiation to reduce tariffs is a positive step, but as the IMF stresses, it must be matched by a renewed commitment to governance reforms, fiscal discipline, and investment in people.

If Cambodia can seize the current moment, combining prudent macroeconomic management with bold reforms, the Kingdom could emerge from this slowdown with a more diversified economy, a stronger financial sector, and a better-skilled workforce prepared for the next phase of growth.

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