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Cambodia: a poor country with investment potential
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Cambodia: a poor country with investment potential

created Forex Club9 May 2024

Cambodia is one of the fastest developing countries in the world. There are many factors supporting economic growth. These include a young population and a favorable geographical location. Thanks to a stable political environment and predictable economic policy, the potential has been well exploited in recent years. It is therefore not surprising that the growth rate CBA is at 7% per year. As a result, Cambodia has become one of the fastest developing countries in the world.

Cambodia: huge prospects and membership with RCEP

Cambodia experienced rapid development due to many factors that occurred simultaneously. One of the most important was the favorable geographical location. Cambodia itself is close to China and the dynamically developing Vietnam. Thanks to its long coastline and proximity to key communication routes, the country began to be perceived as an interesting place for investment. Low wages also help. Thanks to low labor costs, some companies decide to locate industrial plants in Cambodia. For this reason, the Khmers were located in the country textile and clothing factories or bicycle production. Companies from... are particularly keen to invest in Cambodia Chin i Japan. This is due to, among others, from geographical and cultural proximity. Liberal law encourages investing in Cambodia, so foreign companies have no problem taking over Cambodian companies and opening their own branches in the country.

Cambodia is located in one of the key regions of the new center of the world economy. This includes, among others: about CJPE, or Regional Comprehensive Economic Partnership and ASEAN. It is worth mentioning RCEP in more detail, which is currently one of the most important economic areas in the world. It is a free trade agreement that brings together the three largest economies of East Asia (China, South Korea and Japan) and the dynamically developing region of Southeast Asia. Thanks to this agreement, RCEP countries can enjoy easier trade.

rcepi

RCEP. Source: wikipedia.org

The organization itself was founded in 2020 by 15 countries. These included 10 ASEAN member states  (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), as well as 5 other countries (Australia, China, Japan, New Zealand and South Korea). Thanks to the agreement, customs barriers were lowered. In addition, non-tariff barriers (e.g. quotas) were lowered. RCEP allows for easier trading and investment. Solutions have also been created to resolve disputes (arbitration) and protect intellectual property. In the coming years, there will most likely be greater integration of the economies that have joined RCEP. One of the beneficiaries are countries such as Cambodia, which may become a place of large investments. It will also benefit from trade. However, it should be remembered that Cambodia currently exports mainly to the United States and the European Union. However, over time, trade with other RCEP members is likely to increase.

The country's big advantage is low labor costs. As a result, the production of things requiring the employment of a large number of workers is cheaper in Cambodia than, for example, in China. In addition, many manufacturing companies use Cambodia as a place to apply so-called labor cost arbitrage. Enterprises move production to a country with lower labor costs. Ultimately, it can lower prices for its products and maintain its margin. The disadvantages are higher transport costs and longer order processing time (necessity to transport goods).

We mentioned that Cambodia's midwifery is extremely advantageous, so it can benefit from geographic rent. This is because the country is located between Thailand and Vietnam, which are important economies in this part of Asia. The Southern Economic Corridor, which connects Thailand, Cambodia and Vietnam, is playing an increasingly important role in the global division of labor. The Khmer country itself has the potential to become a sub-regional logistics hub. The government is aware of this potential, so it is not surprising that in the coming years it is to allocate approximately $30 billion for the modernization and expansion of infrastructure (road, railway, sea and air).

Rapid economic growth. What drives him?

By moving production to Cambodia, the country experienced rapid economic growth. The chart below shows that GDP per person, adjusted for purchasing power, has grown rapidly over the last 30 years.

development cambodia

GDP per person in purchasing power parity. Source: World Bank

In such a situation it happens convergence effect, i.e. catching up in the level of development of countries in the region. Of course, Cambodia still has a long way to go. Not only is the country lagging behind its neighbors, but it is also significantly below the world average. On the one hand, it proves the enormous backwardness of this country. On the other hand, it provides an opportunity for dynamic economic growth resulting from convergence to more developed countries. The fact that less developed countries can quickly catch up with more developed ones can be seen from the example of Poland, which has overtaken countries such as Greece or Portugal in terms of development level.

GDP per capta ppp

GDP per person in purchasing power parity. Source: World Bank

As you can see in the chart above, the level of development between Cambodia and neighboring Vietnam is very high. This means that Cambodia will be able to benefit from the so-called “labor cost arbitrage”. In short, it is the transfer of production and service operations to countries with lower costs. The reason for this practice is the desire to improve the profitability of companies' operations. This strategy is very popular with the abolition of customs barriers and non-tariff restrictions. Arbitrage mainly concerns labor-intensive activities that have low margins. A great example is the clothing industry, where Asian countries are in the lead.

Another positive aspect that Cambodia has is its very good demographic situation. According to statisticians' estimates, the country's population is expected to increase by about 25%. It is also worth looking at the pyramid structure, which is currently very healthy.

demography

What sectors are key to the Cambodian economy?

The sector is the lever of development tourist and textile. In addition, the country is experiencing increased urbanization and improved infrastructure quality. In the coming years, we can expect an increase in spending on new roads, railways, ports and airports. Therefore, we can expect an increase in revenues and profits from building materials suppliers and construction companies.

The increase in urbanization also means the development of the housing market, because growing cities will need new residential buildings. This will mean an increase in the prices of construction land and, most likely, higher prices of apartments in the centers of the largest industrial, commercial and financial centers.

Let's take a look at the structure of imports and exports. The country exports mainly to the United States and the European Union. This is interesting because the country has not joined in “Asian value chain”, but for now it is an assembly plant and a supplier of cheap products for "Western" countries. If we look at imports, we can see that it is dominated by China and geographically close countries (Vietnam, Thailand, Indonesia and Singapore).

export and import

Cambodia is developing strongly in automotive industry. Of course, there is no major car brand, but it specializes in providing components and less advanced parts. Most likely, due to geographical proximity, many companies will be established as sub-suppliers to Chinese automotive companies. It is possible that the number of car assembly plants will also increase in the coming years. It is worth adding that in 2022, the Cambodian government has developed a plan called: Development path of the Automotive and Electronics Sector.

Another sector that is booming is production of bicycles and bicycle parts. According to MOC data, Cambodia ranks first in ASEAN and 5th in the world in terms of the value of exported bicycles and components. One of the main export destinations is the European Union, where ⅔ of exports go.

However, the most important sector is the one related to production of textiles and clothing. The growth of this market is staggering. In 2022, there were over 1900 factories operating, most of which produce for export. The reason for the development of this sector is that labor and energy costs are really low. As a result, it is currently more profitable to open a new factory in Cambodia than a similar plant in, for example, China. Clothing and textile exports were worth approximately $2022 billion in 13. It is worth remembering that this type of production is very labor-intensive and has little added value. Therefore, if Cambodia wants to move up the supply chain, it must develop other industries.

Another promising segment is furniture industry, which, despite its still small size (employment of 9 people), has great potential. This is due to the fact that the cost of furniture production in such a country is much lower than, for example, in the USA or the European Union. Thanks to this, a furniture company importing furniture from Cambodia can purchase it at a competitive price. In the coming years, further development of this market in Cambodia is expected as a result of the transfer of part of production, e.g. from China.

Importantly, a trend has begun to develop sectors with higher added value, such as production of IT equipment and development of technology companies. This is due to improving education and a large percentage of young people who are familiar with new technologies.  The country is still poor, but is striving to be a middle-income and knowledge-based economy. Demographics also help. More than half of the inhabitants are under 50 years old. This means that the country will most likely experience increased demand for real estate. In addition, the large supply of employees will mean that wages will not increase very quickly. Thanks to this, the country will maintain cost advantages for the next dozen or so years. Of course, it is important for governments to provide predictable laws and good conditions for business development.

Barriers to development: still a lot to improve

The low level of qualification of employees is a huge opportunity for the training industry. There is a lack of finance specialists, engineers and senior and middle management staff. There should also be high demand for learning foreign languages, which will allow for a better career in foreign companies from China, Japan or the United States. For this reason, the demand for learning Chinese, Japanese and English should be very high in the coming years.

However, there is still a lot to do in the field of education because in 2021, as many as 16% of the population could not read and write. Improving the quality of education at both primary and higher levels is one of the greatest challenges for the country. More educated citizens mean a chance for faster transformation of the country and catching up with the more developed economies of the region.

What had been a brake on development for decades was ossified social structure and reluctance to change. However, society is modernizing. Of course, the so-called concept still dominates in Cambodia “saving face”. It means that you should avoid conflict situations and speaking directly. Pointing out a supervisor's mistake may result in the boss losing face, which is degrading in this society. For this reason, communication is indirect. Therefore, people growing up in Western culture may feel a bit lost. It is not worth criticizing or embarrassing Cambodian contractors. Pointing out errors will not be accepted either. Before your first trip to Cambodia, it is worth carefully examining the way of communication and gestures of showing respect. This will certainly help in negotiations.

Cambodia has it too corruption problems. This is evidenced by its very low position in the Corruption Perceptions Index ranking. The country ranks 158th out of 180 countries and regions. It is worth noting that this is much lower than neighboring Vietnam (83rd place) and Thailand (108th). Only Myanmar (162) is a worse country near Cambodia. A better fight against corruption would certainly allow the country to develop faster. However, it is worth remembering that this is a process spanning years or even decades.

Still very weak capital market

Cambodia is an underdeveloped country. No wonder that the local capital market is also not important for investors. Search with a candle ETF having exposure to this country. For this reason, investing in it is only possible through direct access to the stock exchange. Unfortunately, due to the fact that it is a niche market, the number of brokers offering the opportunity to trade Cambodian securities is very small, and the market itself is unattractive. Even though it was founded in 2012, it was in 2023 only 11 listed companies worth approximately $5 billion. It's really not much.

Summation

The favorable location and competitive wage rates mean that the country has a chance for a dynamic increase in GDP and the standard of living of its inhabitants. Population growth and the enrichment of society should support the real estate market. Unfortunately, investment barriers in this market are very high. This is mainly due to the so-called information gap. Most people are unfamiliar with Cambodian law and the real estate market. For this reason, there is a high risk of a bad investment. Unfortunately there is currently no REIT with exposure to this market. Therefore, we are dependent on intermediaries who reduce the profitability of such an investment. If anyone is thinking about investing in the Cambodian stock market, they will be disappointed. Currently, the market is difficult to access for foreign investors and not very liquid. At the end of 2023, there were slightly more than 10 joint-stock companies listed. Undoubtedly, Cambodia is one of the most promising markets in the world. The problem, however, is difficult access to this market. It is therefore worth considering whether it is worth looking for a way to invest in this country. After all, as he says Warren Buffett:

“No points for difficulty.”

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