Political stability secured, but economic concerns, electric vehicles, IDE and debts, Japan and China to forge stronger ties, taxes, surge in investment growth, Hong Kong and UK delegations to boost economic collaboration, are among the topics detailed in this economic review.
PERC: Political stability secured, but economic concerns
An independent assessment was commissioned by NagaCorp Ltd. and conducted by the Political and Economic Risk Consultancy Ltd. A primary concern for Cambodia as it transitions into 2024 is the identification of economic risks, as determined by PERC. The review, which examined a range of political, social, and macroeconomic factors, concentrated on the investment environment surrounding NagaCorp’s casino, hotel, and entertainment operations.
Political stability following leadership transition
The findings indicate that Cambodia’s political landscape is stable following a seamless transition of leadership from former Prime Minister Hun Sen to his son, Hun Manet. This transition, along with the robust support from the various factions of the Cambodian People’s Party (CPP), has been instrumental in maintaining a secure political environment for both local and international investors. Furthermore, Hun Manet’s leadership style is characterised by his reliance on a select group of trusted advisors and an increasing engagement with private sector leaders to ensure that business concerns are addressed.
Economic challenges in 2024
Nevertheless, despite the political stability, the PERC review highlights that Cambodia is confronted with considerable economic challenges. The country’s economy has yet to fully recuperate from the impact of the global pandemic, with projections indicating that growth will remain below pre-pandemic levels for the foreseeable future. External factors, including a reduction in demand for Cambodian exports in the United States and Europe, a deceleration in Chinese economic activity, and the persistence of global conflicts, continue to impede Cambodia’s economic recovery. The report indicates that these external risks are largely beyond the control of the Cambodian government, thereby rendering their resolution in the near term challenging.
The construction and real estate sectors, which were previously instrumental in driving Cambodia’s economic expansion, are currently undergoing a period of correction. In particular, the luxury condominium and office markets have experienced significant challenges, while low wage growth and limited job creation are expected to have a detrimental impact on consumer spending.
‘Additionally, the financial sector is confronted with considerable challenges, including an increase in non-performing loans, which could potentially jeopardise the broader stability of the economy.’
These factors, in conjunction with tepid demand for exports and a decline in tourism from Mainland China, indicate that Cambodia’s overall growth in 2024 will remain subdued.
Infrastructure and labour productivity remain significant concerns
The report identifies several potential developments that could positively impact Cambodia’s economy in the coming years. One such factor is the potential increase in foreign direct investment as a result of multinational corporations diversifying their supply chains and reducing their reliance on China. This trend has the potential to attract further investment into Cambodia’s manufacturing and export sectors. Furthermore, the tourism sector has demonstrated signs of recovery, with an increasing number of visitors from Russia, Eastern Europe, and neighbouring ASEAN countries.
However, infrastructure remains a major concern for investors.
‘The high cost of utilities, especially electricity, coupled with underdeveloped waste management systems and poor maintenance, continue to be significant obstacles to growth.’
The report also highlights that Cambodia’s reliance on coal, while still substantial, may shift as the new government explores greener energy alternatives, which could benefit sectors like sustainable tourism.
Labour productivity in Cambodia has declined since the pandemic, mainly due to a shift in the workforce from higher-productivity manufacturing jobs to lower-productivity sectors like agriculture. The report stresses that improvements in Cambodia’s education system will be crucial for long-term economic growth, but progress is expected to be slow.
While the overall assessment of Cambodia’s political stability is positive, Cambodia remains more stable than it is sometimes portrayed, and aligning these perceptions with reality will be key to attracting further investment.
Still a long way to go for electric vehicles
For the first eight months of 2024, Cambodia registered 3,676 electric vehicles (cars, motorcycles, or ‘tuktuks’). In June, this figure was below the symbolic threshold of 3,000 vehicles; fewer than 1,000 were on the roads in Cambodia in 2023. The main cross-brands are BYD, Toyota, and Tesla.
At the same time, the country has over 7 million vehicles, of which 85% are motorcycles and 10% are cars. Nevertheless, the government has reaffirmed its ambition for carbon neutrality by 2050. He plans to put into circulation up to 30,000 electric vehicles (70% electric motorcycles and 40% cars). The Ministry of Economy has also announced financial measures aimed at facilitating the purchase of electric vehicles. As for the Ministry of Energy, it proposes to cap the price of charging, with a sufficient margin to attract private investors to develop charging stations.
IDE and debts: false joys and false alarms
During discussions between Cambodia and a Canadian delegation, the government stated that Cambodia attracted 7.5 billion USD in foreign direct investment in 2023. This represents an increase of 161% compared to the same period under the previous government, the Cambodian Investment Council would have stated.
This announcement is surprising given that the foreign direct investment figures for the second quarter have not yet been released. This is not the case with the debt figures. It amounts to 11.27 billion USD (or 27% of GDP) compared to 10.9 billion USD at the end of 2023. This debt remains modest. The Ministry of Economy and Finance (MEF) specifies that it is composed of 56% concessional loans and is primarily used to finance infrastructure. In its plan for 2024–2028, the Ministry of Economy and Finance – and this is a new development – has planned to borrow between 2.3 and 2.7 billion USD per year. However, it still aims for concessional funding, whether bilateral or multilateral, but does not seem to consider issuing Treasury bonds.
Japan and China to forge stronger ties
Japan and China are forging stronger ties with one another through the implementation of green technology and infrastructure projects. Japan continues to serve as a pivotal economic partner for Cambodia, particularly in the realms of sustainable development. On 7 August, the Japan External Trade Organization (JETRO), Japan’s external trade body, spearheaded a business mission to Phnom Penh, comprising 19 companies with a focus on green technology and carbon credits.
'This collaboration is in accordance with Cambodia’s objective of increasing the proportion of clean energy usage to 70% by 2030.'
Tan observed that the integration of Japanese innovations with Cambodian businesses will facilitate mutual economic benefits and sustainable growth.
China, the largest source of foreign direct investment (FDI) in Cambodia, has expressed its continued commitment to expanding its presence within the Kingdom. In mid-August, a delegation from Jiangsu province paid a visit with the intention of exploring potential avenues for collaboration in the realms of agriculture, technology, and fisheries. Cambodian Prime Minister Hun Manet has expressed support for further collaboration, particularly the reopening of direct flights between Cambodia and Shantou, which he believes would boost bilateral trade and investment.
For three years, taxes have been up in the air
The Ministry of Economy and Finance has just announced a reduction in taxes affecting foreign airlines. The tax on foreign aircraft flying in Cambodia is reduced from 14% to 10%, and the tax on passenger air transport services is lowered from 10% to 5%. These discounts are valid from June 1, 2024, to May 31, 2027. These measures aim to increase the number of flights serving Cambodian airports and thus the arrival of tourists. In fact, the sector is struggling to regain its pre-pandemic level (6,6 millions de touristes en 2019). For the period from January to July 2019, 3.9 million tourists visited Cambodia; 3.6 million in 2024. And the opening of six new routes to Siem Reap International Airport from China, Korea, and India is under consideration. They would be operational in 2025. It remains that the taxation applied to the profits of foreign airlines deviates significantly from international practices, which also serves as a barrier to their return.
Surge in investment growth (CDC)
During the first 11 months of Prime Minister Hun Manet’s seventh mandate, a total of 237 investment projects, with a combined value of over USD 6 billion, were approved, representing a 220% increase in capital compared to the previous mandate. In July 2024 alone, 44 projects with a combined value of USD 396 million were approved.
This increase in investment is attributed to a number of factors, including Cambodia’s favourable economic policies, its youthful demographic, and political stability. There is a discernible upward trajectory in Cambodia’s investment climate. Political continuity, strategic location and favourable incentives are all contributing factors to the creation of a more dynamic and appealing business environment for global investors, according to Michael Tan, the founding CEO of Aquarii BD Cambodia.
Hong Kong and UK delegations boost economic collaboration
In late July 2024, a delegation from Hong Kong, comprising 30 leaders across the finance, insurance, and technology sectors, visited Phnom Penh with the objective of strengthening economic ties. As a consequence of the visit, 13 memoranda of understanding (MoUs) were signed, with a focus on matters pertaining to trade, banking, innovation, and technology. This represents a significant advancement in Cambodia’s objective of fostering its digital economy. Furthermore, the UK Export Finance (UKEF), the UK government’s export credit agency, has expressed considerable interest in providing support for Cambodia’s infrastructure development. During their visit in early August, UKEF committed to financing projects in public services and infrastructure under the British Investment Partnership, indicating a potential increase in British investments in Cambodia.
Sources : PERC, Aquarii and Brèves ASEAN
Comments