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Cambodia logs new trends in exports, investments but garment will stay

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The garment sector will remain a key economic sector. Hong Menea

Cambodia logs new trends in exports, investments but garment will stay

Experts claim that trade treaties and new investment law places Cambodia in better position for growth in the region

The pandemic has brought about some realisation to Cambodia’s export and investment market despite knocking down two economic sectors – garment manufacturing and tourism.

With the onslaught of Cambodia’s trade treaty with China and a quota-free entry into United Kingdom, as well as the anticipated ratification of the Regional Comprehensive Economic Partnership (RCEP) in January next year, trade investments in non-traditional segments are starting to emerge.

Both investment and export trends have shifted as non-garment manufacturing segment represented a larger share of the market since the pandemic.

Seemingly, the National Bank of Cambodia (NBC) stated that the effort of economic diversification could be illustrated by the increase in foreign direct investment (FDI) to non-garment industries, which is expected to slowly expand.

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Extract: Cambodia Economic Update, June 2021 (World Bank)

Sectors, such as travel goods, energy, electrical parts, vehicle spare parts, among others, have recently emerged as newly attractive industries for foreign investors.

“With appropriate support, these industries could boost the diversification in the manufacturing sector in the medium term,” the central bank said in its Financial Stability Review 2020.

It added that the government had taken advantage of technological advancement by digitalising several public services, including those related to trade, investment and business registration.

While noting that financial technology, especially the payment system, had “grown remarkably”, the NBC mentioned that technological advancement could reduce cost and enhance productivity with improved innovation, which are the key factors to attracting more FDI.

Dr Jayant Menon, visiting senior fellow at the Institute of Southeast Asian Studies (ISEAS-Yusof Ishak Institute) found that the nexus between trade and investment has been strengthened in an era of international production networks and global supply chains.

Modern trade agreements like RCEP, of which Cambodia is a signatory, do as much to encourage investment as they do trade by reducing trade costs and addressing behind the border issues.

The harmonising of rules and regulatory converge – key features of RCEP – will assist in plugging Cambodia more deeply into global supply chains.

Menon opined that the adoption of a single rule of origin, another key objective of RCEP, will further assist in the process of integrating into global supply chains.

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Extract: Cambodia Economic Update, June 2021 (World Bank)

“The benefits to Cambodia arising from these measures will greatly outweigh the impacts from tariff reductions on goods alone.

“In this way, mega-regionals like RCEP if implemented faithfully can attract the kind of FDI required to diversify the Cambodian economy away from its current heavy reliance on garments in its non-agricultural exports,” he said.

The World Bank, in its latest economic update, equally noted that the lure of the FTAs had pushed up the value of approved projects, funded by FDI, in the real sector.

The expansion underpinned a diversification of FDI project that were previously focussed largely in the construction and real estate sector, which garnered $1.8 billion worth of investments in 2019, only to record a plummet at $140 million last year.

In recent times, FDI poured into sectors such as energy, healthcare, telecommunication, garment, travel goods, and agriculture, including agroprocessing industries, adjusting to changes in domestic economic and external demand conditions.

While the largest component of approved FDI project value at $1.8 billion in 2020 went to the tourism sector, despite taking a hit in the pandemic, non-garment industries such as energy, healthcare and telecommunication came in second with investments totaling $1.4 billion.

The garment sector received $220 million followed by agriculture and agro-processing sectors with FDI amounting to $110 million.

Structural weaknesses

In a similar development, exports for non-garment goods have increased. Data by the World Bank showed that in the first four months of this year, exports of bicycles and combined vehicle, electrical, and electronic parts rose 32.3 per cent and 16.4 per cent, respectively, year-on-year.

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Extract: Cambodia Economic Update, June 2021 (World Bank)

“Exports of garment and textile products no longer accounted for the majority of merchandise exports. The share of garment exports in total goods [excluding gold] exports declined to 45.6 per cent in the first four months of 2021, down from 52.2 per cent in 2020 [and 57.6 per cent in 2019],” the bank wrote.

That being said, garment, travel and footwear (GTF) industry remains the mainstay for Cambodia, contributing 17 per cent to gross domestic product in 2019.

However, external demand shocks in the past year and domestic challenges including the closure of factories due to the spread of Covid-19 reduced output.

Characterised by a narrow export base, Cambodia’s growth model exhibited weaknesses “years before the pandemic hit”, the World Bank said.

The industrial sector focused on the cut-make-trim process, which the bank remarked as “the lowest value-added section of the entire value chain” for nearly three decades, leveraging on an unskilled labour force and comparatively low minimum wages then.

It found that the country’s external competitiveness eroded, partly caused by rapidly rising wages—made worse by a dollarised economy—and exacerbated by challenges in doing business and investment climate reforms.

The vulnerabilities, however, were masked by a surge in capital inflows in the pre-coronavirus crisis period to largely finance the construction and real estate sector.

“With the collapse of the tourism sector and a stalled construction boom, the pandemic has exposed Cambodia’s structural weaknesses,” the World Bank stated.

As the pandemic raged on, the country’s goods exports adjusted. The World Bank observed that the decline in GTF goods exports in the second and third quarters of 2020 was partly offset by rising exports of agricultural commodities, processed agricultural products, newly emerging manufactured products such as electrical, electronic, and vehicle parts, including bicycles.

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Extract: Cambodia Economic Update, June 2021 (World Bank)

This, it said, helped maintain a 16.7 per cent year-on-year growth rate of Cambodia’s recorded merchandise exports in 2020, assuming gold exports were included.

“While having a relatively small share of 3.2 per cent of total merchandise exports [excluding gold], exports of electrical parts, wire and accessories, and vehicle parts reached $456 million, growing at 18.1 per cent in 2020. Exports of bicycles also accelerated, reaching $527 million, expanding at 27.7 per cent in 2020,” the bank pointed out.

As for the January-April period this year, exports of bicycles grew 32.3 per cent year-on-year compared to 27.8 per cent while combined vehicle, electrical, and electronic parts exports climbed 16.4 per cent and 18.2 per cent, respectively.

That being said, exports of GTF which bottomed out in January this year, contracting 13.2 per cent year-on-year, showed some recovery, growing 10.2 per cent in March and 27.8 per cent in April despite the rise in shipping costs.

The US market continued to be Cambodia’s number one export market, representing 36.7 per cent of total GTF exports in 2020 with a value of $3.5 billion, from 31.9 per cent in 2019, the World Bank said.

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Extract: Cambodia Economic Update, June 2021 (World Bank)

It was boosted in part by the duty-free access, provided by the US Generalised System of Preferences programme – granted in 2016 – which resulted in the growth of export in luggage, backpacks, handbags and wallets.

At the same time, Cambodia’s exports of bicycles to US market doubled to $147 million in 2020 while exports to the EU declined by 3.9 per cent to $275 million.

In recent years, the growth of exports to the US has bolstered the expanding loss in exports to the EU, made worse by the 20 per cent tariff withdrawal under the Everything But Arms scheme last August.

Last year, the EU market fell significantly, contracting by 35 per cent, reaching only $2.6 billion in 2020, the World Bank said.

Its share slipped to 27.5 per cent of combined GTF exports from 38.2 per cent in 2019 and 42.6 per cent in 2018.

Clinging to garment

However, Ministry of Commerce undersecretary of state Penn Sovicheat maintained that Cambodia will “cling” on to garment as it is still an important component of total exports.

He contended that there is a need to diversify exports and markets, and steer away from dependence on preferential treatments in the long run as Cambodia is on its way to graduating out of the least developed country status.

Before that though, Cambodia has to become more competitive in the other sectors, therefore focus on development is needed on non-garment sectors, including aquaculture, agriculture and agriculture-processing industries.

“As an agriculture country, we have the ability to increase our capacity and make Cambodia a source of agriculture product, and a source to feed the world. For instance, our rice is qualified to be recognised internationally,” Sovicheat said.

Under his ministry, the Cambodian Integration Trade Strategy (2019-2023) prepares the country for graduation via policies, measures and an action plan that have been outlined in one of the chapters.

“We are preparing ourselves in agricultural processing in order to export [more] rice, cassava, rubber and fish. We captured a big market like China and soon it will be South Korea, although we have already started exporting products like mangoes even before the FTA is signed,” Sovicheat said.

Preparation efforts are being made in terms of technical upgrades in assembly lines, manufacturing of electrical components, and car wiring, particularly in the special economic zones, thanks to investments from Japan and South Korea.

“These efforts would make us more competitive in the sectors other than garment. So we prepare by increasing the skills and capacity of our labour force to be ready for Industrial 4.0 and to catch up with our ASEAN members,” he explained.

As such, it is “not the time” to abandon the garment sector or “not pay much attention” because the GTF export volume remains sizeable, he said.

But, he stressed, Cambodia needs to be more competitive in productivity in the garment segment and ensure product quality to inspire confidence in supply in order to be part of the global supply chain.

“We have to adhere to International Labour Organisation’s code that there is no sweat shop operation and child labour so that we don’t undermine the trust of our customers,” he said.

Sovicheat conceded that it would be a challenge training an intensive labour force and diversifying the market following the bilateral trade treaties but it was crucial for posterity.

“We are looking at India, Eurasian Economic Union and UK for FTAs. This is one of our strategies, which is to diversify to new markets, understand what is needed as well as diversify our products,” he said.

So it stands, that although the garment business is “up and down”, confidence in the sector will prevail, and all that needs to be done is to reintegrate, whether after Covid-19 or even by living with the virus, by developing new strategies.

“Because we have been doing this for a long time, we have the expertise [in garment manufacturing] and we cannot simply drop it and turn to something we might not know much about.

“So, everything has to be done at the same time – increasing capacity in agriculture and electrical sectors and garment. But clinging to garment is one of the strategies while we prepare for graduation and diversify exports including non-garment manufacturing,” he added.

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