A bright Future - Analysis on Cambodia's economy

Forget the dark days of civil strife, Cambodia is on the up - that seems to be the message from a wide range of experts, government officials and international business leaders
By Frank Booker 1887 words

With some impressive GDP growth in the past 10 years - averaging more than 7% - and rates reaching 7.3% and 7.6% predicted for 2015 and 2016, Cambodia’s economic outlook looks good. “Cambodia is one of the world’s fastest-growing economies,”said Takehiko Nakao, president of the Asian Development Bank (ADB), in Phnom Penh in March.

The ADB says that exports of garments and footwear - Cambodia’s two main industries - based on customs data, reached $6.0bn in 2014, rising by 10.7% but slowing down from the previous year. Shipments to the EU rose by 22% to $2.4bn, but those to the US fell by 5.4% to $2.0bn. In the same year, construction continued to expand, funded by inflows of foreign direct investment (FDI) and a 34.3% rise in bank credit for the segment. Industry as a whole grew by an estimated 9.8%.

More positive words came from Nakao as he praised the Cambodian government for controlling inflation and exchange rates, introducing its Industrial Development Policy, which will expand the country's manufacturing industry, and for making efforts to tackle corruption. “We are very happy that the government of Cambodia enacted the anti-corruption law,” he said. Since being enacted, Cambodia’s Anti-Corruption Unit has made some high-level arrests of police and court officials over bribe taking and misappropriation of funds.
It seems that a host of international companies have been taking note. As well as a booming garment and apparel sector- worth $5.75 billion in exports in 2014, according to government figures - producing clothing and shoes for brands such as Nike, Walmart, Marks and Spencer among many others, ­other global giants are investing in the country’s future. Carmakers Porsche, BMW, Audi and Mercedes all have recently opened or upgraded showrooms in Phnom Penh. Since setting up in Cambodia in 2010, Bosch has seen double-digit growth, spurred by the use of its products in the burgeoning automotive and construction sectors, the latter of which saw approved construction projects worth $2.5 billion in 2014.

Jean-François Cautain, the outgoing EU Ambassador to Cambodia, is also upbeat about the path Cambodia is taking. “I believe that the government is starting to feel the hindrances stemming from corruption. Key ministers are publicly criticising corruption as an obstacle to reforms, development and poverty reduction,” he told the Southeast Asia Globe.

“Increasing FDI from countries with strong compliance policies can only materialise significantly in a context of rule of law,”Cautain continued. “The government has to combat corruption if it seeks strong, enduring economic growth and wants to secure long-term FDI.”
Back in November, the ADB noted that, in order to attract the FDI it needs, the Kingdom needed to concentrate on eliminating “informal payments often needed to obtain government licences, permits and access to basic services.” This is an area the government, particularly the Ministry of Commerce, has been working on.

Under the supervision of Sun Chanthol, the minister of commerce - a man with a high-level education at one of the US’s top business schools and plenty of experience in the corporate world there - much has changed. Nowadays, all around offices where payments are made, you can see walls covered with anti-corruption posters and tables of official rates for services.

“We’ve eliminated promotions through connections,” he told the Globe. “We’re continuing to reduce unnecessary paperwork, are speeding up approval processes, staying open longer hours to service our clientele and are developing digital-service platforms.”
In coming months, the government will implement a number of e-government initiatives that will go a long way to improve efficiency, transparency of processes and consistency of transactions. An e-filing system will enable companies or individual taxpayers to submit their tax returns electronically, while a national single-window system will integrate all public agencies into one web portal for ease and efficiency. The process to register a company that previously required applicants to be physically present will be making an online transition, where information such as company names, registration and tax IDs will be available within an hour to the applicant as well as all relevant ministries.

According to Sun Chanthol, Cambodia’s ranking on the World Bank’s Ease of Doing Business Index is expected to rise from 135 currently to 21 when these plans are fully implemented.

“Aside from bolstering the business environment, the speed, ease, and transparency of administration will also go a long way in boosting investor confidence,” said Andre de Jong, Managing Director of Robert Bosch Cambodia
Jeffrey Lamb, outgoing head of UK Trade & Investment at the British Embassy in Cambodia, believes Cambodia can quickly and significantly improve its ranking.

“This will be beneficial by not only providing better service and being more efficient, but will also help improve Cambodia’s image in the eyes of the foreign investor,” he told the Globe. “The more attractive Cambodia looks, especially compared to its neighbours, the more investment will come. This will have knock-on and multiplier effects, spurring a better investment environment from international investors, who will in turn continue to elevate and diversify the economy and the skills of Cambodians.”

And it is not just the ministry of commerce that is cracking down on corruption. The Cambodian government set up an Anti-Corruption Unit in 2010 and - in December 2013 - the Cambodia Beverage Company, the producer and distributer of Coca-Cola Company’s products in the Kingdom, had enough faith in the institution to sign a memorandum of understanding (MoU) with it. The company agreed not to engage in corruption or bribery and to teach its staff to keep their hands ‘clean’ and inform the ACU of any solicitations for improper payments.

“The MoU has had an effect on our business in a positive way,” Paul Popelier, general manager of the Cambodia Beverage Company told the Globe. “It has helped to send a clear message out loud to all stakeholders who work with us that our company is a place where corruption does not exist in any form. It strengthens our relations with the Cambodian government, and it helps remove some of the challenges regarding improper payment related to our operations.”
Popelier’s company was the first to sign an MoU with the ACU and since then, six more international companies - including Herbalife and Prudential - have since put their signature to similar agreements making a total of 17 national and international companies on the ACU’s books.

To underscore Coca-Cola’s commitment to Cambodia and doing business there, earlier this year it was announced that it will open a new $100m bottling plant at the Phnom Penh Special Economic Zone (PPSEZ). The zone, situated on a 357-hectare area of land near the Cambodian capital’s airport and aside the main route to Cambodia’s ports, is home to 77 companies - representing $365m million in investment as of March 2015. PPSEZ is modelled as a ‘one-stop shop’ and has managers from Cambodia, Japan and the US. Services include assistance with set up and registration, accounting, legal matters, customs clearance and labour management. PPSEZ is just one of 11 special economic zones strategically places around the country and which offer similar services to investors.

Eliminating corruption and improving standards has been at the top of Hang Chuon Naron’s list of priorities. He is Cambodia’s Minister of Education, Youth and Sport and last year personally oversaw a review of the country’s Grade 12 exams. In a widely lauded 2014 exam reform, test papers were written in secret to avoid them being leaked to students and heavy security was in place at examination halls to ensure crib sheets and mobile phones were not used. This resulted in the pass rate falling from 87% in 2013 to less than 25% last year.

According to the minister, this is just the start. He is well aware that Cambodia will have to provide skilled workers if it is to compete with other countries in the Asean Economic Community, which is due to reshape Cambodia’s position in Southeast Asia at the end of the year.

“The goal that we have right now is to give people the right foundation. By 2030 we want Cambodia to produce a lot of agricultural products, have agribusiness, an electronics sector,” he told the Globe. “Right now, we can’t know exactly how many experts we will need in each sector. But we do know we want to give people a strong foundation, so that they will be able to become not only engineers but managers and such like. We want people to be able to follow a path of lifelong learning. What is a strong foundation? That would be languages, critical thinking, working in a team - soft skills and hard skills.

Another initiative is the payment of teachers’ salaries into bank accounts. “Helping to stop leakages in cash flow means teachers are paid their full wages on time and can focus on being in the classroom,” Cautain told the Globe.
And even the executive director of one of Cambodia’s biggest NGOs has praise for the path Cambodia is taking. “I am quite optimistic that we are on the right path in the effort to promote transparency and accountability in Cambodia,” said Preap Kol, of Transparency International Cambodia, when the Globe asked him where he saw his country in five years' time.

Key strengths of the Cambodian Market

- Sustained political stability and security
- High growth record over the past 15 years due to transformation to open market economy
- Effective macroeconomic management in response to crises
- Strong government-private sector consultation and responsiveness
- Good geographic location in the centre of Asean
- Steady inflow of foreign direct investment
- Adaptable and open export-oriented economy:
- 100% foreign ownership for any business in any sector
- No fund transfer restrictions
- Up to 50 year land lease etc.
- Young, growing population and middle class with a median age of 23

Key challenges

- Human resource capacity constraints: low education/skill level of workforce
- Underdeveloped infrastructure
- Need to diffuse corruption across sectors

Key reforms at a glanceCompleted, current and upcoming initiatives by the Royal Government of Cambodia:

  • the creation of anti-corruption commissions within the National Assembly and the Senate
  • improved transparency and simplified procedures, including the setting up of online systems for business registration and tax payments, by the Ministry of Commerce
  • the Ministry of Economics and Finance has undertaken a number of reforms in a bid to reduce corruption in the customs and tax sector, resulting in a noticeable increase in revenue
  • the issue of “ghost” civil servants (officials getting a government salary even though they do not actually work or even exist) has been addressed by a scheme to pay civil servants’ salaries through bank accounts
  • a one-window service managed by the Ministry of Interior - “providing citizen-friendly administrative services in an efficient, transparent and corruption-free manner” - has proved effective and is set for expansion
  • the Anti-Corruption Unit is set to work with the parliamentary anti-corruption commission on a whistleblower protection law
  • the Ministry of Interior, through the National Programme for Sub-National Democratic Development, is to commence the implementation of procedures to improve transparency and access to information at local level
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