Cambodia's economy will not deteriorate, despite the fact that investments in garments and tourism have already done so

Compass Cambodia report - Despite knocking down two economic sectors – garment manufacture and tourism – the pandemic has brought some realization to Cambodia's export and investment market. With the impending ratification of Cambodia's trade treaty with China and quota-free entry into the United Kingdom, as well as the expected ratification of the Regional Comprehensive Economic Partnership (RCEP) in January of next year, trade investments in non-traditional segments are beginning to emerge.

Since the pandemic, the non-garment manufacturing segment has taken a larger share of the market, affecting both investment and export trends.

According to the National Bank of Cambodia (NBC), the endeavor to diversify the economy can be seen in the increase in foreign direct investment (FDI) to non-garment businesses, which is predicted to gradually develop.

Travel products, energy, electrical parts, and car spare parts, among other areas, have recently become more appealing to international investors.

In its Financial Stability Review 2020, the central bank stated, "With appropriate support, these industries could boost the diversification in the manufacturing sector in the medium term," It went on to say that the government has taken advantage of technological advances by digitizing a number of government services, including commerce, investment, and business registration.

While noting that financial technology, particularly the payment system, has “grown remarkably,” the NBC also stated that technical advancement may lower costs and increase productivity through increased innovation, both of which are important elements in attracting additional FDI.

In its most recent economic update, the World Bank also stated that the allure of the FTAs had driven up the value of approved FDI-funded projects in the real sector. The growth supported a diversification of FDI projects that were previously focused mostly on the construction and real estate sectors, which attracted $1.8 billion in investments in 2019 before plummeting to $140 million the following year. FDI has recently flooded into sectors such as energy, healthcare, telecommunications, apparel, travel products, and agriculture, particularly agroprocessing, in response to changes in domestic and international demand conditions.

While tourism had the greatest share of approved FDI project value ($1.8 billion in 2020), despite taking a hit from the pandemic, non-garment businesses such as energy, healthcare, and telecommunications placed in second with $1.4 billion in investments.

The apparel industry received $220 million in FDI, followed by agriculture and agro-processing, which earned $110 million.

Exports of non-garment goods have also increased in a similar trend. Exports of bicycles and combined vehicle, electrical, and electronic parts increased 32.3 percent and 16.4 percent, respectively, in the first four months of this year, according to World Bank data.

“The majority of goods exports no longer consisted of garment and textile products. In the first four months of 2021, the share of garment exports in total goods [excluding gold] exports fell to 45.6 percent, down from 52.2 percent in 2020 [and 57.6 percent in 2019], according to the bank.

Nonetheless, the garment, travel, and footwear (GTF) industry continues to be Cambodia's cornerstone, accounting for 17% of the country's GDP in 2019.

External demand shocks in the previous year, as well as domestic problems such as factory closures due to the spread of Covid-19, lowered output.

Cambodia's growth model, which is characterized by a restricted export base, had flaws "years before the epidemic arrived," according to the World Bank.

For nearly three decades, the industrial sector concentrated on the cut-make-trim process, which the bank described as "the lowest value-added segment of the entire value chain," relying on an inexperienced workforce and comparatively low minimum salaries.

It discovered that the country's external competitiveness has deteriorated, owing in part to fast growing wages (compounded by a dollarized economy) and exacerbated by obstacles in conducting business and investment climate improvements.

The vulnerabilities were hidden, however, by a boom in capital inflows in the run-up to the Coronavirus crisis, which were mostly used to fund the construction and real estate sectors.

The pandemic has highlighted Cambodia's structural flaws, according to the World Bank, with the collapse of the tourism sector and a stopped construction boom.

The country's products exports altered as the pandemic progressed. According to the World Bank, rising exports of agricultural commodities, processed agricultural products, and newly emerging manufactured products such as electrical, electronic, and vehicle parts, including bicycles, partially offset the decline in GTF goods exports in the second and third quarters of 2020.

This, it claimed, would help keep Cambodia's recorded merchandise exports growing at a 16.7% annual pace in 2020, if gold exports were included.

Source: Compass Cambodia comprehensive arrangement

Editor: Malinda         Chief Editor: Sunnie         General in Chief/Executive Producer: Nicole

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