Amidst a backdrop of global uncertainties, Cambodia's economy faced its fair share of challenges in 2023. However, many opportunities continue to be present in the Southeast Asian nation, which is well-primed for continued growth and expansion in the region. To delve further into these prospects, B2B Cambodia sat down with Stephen Higgins, Managing Partner at Mekong Strategic Capital, to discuss Cambodia's economic trajectory, its capital markets, and the broader investment landscape.
Reflecting On Cambodia’s Economic Lows In 2023
“2023 was tough,” Higgins began, describing the year as even more economically challenging than anticipated, even dubbing it as one of the most difficult years Cambodia had seen in the last two decades.
Providing a sectoral analysis, Higgins mentioned:
- Significant declines seen in exports, particularly in the garment sector, which dipped by 18 to 20 per cent and had a ripple effect that led to factory closures and reduced employment levels;
- The tourism sector did not reflect a significant economic contribution, despite showing statistical growth, primarily due to a decline in air arrivals by over 60 per cent compared to pre-COVID levels;
- “The finance sector had its worst year in 20 years,” Higgins stressed, citing credit growth at only around 3.6 per cent in the first eleven months of 2023, which he called a “recessionary number”;
- Real estate similarly faced severe downturns, marking 2023 as a year of economic distress across multiple fronts.
How Can Government Intervention Help Stimulate Cambodia's Economy?
Higgins cited external factors as largely influencing the economic landscape, which makes it difficult for government interventions to effect immediate change. However, he mentioned the Cambodian government’s announcement of a reduction in bank reserve requirements to 7 per cent at the Government-Private Sector Forum (G-PSF) in November 2023, as a positive sign for the future as it essentially helps to inject around USD $2.5 billion worth of liquidity into the market.
“They announced that reserve requirements from banks, instead of increasing from up to twelve and a half per cent, which is where it was pre-COVID, would go back to 7 per cent, which was their COVID emergency measure,” said Higgins.
“What does that mean in practice? It basically means there's another USD $2.5 billion dollars worth of liquidity flowing into the market, and in the context of a USD $30 billion economy, that is a big number. He said that this move by the government has already begun showing positive signs, with improvements in loan arrears and a slight uptick in economic activity seen towards the end of 2023.
Investing In Cambodia: What Are The Opportunities And Challenges?
Highlighting Cambodia's unique investment opportunities in comparison to its neighbouring countries, Higgins pointed out Cambodia's lower labour costs, political stability, and ongoing infrastructure investments as attractive prospects.
When it comes to investments and attracting foreign investors, there's a few [attractive features that Cambodia has], like lower cost of labour than Thailand, though it's not particularly lower than Vietnam so we don't want to be competing with Vietnam on the cost of labour. Political stability is a big thing, having a dollarised economy also helps, and ongoing investment in infrastructure.
“The other one is: if you're a manufacturer and you're in Thailand, the floods of ten years ago continue to be very front of mind for large manufacturers over there, particularly the Japanese, so having another manufacturing node or source just next door is quite attractive to them. But also their working age population is shrinking, so if you're a manufacturer in Thailand, if you can start to move just next door, that's a whole lot easier than moving somewhere completely different,” he added.
Watch Part 2 of B2B Cambodia's interview with Stephen Higgins:
Improving Cambodia’s Reputation And Education Systems
On the existing challenges in Cambodia’s investment landscape, Higgins underlined that there are still some reputation concerns that need to be addressed in order to attract more foreign investment.
Cambodia has a reputation issue, and it has for a long time, and I don't think it's always sold itself very well to international investors, but when people come here and see it for themselves, most people are blown away by the opportunity and development here.
“[From] being on the (FATF) grey list, then seeing the government has addressed those issues, that is really, really important to foreign investors. The new government that's in place, I've just been really impressed by. I think they come across as… far more appealing and far more encouraging for investors coming here,” he added.
Another major challenge Higgins mentioned is the persisting 'skill gap' among workers, which will need to be addressed through an improvement in education. The main thing Cambodia will need to work towards is ensuring that the available skillsets in the local workforce match up to those in neighbouring countries, but Higgins sees this as completely achievable, having observed that young Cambodians demonstrate a high propensity and eagerness to learn.
The issues with the education system here go back to the civil war, so it's a long standing problem that has meant that there is a skill gap here… But the passion for learning and the willingness to learn among young Cambodians is absolutely first class. so if you give them the opportunity and tools to learn, they can catch up quite quickly.
“There are companies here that do quite sophisticated manufacturing that have been able to get their workforce [in Cambodia] to a similar level of productivity as their factories in Thailand very, very quickly. They've had to invest in education, but they've been able to get [the workers up to par], so the raw talent is there. It might take some investment to get the outcomes that you're looking for, but you can get [the workforce] to where you want them to be,” he added.
On what concrete steps can be taken to bolster the education system, Higgins stated that there is a major need for more technical degree offerings and suggested that the government will need to take further action in improving the quality of public schools.
“Every university student seems to want to do a commerce degree here, maybe so they can go and work in a bank, but what Cambodia needs more of is technical training,” he said. “The country needs really good educational institutions that train high-class mechanics, high-class electrical engineering, those types of things that would help the private sector, and which would maybe be at the tertiary level.”
“I think at the middle-school, primary and secondary levels [Cambodia has] some world class institutions… [which are as] good as you would get in any country in the region, and you've also got a middle-tier that supports the middle class, but [getting more] government investment into government schools is where, as a country, I think there needs to be the most focus,” Higgins added.
Challenges In Cambodia’s Developing Capital Markets
Reflecting on Cambodia’s nascent capital markets and securities exchange, Higgins noted the need for more sensibly priced IPOs and better dividend policies to enhance market liquidity and investor confidence.
“...the stock exchange here has not done as well as I think anyone would have hoped and wanted, and part of it is there is a lack of liquidity stocks on there for the most part,” he said. “A lot of them are too small. A lot of the IPOs have been badly priced, they're priced too high… so we're not seeing the liquidity there that we'd like long-term.”
Watch Part 3 of B2B Cambodia's interview with Stephen Higgins:
“There’s the old saying of ‘liquidity begets liquidity’, so the more liquidity you have, the more liquidity you get, but when you don't have much, it's very hard to get more,” Higgins added.
IPOs being priced too high guarantees people lose money, and then they don't come back and invest again. So for new issuers, a sensibly priced IPO is far and away the single biggest thing that's needed, as well as sensible dividend policies.
“The Phnom Penh port, for example, is a very well run company. It's a great asset, but its dividend is, as a percent of its earnings, one of the lowest in all of Asia, and there's no logic for that. They should be paying out a much higher dividend, and that would be attractive for investors and would help get investors in. Whereas guaranteed dividends seems to have become a thing here, I don't think it's really a thing in most other markets. It doesn't make a lot of sense to me. It's a bit like when you see a condo that has a guaranteed rental yield, you notice people steer clear of it, because if they have to offer a guaranteed yield, that says it's probably not a very good investment to begin with,” he added.
Opportunities In Cambodia’s Capital Markets
Looking forward, Higgins said he sees potential growth in the capital markets driven by increased professionalisation among Cambodian companies and greater demand for investment options other than bank loans.
“For the last decade or so, if a company needed money to invest and it met the requirements, had audited financials and was profitable… It was a lot cheaper and easier to just go to the bank to get money, not to list,” said Higgins.
“But it's getting harder now, there's less liquidity in the bank system… So you will start to see more and more listings, and once you've got a lot more stocks on the market, it's going to be more attractive to investment management firms coming in to support that.
“The other one to watch is the National Social Security Fund (NSSF). That's going to grow as an investment pool, and part of where they are supposed to invest is into the equities markets. So this huge pool of money starting to go into the Cambodia Securities Exchange (CSX) should really help drive prices higher, and as those prices get higher, people make money and demand grows again, so it gets more attractive for companies to list on CSX,” Higgins added.
He also mentioned the direction of the new government as a promising sign for the future of Cambodia’s capital markets.
The biggest thing in the last few years I really think is the new government that came in during the third quarter of last year. I really see them as bringing the most hope in terms of changing some of the existing dynamics around the capital market here.
A Promising Future For Long-Term Investment In Cambodia
Outlook On 2024
Looking ahead to 2024, Higgins said he is cautiously optimistic, forecasting a growth rate of 5 to 6 per cent. This projection is based on the anticipation of improved tourism, diversification in manufacturing, and the beneficial impact of increased liquidity in the economy.
“Tourism will be, we think, a big one, more because it's coming from so far back, and Cambodia fundamentally has a really good tourism product,” he remarked. “Angkor Wat is one of the most remarkable sites globally. The beaches and the islands that Cambodia has are also wonderful tourist assets, they just need to be packaged better.”
On what other sectors show the most promise for foreign investors in 2024, Higgins pointed to manufacturing.
“We don't see property being a major asset class for foreign investors unless prices fall dramatically to make it more attractive, and outside of that, Cambodia doesn't need more retail shopping centres, I think that's pretty well done... but manufacturing and tourism would be the big ones.”
Vision 2030, 2050 And Beyond
Addressing Cambodia's goals to reach upper-middle-income status by 2030 and higher-income status by 2050, Higgins said he believes these targets are achievable, partly because Cambodia will need to undertake the process of rebasing its GDP.
“In part, [Cambodia] gets a free kick because the country’s GDP needs to be rebased. It's a complex mathematical issue to calculate, but basically, when they go and work [the GDP] out again, the size of the economy and, therefore, the GDP per capita, will be at least 30 per cent bigger just because of a change in how they do the measure, so that's going to help a lot,” said Higgins.
He emphasised the demographic advantages Cambodia holds over its regional neighbours and other ongoing improvements in infrastructure and the manufacturing sector as presenting the most compelling case for long-term investment in Cambodia, all of which will significantly contribute to the achievement of these broad economic targets
If you look out to 2040, which is only a bit over 15 years away, the working age population [in Cambodia] is forecast to grow 18 per cent, which is pretty big. Vietnam is only forecast to grow 4 per cent… Thailand will shrink by 14 per cent, so if you're looking at where to invest in Asia, you want to go where there's going to be more workers, and that's Cambodia… Cambodia is the place to be.
Nonetheless, Higgins once again underlined the critical need for substantial investment in the education system to overcome the middle-income trap and realise these ambitious goals.
“The one thing that needs a lot more focus and support is the education system, so to reach those higher income levels and to avoid what's known as the middle income trap, you need a high quality education system,” he said. “At the moment, that does not exist. The government is looking to do a lot to try and build this system, but there's a long way to go and it's going to require a lot more investment.”
Advice For Future Investors In Cambodia
Having amassed 30 years of experience in financial services and investment, over a decade of which was spent in Cambodia, Higgins has a lot of advice he can offer to new investors seeking to enter the local market. However, he boiled down his advice to two main points: have patience and be tolerant of ambiguity.
Patience is often required, things don't always happen as quickly as you like. Working hard to understand the perspective of those that you're dealing with is also very important. Understanding that this is just a long-term growth economy that will have its ups and downs, but long-term, this place is going to be really attractive.
“Whether you're looking at 2040, 2050, if Cambodia is not the highest growing economy over that period, I would be surprised. It's the demographics that underwrite that, and it's coming from a lower base that helps, but it’s also the political stability, the investment in infrastructure, and the location. It's got a market of nearly 100 million people on one side, over 60 million right next door.
"It's incredibly well placed to take advantage of all these things over that period of time. If Cambodia is not the highest growth economy in ASEAN [in the future], it would be surprising to me. That’s something people should get excited about,” Higgins concluded.
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- What Are The Determining Factors For European Investment Into Cambodia?
- CBRE’s ‘Fearless Forecast 2024’ Navigates Challenges And Opportunities In Cambodia’s Real Estate Market.
- Collective Investment Schemes In Cambodia – Why Invest and the Importance of Investment Diversification.