Cambodia Investment Review
According to 2024 August report by Mekong Strategic Capital (MSC), Cambodia’s economy has reached a turning point after experiencing a significant downturn that began in mid-2022. The report indicates that while the economy has bottomed out, the mid-term outlook is positive, with various sectors showing signs of recovery. The report offers a detailed analysis of the factors that contributed to the economic downturn and provides an optimistic forecast for the future, emphasizing the importance of continued strategic investments and government interventions.
Financial Sector: Liquidity Improves, But Challenges Remain
The economic downturn, triggered by global financial tightening, saw a sharp decline in liquidity within Cambodia’s financial sector. This reduction in liquidity led to flat loan growth as banks became increasingly cautious in their lending practices. The impact was particularly severe in the second half of 2022, with loan disbursements falling sharply. However, MSC’s report highlights that the liquidity situation has significantly improved in 2024, with customer deposits growing by 20% annualised in the first half of the year.
“The financial sector is now awash in liquidity,” noted the MSC report, which contrasts starkly with the conditions just a year earlier. Despite this improvement, many borrowers remain focused on repaying existing loans rather than taking on new debt, which continues to weigh on credit growth.
Loan arrears, a key indicator of financial stress, have also been a concern. By mid-2024, more than one in every 13 borrowers was in arrears by more than 30 days. However, MSC expects this situation to improve as the year progresses, particularly as interest rates fall and household incomes begin to stabilize.
Garment Exports: A Sector on the Rebound
Garment exports, which form the backbone of Cambodia’s export economy, experienced a significant contraction beginning in the second half of 2022. This downturn persisted until late 2023, severely impacting the overall economic growth. However, the sector has since shown signs of recovery, with exports up by 19% in the first seven months of 2024 compared to the same period in 2023.
The MSC report emphasizes the importance of the garment industry to Cambodia’s economic recovery but also advises caution. The report points out potential risks related to the US origin rules, which could impact the sector’s long-term growth prospects. Nevertheless, the rebound in garment exports is a critical component of the overall positive mid-term outlook for Cambodia’s economy.
Tourism: Mixed Results with a Cautious Optimism
Tourism, another vital sector for Cambodia, has shown a mixed performance since the economic downturn began. While there was a noticeable increase in passenger air arrivals during the fourth quarter of 2023, the numbers have since plateaued, falling short of pre-COVID levels. MSC’s report expresses cautious optimism for the tourism sector, predicting a stronger performance in the latter half of 2024. This expected improvement is attributed to cheaper flights and increased flight capacity, which are likely to attract more visitors to Cambodia.
Domestic Consumption: Signs of Recovery Amidst Caution
Consumer spending, often viewed as a proxy for economic health, suffered a significant blow during the economic downturn. The MSC report highlights a dramatic 60% decline in vehicle imports from August 2022 to August 2023, reflecting a steep drop in discretionary spending. However, there are early signs of recovery in 2024, with domestic demand gradually picking up.
MSC’s analysis suggests that while the collapse in consumer spending was severe, the recovery underway is encouraging. The report advises that maintaining this momentum will be crucial for sustaining economic growth in the mid-term.
GDP Growth: Uncertainty Amidst Positive Signs
One of the more perplexing aspects of Cambodia’s economic data has been the reported 5% GDP growth in 2023. According to MSC, this growth was primarily driven by non-garment manufacturing, particularly solar/diode exports, which accounted for over 100% of non-garment export growth. However, the report casts doubt on the sustainability of this growth, citing the lack of significant value-added solar panel manufacturing in Cambodia. As of the first half of 2024, solar/diode exports have decreased by $1.2 billion on an annualized basis, raising questions about the long-term viability of this growth driver.
Infrastructure and Investment: Key Drivers for Future Growth
Looking ahead, MSC remains optimistic about Cambodia’s mid-term economic prospects. The report highlights several key drivers for future growth, including ongoing infrastructure investments and the diversification of the manufacturing sector. The administration under Prime Minister Hun Manet has been particularly effective in attracting diversified investments, which are expected to bolster economic expansion in the coming years.
Furthermore, the report underscores the importance of continued government support and strategic investments to ensure sustained economic growth. MSC suggests that additional fiscal stimulus may be necessary to support domestic demand, and to navigate the uncertainties of the global economic environment, which has become more volatile over the past six months.
In conclusion, the MSC report provides a comprehensive overview of Cambodia’s economic situation, indicating that the economy has likely bottomed out after a challenging period. While there are clear signs of recovery across various sectors, the report advises caution, emphasizing the need for continued strategic investments and government interventions to maintain positive momentum.
