Cambodia
Executive Summary
Like in most other countries, the COVID-19 pandemic has had a significant adverse impact on Cambodia’s economy. Annual gross domestic product (GDP) contracted by 3.1 percent and per capita GDP fell 10 percent to USD1,519 in 2020. Prior to the pandemic, Cambodia had experienced an extended period of strong economic growth, with average GDP growth of nearly 7 percent over the last two decades, driven by growing exports (particularly in garment and footwear products), increased investment, and domestic consumption. Tourism has been another large contributor to growth, with tourist arrivals reaching 6.61 million in 2019. The World Bank predicts that Cambodia’s economy will begin recovering and grow by 4 percent in 2021, though a COVID outbreak that started in February 2021 has already cost the economy an estimated USD250 million and could prolong the country’s recession.
The government has made it a priority to attract investment from abroad. Foreign direct investment (FDI) incentives available to investors include 100 percent foreign ownership of companies, corporate tax holidays of up to eight years, a 20 percent corporate tax rate after the incentive period ends, duty-free import of capital goods, and no restrictions on capital repatriation. In response to COVID-19, the government enacted additional measures to boost competitiveness and support the economy, including a long-awaited consumer protection law, additional tax breaks to the hardest hit businesses (such as those in the tourism and restaurant sectors), and direct aid to people employed in the informal sector. The government also delayed the implementation of a capital gains tax, which was due to go into effect in 2021. A newly established SME Bank of Cambodia will financially support small- and medium-sized enterprises.
Despite these incentives, Cambodia has not attracted significant U.S. investment. Apart from the country’s relatively small market size, other factors dissuading U.S. investors include: systemic corruption, a limited supply of skilled labor, inadequate infrastructure (including high energy costs), a lack of transparency in some government approval processes, and preferential treatment given to companies from certain countries, namely China. Foreign and local investors alike lament the government’s failure to consult the business community on new economic policies and regulations. Notwithstanding these challenges, a number of American companies maintain investments in the country. For example, in December 2016, Coca-Cola officially opened a USD100 million bottling plant in Phnom Penh.
In recent years, Chinese FDI — largely from state-run or associated firms — has surged and has become a significant driver of growth. The rise in FDI highlights China’s desire for influence in Cambodia, and Southeast Asia more broadly. Chinese businesses, many of which are state-owned enterprises, may not assess the challenges in Cambodia’s business environment in the same manner as U.S. businesses. In 2019, FDI hit USD3.6 billion – a record – with 43 percent reportedly coming from China. In 2020, Cambodia signed a Free Trade Agreement (FTA) with China and joined the Regional Comprehensive Economic Partnership (RCEP) agreement, though neither agreement has been implemented yet.
Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI. However, there has been some increased investment in manufacturing, including garment and travel goods factories, as well as agro-processing.
| Measure | Year | Index/Rank | Website Address |
| TI Corruption Perceptions Index | 2020 | 160 of 180 | http://www.transparency.org/research/cpi/overview |
| World Bank’s Doing Business Report | 2020 | 144 of 190 | http://www.doingbusiness.org/en/rankings |
| Global Innovation Index | 2020 | 110 of 131 | https://www.globalinnovationindex.org/analysis-indicator |
| U.S. FDI in Cambodia ($M USD, historical stock positions) | 1994 -2020 | USD 1.5 billion | http://www.cambodiainvestment.gov.kh |
| World Bank GNI per capita | 2019 | USD 1,530 | http://data.worldbank.org/indicator/NY.GNP.PCAP.CD |
6. Financial Sector
Capital Markets and Portfolio Investment
In a move designed to address the need for capital markets in Cambodia, the Cambodia Securities Exchange (CSX) was founded in 2011 and started trading in 2012. Though the CSX is one of the world’s smallest securities markets, it has taken steps to increase the number of listed companies, including attracting SMEs. At the end of 2020, market capitalization stood at USD2.5 billion and the average daily trading value averages USD150,000. The CSX currently has seven listed companies: the Phnom Penh Water Supply Authority; Taiwanese garment manufacturer Grand Twins International; the Phnom Penh Autonomous Port; the Sihanoukville Autonomous Port; Phnom Penh SEZ Plc; ACLEDA Bank; and Pestech Plc.
In September 2017, the National Bank of Cambodia (NBC) adopted a regulation on Conditions for Banking and Financial Institutions to be listed on the Cambodia Securities Exchange. The regulation sets additional requirements for banks and financial institutions that intend to issue securities to the public. This includes prior approval from the NBC and minimum equity of KHR 60 billion (approximately USD15 million).
Cambodia’s bond market is at the beginning stages of development. The regulatory framework for corporate bonds was bolstered in 2017 through the publication of several regulations covering public offering of debt securities, the accreditation of bondholders’ representatives, and the accreditation of credit rating agencies. The country’s first corporate bond was issued in 2018 by Hattha Kaksekar Limited. Four additional companies have since been added to the bond market: LOLC (Cambodia) Plc.; Advanced Bank of Asia Limited; Phnom Penh Commercial Bank Plc; and RMA (Cambodia) Plc. RMA, which issued its bonds in early 2020, was the first non-bank financial institution to be listed. There is currently no sovereign bond market, but the government has stated its intention of making government securities available to investors by 2022.
Money and Banking System
The NBC regulates the operations of banking systems in Cambodia. Foreign banks and branches are freely allowed to register and operate in the country. There are 44 commercial banks, 14 specialized banks (set up to finance specific turn-key projects such as real estate development), 74 licensed microfinance institutions (MFIs), and seven licensed microfinance deposit taking institutions in Cambodia. The NBC has also granted licenses to 12 financial leasing companies and one credit bureau company to improve transparency and credit risk management and encourage lending to small- and medium-sized enterprise customers.
Prior to the COVID-19 pandemic, Cambodia’s banking sector experienced strong growth. The banking sector’s assets, including those of MFIs, rose 21.4 percent year-over-year in 2018 to 139.7 trillion riel (USD34.9 billion), while credit grew 24.3 percent to 81.7 trillion riel (USD20.4 billion). Loans and deposits grew 18.3 percent and 24.5 percent respectively, which resulted in a decrease of the loan-to-deposit ration from 114 percent to 110 percent. The ratio of non-performing loans was measured at 1.6 percent in 2019.
The government does not use the regulation of capital markets to restrict foreign investment. Banks have been free to set their own interest rates since 1995, and increased competition between local institutions has led to a gradual lowering of interest rates from year to year. However, in April 2017, at the direction of Prime Minister Hun Sen, the NBC capped interest rates on loans offered by MFIs at 18 percent per annum. The move was designed to protect borrowers, many of whom are poor and uneducated, from excessive interest rates.
In March 2016, the NBC doubled the minimum capital reserve requirement for banks to USD75 million for commercial banks and USD15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a USD30 million reserve requirement, while traditional microfinance institutions have a USD1.5 million reserve requirement.
In March 2020, the NBC issued several regulations to ensure liquidity and promote lending amid the COVID-19 pandemic. They include: (1) delaying the implementation of Conservation Capital Buffer (CCB) for financial institutions; (2) reducing the minimum interest rate of Liquidity-Providing Collateralized Operations (LPCO); (3) reducing the interest rates of Negotiable Certificate of Deposit (NCD); (4) reducing the reserve requirement rate (RRR) from 8 percent (KHR) and 12.5 percent (USD) to 7 percent (KHR and USD) for 6 months starting from April 2020; and (5) reducing the liquidity coverage ratio. The NBC also requested financial institutions to delay dividend payouts in order to preserve financial sector liquidity. The government has also encouraged banks to continue restructuring loans to help avoid defaults. In late 2020, the government announced that businesses in the garment and footwear, tourism, and aviation sectors would continue to receive tax incentives in 2021. In addition, financial institutions’ borrowings from both local and foreign sources will benefit from reduced tax withholdings in 2021.
Financial technology (Fintech) in Cambodia is still at early stage of development. Available technologies include mobile payments, QR codes, and e-wallet accounts for domestic and cross-border payments and transfers. In 2012, the NBC launched retail payments for cheques and credit remittances. A “Fast and Secure Transfer” (FAST) payment system was introduced in 2016 to facilitate instant fund transfers. The Cambodian Shared Switch (CSS) system was launched in October 2017 to facilitate the access to network automated teller machines (ATMs) and point of sale (POS) machines.
In February 2019, the Financial Action Task Force (FATF), an international intergovernmental organization whose purpose is to develop policies to combat money laundering, cited Cambodia for being “deficient” with regard to its anti-money laundering and countering financing of terrorism (AML/CFT) controls and policies and included Cambodia on its “grey list.” The government committed to working with FATF to address these deficiencies through a jointly developed action plan, although progress to date has not been sufficient and Cambodia remains on the grey list in 2021. Should Cambodia not take appropriate action, FATF could move it to the “black list,” which could negatively impact the cost of capital as well as the banking sector’s ability to access international capital markets.
Foreign Exchange and Remittances
Foreign Exchange
Though Cambodia has its own currency, the riel (denoted as KHR), U.S. dollars are in wide circulation in Cambodia and remain the primary currency for most large transactions. There are no restrictions on the conversion of capital for investors.
Cambodia’s 1997 Law on Foreign Exchange states that there shall be no restrictions on foreign exchange operations through authorized banks. Authorized banks are required, however, to report the amount of any transfer equaling or exceeding USD100,000 to the NBC on a regular basis.
Loans and borrowings, including trade credits, are freely contracted between residents and nonresidents, provided that loan disbursements and repayments are made through an authorized intermediary. There are no restrictions on the establishment of foreign currency bank accounts in Cambodia for residents.
The exchange rate between the riel and the U.S. dollar is governed by a managed float and has been stable at around one U.S. dollar to KHR 4,000 for the past several years. Daily fluctuations of the exchange rate are low, typically under three percent. The Cambodian government has taken steps to increase general usage of the riel, including phasing out in June 2020 the circulation of small-denominated U.S. dollar bills; however, the country’s economy remains largely dollarized.
Remittance Policies
Article 11 of Cambodia’s 2003 Amended Law on Investment states that QIPs can freely remit abroad foreign currencies purchased through authorized banks for the discharge of financial obligations incurred in connection with investments. These financial obligations include payment for imports and repayment of principal and interest on international loans; payment of royalties and management fees; remittance of profits; and repatriation of invested capital in case of dissolution.
Sovereign Wealth Funds
Cambodia does not have a sovereign wealth fund.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
There has been a surge in FDI inflows to Cambodia in recent years. Though FDI goes primarily to infrastructure, including commercial and residential real estate projects, it has also recently favored investments in manufacturing and agro-processing. Cambodia reports its FDI at USD4.1 billion in 2020 in terms of fixed assets and registered capital.
Investment into Cambodia is dominated by China, and the level of investment from China has surged especially the last five years. Cambodia reports that its stock of FDI from China reached USD19.5 billion by the end of 2020. Other major sources of FDIs in Cambodia include the United Kingdom (USD4 billion), Malaysia (USD4.4 billion), and Korea (USD5.4 billion), through 2020.
| Host Country Statistical source* | USG or international statistical source | USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other | |||
| Economic Data | Year | Amount | Year | Amount | |
| Cambodia Gross Domestic Product (GDP) ($M USD) | 2020 | NA billion | 2020 | $25.4 billion | www.worldbank.org/en/country |
| Foreign Direct Investment | Host Country Statistical source* | USG or international statistical source | USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other | ||
| U.S. FDI in Cambodia ($M USD, stock positions) | 2020 | $1,515 | 2017 | $517 | BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational-enterprises-comprehensive-data |
| Cambodia’s FDI in the United States ($M USD, stock positions) | N/A | N/A | 2017 | $5 | BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational-enterprises-comprehensive-data |
| Total inbound stock of FDI as % host GDP | 2020 | 169% | 2019 | 127.5% | UNCTAD data available at https://unctad.org/en/Pages/DIAE/ World%20Investment%20Report/ Country-Fact-Sheets.aspx |
* Source for Host Country Data: The Council for the Development of Cambodia (CDC) provides official government data on investment in Cambodia, but not all data is published online. See: www.cambodiainvestment.gov.kh/why-invest-in-cambodia/investment-enviroment/investment-trend.html
| Direct Investment from/in Counterpart Economy Data (through 2018) | |||||
| From Top Five Sources/To Top Five Destinations (US Dollars, Millions) | |||||
| Inward Direct Investment | Outward Direct Investment | ||||
| Total Inward | 23,246 | 100% | Total Outward | 840 | 100% |
| China | 6,786 | 29.2% | South Africa | 310 | 37% |
| Korea | 1,934 | 8.3% | China | 260 | 31% |
| Vietnam | 1,880 | 8% | Singapore | 225 | 27% |
| Hong Kong | 1,688 | 7.3% | Philippines | 31 | 3.7% |
| Taiwan | 1,629 | 7% | Myanmar | 17 | 2% |
| “0” reflects amounts rounded to +/- USD 500,000. | |||||
Data retrieved from IMF’s Coordinated Direct Investment Survey database presents a much different picture of FDI into Cambodia as compared to that provided by the Cambodian government. For example, the Council for Development of Cambodia reports USD38.5 billion stock FDI in term of fixed asset through year-end 2018, while the IMF reports only USD23 billion.