Cambodia is an attractive investment destination for businesses looking to expand in ASEAN. A steady economic growth of around 7% in recent years is forecasted to continue in 2019.
The growth rate is the highest amongst the fast-growing ASEAN nations. However large-scale reforms are needed to support this growth and to make the country competitive on a global level.
Economic Performance in 2018
In the second quarter of 2018, the FDI inflow increased for the fifth consecutive time in the last two years to US$ 832 million. In 2018, the garment industry and tourism sector primarily supported the economic performance of the country.
The garment industry expanded in 2018 owing to relocation of companies to Cambodia due to rising wages in China and several factory incidents in Bangladesh. In the first half of 2018, garment exports increased by 11%.
Cambodia has very open investment laws and offers a range of incentives to investors. In combination with its close proximity to production facilities in Thailand and Vietnam as well as the Chinese market, the country represents a perfect investment opportunity.
The country’s Special Economic Zones (SEZ) offer a perfect setting for foreign investments especially in border areas and for the export-based manufacturing industry.
Corporate tax exemption of up to eight years and further exemption on profits, if reinvested in the country, complete duty and tax exemption on imports and exports for most industries are attractive incentives. Hundred percent foreign ownership of companies is allowed in most sectors.
The country’s investment law also provides regulations governing the protection of investments from regulated prices and nationalisation. Yet the lack of Rule of Law and the high endemic corruption may partially weaken those provisions.
At the beginning of 2018, an agreement with the European Patent Organisation came into force providing validation of EU patents in Cambodia. This allows with one single patent registration the coverage of the EU, Cambodia and other signatory states. With this agreement, EU companies can easily protect their innovations while producing in Cambodia for the Asian market.
2019 Economic Outlook
This year, the Cambodian economy is expected to grow at around 7% as in the preceding years. Although global economic changes call for different approaches, the US-China trade war, however, can indirectly support the local export-based economy in 2019.
With challenges such as energy supply and the potential exclusion of the country from the “Everything but Arms” policy of the EU notwithstanding, the garment sector will remain an important driver of the economy in 2019. Other manufacturing industries might also find the attractiveness of Cambodia for their supply chains.
Garments, the EU and Renewable Energy in Cambodia
2019 will be dominated by the garment sector. It already accounts for 16% of the GDP and 80% of the total exports. The sector offers large potential with the country’s strategic location, competitive labour force, supportive government initiatives and the preferential access to major markets like the EU and US. Nonetheless, the garment sector faces two major challenges in 2019 that need to be addressed.
First, the EU launched a withdrawal procedure regarding Cambodia and the “Everything but Arms” policy. This policy facilitates Cambodia with exclusive access to the EU common market without paying duties or tariffs. During the launched 18-month withdrawal period, human rights issues in Cambodia will be investigated by the EU. The EU represents the largest importer of Cambodian garment products with around 40% of all garment exports. Despite the impending setbacks of the EU market, the US market with a share of 30% and the rising Chinese demand can still back the local garment industry.
Further, local energy supply represents a problem that needs to be tackled for economic growth. High energy costs could impede growth. The government plans to connect all 24 provinces to the national grid by 2020. Biogas, solar and wind power offer potential to spice up the energy mix and to quickly reduce the prices while making energy supply more reliable.