Regional Focus

Cambodia: a snapshot

Published: Sep 2014

Key facts

14,864,6461 (1 June 2013)
GNI per capita:
GDP growth (annual %):
7%2 (2013)
Doing Business (2014) rank:
1371 (2013: 135)

The Kingdom of Cambodia is located in the south of the Indochina Peninsula, neighbouring Thailand, Vietnam and Laos. It was previously known as the Khmer Empire when it ruled over South East Asia between 802 and 1431. Today, the country is regarded as one of the emerging nations in the region.

Cambodia has however faced difficulties over the past 60 years following its independence from France in 1953. Political instability, civil war and a bombing campaign devastated the country and its population through the second half of the 20th century – prohibiting its development.

The instability has largely disappeared and the country is now in better shape, and is looking to use its natural resources and economic potential to end its dependence on foreign aid. The country also hopes to encourage more foreign investment.

Nevertheless, Cambodia still has many challenges to overcome but has been granted a ‘B2’ rating by Moody’s with a stable outlook. Moody’s cites a healthy outlook for economic growth, limited vulnerability to fiscal and external funding stress and ongoing fiscal consolidation from fiscal stimulus as the key drivers for this.

Business environment

According to data collected by the World Bank for its Doing Business 2014 report, starting a business in Cambodia requires 11 procedures, takes 104 days and costs 150% of income per capita. Only five countries rank lower in terms of ease of setting up a business.

The report states that Cambodia made starting a business even more difficult last year by introducing a requirement for a company name check at the Department of Intellectual Property and by increasing the costs both for getting registration documents approved and stamped by the Phnom Penh Tax Department and for completing incorporation with the commercial registrar. Cambodia also performs poorly on contract enforcement (162nd of the 189 economies surveyed), although it rates above the regional average and 42nd overall on access to credit. On average, Cambodian firms pay total taxes amounting to 21.4% of profit, which gives it a global taxation ranking of 65.

The 2014 Index of Economic Freedom allocates Cambodia an economic freedom score of 57.4, making its economy the 108th freest of the 178 rated nations. Its overall score is lower than in 2013 and below the regional average.

Since Cambodia’s economic freedom was first assessed in the 1997 index, its overall economic freedom score has improved by only 4.5 points, with advancements in trade, monetary and investment freedom largely offset by significant declines in business freedom and freedom from corruption. The index states that ‘substantial challenges remain, particularly in implementing deeper institutional and systemic reforms.’

Uneven advance to ASEAN

Cambodia is preparing for the establishment of the ASEAN Economic Community, but needs to step up reforms to improve the transparency and reliability of its regulatory systems to encourage more investment according to a report produced in April 2014 by the Asian Development Bank (ADB) in collaboration with the Institute of South East Asia Studies (ISEAS).

“Cambodia is doing well with preparations for the ASEAN Economic Community because it has always been an open and outward-looking economy, but it needs to catch up with the implementation of e-customs, the national single window (which enables cross-border traders to submit regulatory documents to a single entity) and the ASEAN single window border procedures,” says Jayant Menon, lead economist at the ADB.

In March 2014 The Cambodia Daily quoted Chuop Narath, deputy director of the department of employment and manpower at the Ministry of Labor as saying that Cambodia was not ready to join the single regional market and production base.

Exports drive growth

An IMF report released in February 2014 observed that economic activity was robust in 2013 driven by healthy exports and tourism. Real estate and construction also expanded rapidly, supported by fast credit growth and foreign direct investment which remained strong, partly as a result of factories relocating from China and Vietnam.

Private sector credit has grown by approximately 30% per annum over the last three years thanks to ample liquidity – including bank funding from abroad – and heightened competition in the banking system.

The IMF describes the introduction of negotiable certificates of deposit as a welcome first step toward market-based monetary operations, although it warns that establishing an interbank and foreign exchange market would be needed to begin addressing dollarisation, including allowing more exchange rate flexibility.

‘The transition to risk-based supervision and the rapid expansion of the banking system continue to put additional burden on the supervisory capacity and in this context, the 2010 Financial Sector Assessment Program recommendation of imposing a moratorium on new bank licenses remains appropriate,’ states the IMF.

With the current account largely funded by external aid and foreign direct investment and annual inflation remaining around the historical average of 5%, no immediate macro-financial risks seem to threaten growth prospects, although the rapid bank credit growth of recent years underscores the need for policy vigilance.

Services remained the largest source of growth from the supply side, expanding by an estimated 8.4% in 2013. Bank credit to wholesale and retail traders increased by 24.5% to $2.5 billion and to real estate by 36.5% to $251m. Tourist numbers were up 17.5% to 4.2 million.

Industry grew by an estimated 10.5% on strong demand for Cambodian garments and footwear in the EU. Exports of garments and footwear to that market surged by 26% to $2 billion and those to the US rose by 6% to $2.1 billion according to customs data.

Construction and rice milling also contributed to industry growth. Bank credit to construction rose by 29% to $577m and exports of milled rice almost doubled to $262m, although floods in September and October 2013 damaged crops.

In May 2014, the Asian Development Bank (ADB) signed a $75m senior loan with Cambodia’s largest bank, ACLEDA Bank, to address the rising financing requirements of micro-, small- and medium-sized enterprises (MSMEs) in the country.

Cambodia’s level of financial services is one of the lowest in Asia and the Pacific. While MSMEs account for 99% of private companies and 73% of all jobs in the country, they have very limited access to bank financing. According to the country’s central bank, 84% of MSMEs are financed through the informal financial sector, where interest rates are as high as 10% per month.

ACLEDA, which has an extensive branch network in rural areas, will use the loan to broaden its lending base and extend its services to underserved communities.

Political paralysis

Inflows of net foreign direct investment reached $1.3 billion in 2013, though that figure represented a decline from 2012, partly a result of political tensions after Cambodia’s most recent national elections. Cambodia has long been blighted by political unrest. Following the national elections in July 2013, the Cambodia National Rescue Party (CNRP) rejected the results, claiming widespread irregularities in the election process.

Subsequent demonstrations by the CNRP were replicated by other aggrieved sectors, such as garment workers and victims groups protesting human rights abuses. This led to a virtual ban on assembly for opposition groups and the government produced a series of laws that raised concerns over restriction of dissent and separation of powers between the executive and the judiciary.

In July 2014 the ruling Cambodian People’s Party (CPP) and the CNRP announced a deal that would enable the opposition party to take its 55 seats in parliament, ending nearly a year of political deadlock and reassuring investors.

Tim Meisburger, regional director for elections and political processes at the Asia Foundation suggests that the political impasse created an opportunity for reform that has not existed in Cambodia since the early 1990s. “Since opposition political parties are unlikely to be able to convince the current government to hold early elections, their next chance will be national elections in 2018. In those elections they may win the big prize in the winner-take-all system. Or they may not, as four years is a long time and in that time voters may swing back towards the CPP, or that party might refuse to give up power.”

Given these factors, opposition parties might be willing to trade the uncertain possibility of 100% of government power under the current system for early elections for provincial governors and some level of election system reform that would guarantee them a significant share in government power at the local and national levels and with the possibility of winning a majority in the National Assembly.

“The ruling party might also be willing to deal,” says Meisburger. “History suggests that eventually there will be a change in government and the results of the last election suggest that the desire for change – any change – is growing. If that trend continues the governing party will have an increasingly harder time winning the next elections and a loss will mean either they lose 100% of government power or reject the results with potentially disastrous consequences that spell the end of the party completely.”

Alternatively, the CPP could lead a reform process that would bring about political decentralisation and election system reform.

Moribund markets

With a stable exchange rate based on sound macro-fundamentals for the past decade, an inflation rate that has stayed within a manageable level of 4% for the last five years, consistent improvement in government revenue collection and a reduced budget deficit, the National Bank of Cambodia (NBC) says growth momentum is expected to continue in the medium term.

However, the size of the Cambodian stock exchange illustrates how far the country lags other frontier markets in South East Asia. The exchange was only inaugurated in July 2011 and there are just two listed companies, while the relatively small scale of most Cambodian companies means there is limited demand for bond issues in the range of $50m upwards. The first two offerings combined were worth less than $40m.

While Cambodia and Laos have just five listed companies between them, its neighbour to the east (Vietnam) has more than 650 public companies. Indeed, one of the two companies listed in Cambodia and the most recent addition to the bourse is actually Vietnamese – textiles firm Grand Twins International (Cambodia). The only other listed entity is Phnom Penh Water Supply Authority.

Reuters reports that Hong Sok Hour, CEO of the exchange has said that around ten companies are exploring a listing and that there would likely be one more before the end of 2014, while noting that the process of preparing financial statements continued to be a challenge.

Developed banking sector

The commercial banking sector is regulated by the NBC, the sole regulator of financial institutions in the country and the regulatory environment is pretty sophisticated, explains Patrick Smith, Cambodia-based head of law firm DFDL’s Japan desk and deputy head of the firm’s banking and finance practice group.

“There are quite a few commercial banks licenced to operate in Cambodia and many foreign banks have established subsidiaries, branches or representative offices, although the NBC has stated that it would be unlikely to issue any further banking licences in the near future.”

There is currently no Islamic banking activity in Cambodia, but this is expected to change in the near future in line with other Asian countries.

Recent entrants include Japanese banks SNBC and MUFG, although the representative offices of these banks are not allowed to do banking business in Cambodia – only branches or subsidiaries are able to obtain a banking licence. A favoured method of entering the market is to acquire positions in existing commercial banks.

Overseas banks in Cambodia are sometimes allowed to service companies who are based in their home country, particularly those from Vietnam, China, Japan and Korea, which from a treasury perspective means that international companies can access banks from their own jurisdiction.

“This is not an option for corporates based outside Asia, but the banking system in Cambodia is well-capitalised and it is relatively easy to obtain finance at reasonable rates,” says Smith. “The laws relating to lending are transparent and there are few restrictions in terms of what banks can or cannot do.”

Lending is conducted at fixed rates of interest in US dollars rather than the local currency and the almost total absence of floating rate lending means hedging is largely redundant. However, there is currency risk and DFDL has acted for a number of hedging counterparties in Cambodia in relation to currency swaps and forwards.

“However, there are options for treasurers looking to do business locally in terms of finance, if not in terms of asset allocation,” adds Smith. “There is an established payments infrastructure – most large scale transactions are denominated in dollars. Payments in and out of the country must be made through an authorised intermediary, but this is typically a commercial bank with which a treasurer will already have a relationship.”

Cambodia has a foreign exchange law, but it can only be applied by the NBC during times of economic or financial crisis to control currency movement for a period of up to three months. That law has been in effect since the late 1990s but was not exercised either during the Asian financial crisis of 1997-98 or the global financial crisis of 2007-08.

According to Grant Knuckey, ANZ CEO Cambodia, the country is developing rapidly and strengthening ties to the larger ASEAN market are creating a lot of opportunities for businesses.

“The business banking environment is promising and highly competitive, particularly when compared to other emerging markets. We have seen a significant inflow of new banks to the market over the last three years and as a result, the price of liquidity has dropped considerably – certainly below the level one would expect in a single-B jurisdiction. Corporates would absolutely see it as a ‘buyers’ market’ from a price and terms perspective, which is driving a lot of investment into the country.”

He also suggests that there is a significant opportunity for growth of financial markets in Cambodia, in terms of both debt capital and equity capital. “Debt capital markets are yet to establish, partly due to the availability of bilateral credit and partly due to the relatively small ticket size. At the top end of the corporate market this looks likely to change soon, as debt levels get beyond the capital constraints of local banks.”

Local treasury presence

When asked whether there are any capital restrictions or controls that affect companies in Cambodia, Smith refers to the requirement for banks to report large transactions in compliance with anti-money laundering laws or the central bank’s review of capital inflows and outflows. However, this is a reporting obligation on the part of the bank which is not dissimilar to that in effect in many other countries.

“The companies we deal with typically have treasury staff based in Cambodia, even those with regional treasury centres in locations such as Singapore,” Smith concludes.

Knuckey acknowledges that Cambodia’s system-level payments environment still has some way to go before it is a full, real time gross settlement environment like most of its peers in the region. “But in terms of bank-to-corporate payments systems, the environment is good and our clients here in Cambodia have access to the same payments and cash functionality (including host-to-host solutions) as clients in more mature markets.”

He describes Cambodia as one of the most liberal capital regimes in the region. “Movement of capital is relatively unrestricted, particularly inbound. Outbound, there are some minor restrictions on banks, but these don’t apply to corporates.”

As a result, the vast majority of companies are locally managed “although some blue-chip multinationals will manage via their regional treasury centre in a site such as Singapore,” he concludes.

  1. World Bank
  2. IMF

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