Why Cambodia can be the next Asian Tiger?

For many serious observers, Cambodia is a dark horse with unprecedented potential to turn into
the next big thing in Southeast Asia. Rising from the ashes of the Khmer Rouge, Cambodia has established itself as one of the world’s fastest-growing economies in the region. Khmer Times talks to experts to find out why and how the Kingdom could well be the next Asian Tiger.

Having one of the fastest economic growth rates in the world for over two decades, coupled with a rising young population and rapidly getting converted as an attractive investment destination, Cambodia is being increasingly viewed by business leaders and economists as the next Asian Tiger, closely following the footsteps of Singapore, Hong Kong, Taiwan and South Korea in many respects..

According to a recent World Bank report, thanks to thriving garment exports and flourishing tourism, Cambodia’s economy grew at an average annual rate of 7.7 percent between 1998 and 2019, making it one of the fastest-growing economies in the world.

The report further cited that post-pandemic, Cambodia’s economic recovery has started regaining momentum. Traditional growth drivers, especially garment, footwear and travel goods manufacturing and agricultural commodities exports, have fully recovered.

The Kingdom’s economy, according to the report, is projected to grow 4.8 percent in 2022, upwardly revised from a forecast of 4.5 percent in April, underpinned by merchandise exports and domestic economic activity. Over the medium term, the economy is expected to grow around six percent annually as the new investment law and free trade agreements help boost investment and trade.

While expressing his confidence in the fast-growing Cambodia economy, Anthony Galliano, President of the American Chamber of Commerce (AmCham), told Khmer Times that the country deserves to be recognised as one of the world’s most attractive investment destinations given its historical economic achievements and by being one of the most promising prospects in the region.

Rising from the ashes of the Khmer Rouge, in what might have appeared to be an unobtainable undertaking, Cambodia has established itself as one of the world’s fastest-growing economies since 1998, he noted while commending the achievement.

As a result of almost near-perfect governmental management of the Covid-19 pandemic, in maintaining a balance of health and social safety and economic security and stability, Cambodia also emerged as one of the least blemished economies with one of the lowest mortality rates due to the pandemic, Anthony pointed out.

“Historical GDP growth is one of the world’s best in the 21st century and the future outlook points to a resumption of this stellar performance. The International Monetary Fund (IMF) is projecting that Cambodia will be the region’s fastest-growing economy by 2025. The Kingdom has a remarkable near zero unemployment rate and is finally creating better jobs with rising incomes,” Anthony said.

According to the AmCham President, dollarisation has protected the Khmer Riel and limited the inflationary pressures, while other regional currencies have depreciated as the US dollar is the strongest it has been in two decades.

“Cambodia has an open economy and a stable government and it continues to provide investment incentives. The country has entered into and continues to enter into key trade treaties, and is continually and rapidly upgrading its infrastructure, particularly roads and ports,” Anthony said, while listing out reasons why the country can be the next ‘Tiger’ economy from the region.

A garment factory in Phnom Penh. Cambodia’s exports are growing, be it garments, rice or bicycles.
KT/Chor Sokunthea

According to him, some of the advantages of investing in Cambodia include 100 percent ownership of companies of foreign investors except in some categories such as cigarette manufacturing, movie production, rice milling, gemstone mining and processing.

Other advantages include low corporate tax, minimum capital requirement of just $1,000 to set up a company and a youthful population of around eight million under 25 years, Anthony said, adding that “Cambodia is perhaps the safest place on earth to live in.”

The economy, according to him, accelerates despite the reduction of China’s FDI and the slowdown of Cambodia’s exports to the country, as a consequence of China’s zero covid policy.  “China’s reopening is the wild card for a further shot in the arm to spur Cambodia’s economic growth too much higher levels than anticipated,” Anthony said.

Vichet Lor, Phnom Penh President of Global Real Estate Association (GRA), agreed with the view that the high level of dollarization has helped the country to attract large foreign investments as it protects investors from major currency fluctuations.

Being a fully liberalised economy, Cambodia could attract foreign investment to key infrastructure projects such as roads, airports, oil drilling and mining, Lor said, adding that the Kingdom is also having one of the lowest corporate taxes in Asia and will continue to be so for the foreseeable future with the introduction of the New Investment Law that offers tax incentives and tax holiday for up to nine years.

The stability of the economy is also underscored by the fact that the Gross National Debt is only about 40 percent of the GDP prompting financial institutions like ADB, IMF and World Bank to rate Cambodia as financially safe for the medium term, Lor further said.

Another huge advantage of Cambodia becoming the next ‘Asian Tiger’ is that it has a young population of about 70 percent under the age of 40 and its unemployment rate is near zero. In Vichet’s opinion, a bi-lingual or tri-lingual population in Phnom Penh increases the competitiveness and attractiveness of FDIs. After, Singapore and Malaysia, Cambodia is considered to have the largest English-speaking population in the region.

The absence of restrictions in foreign currency exchanges or transfers has also boosted the country’s standing in attracting investments from abroad. A rising tax collection year on year has provided the government with more room and flexibility to invest further in infrastructure developments.

The revised Taxation Law to be adopted by the National Assembly soon will further enhance investor confidence in Cambodia. Emerging capital markets including Cambodia Securities Exchange (CSX) will take the economy to greater heights. The country also has many unexplored areas for growth such as in fintech and e-commerce that could attract more investment in the near future.

Cambodia’s Special Economic Zone (SEZ) policy is also playing a leading role to stimulate the manufacturing sector as the country has greatly benefitted from the Free Trade Agreements with China and South Korea besides the Regional Comprehensive Economic Partnership (RCEP) Agreement.

Export of bicycles from Cambodia has set new records. Between Jan-Sept 2022, the bicycles sector contributed $700 million to the export pool. KT/Chor Sokunthea

According to Vichet, there are even more reasons for boosting investor confidence in Cambodia such as the proposed launch of the commercial court in 2023 to hear trade disputes. “The hosting of the South East Asian (SEA) Games next year and the inauguration of the new Phnom Penh International Airport, which is the world’s 9th largest airport, likely in 2023, will further cement Cambodia’s position as an investment destination with adequate infrastructure and facilities to accommodate a burgeoning economy,” he said.

Cambodia’s high urbanisation rate is stimulating demand for all types of goods and services especially housing, retail and international Grade A office towers and commercial mixed-used buildings. “The rising middle class in Cambodia will increase the demand for luxury goods and increase the trade exchanges between Cambodia and major markets like Europe, the US, Japan, South Korea and China,” Vichet said.

Cambodia is also one of the most politically stable countries in Asia and will continue to be for the near foreseeable future which further reduces the risk impact and mitigates the risk of investing in the country.

The Kingdom is also making efforts to structure itself to be a leading tourist destination with more five-star international hotels investing in the country’s hotel industry.

Sandeep Majumdar, President of the Indian Chamber of Commerce (InCham) in Cambodia opined that the recent successful conduct of the Asean Summits by the Kingdom has boosted the country’s image across the world.

“Also, Cambodia’s exports are growing – be it garments, rice or bicycles. The country has always welcomed investors and the new Investment Law greatly increased the confidence of investors,” he said.

Cambodia’s SEZs are also attracting a lot of investment, Sandeep pointed out. Now, one could see Cambodian Chambers of Commerce in several countries even in far-off places such as Canada, he added.

According to Sandeep, a high-level Indian business delegation will visit Cambodia from January 17 to 19, 2023. “We are expecting representatives of over 200 companies, besides Cabinet ministers and members of the royal families in the delegation. They will have meetings with Cambodian ministers and business leaders. I am sure that some of the Indian companies that are part of the delegation will come forward to invest in Cambodia,” he said.

The conversion of Cambodia from a poor country couple of decades ago to a fast-growing economy, in such a short span, has been remarkable and a story, hardly repeated by any other country in the world. The Kingdom reached the lower middle-income status in 2015 and has set its sights on attaining upper middle-income status by 2030.

According to the World Bank report, Cambodia has recently redefined the poverty line, using the most recent Cambodia Socio-Economic Survey for 2019/20. The national poverty line is now 10,951 riels per person per day or the equivalent of $2.70 (at October 2022 exchange rates). Under the new poverty line, about 18 percent of the population is identified as poor. The poverty rate is the lowest in Phnom Penh (4.2 percent) and other urban areas (12.6 percent), and the highest in rural areas (22.8 percent).

Over the period 2009-2019/20, poverty rates declined by 1.6 percentage points a year, driven substantially by rising wage earnings. The scale-up of social assistance to poor and vulnerable households, launched in June 2020, has moderated income losses during the pandemic.

A survey of the households also showed that employment has returned to pre-pandemic levels. The negative effect of the pandemic on non-farm family businesses has stabilised; however, low consumer demand remains the main driver of revenue losses, the World Bank report said.

Senior economist and Director General of the Institute of China Studies at the Royal Academy of Cambodia, Ky Sereyvath told Khmer Times that high labour productivity-wage ratio has enabled the country to attract FDIs in large volume and this accelerated the country’s economic growth to a great extent.

Cambodia is striving to promote the country as the rice basket and earn revenue of around $800 million annually. KT/Chor Sokunthea

Adding to the country’s advantages are the political stability and peace prevailing in the Kingdom, which boosted aggregate demand and consumption, he said, while also pointing out that the integration of Cambodia’s economy to regional and world economies via WTO, ASEAN, RCEP and FTAs “has created platforms for rapid growth.”

Meanwhile, Cambodia’s Minister of Economy and Finance, Aun Pornmoniroth, while participating in a 2023 budget law debate in National Assembly last month, said that due to rising global demand, foreign investors’ confidence, and a full reopening of borders, the country is expected to see 5.4 percent economic growth this year and 6.6 percent next year.

The minister said the GDP per capita would rise to $1,785 in 2022 and further up to $1,924 in 2023. The industrial sector, mainly garment and construction, is predicted to grow by 9.2 percent next year, while the service sector, mainly tourism, transport, telecom, trade and real estate, by 6.6 percent and agriculture, by 1.1 percent.

The country’s inflation is expected to go down to 2.5 percent in 2023 from around five percent in 2022, he added.

While supporting the minister’s words, World Bank senior country economist Ly Sodeth said Cambodia’s economy is recovering well after Covid-19. “The surge in manufacturing, especially export-oriented garments, footwear, travel goods, and bicycles, the revival of the travel and tourism industries and the return of FDI inflows have helped economic recovery in 2022,” Sodeth said during the launch of the World Bank’s Cambodia Economic Update in Phnom Penh recently.