Cambodia Investment Review

World Bank’s May Economic 2023 Outlook: Unlocking Potential on Cambodia’s FDI Future

World Bank’s May Economic 2023 Outlook: Unlocking Potential on Cambodia’s FDI Future

Cambodia Investment Review

As the global economy stages a remarkable recovery from the COVID-19 pandemic, Cambodia emerges as a budding economic powerhouse with an outlook ripe for foreign direct investment (FDI), according to the World Bank’s Economic Update report released in May 2023.

The report emphasizes a nuanced balancing act that Cambodia’s macroeconomic policy must perform – nurturing growth and employment while maintaining macro-financial stability in a changing financial landscape. “The delicate equilibrium between supporting growth and preserving stability is more challenging in the context of tightening financial conditions and rising private debt levels,” the report noted.

Read more: World Bank Predicts Accelerated Economic Growth of 5.5% for Cambodia in 2023

Inflation in Cambodia has retracted to pre-pandemic levels, providing authorities with the leeway to implement accommodative monetary policies. The World Bank advises that maintaining or lowering the reserve requirement ratio could be advantageous, given the current economic milieu.

In the realm of fiscal policy, the World Bank recognizes Cambodia’s ability to sustain or even enhance spending on infrastructure and human development that could drive growth. This increased expenditure, it suggests, “will boost the productive capacity of the economy over the longer term.” The report further encourages the continuation of social assistance programs for the economically disadvantaged, promoting inclusive growth.

High importance on export product diversification

Despite the optimism, the report does not shy away from cautioning about potential financial stability risks, notably the recent rapid credit growth and a relatively high level of private sector debt. The concentration of this debt in real estate-related exposures necessitates heightened supervision. “Intensified oversight is crucial as pandemic measures such as loan restructuring and forbearance phase out,” it stated.

To strengthen the financial stability landscape, the report prescribes an enhanced focus on stress testing individual institutions, systematic onsite inspections, realigning the regulatory framework with international standards, and improving the quality assessment of loan portfolios. Concurrently, it recommends that authorities should prepare legislation on deposit insurance and bank resolution. “Given the likelihood of rising non-performing loans, the authorities should ensure that resolution options are primed for deployment,” the report stressed.

For long-term economic resilience and competitiveness, the World Bank places high importance on export product diversification. According to the report, “Efforts are needed to further promote export product diversification.

Unlike other countries in the region, Cambodia has had limited success in diversifying outside of garments and footwear, while the country’s agro-processing capacity remains limited.” To aid this, the report advises ensuring contract enforcement, safeguarding intellectual property rights, and bolstering national certification and testing capacity to comply with international standards.

World Bank’s Economic Update report released in May 2023: FDI Outlook

The report also highlights the importance of FDI in Cambodia’s economic progress. Despite Cambodia’s relative success in attracting FDI, the report observes, “It has been less successful in connecting FDI with domestic investment.” This forms the premise for its proposed three-pronged strategy focused on attracting, bolstering, and connecting FDI.

To attract productive FDI, the World Bank recommends streamlining business licensing procedures, ensuring transparent implementation of the new Law on Investment, and targeting investment promotion. “Open entry policies, removing barriers and protectionism, could go a long way in attracting FDI,” the report mentioned.

To bolster existing FDI, the World Bank suggests strengthening investment protection, resolving conflicts, introducing a commercial court, proactive investment retention mechanisms, and targeted aftercare programs. These measures, it proposes, would encourage reinvestment of corporate earnings and expand operations.

Removal of restrictive policy measures

For deepening the connection between FDI and local firms to integrate into Global Value Chains (GVCs), the report offers a comprehensive approach. This includes establishing an online portal and a digital app to provide basic matchmaking services, developing a supplier program, promoting SMEs, developing human capital, and upgrading skills.

Furthermore, the World Bank strongly encourages the removal of restrictive policy measures introduced during the pandemic. “The immediate removal of measures such as the reintroduction and expansion of Customs’ ‘green lane’ is crucial to facilitate trade,” it stated. The report underscores the importance of creating an enabling environment for business and investment to thrive, primarily focusing on improving business regulations and licensing procedures.

In the realm of multinational corporations, the report noted, “Improvement of the business environment is regarded as the most impactful strategy to increase local sourcing.” The report cites empirical evidence confirming that constraints in the business environment correlate with the lower productivity performance of Cambodian firms.

World Bank’s Economic Update report released in May 2023: FDI Outlook

Notably, in the 2022 Global Competitiveness Index, Cambodia ranked lower than its peers in several business environment measures, an area that the country must focus on for improving its FDI appeal. The World Bank stressed the need for immediate steps to create an environment that encourages both local and international businesses.

Infrastructure, though improved significantly in recent years, still poses a challenge, with transport and electricity figuring among the top ten constraints, as per the World Bank Global Investment Competitiveness 2021-2022 Survey data. Addressing these impediments will be crucial in attracting more FDI and enhancing domestic investment.

Read more: AMRO urges more FDI inflow is needed in three priority sectors

The report also outlines investment policies crucial for Cambodia’s growth. It elucidates three main goals: Attracting productive FDI, Bolstering existing FDI for re-investment, and Connecting FDI to local firms for deeper GVC integration.

To realize these goals, the report suggests a roadmap, including the open entry policy to attract FDI, strengthening investment protection to bolster existing FDI, and connecting FDI to local firms through an online portal and digital app for basic matchmaking services.

Moreover, the authorities are advised to establish a supplier development program, promote SMEs, develop human capital, and upgrade skills. Also, simplifying VAT refunds would help connect FDI to local firms and deepen GVC integration.

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