The Cambodian economy has posted some of the most enviable growth statistics in the world, with GDP increasing eightfold over the past 25 years. But with a surging economy comes rising expectations, and Cambodia will have its work cut out for it if it hopes to continue to make gains in the 25 years ahead.
There are few countries in the world that can boast the level of economic growth that Cambodia has achieved during the past 25 years, which saw GDP soar from a mere $2.5 billion in 1992 to about $20 billion today. Of course, the economy was starting from a low base, built from scratch on the chaff of the Khmer Rouge’s agrarian dystopia and stunted by decades of war.
But 1993 is generally seen as a turning point, with UN-backed elections and the shift to a market economy laying the foundations for economic growth. However, it would take another two decades before the economy reached the critical mass necessary to attract heavyweight foreign investors.
Today, the Kingdom is increasingly visible on investors’ radars and its fast-expanding economy has proven remarkably resilient to global headwinds. While the changes of the past 25 years are impressive, so are the possibilities for the next 25.
Last year, the World Bank upgraded Cambodia’s economic status from low income to lower-middle income. If projections hold, the country can expect to graduate to upper-middle income status by 2032. Each rung on this economic ladder holds an entirely new set of opportunities for businesses.
While Cambodia may be a relatively small market of 16 million, its demographics are tantalising to investors. Over two-thirds of the country is under the age of 30, with rising incomes and a falling dependency ratio. Though poverty continues to grind in the countryside, consumer culture is swelling in the major cities, fuelled by the Kingdom’s first generation of modern malls, cinemas, brand retail outlets and food chains.
With this comes higher expectations, which are driving economic growth but also putting pressure on wages and the Kingdom’s reputation as a ready source of cheap labour. A primary challenge for industry looking ahead will be to increase the skill and productivity of workers to move output beyond low-margin stitched garments towards higher value-added products.
Finding workers with nimble hands to operate textile machinery is one thing, but recruiting for more complex industrial processes is far more challenging. Meanwhile, the porous borders envisioned by ASEAN will put higher-skilled Thai and Vietnamese workers within easy reach, especially in the special economic zones (SEZs) along the country’s borders.
Cambodia’s first SEZ opened in 2005. Today there are nearly two dozen of these industrial parks, whose tenants seek to benefit from cheaper electricity, smoother customs clearance and tax breaks. In the coming years, expect to see more clustering, with SEZs differentiating according to specialty and their tenants working as part of a single supply chain.
The coming decade could even see a technology cluster. Models in India and Egypt have demonstrated their potential.
Garments will continue to dominate the Kingdom’s manufacturing sector in the coming years. But an increasing share of production will be occupied by food processing, electronics and automotive parts. Perhaps even bigger growth will come in the services sector, which stands to gain from the knock-on effect of expansion in the tourism, financial and property sectors.
Logistics will take on a heightened priority as ASEAN regional integration erodes borders and allows companies to develop more complex cross-border supply chains. Massive investments in infrastructure are cutting down travel times, with costs to fall further once rail connections to Thailand, and eventually Vietnam, are in place and spurs to industrial zones are built. Rail transport will allow traders to maximise loads at low costs, especially on heavy, low-value construction materials and feedstock.
Cambodia’s financial sector, already expanding at a dizzying pace, is on course for further robust growth. With just 17 percent of the population banked, and so much of investment tied up in real estate, there is enormous potential for credit expansion and new financial products. Regulatory measures such as revised capital requirements and a ceiling on interest rates may cool supply, but they will do little to curb the underlying demand, making this one of the most dynamic sectors going forward.
It won’t always be smooth sailing. Deteriorating credit quality and a looming real estate bubble, as well as various external factors, will test the economy’s resilience in the coming years. But ultimately, the biggest factor shaping Cambodia’s economic fortune will be its political stability. Without it, everything built over the past 25 years comes unglued.