Cambodia's Economic Crossroads: Navigating U.S. Trade Policy Uncertainties

Moody’s Investors Service has delivered a stark warning for Cambodia’s economy, revising its credit outlook to negative from stable for 2025. While affirming Cambodia’s B2 long-term issuer rating, the downgrade underscores the precarious position of a nation heavily reliant on U.S. trade amid escalating policy uncertainties. With nearly 40% of Cambodia’s exports destined for the U.S.—equivalent to 20% of its GDP—the proposed 49% reciprocal tariffs could slash real GDP growth by 2 percentage points this year, from an already modest 5.3% forecast.

The U.S. Trade Sword of Damocles

Cambodia’s economy remains a textbook case of overreliance on a single trade partner. The garment and footwear sector, which accounts for over 80% of Cambodian exports to the U.S., is particularly exposed. A would reveal how even minor shifts in U.S. trade policy—such as the recent threats of retaliatory tariffs—could disrupt supply chains and investor confidence. The proposed 49% tariffs, if implemented, would effectively price Cambodian goods out of key U.S. markets, forcing a painful rebalancing.

Domestic Vulnerabilities Compound Risks

Beyond trade, Cambodia faces a trifecta of internal challenges:
1. Real Estate Slump: A prolonged downturn in the sector has already dented private consumption and increased banking system risks.
2. Tourism Decline: Chinese visitor numbers, once a cornerstone of tourism revenue, have yet to recover to pre-pandemic levels, leaving a critical income gap.
3. FDI Fragility: Foreign direct investment, which stood at 10% of GDP in 2024, could retreat further if geopolitical tensions between the U.S. and China intensify.

These factors, combined with a potential current account deficit—driven by reduced export earnings—paint a fragile near-term outlook. Cambodia’s foreign-exchange reserves ($18.3 billion as of February 2025) offer a buffer, but they are no panacea against prolonged trade disruptions.

Structural Weaknesses Linger

Moody’s acknowledges Cambodia’s strengths: low government debt (below 30% of GDP) and support from multilateral lenders. Yet, structural flaws—weak governance, dollarization, and limited policy flexibility—limit the government’s ability to counter external shocks. A would highlight how these factors could constrain long-term resilience, even if near-term trade risks are mitigated.

The Path Forward: Risks and Opportunities

The negative outlook could stabilize if U.S. trade policies clarify in Cambodia’s favor. However, the downgrade to B3—a lower rating—is probable if tariffs bite, FDI collapses, or global growth weakens further. Investors should monitor:
- Export Diversification: Progress in shifting reliance from the U.S. to regional markets.
- Tourism Recovery: A rebound in Chinese and other visitor numbers.
- FDI Trends: Sustained investment in sectors like tech manufacturing or renewable energy.

Conclusion: A Delicate Balancing Act

Cambodia’s economy is at a crossroads. With U.S. trade policy uncertainties and domestic vulnerabilities weighing on growth, the path to stability hinges on three critical factors:
1. Trade Policy Certainty: The absence of 49% tariffs would spare GDP a 2 percentage point hit, buying time for diversification.
2. Resilience of Key Sectors: Garment exports, tourism, and FDI must remain robust enough to offset real estate and geopolitical risks.
3. Structural Reforms: Addressing governance gaps and accelerating economic diversification could reduce reliance on external tailwinds.

While Cambodia’s $18.3 billion in reserves and low debt provide a cushion, the stakes are high. Should U.S. tariffs materialize or FDI falter, the economy could face a prolonged downturn, pushing its B2 rating lower. For now, investors must proceed with caution, favoring sectors insulated from trade shocks—such as domestic consumer staples—or waiting for clearer policy signals. The road ahead is fraught with risks, but with prudent management, Cambodia might yet navigate this storm.