FDI flow in Cambodia steady, but for Corona bump

Cambodia is back on the path of attracting FDI after a decline in 2020 due to Covid-19 pandemic. According to the Financial Stability Report 2021 of the National Bank of Cambodia, FDI inflow in 2021 was valued at $3.5 billion

Foreign direct investment often reflects the faith and confidence of an individual or an organisation of a foreign country in the investment recipient nation’s stability, growth prospect and soundness of political, economic and legal systems.

Cambodia continues to be an attractive destination for foreign investment due to its sound political and legal system as well as its liberal investment regime. In the Kingdom of Cambodia, which follows open market policies, most sectors are open to foreign ownership through foreign direct investment (FDI).

The country is back on the path of attracting FDI after a decline in 2020 due to Covid-19 pandemic. According to the Financial Stability Report 2021 of the National Bank of Cambodia (NBC), released recently, FDI inflow in 2021 was valued at $3.5 billion, which was a decline of 3.9 per cent year-on-year.

Earlier in a social media post, NBC had announced that the total FDI inflow between mid-1994 and end-2021 amounted to 168.8 trillion riel ($41.0 billion), with a variety of nations investing. “Foreign direct investment in Cambodia as of the end of 2021 remained robust with a growth rate of 11.2 percent over the previous year,” read the NBC post.

It attributed the increase in FDI to investment from China, South Korea, Vietnam, Singapore, Japan and Malaysia. Most of these funds flowed into the finance, manufacturing, real estate, hotel and restaurant, agriculture, and construction sectors of the country. Of these, the financial sector accounted for nearly 23 per cent of total FDI.

Chenda Sophea, Secretary-General of the Council for the Development of Cambodia (CDC), had said the positive investment climate was buoyed by the adoption of the strategic framework and programme for post-Covid recovery 2021-2023, which is based on the 3Rs – Recovery, Reform, and Resilience.

At the start of April 2022, it was reported that in the first quarter of 2022, CDC had approved 47 investment projects with total value  of $2.5 billion.

The Financial Stability Report 2021 says, “The FDI flow was not seen to recover yet because of the pandemic-related uncertainties. FDI inflow was recorded at $3.5 billion in 2021, declining by 3.9 percent. A slowdown in banks’ capital investment led FDI in the financial sector, which accounted for one-third of the total FDI, to decline by 3 percent.

“FDI in the non-financial sectors decreased by 4.4 percent particularly in accommodations (which includes hotels, restaurants and casinos) at -43.7 percent, agriculture (-22.3 percent), and telecoms (-11.1 percent).”

However, the FSR 2021 points out, other sectors recorded positive growth, like manufacturing (21.3 percent), and construction and real estate (1.1 percent). FDI inflow to the construction and real estate sectors was a small but positive increase compared with a negative rate of -10.6 percent in 2020.

The hydropower and energy sectors represented 4.3 percent of the total FDI inflow in 2021, remarkably increased by 2.6 times, showing the government’s efforts to attract investments into this sector with an aim of lowering energy costs. KT/Chor Sokunthea

The hydropower and energy sectors represented 4.3 percent of the total FDI inflow in 2021, showing the government’s efforts to attract investments into this sector with an aim of lowering energy costs, which was a major barrier to accelerating the country’s economic development for many years.

Registering a recovery, imports of construction materials and equipment increased by 27.1 percent after a contraction of -12.2 percent in 2020.

While Asia remained the main source of FDI in Cambodia, China topped the list of nations. The Asian economic giant stayed the top foreign investor in Cambodia, and accounted for nearly half of the total FDI inflow in 2021.

“Investment from China mainly flowed into the manufacturing, finance and construction and real estate and accommodation sectors. The other Asian FDI contributors to Cambodia were Singapore (8.3 percent), Korea (8.1 percent), Japan (5.9 percent), Thailand (4.4 percent) and Malaysia (3.8 percent),” states the Financial Stability Report 2021.

In simple terms, foreign direct investment is the direct investment equity flows in one country from other economies.  It is the sum of equity capital, reinvestment of earnings, and other capital.

Cambodia has managed to register a steady increase in the flow of FDI in the last two decades due to a stable political system and consistent solid economic performance. In 2020 (when the Corona pandemic had taken the whole world in its grip) at $3.6 billion, the FDI declined by 1.05 percent from $3.66 billion in 2019, which was up 14.02 percent from 2018.

In 2018, the Kingdom attracted $3.21 billion FDI, which was an increase of 15.23 percent over the direct investment equity flows of 2017. In 2017, Cambodia attracted 2.79 billion in foreign direct investment, up 12.61 percent over 2016.

Just to put things in context, since the beginning of the 21st century, the FDI flow in the Kingdom of Cambodia has been rising every year. In 2000, the country received $0.12 billion (equivalent to 3.24 percent of the GDP); in 2001, it was $0.15 billion or 3.68 percent of the GDP (gross domestic product).

And the FDI flow continued to increase to $1.40 billion or 12.49 percent of the GDP in 2010. In the next five years (2011-2015), Cambodia attracted $9.27 billion in FDI and in the next five years (up to 2020) the Southeast Asian economy witnessed an inflow of $15.76 billion and mind it this period included the Corona pandemic also.

For 2021, the Association of South East Asian Nations (ASEAN) reported a strong return of growth in FDI inflow with investment flow increasing by 42 percent to $174 billion in 2021, which is almost close to pre-Covid-19 pandemic levels after a big decline in 2020, says ASEAN Investment Report 2022 Pandemic Recovery and Investment Facilitation report released recently. It also shows the attractiveness of the region’s economy for global investors, the report added.

According to the report, this increase to near pre-pandemic levels reverses the decline in 2020 caused by the Covid-19 outbreak and reflects the attractiveness of the region’s economy for global investors.

“With a large market and strong regional integration, ASEAN remains a major FDI destination in the developing world – second only to China – and will play an important role in driving global economic recovery,” says the report.

It also shows the attractiveness of the region’s economy to global investors. The rebound underscores the resilience of the region, which has been battered by successive waves of the pandemic. The recovery in ASEAN compares favourably with the 30 per cent average growth in developing economies. ASEAN remained a top recipient of FDI in developing regions and continued to be an engine of growth. The region’s share of global FDI inflows rose from a pre-pandemic annual average of 7 per cent in 2011–2017, to 11 per cent in 2018–2019, to 12 per cent in 2020–2021. Strong inflows pushed up FDI stock in the region to $3.1 trillion, an increase of 72 per cent from 2015 ($1.8 trillion).

The report attributes many factors for this strong FDI inflow growth, like rising investment across different modalities, a strong rebound in manufacturing, corporate investment strategies focusing on capacity expansion to bolster supply chains and for the post-pandemic recovery, significant investment from key source countries, and investment in infrastructure-related activities, including in the digital economy.

“Strong investment in manufacturing, finance and some services industries associated with the rapidly growing digital economy and Industry 4.0 activities were the main industry drivers. Investment in manufacturing recorded the strongest growth (134 per cent), to $45 billion, in industries such as electric vehicles, electronics, biomedical and pharmaceuticals. Finance and banking remained the largest FDI recipient industry with 22 per cent growth, to $57 billion, underpinned by ASEAN and foreign banks picking up investment and multinational enterprises.

FDI from the top 10 sources accounted for 74 per cent of investment in ASEAN with the top 5 contributing more than 55 per cent to total inflows in 2021.

This is compared with 90 per cent for the top 10 and 64 per cent for the top 5 in 2020, suggesting more diverse sources of investment. Investment from the USA in the region ranked top, rising by 41 per cent to $40 billion, mainly because of significant increases in investment in banking and finance, and in the electronics, biomedical and pharmaceutical industries.

FDI from China increased by 96 per cent to almost $14 billion.

In recent years, ASEAN member states have adopted significant investment reforms and regional frameworks for the purpose of promoting FDI. According to a recent UNCTAD Investment Policy Monitors, while the number of measures restricting or regulating investment at the global level has gone up, ASEAN is moving in the other direction, continuing to implement almost exclusively measures favourable to investment. These actions, together with the influence of regional integration, have contributed to an improving investment environment over the past decade, which has played a role in supporting ASEAN in attracting FDI inflows exceeding $100 billion since 2010 (with recent years registering inflows of more than $170 billion).

Meanwhile, despite global uncertainties and challenges, a statement from the Cambodian government on June 21, 2022, suggests that the foreign direct investment for 2022 and 2023 will “recover around 12 per cent and 11.6 per cent of GDP, respectively.