• Cambodia: Economic risk update

  • Overview

    By most measurements, the Cambodian economy is healthy. The Asian Development Bank forecasts economic growth of 7% in 2019 and 6.8% for 2020, while the World Bank considers economic growth to be “better than expected” because of increasing exports, growing internal demand, and consistency in foreign investment. But structural problems persist. Cambodia is repeatedly ranked as one of the worst countries in Southeast Asia for corruption. Money laundering remains rife, especially in the gaming and property sectors. The global money-laundering watchdog Financial Action Task Force (FAFT) put Cambodia on its list of countries “highly vulnerable to money laundering” in February. Meanwhile, almost all international financial institutions recommend faster diversification away from low-cost, low-skilled manufacturing, and for Cambodia to carve a niche in high-skilled assembly before others nations in Southeast Asia, namely Thailand and Vietnam, dominate certain industries.


    The major concern is that Cambodia’s numerous political problems weaken the economy. Democratic deterioration since 2017 could lead the European Union (EU) removing Cambodia from its preferential Everything But Arms (EBA) scheme, which grants almost all Cambodia exports zero-tariff and quota status. Cambodia is a highly export-dependent economy – worth more than half of GDP – and the EU purchases roughly two-fifths of all Cambodian exports, making it the largest export destination. The European Commission is expected to file its report on the political situation in Cambodia by November, and the Cambodian government must then demonstrate progress before the final decision is made by the EU on removal from the EBA scheme in January or February 2020.

    Independent economists predict that this would have a disastrous impact on the country’s manufacturing sector, chiefly the garment and footwear sectors, which produce most of the country’s exports and are the single largest employers in the country. The World Bank estimates that the EBA’s withdrawal could cost Cambodia roughly $600 million per year, as higher tariffs forces European purchasers to look for supply chains in other Asian nations. Garment exports would decline by between $320 million and $381 million. In 2018, total garment exports were worth $9.5 billion. The National Union Alliance Chamber of Cambodia takes a fairly radical estimate, claiming that about 45% of garment workers and 20% of footwear workers (about 250,000 combined) would be made unemployed if Cambodia is removed from the EBA scheme. The European Parliament takes a more conservative view, with a report published in April 2019 claiming that something around 4% of the workforce may lose their jobs – this figure was the percentage of garment sectors workers who lost their jobs in Sri Lanka when the EU removed its GSP status between 2011 and 2017.

    A public statement by the European Chamber of Commerce in late September said that the EU’s withdrawal of Cambodia from the EBA scheme would be “tantamount to sanctions that will jeopardize European investments, the European business community, European development initiatives and the livelihoods of Cambodian citizens.” So far, there are few signs of panic in the sector. The ADB forecasts a sectorial growth rate of 10.6% this year. But the chief executive of a large, international garment manufacturer, which has been active in Cambodia for more than a decade, said that long-term investments are being held back, while a number of manufacturers are making contingency plans to swiftly move operators out of Cambodia in case of EBA withdrawal.

    A major concern is a snowball effect, even if job losses and drop in exports in the manufacturing sectors aren’t as bad as predicted. At least one (and often more than two) other person depends on the earnings made by garment workers. Often the majority of these workers’ salaries are remitted to rural areas to pay for family members, usually the elderly or young. Therefore, a loss of 50,000 jobs in the manufacturing sector could directly affect the finances of between 100,000 – 150,000 people. If earnings by manufacturing workers sent home to family in the countryside are cut, it could indirectly affect the finances are vastly more people, as large sums of remitted money would be taken out of the rural economy.

    None of this is helped by the government’s decision, announced on September 20, to yet again raise the legal minimum wage for workers in the textiles and footwear sectors to $190 per month, a 4.4% increase from the 2019 wage of $182 per month. It will take effect from early 2020. Employers will also pay an additional health insurance costs for their employees, including a new 2.6% contribution for accident insurance, from 2020. A source at the Collective Union Movement of Workers, a trade union, said: “We accepted the new minimum wage rise to $190 per month, but we wanted $195. There was not much pressure from our side, though. Our main concern is the EBA.”

    A member of the Garment Manufacturers Association in Cambodia, an industry association, complained:

    Some members, who are already struggling, won’t be able to cover the new costs of higher wages and more contributions for insurance. It will affect the smaller companies more, and Cambodians own the smaller companies. The larger companies are foreign-owned. Other manufacturers are seriously thinking of moving operations to Vietnam.”

    Minimum wages in Vietnam vary depending on location, but the highest, in urban Hanoi and Ho Chi Minh City, are $180 per month – already lower than Cambodia’s. Vietnam’s lowest minimum wage, in rural areas, is just $125 per month. Electricity supplies are cheaper and more reliable. Infrastructure is of a much higher standard. And, most importantly, Vietnam agreed a free-trade deal with the EU this year, which, when signed later this year or in early 2020, will dramatically reduce tariffs for exports. This could come at the same time as tariffs on reintroduced on Cambodian exports.


    The second – and not unconnected – concern is household debt. “The growth of domestic credit in Cambodia has been faster than any other country in East Asia – increasing nine-fold in 12 years,” the World Bank reported in 2018. And its economic update, published in May, reported:

    Total outstanding loans financed by the banking and microfinance sectors reached more than 100 percent of GDP, or 104.2 trillion riels in 2018. Of which 80 percent was provided by the banking sector and the remaining 20 percent by the microfinance sector.”

    The National Bank of Cambodia (NBC), in its latest Financial Stability Review, published in April, warned of individual debt having potentially “destabilising effects on the economy”. An economist at the central bank said:

    We’re acting as though it is not a problem today. But if the property sector falters slightly – if more Chinese people take their money out of the country, it could happen rapidly – and if we see a downturn with foreign investment, debt will become a major problem.”

    An official at the Ministry of Finance said the problem is “worse than official reports let on, from the World Bank and IMF, because classifications are inconsistent.” In the banking sector, reported nonperforming loan (NPL) ratios rose to 2.8% in 2018, up from 2.3% in 2017.  NPL ratios in the agricultural sector, however, were at 8%, and in the manufacturing sector at 4%. Sources said that efforts must be made to reduce the speed at which debt is growing and, at the same time, to increase deposit-taking. Sources also contend that the full extent of Cambodia’s debt problem is being masked by high levels of foreign investment, especially in the property sector, by artificially keeping land and sale prices high – and if foreign investment declines, many debts will become unmanageable.

    Over the last two years, there has also been growing concern about the microfinance sector. Roughly 2.4 million Cambodian borrowers now have $5.4 billion in outstanding micro-loans.   After a report by two local NGOs in August reiterated the negative impact of microfinance loans on poor communities – including the forced sale of land to pay for outstanding debts, increased emigration and often forced labour – the Council of Ministers spokesman called staff of the NGOs to an unprecedented meeting and demanded they retract the report. They refused. Cambodia has only rudimentary laws on personal bankruptcy, which favours the repossession of debtors’ goods by creditors. An official at the Ministry of Information said:

    The government is extremely worried about microfinance debt at the moment. It doesn’t know what to do. Advisers tell ministers not to interfere. But [staff at the Information Ministry] see that the government is criticised because of the debt, not the companies or advisers.”

    A provincial manager at a large MFI in Cambodia admitted that the culture has changed in recent years towards being more profit-motivated. They added:

    Years ago, we were very focused on helping people and improving lives. Now, my bosses are looking for profit. We are pressured to issue more loans and higher loans. And we are getting stricter on repayment. I don’t know, sometimes, if many borrowers really understand the terms.”

    In 2017, the government intervened to impose a maximum interest rate of 18% per year on microfinance loans, when rates had previously been as high as 30%.  But sources said MFIs just introduced new charges to compensate for the lost money. An official at a foreign institution that invests in Cambodia’s microfinance sector said:

    I am advising against investing any more in the sector. It’s overheated, it cannot keep on going as it is, and, at some point, we are going to see a backlash as poor Cambodians get more desperate. Also, Cambodia MFIs have been bought out by international companies in the last two years, and they aren’t aware of Cambodia’s specific problems – the microfinance sector is worse in Cambodia than anywhere else in the world – and are more profit-drive.”


    The third economic risk is that Cambodia’s economy is negatively affected by downturns in the Chinese economy. Downturns in China are already hurting Cambodia’s tourism sector. The number of visitors to the famous Angkor Wat complex fell by 12% in the first nine-months of this year, compared to the same period in 2018, and the Ministry of Tourism has put this down to declining Chinese visitors. An official at the Ministry of Tourism in Siem Reap province said the sector is currently in a flux, as the government has pushed hard to appeal mainly to Chinese visitors. The Ministry aims to welcome 3 million Chinese tourists annually by 2020, rising to 5 million by 2025 and 8 million by 2030. But the official said:

    Because many Chinese come on cheap package deals [so-called “zero-dollar tourism”] local shops, restaurants, hotels, and operators are losing money. Many spent a lot to change to accommodate Chinese tourists – not Americans or English, who they appealed to in the past – but haven’t seen better income. What some of us realize now is that 10 Chinese tourists could spend the same as one America. It’s not about numbers.”

    The official also said that some Western-orientated travel companies and operators are putting less focus on Cambodia, and investing more in Vietnam and even Laos, which “are not seen as overrun with Chinese tourists.”    

    The biggest economic development in recent months has been to Cambodia’s gaming sector. In August, Prime Minister Hun Sen ordered a halt to issuing new licenses to online gambling operations, and to close them down by the end of 2019. Most of such operations are Chinese-run in Cambodia, and sources said Beijing instructed the Cambodian government to do this, in order to crackdown on capital illegally exiting China. New gaming taxes and regulations are expected to come into effect later this year or early 2020 in Cambodia. But an independent analyst in the Asian gaming sector said that “the government might see the money lost because of the online gambling ban, and because of more regulation of casinos, and change its mind. I think the casinos won’t be affected too much.”

    Another unsteady sector is energy. In early 2019, much of Cambodia experienced daily blackouts for months because of power shortages as unusually-long draughts reduced output from hydropower dams. The cost to businesses hasn’t yet been publicly announced, though reports at the time suggested that it cost the economy tens, if not, hundreds of millions of dollars because of lost working hours and ruptures in supply chains. In response, the government has shown greater interest in renewable energy, especially solar-power, and several new solar farm. An independent economist said:

    If I was an investor, I would look at Cambodia’s energy market. The appeal of renewables is really great. The government is slow to realize this, even now. But it’s getting there, and there could be good profits here in the coming years.”

    This comes at a particularly bad time for Cambodia’s hopes on oil and gas extraction. The Singaporean firm KrisEnergy owns 95% of Block A in the Gulf of Thailand – one of six offshore blocks in Cambodia – after buying the shares of Chevron and Mitsui Oil Exploration. Cambodia’s state-run National Petroleum Authority controls the other 5%. In September, KrisEnergy was given a three months of court protection from creditors’ legal action in September while it restructures its $476.8 million debt. An official at the Ministry of Information, who is knowledgeable of the deal, said “some ministers are ready to give up on oil and gas. It’s been far too confusing and long for some.” A report by Fitch Solutions Macro Research published on September 10 states that the “outlook for Cambodia’s onshore oil and gas is more sombre, with 12 out of 19 available blocks remaining unassigned at the time of writing, and only one showing recent progress”.

    Investors should be wary of intra-elite tensions at the moment. There have been unusual disputes between the government and some business tycoons in recent months. In March, Kith Thieng, the brother of prominent tycoon Kith Meng, was arrested for alleged drug dealing. In July, tycoon Mr Sam Ol was arrested for illegal timber logging. That some tycoons engage in illegal activity is an open secret, but the government has rarely taken action against them. A political analyst said that “the government is making sure the business elite are in check and they don’t have any plans to try to usurp power while the government is politically weak.” Other analysts, however, claim that since the government is keen to appear to be tackling corruption, it serves as an ideal time for politicians to get rid of unpopular or unwanted tycoons. Indeed, the arrest of some tycoons could be a favour for other tycoons. It would also be advisable for investors to steer clear of companies owned by military officials. The government is making changes to how military officials can run businesses.