Cambodia

Executive Summary

The COVID-19 pandemic has had a significant adverse impact on Cambodia’s economy. Despite a surge of cases in 2021, Cambodia’s economy demonstrated resilience in some sectors (agriculture, manufacturing) and showed signs of gradual recovery from the previous year’s economic disruptions, achieving 2.2  percent gross domestic product (GDP) growth. This follows a 3.1 percent contraction of its GDP in 2020. Having adopted a “living with COVID” stance to reopen its economy and attract international tourists, the Royal Government of Cambodia (RGC) in March 2022 dropped all quarantine and testing requirements for fully vaccinated travelers. The World Bank predicts Cambodia’s GDP growth to rebound to 4.5  percent in 2022.

The RGC has made attracting investment from abroad a top priority, and in October 2021 passed a new Law on Investment.  Foreign direct investment (FDI) incentives available to investors include 100 percent foreign ownership of companies, corporate tax holidays, reduced corporate tax rates, duty-free import of capital goods, and no restrictions on capital repatriation.  In response to the COVID-19 pandemic, the government enacted economic recovery measures to boost competitiveness and support the economy, including a long-awaited Competition Law, a Public-Private Partnership Law, and provided tax breaks to the hardest hit businesses, such as those in the tourism and restaurant sectors. The government also delayed the implementation of a capital gains tax to 2024 and established an SME Bank of Cambodia to 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 local or other foreign companies that engage in acts of corruption or tax evasion or take advantage of Cambodia’s weak regulatory environment. Foreign and local investors alike lament the government’s failure to adequately consult the business community on new economic policies and regulations. In light of these concerns, on November 10, 2021, the U.S. Departments of State, Treasury, and Commerce issued a business advisory to caution U.S. businesses currently operating in, or considering operating, in Cambodia to be mindful of interactions with entities involved in corrupt business practices, criminal activities, and human rights abuses. Notwithstanding these challenges, several large American companies maintain investments in the country, for example, Coca-Cola’s $100 million bottling plant and a $21 million Ford vehicle assembly plant slated to open in 2022.

In recent years, Chinese FDI — largely from state-run or associated firms — has surged and has become a significant driver of growth in Cambodia.  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 2021, Cambodia recorded FDI inflows of $655 million, with approximately 52 percent reportedly coming from the PRC.

Physical infrastructure projects, including commercial and residential real estate developments, continue to attract the bulk of FDI. However, there has been some increased investments in manufacturing, including garment and travel goods factories, as well as agro-processing.

In 2022, both the Cambodia-China Free Trade Agreement (CCFTA) and the Regional Comprehensive Economic Partnership (RCEP) agreement entered into force.

Climate change remains a critical issue in Cambodia due to its vulnerability to extreme weather occurrences, high rates of deforestation, and low environmental accountability.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perception Index 2021 157 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 109 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 1994-2021 $1.58 billion https://apps.bea.gov/international/factsheet/

http://www.cambodiainvestment.gov.kh

World Bank GNI per capita 2020 $1,500 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD

6. Financial Sector

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, with nine listed companies, it has taken steps to increase the number of listed companies, including attracting SMEs. In 2021, market capitalization stood at $2.4 billion, and the daily trading value averaged $246,000.

In September 2017, the National Bank of Cambodia (NBC) adopted a regulation on the Conditions for Banking and Financial Institutions to be listed on CSX. 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 $15 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, and there are currently eight corporate bonds listed on the CSX.  There is currently no sovereign bond market, but the government has stated its intention of making government securities available to investors in 2022.

The NBC regulates the operations of Cambodia’s banks. Foreign banks and branches are freely allowed to register and operate in the country. There are 54 commercial banks, 10 specialized banks (set up to finance specific turn-key projects such as real estate development), 79 licensed microfinance institutions (MFIs), and five licensed microfinance deposit taking institutions in Cambodia. The NBC has also granted licenses to 17 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.

The banking sector’s assets, including those of MFIs, rose 16 percent year-over-year in 2020 to KHR 241 trillion ($59.4 billion) and customer loans increased 15 percent to KHR 151 trillion ($37.3 billion). In 2020, the number of deposit accounts reached 8.9 million (out of a population of roughly 17 million), while credit accounts reached 3.2 million.

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 $75 million for commercial banks and $15 million for specialized banks. Based on the new regulations, deposit-taking microfinance institutions now have a $30 million reserve requirement, while traditional microfinance institutions have a $1.5 million reserve requirement.

In response to the COVID-19 pandemic, the NBC adopted measures to maintain financial stability and ensure liquidity in the banking system. These measures included allowing banks to maintain their capital conservation buffer at 50 percent, reducing the reserve requirement rate, and allowing banks to restructure loans for clients impacted by COVID.

Financial technology (Fintech) in Cambodia is developing rapidly. 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 checks 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) 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 RGC committed to working with FATF to address these deficiencies through a joint action plan, although Cambodia remains on the grey list as of 2022. 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.

In addition to Cambodia’s weak AML/CFT regime, vulnerabilities include a largely cash-based, dollarized economy and porous borders. Both legal and illicit transactions, regardless of size, are frequently conducted outside of regulated financial institutions. Cash proceeds from crime are readily channeled into land, housing, luxury goods and vehicles, and other forms of property, without passing through the banking sector. Moreover, a lack of judicial independence and transparency constrains effective enforcement of laws against financial crimes. The judicial branch lacks efficiency and cannot assure impartiality, and judicial officials, up to and including the chief of the Supreme Court, have simultaneously held positions in the political ruling party. Refer to Section II: “Illicit Finance and Corrupt Activities in Cambodia” of the U.S. government’s Cambodia Business Advisory on High-Risk Investments and Interactions released on November 10, 2021, for more information.

Cambodia does not have a sovereign wealth fund.

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