Investment Hightlights

Macroeconomics of Cambodia in 2024

• ● Cambodia, as a member of the Association of Southeast Asian Nations (ASEAN), is characterized by a young workforce, a lower unemployment rate, and rapid economic growth.
   
• ● The political regime is stable, and there is stability in the exchange rate, with the U.S. dollar freely circulating. The banking sector and electronic payment systems are well-developed, leading to higher deposit interest rates due to rapid economic growth.
  ● Despite the short-term impact of the pandemic, Cambodia's economic recovery is favorable, with only high-end real estate and the tourism industry requiring a longer recovery time. Both the International Monetary Fund (IMF) and Cambodia's Ministry of Economy and Finance anticipate that the growth rate in 2024 will surpass the 2023 level.
  ● Based on IMF data, it is expected that Cambodia will remain the country with the highest economic growth in Southeast Asia in 2024. Therefore, even if the Federal Reserve begins to lower interest rates, Cambodian banks are projected to maintain higher interest rates compared to other regions. This is advantageous for the issuance of money market funds in the local market.

Cambodia, situated in the central-southern part of Southeast Asia, is a member of the United Nations and the ASEAN. It shares borders with Thailand to the west and northwest, Laos to the northeast, Vietnam to the east, and faces the Gulf of Thailand to the south. The capital is Phnom Penh, and the country covers an area of approximately 181,035 square kilometers, about five times the size of Taiwan.
Cambodia's population structure, characterized by a positive demographic pyramid, is conducive to economic development. As of 2022, the World Bank estimates the country's population at 16.767 million, with young people under the age of 34 constituting around 70% of the total population. Rich in natural resources, Cambodia has a highly open free-market economy that promotes privatization and trade liberalization. The constitutional monarchy, established in 1993, features a separation of legislative, executive, and judicial powers. Prime Minister Hun Sen held power for nearly 35 years, ensuring political stability. In the latter half of 2023, Hun Sen's son, Hun Manet, officially succeeded him as the new prime minister. Cambodia has signed trade agreements with multiple nations, including the ASEAN Free Trade Area (AFTA) since joining ASEAN in 1999, a free trade agreement with China (signed in October 2020), the Regional Comprehensive Economic Partnership (RCEP, signed in November 2020), and a bilateral free trade agreement with South Korea (signed in February 2021).
 

1. Low Unemployment Rate

According to data from the World Bank, Cambodia has maintained an unemployment rate below 1% since 2008. In 2022, the unemployment rate was 0.361%, which is considered relatively low on an international scale. A low unemployment rate indicates a relatively vibrant economic system, and even during the pandemic, Cambodia has managed to keep its unemployment rate at a low level.

   Source:  The World Bank

2. Impact of Pandemic and War Leading to High Inflation and Rising Interest Rates

In 2022, the global economy experienced a rebound in the aftermath of the COVID-19 pandemic. However, various challenges persisted, such as disruptions in the supply chain due to lockdown measures implemented by China and inflation triggered by the Russia-Ukraine war, particularly in fuel and raw materials. These factors contributed to a global inflation rate of 8.8% in 2022 (compared to 3.4% in 2021), with increases observed in both advanced economies and emerging economies at 7.2% and 9.9%, respectively.

To address this situation, most central banks attempted to curb the growth of inflation by raising policy interest rates, aiming to reduce overall demand for investment and consumption. For instance, the Federal Reserve increased interest rates at a pace exceeding expectations, leading to an influx of funds into the United States and strengthening the U.S. dollar. The outflow of funds primarily came from emerging and developing countries, exerting continuous pressure on the local currency values, international reserves, and debt repayment capabilities of these nations.

These challenges resulted in a downward revision of global growth expectations to 3.5% in 2022 (according to IMF estimates), compared to earlier predictions of 4.4% in January 2022.

Source: National Bank of Cambodia

Outlook on Global and Cambodian Economies

The International Monetary Fund (IMF) recently released its latest World Economic Outlook report, projecting a global economic growth of 3.0% in 2023 and 2.9% in 2024. The growth forecast for 2024 has been revised down by 0.1 percentage points from the July prediction. The report indicates that the global economy continues to recover from the COVID-19 pandemic and the Ukraine crisis, but the progress is slow and uneven. Despite showing resilience earlier in the year, global economic activity has not yet reached pre-pandemic levels, and there is an increasing trend of divergence among countries.

The IMF predicts a deceleration in global economic growth from 3.5% in 2022 to 3.0% in 2023 and further to 2.9% in 2024, all below the historical average of 3.8% (2000 to 2019). In contrast, Cambodia's growth expectations have been adjusted by the IMF, with a revised growth rate of 5.6% for 2023 (down from 5.8% in April) and a forecast of 6.1% for 2024, significantly outperforming global and regional levels. According to Cambodia's Ministry of Economy and Finance's budget overview for the fiscal year 2024, the country's economy is in recovery, expecting a growth of approximately 6.6%. The Gross Domestic Product (GDP) is estimated to be around 14.296 trillion Riels (approximately 351.7 billion USD), with a per capital GDP expected to rise from 1,917 USD in 2023 to 2,071 USD, and the exchange rate is projected to be maintained at around 4,065 Riels to the US dollar.

Positive Impact of Foreign Direct Investment on Various Industries in Cambodia

Data from the National Bank of Cambodia (NBC) indicates that effective health policies and management by the Cambodian government during the COVID-19 pandemic ensured the recovery of domestic economic activities in 2022. The introduction of a series of economic and financial measures, especially the relaxation of regulations in the "Economic Recovery Framework and Program for Coexistence with COVID-19 in the New Normal 2021-2023" and the leniency in banking industry supervision, has supported and accelerated Cambodia's economic recovery. These favorable domestic conditions, coupled with growing external demand, led to a 5.1% economic growth in Cambodia in 2022.

This growth was primarily driven by a 9.4% expansion in the manufacturing sector, a 15.2% growth in the hotel and restaurant industry, a 6.1% increase in transportation, and a 4.5% rise in wholesale and retail trade. Additionally, exports surged by 19.8%, outpacing the 8% growth in imports. Tourism revenue notably increased by 6.6%, and remittances from Cambodian workers abroad grew by 4%. Furthermore, foreign direct investment saw a 4% increase, mainly due to the revival of the garment and food processing industries, despite relatively weaker inflows in some other sectors.

Source: National Bank of Cambodia

4. Cambodian Riel Exchange Rate Stability and Temporary Inflation Increase

The National Bank of Cambodia (NBC) has stated that the increase in foreign direct investment and exports has prevented further decline in Cambodia's international reserves. Despite a slight decrease, the foreign exchange reserves remain sufficient to cover approximately seven months of future imports of goods and services, well above the minimum threshold for developing countries (three months). Adequate international reserve levels support the implementation of monetary and exchange rate policies, particularly in stabilizing the exchange rate and providing sufficient liquidity to maintain price stability and sustain economic growth.

The exchange rate of the Cambodian Riel against the US Dollar has been maintained at around 4,102, representing a 0.1% depreciation compared to the previous year. The average inflation rate for 2022 reached 5.3%, surpassing the 2.9% recorded in 2021, primarily due to increases in fuel and food prices. The inflation rate peaked at 7.8% at the end of the first half of 2022 but gradually decreased in the second half as fuel and food prices retreated.

Source: National Bank of Cambodia。

5. Despite external influences, a sound financial and trade environment has gradually contributed to the improvement of Cambodia's economy.

The banking system has played a crucial role in supporting Cambodia's economic recovery by actively providing financial services to meet economic demands. Private sector credit for various key economic sectors increased by 21%, while consumer deposits grew by 11.3%. The reopening of the economy in 2023 is expected to support the recovery of key economic sectors, including trade, tourism, and investment, even as the global economy faces numerous challenges and increasingly uncertain prospects. The International Monetary Fund predicts global economic growth to be lower in 2023, at 3.2%, compared to 3.2% in 2022. The prolonged Russia-Ukraine conflict is expected to have far-reaching impacts on supply chains and put pressure on inflation. The Federal Reserve's decision to raise interest rates in 2023 due to inflation will further tighten international financial conditions, leading to a further appreciation of the U.S. dollar and increased pressure on the currencies and international reserves of other emerging economies.

Despite these external challenges, data from the National Bank of Cambodia (NBC) indicates that Cambodia's economic growth in 2023 is expected to be driven by a 6.9% growth in the garment industry and a 14.3% growth in non-garment manufacturing products. As flights from China to Cambodia gradually resume and travel restrictions for Chinese citizens are lifted, the tourism sector is expected to grow by 18.5%, including an increase in local and international visitors. The agriculture sector is expected to grow by 1.1%, driven by the implementation of the Regional Comprehensive Economic Partnership (RCEP) and bilateral Free Trade Agreements (FTA), as well as the removal of import tariff preferences for rice in the European market. However, the construction and real estate sectors are anticipated to experience slower growth at 1.7% and 1.2%, respectively. While domestic demand in the real estate market is gradually rising due to the relatively affordable property market, the market demand for high-end properties by non-residents will take some time to recover to pre-crisis levels.

The local interest rate level is relatively favorable in the event of future Fed Fund Rate cuts

It is evident that Cambodia's average interest rate levels, both before and after a Federal Reserve (Fed) rate hike, remain above the Fed's interest rate levels. Even when the Fed maintains a low-interest environment, Cambodia's rates are still at least 3% or higher. Cambodia's rates are less likely to be significantly affected by a Fed rate cut. Although the Fed has hinted that the rate-hiking cycle has peaked without providing a clear timeline for rate cuts, the CME FedWatch Tool suggests a more than 70% chance of rate cuts starting after March next year.

Therefore, it can be anticipated that even if the Fed begins to cut rates in the future, the reduction in Cambodia's rates relative to the Fed's cuts will be relatively limited. Additionally, under the backdrop of robust economic growth, the US dollar deposit and lending rates are higher in Cambodia compared to other Asian countries. Banks offer USD lending rates ranging from 8-12%, resulting in deposit rates reaching a high range of 6-8%. Similar to Taiwan's high-interest-rate era in 1980, this scenario is relatively favorable for local currency-type funds.
 

資料來源: National Bank of Cambodia, FED

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7. 資料來源: CME FEDWATCH TOOL
8. 2024 presents excellent growth opportunities for Cambodia

The current Cambodian economy relies primarily on exports of garments, footwear, and travel goods, construction and real estate, tourism, and agriculture. The government of Cambodia anticipates that by 2024, the industrial sector, mainly dominated by garments and construction, is expected to grow by 8.5%, while the service sector, focusing on tourism, transportation, telecommunications, trade, and real estate, is expected to grow by 6.9%. The agriculture sector is projected to grow by 1.1%. It is also expected that if international oil prices return to normal, the inflation rate in the country will be 2.5% in 2024, the same as in 2023.

Industry analysis from fDi Intelligence, a division of the Financial Times (FT) Group, emphasizes that in their annual outstanding observations list, which studies overall economic and foreign direct investment trends in the top 50 foreign direct investment destinations globally, Asia has shown remarkable performance. Six Asian countries made it to the top ten, with Cambodia leading the list, indicating continued optimism in various nations about investment opportunities in Cambodia.

With the Federal Reserve (Fed) starting to raise interest rates in 2020, leading to the outflow of the US dollar from emerging markets back to the United States, the recent confirmation by the Fed that interest rates have reached their peak has prompted a gradual departure of the US dollar from the domestic market back to emerging markets, seeking new investment opportunities. This shift is expected to significantly benefit Cambodia's financial market, US dollar liquidity, and industrial capital investment.