FOREIGN DIRECT INVESTMENT IN CAMBODIA

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1 FOREIGN DIRECT INVESTMENT IN CAMBODIA PHNOM PENH SECURITIES PLC. No. 32, Monivong Bld, Phnom Penh, Cambodia Tel: Fax: Website: In this Paper: Executive Summary Page 01 Overview of Page 02 Seven Good Reasons to Invest in Cambodia Page 03 Conclusion Page 06 Executive Summary This Report is presenting seven good reasons why Cambodia can attract huge Foreign Direct Investment (FDI), which is a core potential contributor to growth and development through bringing stable capital; new technology; innovative management know-how; and more new markets to the Kingdom. The reasons include, but not limit to, strategic location, open economy, preferential access to ASEAN and the World, attractive investment incentives, low labor costs, easy access to water and electricity, and sound macroeconomic environment with stable political situation. Therefore, PPS hopes that this research paper can provide a good reference to foreign investors who intend to invest in Cambodia. 14 October P a g e

2 Overview of Special Report Foreign Direct Investment (FDI) has come to be widely recognized as a major potential contributor to growth and development, since it can bring capital, technology, management know-how, and access to new markets. Moreover, it is more stable, with a longer-term commitment to host economy, than other forms of capital inflows. Thanks to these benefits, emerging market countries that need more new investors tend to attract more FDI, while companies in developed countries also seek new locations for lower costs. With this regard, Cambodia is a good example, since she is ideally placed for a surge in investment and business development. FDI in Cambodia grew significantly from almost nothing in the late 1980s to an annual average of roughly US$1 billion in the second half of 1990s thanks to the Paris Peace Accord of By September of 2011, the Ministry of Commerce (MoC) and the Council for the Development of Cambodia (CDC) approved 1,736 projects worth US$38.51 billion in total. Table 01: FDI in Cambodia from 1994 to 2011 (September) Year * Total Number of Projects Capital (US$ billion) , Chart 01: FDI by Sector in Chart 02: Top 5 Origins of FDI in 2010 (US$ million) (US$ million) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Agriculture Industries Services 1,200 1, Source: Council for the Development of Cambodia (CDC) However, please note that official FDI figures in Cambodia, like as in many other developing countries particularly Least Development Countries (LDCs), are based on approved investment. Actual investment may be only a small part of the approved amount. Nonetheless, Cambodia has attracted a lot of foreign investment into the country, since she has provided a lot of opportunities for companies who seek new developing country to invest. 14 October P a g e

3 Seven Good Reasons to Invest in Cambodia Special Report Strategic Location Open Economy Cambodia is a small country of about 14.5 million people, but she is located at the heart of what has been known as the most dynamic region of the world economy for the past several decades: South-East Asia. The country borders Thailand to the west and northwest, Laos to the northeast, Vietnam to the east and southeast, and the Gulf of Thailand to the south. Moreover, Cambodia has easy access to seaports and airports (and huge potential land freight transport, especially railway, for regional countries), and is rich of natural resources and world wonders, i.e. Angkor Wat temples and Preah Vihear temple. Therefore, Cambodia is strategically located for a worldconnected business operation. Cambodia has transformed herself to an open economy since early 1990s, and has improved year-by-year on the level of economic freedom. The Index of Economic Freedom in 2011 ranked Cambodia, with a score of 57.9 points, 102 nd among 170 countries, 17 th among 41 countries in the Asia-Pacific region, and quite higher than other emerging market countries (table 02). Table 02: Economic Freedom Index in 2011 for Cambodia Vs. Selected Countries Countries Cambodia Vietnam Laos Philippines Indonesia China Brazil India Score Ranking Source: Economic Freedom Index 2011, compiled by Heritage Foundation in the United States Preferential Access to ASEAN and the World Attractive Investment Incentives Thanks to the Paris Peace Accord in 1993 and open sky policy from the Royal government, Cambodia is able to join and become a member of various international and regional organizations that facilitate trade, which in turn the country can enjoy preferential trading status on duty-free privileges for exports and Most Favored Nation (MFN) treatment. Those organizations include, but not limit to, Association of Southeast Asian Nations (ASEAN), World Trade Organization (WTO), and ASEAN-China Free Trade Area (ACFTA). Moreover, Cambodia also possesses other beneficial agreements such as ASEAN-China comprehensive Economic Cooperation Agreement, ASEAN-Japan Comprehensive Economic Partnership, ASEAN-Korea Comprehensive Economic Cooperation Agreement and a dozen other multilateral agreements with developed countries including USA (Generalized System of Preference GSP) and European nations (Everything But Arms policy). With these regional integration and agreements, investors have the greatest opportunity to reach billions of customers with preferential access. Cambodia has adopted a number of laws and regulations to improve its open economy and encourage foreign investment. Currently, Cambodia offers investors one of the most liberal investments regime and tax incentive scheme in Southeast Asia. 14 October P a g e

4 The country provides a One-Stop-Service, fast track investment approval process (only 28 days) for foreign investors, who can then own 100% of their business with a long term lease up 99 years of land. Moreover, prices of products and services depend on market price, which reflects that business owners have greater control of company operations and flexibility on their price strategy. Thus, it implies that Cambodia has great liberal investments regime. Recently, Cambodia has introduced Special Economic Zones (SEZs), which bring all industrial activities together. Meanwhile, Cambodian law has offered tremendous tax incentives to investors, as they can enjoy corporate profit tax exemption for up to 8 years; full import duty-free for raw materials, machinery, equipment, no export tax, and no value added tax (for SEZs). Besides, the country also allows foreign investors to employ foreigners up to 10% of total workforce if expertise needed to conduct business, and provides a permanent visa for families of investors as well as free repatriation of profit. However, all FDI projects must be registered with the Council for the Development of Cambodia (CDC) in order to be qualified, called Qualified Investment Projects (QIPs), and eligible to for business incentives. Low Labor Cost Low labor cost is another reason for investing in Cambodia, where the total workforce has more than 8.8 million (or 61%) of total population and the median age is only 23 years. Among the emerging market countries in the region, Cambodian labor cost is the most interesting for foreign investors focusing on costs advantages (table 03). It implies that Cambodia has a huge potential workforce for oversea companies, as she has young, hardworking, and honest employee with the lowest wage in the region. Tablet 03: Comparative Monthly Minimum Wage in 2011 for Selected Countries Countries Cambodia Vietnam Laos Philippines* Indonesia* Thailand* Malaysia* China* Monthly Minimum Wage (Local Currency: in thousands) Monthly Minimum Wage (US$) 250 1,170-1, , Exchange Rate Per US$1 4, , , , Source: National Wages and Productivity Commission of the Philippines and Wage Indicator in 2011 *Data in 2010 Easy Access to Water and Electricity In addition to cheap labor cost, Cambodia also provides a favorable condition on easiness of access to water and electricity for their production. Cambodia has tremendous free of charge water supply thanks to her various water system including natural sources such as Mekong River (the longest river in Cambodia), Tonle Sap River, and Tonle Sap Lake (the biggest lake in Cambodia), and many other ponds. Moreover, the price of piped water was as cheap as US$0.07 per m October P a g e

5 For the time being, the authority Electricité Du Cambodge has supplied electricity to many provinces in Cambodia even though in some remote areas it is based on power plants using fuel and diesel oil. Moreover, the price of electricity keeps improving thanks to the development of hydropower, which is a potential adequate and reliable source of electricity and can generate more 10,000 MW that is large enough to cover domestic demand of only 3,045 MW in With this regards, Cambodia s electricity price will surely be quite lower than current price (US$0.20/kwh) and can be even cheaper than that of its neighboring countries. Chart 03: Electricity Tariff (US$/kwh) in Dec Phnom Penh Sihanoukville Siem Reap Banteay Meanchey Others* Average Source: EAC 2010 and PPS staff estimates Sound Macroeconomic and Stable Politic Environment Cambodia real GDP growth averaged over 9% during , the highest rate of any low-income countries in Asia (and one of the best performances worldwide), while the inflation was controllable at a low rate compared to neighboring countries. In addition to strong dollarized economy of the country, local currency (Khmer Riel) is pegged to US dollar within a stable range (table 04), since the Kingdom has adopted a flexible but administered exchange regime at +/- 5% of 4,000KHR = 1USD. This means that the National Bank of Cambodia will intervene when the exchange rate is fluctuated over +/- 5% (below 3,800 KHR or over 4,200 KHR). Thanks to the improving infrastructure, which create prime conditions for all sectors growth, Cambodia GDP is forecasted to reach average of 6.6% for the next 5 years (table 05). In addition, Cambodia has also offered confidence to foreign investors through its recent political stability and improving legal system, i.e. introducing Anti-Corruption Law. Meanwhile, the next general election in 2013 will be in a more peaceful & quiet and better situation than previous times, since the current ruling party (Cambodian People s Party CPP) is expected to keep its winning because of its strong supporters; for instance, election in 2008, CPP already won 90 seats over 123 seat (or equal to 73% majority, while 50%+1 vote is enough to form a new government). 14 October P a g e

6 Table 04: Exchange Rate for Khmer Riel Vs US Dollar (End Period) Table 05: Cambodia GDP Growth Forecast Type Dec-07 Dec-08 Dec-09 Dec-10 10/09 Indicators Average Official 4,003 4,081 4,169 4, % GDP Growth 6.8% 6.5% 6.5% 6.6% 6.8% 6.6% Market 4,004 4,121 4,186 4, % Inflation 5.0% 4.5% 3.4% 3.0% 3.0% 3.8% Source: National Bank of Cambodia Source: IMF, World Bank, and PPS staff estimates Conclusion Thanks to the opportunities available above, Cambodia has attracted more and more foreign direct investments, which in turn contribute to the economic growth of the Kingdom. It is a mutual benefit. Therefore, the country is expected to gain more FDI inflow in the coming years, as for instance, it soared 250% in August compared to the same period last year despite the West s economic woes (see table 01 above). Contact PHNOM PENH SECURITIES PLC. No. 32, Monivong Bld, Phnom Penh, Cambodia Tel: Fax: Website: Disclaimer Copyright 2011 Phnom Penh Securities Plc. All rights reserved. The information contained herein, including any expression of opinion, is based upon sources carefully considered and believed to be reliable at the time of publication, but their accuracy and completeness are not guaranteed. Opinions, estimates, and projections expressed in this document are fair and reasonable in the circumstances prevailing at the time, but are subject to change without notice. The use of this document shall be solely risk of the users. Directors, associates, employees and affiliates of PPS accept no liability for any damage caused by using this paper. This document may not be copied, reproduced, published or redistributed by any person for any purpose without the express consent of an authorized representative of PPS. Please cite sources when quoting. 14 October P a g e