Over the last few years, Cambodia has witnessed a slowdown in some traditional trade and investment sectors which has been largely attributed to changes and challenges in the global economy.
The economy has experienced the shifting influence of China, the European Union (EU) and ASEAN member states. Efforts to diversify production and trading partners appear to offer the economy greater resilience against global economic headwinds into the future and provide nationwide sustainable development.
Lawrence Lennon, Managing Director of CBRE Cambodia, explained that China has experienced economic headwinds for the last two to three years. The slowdown has occurred in the real estate and construction sector, which represents up to 30 percent of the Chinese Gross Domestic Product (GDP) and 70 percent of household wealth.
Meanwhile, the nation has concurrently witnessed a slowdown in Chinese-made exports, as global demand has recoiled.
“The Chinese economy has faced logistics challenges posed throughout the Covid pandemic period, an ongoing trade war between Western and Chinese companies, and an overall slowdown in Western markets, reducing Western consumer demand for imports from China,” he explained.
The post-Covid economic lag also led to a general reduction in consumer spending globally, which has had a knock-on effect on Chinese trade.
The pandemic and the period following was an unpredictable one for consumers all around the world, said Lennon, “as salaries were reduced while costs of living increased leading to the so-called ‘Cost of Living Crisis’.”
The Chinese state is however taking the slowdown seriously and has various mechanisms underway to re-stimulate the domestic economy, noted Lennon, including kick-starting the local real estate and construction sector.
Yet despite stimulants, China is still facing lower demand for real estate and reduced consumer spending compared to pre-Covid levels. “Therefore, in the shorter term we should expect less overseas infrastructure investment spending and other capital outflows to trade partner nations such as Cambodia than previous levels,” Lennon said.
It’s no wonder Cambodia is easily influenced by the Chinese market’s economic trends, said Lennon, noting that Cambodia historically has seen around 50 percent of yearly foreign direct investment (FDI) coming from Chinese sources.
If this influx of capital reduces, activity in the market naturally will too.
Similarly, Chinese tourist numbers have reduced, which is reducing activity in the local tourism and hospitality segments.
Chinese inbound tourists to the Kingdom accounted for around 40 percent of all arrivals in 2019, but only around 10 percent in 2023, according to periodic data released by the Ministry of Tourism.
Sisavuthara Sim, Founder and CEO of Nexus Capital & Investment Advisory, agreed, “With the Chinese government currently solving in-house problems, we have not seen the level of Chinese investment in Cambodian real estate as we witnessed in 2019 and prior years.” Nonetheless, China remains Cambodia’s largest investor.
The Council for the Development of Cambodia’s (CDC) latest Foreign Direct Investment (FDI) report details that Chinese-funded investment into Cambodia remains the majority share.
Chinese investment is followed by Singapore and Malaysia, placing second and third respectively. It also remains Cambodia’s largest trade partner in 2024 by volume of goods traded, followed by the United States, ASEAN member states (led by Vietnam and Thailand) and the European Union.
“Therefore despite some downturn in recent periods, we can’t ignore the ongoing positive influence of China upon the local Cambodian economy,” Sisavuthara concluded.
Economic tensions
Changes are also occurring in Western markets, which is influencing Cambodia’s trade prospects in recent periods. Economic tension is increasing in Europe, and the knock-on effect is reducing demand for Cambodian export products, stated Sisavuthara.
A general slowdown in European, US and UK markets is being caused by rising inflation, interest rates and the increased cost of living, Lennon explained.
The other factor that is having a negative effect on growth in the European market is the ongoing conflict in Ukraine, he said, which is causing instability for both the public and private sectors due to the potential of spillover conflicts in the region, raising the cost of food and fuel.
“There seems to be no clear end in sight for the conflict, and must be noted as an important event that now influences the European economy, and in turn the global economy,” Lennon said.
Western economic health is very important to Cambodia because historically approximately 60 percent of Cambodia’s exports to Europe, the US and the UK, he said.
“Meanwhile, of those exports, around 50 percent reflect garments and footwear, which include big Western brands such as H&M, Uniqlo, Marks and Spencers and so on.”
The country exported garment products worth $4.4 billion in the January-July period of 2023, a nearly 20 percent decrease year-on-year compared to 2022.
In the same period, the export of footwear decreased by 22.7 percent to $808 million, according to a mid-year report from the General Department of Customs and Excise (GDCE) last year.
A reduction in purchasing power in Western markets seen in the first half of 2023 therefore quickly had a significant influence on these types of consumer products being produced in Cambodia.
For these reasons, Lennon commented that while the garment trade is positive for the Cambodian economy in that it represents huge national employment, Cambodia’s reliance on the sector for its trade deficit means the economy is less resilient when demand for such products reduces, as we have witnessed in recent periods with fluctuations in Western demand.
Sisavuthara also notes a drop in trade with European nations and the UK, however, he said that Cambodia’s trade with the US market in early 2024 remains robust and demonstrates forward momentum.
Cambodia-ASEAN trade
Regardless of changes in the influence of both China and Europe, commentators agree that Cambodia-ASEAN trade is growing significantly in recent years, and is expected to continue to increase.
The Ministry of Economy and Finance (MEF) FDI report in the first half of 2023 which measured the changes in foreign demand for Cambodian-made products, demonstrated that ASEAN nations demand for Cambodian investments jumped 110 percent in the period, compared to Chinese demand rising only 10 percent.
In the same period, Cambodia saw a reduction in demand from traditional trading partners such as the US, EU, Japan, UK and others, according to MEF reports.
This demand from ASEAN partners is expected to continue growing, said Lennon.
The two ASEAN countries, Singapore and Malaysia, are likely to be leaders of the pack for increased Cambodia investment, suggested Sisavuthara.
According to the latest Council for the Development of Cambodia (CDC) FDI report, Singaporean and Malaysian direct investments in Cambodia are ranked number two and three, only after China.
The emerging influx of investment from sources such as Singapore and Malaysia demonstrates Cambodia’s ability to attract capital from sources other than China, he said.
Sisavuthara believes that diversification of investment partners, especially within the Southeast Asian region, should be a key focus for Cambodia to reduce reliance on Chinese FDI.
“Singapore is the financial hub of Southeast Asia,” he said, “therefore I think it is natural that we should focus on attracting more investor demand from there.”
Meanwhile, when trading with ASEAN partners and China, Cambodia has a trade deficit.
In exchanges with Western markets, such as the US and EU, Cambodia has a trade surplus, Sisavuthara explained.
Therefore increased ASEAN trade is more beneficial to the overall economic outlook, he said.
Trade diversification
Diversification of the economy’s production and trading partners appears to hold the key to a more resilient economy for the Kingdom during global economic shifts in future.
Lennon said that the numerous trade envoys undertaken by the new Prime Minister Hun Manet in 2023 and 2024 to countries such as Japan, Thailand, France and Australia, among other destinations, show a highly proactive government policy in terms of the attraction of diversified investment and industry.
More diversity in trade partners and incoming FDI will mean more diversity in production capacity, and ultimately less reliance on a few key trade partners for a few key industries to drive the economy, he explained.
Meanwhile, diversification in the industry will harness opportunities for the improvement of vocational skills, and create a more skilled workforce in the future able to attract more complex, high-value investments.
Diversification of trading partners is likely to decrease reliance on traditional trade partners and open up green pastures and boost new investment opportunities, agreed Sisavuthara.
Cambodia already boasts various preferential trade treaties such as the Generalized System of Preferences (GSP) with the US, Everything But Arms (EBA) with the EU, along free trade agreements with ASEAN nations, Korea, China and others.
More such agreements will help Cambodia shift from reliance on traditional trading partners such as China and Europe by creating competitive trade conditions in other regions, he said, and leverage the potential of new markets.
There are also opportunities to expand manufacturing as part of existing supply chains with neighbouring nations, along with the greater ASEAN region, to stimulate more commerce regionally.
“This means cooperating with regional firms to fill the demand of regional supply chains and tap into industries other nations are demanding,” Lennon said, noting that these opportunities are aided by the huge development made in Cambodia’s regional transportation infrastructure.
Lennon noted that while logistics costs remain a challenge in Cambodia, new opportunities lie in greater utilization of riverways and potentially creating an “off-peak rate” for light-logistics vehicles to maximize use of the newly completed Phnom Penh-Sihanoukville Expressway.
This will also likely allow the developer to maximize its return on investment, said Lennon.
The government’s recently unveiled ‘Comprehensive Intermodal Transport and Logistics System Master Plan 2023-2033’ (CITLS) is set to fast-track the transport sector and reduce costs of freight, being implemented in August this year.
Comprising 174 projects, the plan covers roads, railways, river, sea and air transport networks, with an estimated investment requirement of approximately $36.6 billion.
The plans also include maritime infrastructure development able to serve 1.2 million passengers and 41 million tonnes of cargo annually by 2030.
Along with massive investment in logistics systems, the network of high-standard Special Economic Zones (SEZ) also creates ease of manufacturing operations in the country, Sisavuthara said.
Electricity cost is another key priority for the government to ease commercial competitiveness, and breed economic growth from all directions, commentators agreed.
Economic resilience
Diversification of manufacturing production and adding value to existing products is also a path to greater economic resilience.
While traditional exports in segments such as garments are declining, emerging export sectors are demonstrating swift growth, Lennon pointed out.
According to MEF statistics, during the first half of 2023 traditional industrial exports such as textiles, garments and footwear, declined by around 20 percent, and bicycle production by almost 40 percent.
Meanwhile, in the same period, the economy witnessed growth in emerging export sectors such as gold, agricultural and fisheries, electronics and spare parts, wood and wooden products, along with other export products.
Given this increase in demand for non-traditional exports, new avenues are certainly open for Cambodian manufacturers to explore.
Diversification of industrial production will increase resilience in the economy and effectively hedge bets when demand changes, Lennon explained.
Alongside attracting new industries and trade partners, Cambodia’s most time-tested industry, agriculture, appears to offer huge promise for the Cambodian economy for many years to come.
Agribusiness has shown considerable strength even during the recent economic recession where the country witnessed more and more agricultural production and export earnings, said Sisavuthara.
Since the Covid period, Cambodia has also witnessed increased investment from European, US, Australian and other major economy development agencies and Non-Governmental Organizations (NGO) focused primarily on Cambodian agribusiness development.
This demonstrates their understanding of the dynamic nature of agribusiness, and Cambodia’s largely untapped potential, he said.
“However, Cambodia must not only export raw agricultural products to be processed and sold overseas. Instead, we need to add value to raw materials and achieve higher yields for the same products after secondary processing,” he suggested.
The agribusiness sector will however require more private investment and innovation in order to create the correct conditions for adding value to raw products.
Yet in turn, these investments will create more job opportunities in the agribusiness sector, allowing increased consumer spending and importantly more spending on real estate investment.
“Now we have a low-value and high-volume agricultural model. We can create a lot more wealth for all parts of the supply chain if we can transfer to a high value-added agricultural model,” he said.
Lennon noted that Cambodia remains largely underdeveloped in terms of agricultural capacity, compared to more industrialized economies.
The benefit of the Cambodian agriculture sector is that more farmers still use sustainable practices in producing food of very high quality.
Therefore, he believes, “Cambodia has the environmental potential to become the breadbasket of the region, given it can improve its agricultural productivity.”
Along with Cambodia’s potential for agribusiness growth, there are food security issues for most major economies, meaning demand for agricultural production remains strong and set to increase, noted Lennon.
While tourism represents a potential vehicle of growth for the economy also, alongside agriculture, demand for travel naturally changes based on consumer spending trends and global economic conditions, a trend that Cambodia has experienced in the years following the Covid pandemic, noted Sisavuthara.
The agribusiness sector, however, is unlikely to reduce demand in coming years as all economies are reliant on it, he said.
Forty percent of food products are currently imported into Cambodia to satisfy demand, Lennon said, and he suggested that much of these current imports likely represent processed foods.
The country might remove this reliance on food imports through its own food production, diversification of food products and adding value to raw goods to produce better quality food for domestic and international markets, he said.
“The best start is for Cambodia to achieve food self-sufficiency, removing the need for food imports, and after this expand export potential,” said Lennon.
Furthermore, many international economies are also suffering from increasing obesity rates due to highly processed foods.
Hence, Cambodia has an opportunity to provide its own people and trade partners with higher quality Cambodian-grown food, improving trade and health, he said.
Innovation in agriculture and food processing also offers quality and sustainable employment opportunities for the people, he concluded.
Source:Khmer Times
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<p>Time: 2024 By: Ministry of Industry and Trade</p>
