Prime Minister Hun Sen describes how “Cambodia has become an island of peace,” to a cluster of business representatives at a recent summit in Phnom Penh, hoping to lure more foreign direct investment to build up infrastructure and sustain fast economic growth.
As his ruling Cambodian People’s Party gears up for crucial elections in 2018, Hun Sen is also campaigning for more foreign direct investment (FDI) to maintain fast growth in one of the region’s accelerating economies.
Cambodia needs FDI to keep its economy chugging along. Gross domestic product (GDP) growth averaged 6.7% between 2010 to 2016, and is expected to reach 7.1% in 2017, which if hit would make Cambodia the fastest-growing economy in the Association of Southeast Asian Nations (Asean).
The rapid growth has been fueled by a strong agricultural sector, garment exports and a property boom that has transformed the once sleepy backwater capital into a traffic-choked metropolis with fast-rising skyscrapers and condominium towers.
Unlike other emerging regional economies such as Myanmar and Vietnam, Cambodia has a small population of only 15 million, of which 75% are under the age of 35.
That’s demographic testimony to the impact of the radical Maoist Khmer Rouge regime that has been blamed for the deaths by murder and deprivation of nearly two million people. The self-destructive Khmer Rouge era (1975 to 1979,) followed by years of civil war, has left a shoddy provincial infrastructure of poor roads and limited access to electricity and irrigation.
Now, Cambodia’s poor infrastructure is cutting into the competitiveness of its emerging export industries. The country’s “fragrant” jasmine rice, for instance, is gaining popularity abroad, but high internal transport and logistical costs have undermined its price competitiveness in global markets.
According to Ty Sokun, secretary of state of the Ministry of Agriculture, Forestry and Fisheries, the farm gate price of jasmine rice in Cambodia is only US$247 per ton, compared to US$253 per ton in neighboring Vietnam and US $379 per ton in Thailand.
By the time Cambodian rice is transported to ports for export, the price rises to US$498 per ton, compared to Vietnam’s US$398 and Thailand’s US$419. Cambodia’s 220km road between Phnom Penh and the main Sihanouk Port is a mere two-lane highway, leading to heavy congestion and logistical expense.
Cambodia’s garment and shoe industries, driven by cheap labor costs, have been the main draw for export-oriented FDI, primarily from other Asian countries. Labor is cost-competitive, but electricity is not.
“Our energy prices are right now the highest in Asean, but I am confident that in five to 10 years it could be the lowest,” said Chea Serey, director-general of the National Bank of Cambodia, the central bank.
Last year, Cambodia imported 28% of its energy needs, chiefly from Vietnam. This year, it is projected to fall to 25% as the country invests in hydroelectricity and to a lesser extent coal-fired plants, both controversial for their environmental impact.
Sok Chenda Sopha, secretary-general to the Council of Development of Cambodia, predicted the country would be self-sufficient in electricity by 2018-19, although he could not guarantee a cheaper prices by then.
The government is well aware of the infrastructural constraints and is spending to address them. “From now over the next 10 years we will invest approximately US$12 billion in infrastructure in Cambodia,” Sun Chanthol, senior minister of the Ministry of Public Works and Transport, told the recent business summit.
Future major projects include an upgrade of Route 5, the main road connecting Phnom Penh to the western town of Poipet on the Thai border to a four-lane highway. Meanwhile, work is under way on upgrading Route 1, the main connection from the capital to Bassoc, on the Vietnamese border.
The road between Phnom Penh and Sihanoukville, a resort town around three hours south of the capital, will be expanded into another four-lane expressway, while the Sihanoukville Port will also be expanded and modernized. “We are going to build a new container port that would allow 93% of the vessels going around the world today to call into our port at Sihanoukville,” Sun said.
A freight service handled by the privately-owned Royal Railway already handles about 40% of the traffic between the capital and the port. A rail link between Poipet and Sisophon, delayed for decades by security concerns and land reclamation problems, is scheduled to be reopened soon, providing a possible freight route for manufactured goods at the Poipet Special Economic Zone (SEZ.)
Japan’s automotive industry, with huge invested capacity in neighboring Thailand, is already setting up operations in Poipet as part of its Thailand-plus-one strategy.
The strategy was coined after the devastating floods of 2011 that knocked out six industrial estates in Thailand and temporarily interrupted global supply chains. Seat covers for Toyota cars and trucks built in Thailand will soon be manufactured in Poipet, according to news reports.
“Poipet can develop as a supporting production base, connected to Thailand,” said Hiroshi Uematsu, chief executive of the Japan-owned Phnom Penh SEZ. The capital city SEZ had attracted well-known multinational companies such as Minebea, Denzo, Ajinomoto, Coca Cola and Angkor Beer. The Poipet SEZ is scheduled to be opened in mid-2017.
Of the US$22 billion in FDI, Cambodia attracted between 2011 to 2015, China accounted for about 30% of the total inflows, mainly in infrastructure and construction, according to official statistics. Chinese investments have recently fueled a property boom, giving rise to clusters of new condominiums in Phnom Penh proper and across the Tonle Sap River in until recently underdeveloped areas.
A recent CBRE Group survey predicted that 8,000 new condo units would come on the market this year, with another 13,000 planned in 2018. Central bank officials, who doubled minimum capital requirements for banks in March 2016 to cool lending to the sector, say they are not overly concerned about a potential bubble, as most of the condominium buyers tend to be foreigners.
“A lot of the investors actually come from overseas – mostly Chinese, Taiwanese and Singaporeans,” said the central bank’s Chea. Although the biggest banks reined in their lending to real estate last year, it remains to be seen if some of the smaller, more opaque financial institutions are overextended in the sector.
There are now signs with the sprouting of SEZs that more Japanese FDI is headed to Cambodia, which would offer some counterbalance to Cambodia’s recent reliance on Chinese investments and provide high rent-paying foreign occupants for new property developments.
So what does this all say about Hun Sen’s claim Cambodia is now an island of political peace?
“Ultimately, investors look at the growth rate, they look at the connectivity of the market, and they look at the fundamentals around labor costs and the like,” said one foreign banker in Phnom Penh. “At the top end of the local and foreign businessmen here, there is a pretty high level of comfort.”