Cambodia at an Economic Crossroads: Managing a Triple Shock in an Era of Rising Risk

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Cambodia at an Economic Crossroads: Managing a Triple Shock in an Era of Rising Risk

Cambodia’s economy—once praised for its rapid post-pandemic rebound—is now under mounting strain from a convergence of global, regional, and domestic pressures. Economist Jayant Menon has described this convergence as a “triple whammy”: external geopolitical shocks, regional disruptions, and deep-seated internal vulnerabilities. By early 2026, these pressures have intensified, growth expectations have been revised downward, and structural risks have sharpened—particularly following the renewed Cambodia–Thailand border conflict.

This analysis builds on Menon’s framework while integrating recent economic trends to assess Cambodia’s risks, constraints, and strategic options as it navigates a period of heightened uncertainty.

The Triple Shock: Global, Regional, and Domestic Pressures Collide

At the global level, Cambodia faces rising protectionism and deteriorating trade conditions. Increased U.S. tariffs have weakened competitiveness in garments—the backbone of Cambodia’s export economy and a source of employment for millions. This exposure leaves growth highly sensitive to policy shifts beyond Cambodia’s control.

Regionally, economic slowdowns among key partners, especially Thailand, have compounded these challenges. The resurgence of border tensions in late 2025 has been particularly damaging. Cross-border trade—worth billions annually—has been disrupted, supply chains fractured, migrant labor flows reversed, and tourism confidence shaken. Agricultural exports such as rice and cashews have stalled, remittance inflows have dropped, and border provinces have borne the brunt of displacement and income loss.

Domestically, longstanding vulnerabilities amplify the impact of these shocks. Weak human capital outcomes, rising non-performing loans (NPLs), overextended real estate development, and infrastructure bottlenecks constrain the economy’s ability to absorb stress. Unlike past downturns, today’s slowdown is occurring in a far more complex geopolitical environment, making recovery slower and more uncertain.

A Downgraded Outlook and Growing Sectoral Fragility

Economic forecasts reflect this deterioration. Growth has slowed markedly from pre-2024 levels, with projections for 2026 clustered around the 4–5 percent range. Exports remain volatile, domestic demand subdued, and tourism recovery uneven—particularly in areas affected by border instability.

While garment exports have seen short-term gains due to pre-tariff stockpiling, profit margins are under pressure and longer-term competitiveness is eroding. Agriculture continues to grow modestly, supported by diversification toward RCEP markets, but climate shocks pose rising risks. Services—especially tourism and transport—remain the weakest link, vulnerable to both regional conflict and global uncertainty.

Externally, the current account deficit is widening, reflecting trade imbalances, while foreign direct investment remains relatively resilient. Inflation is contained, and foreign reserves provide short-term stability. However, increased fiscal spending—while necessary—adds pressure if growth continues to soften.

Absent structural reform, Cambodia risks slipping into a prolonged low-growth trajectory, with output potentially falling below 4 percent and regional supply chains bypassing the country in favor of more diversified competitors.

Post-LDC Graduation: Progress Meets New Exposure

Cambodia is on track to graduate from Least Developed Country (LDC) status in 2029—a recognition of decades of economic progress. Yet this transition also exposes new vulnerabilities. Preferential trade access will diminish, export costs will rise, and regulatory obligations will increase, particularly in pharmaceuticals and intellectual property.

Menon cautions that graduation alone will not propel Cambodia into upper-middle-income status. Without productivity gains, diversification, and resilience-building, Cambodia risks falling into the middle-income trap—where low-cost advantages fade before higher-value capabilities emerge.

The challenge is not graduation itself, but whether Cambodia uses this window to restructure its growth model toward skills, innovation, and sustainability.

Human Capital: The Structural Weak Point

Human capital remains Cambodia’s most critical domestic constraint. Child malnutrition continues to undermine educational attainment, workforce productivity, and long-term growth. This weakness is particularly dangerous as Cambodia confronts rapid digitalization and automation, which threaten traditional employment in garments and agriculture—sectors that employ the majority of workers.

Regional peers have moved faster to invest in education, vocational training, and digital skills. Without similar investments, Cambodia risks a generation of workers unprepared for economic transition. Expanding nutrition programs, improving education quality, and integrating digital skills into the workforce are no longer social priorities alone—they are macroeconomic imperatives.

Financial Sector Stress: The NPL Challenge

The banking sector presents another fault line. Rising non-performing loans—driven by property oversupply, tourism stagnation, and household debt—are constraining credit growth and weakening bank profitability. While regulators have extended loan restructuring measures, delayed resolution risks freezing lending precisely when the economy needs it most.

Establishing mechanisms to isolate and resolve bad assets, strengthening regulatory oversight, and stress-testing major exposures—particularly large infrastructure projects—are essential to prevent financial instability from amplifying broader economic shocks.

Strategic Pathways Forward

Cambodia’s position is fragile but not without options. Key priorities include:

  • Stabilizing Border Relations: A durable diplomatic resolution is essential to restore trade, remittances, and investor confidence.
  • Economic Diversification: Accelerating integration with regional supply chains beyond low-value exports.
  • Human Capital Investment: Tackling malnutrition and skills gaps to prepare the workforce for technological change.
  • Financial Sector Repair: Addressing NPLs decisively to restore credit flow.
  • Sustainable Infrastructure Governance: Ensuring large projects align with fiscal discipline and environmental resilience.

Cambodia still benefits from strong reserves, manageable public debt, and continued investor interest. These buffers offer a narrow but real opportunity to reset its development trajectory.

As Menon observes, localized conflicts may not derail regional integration, but they sharply magnify national risks. Whether Cambodia converts this moment into durable progress—or allows vulnerabilities to harden—will determine whether its development gains become irreversible or remain fragile.

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