PEST Analysis for Cambodia

Country Information

•          Land Area        : 181,035 Km²

•          Cambodia is bordered with :

–      Thailand          : north and west (817 km/508 mi)

–      Lao PDR          : north (555 km/345 mi)

–      Vietnam           : east and south (1,158 km/720 mi)

–      Coastline         :  443 km (275 mi)

•          Climate            : Tropical zone and 2 seasons

•          Population                   : ~15,424140 million (as of  2014)

•          Population growth rate:  1.54%

•          Density            : 85 persons/km²

•          Capital City      : Phnom Penh

•          60% of population is based on agriculture         

                        (https://en.wikipedia.org/wiki/Geography_of_Cambodia)                

I. Political Climate

•       Cambodia has step by step developed its economy and social structure from the bottom after three decades of devastation and societal fragmentation from civil conflicts, colonization, genocidal Khmer Rouge and foreign sanctions, with the help of United Nations and foreign countries (Vu, 2015).

•        Cambodia is a constitutional monarchy. After 2013 election, there are two main political parties: CPP and CNRP.

Corruption

•       Transparency International (TI) ranks Cambodia in the 156th place in the corruption perception index in 2014. Cambodia’s government makes efforts to reduce corruption nationwide (Vu, 2015).

•       In March 2010, the Cambodia’s government passed the draft of the Anti-corruption Law.

•       The RGC has requested the private sector to help support efforts to reduce informal payments. In response, 17 large companies have recently signed an MOU with the Anti-Corruption Unit, 9 of which are located in the Phnom Penh Special Economic Zone (PPSEZ) (World Bank, 2015)

Prime Minister’ Facebook Page

•       Prime Minister Hun Sen is nearing the pinnacle of Cambodian social media popularity. He has launched a new personal website and his own Hun Sen app for Android phones.

•       As of Tuesday evening, his official Facebook page had accrued more than 2,108,800 “likes,” edging out Mr. Sam Rainsy’s official page, which had about 2,094,800 “likes.”

                                    (Source: The Cambodia Daily, 03 February 2016)

A New Wave of Reforms

•       To address this, the RGC has initiated a new wave of reforms since early 2014. Three key reforms in the area of trade facilitation are:

1. Company registration is being simplified and automated. It is intended to allow applicants to register a new company online in significantly less time, ultimately diminishing face-to-face contact.
2. Automation of the Certificate of Country of Origin (COO). In a first phase, MOC launched an Interim System, which can be used from the Ministry's premises. Work is under way for the system to be fully automated so that companies can apply for the certificate electronically. The new COO system is intended to become an electronic payment platform and offer the first e-payment facility (with e-signature) for government services (World Bank, 2015).
3. Transition of CAMCONTROL to a modern Food Safety and Consumer Protection Agency. This is intended to improve the overall level of food safety in Cambodia and reduce duplications with the General Department of Customs and Excise (GDCE).

II. Economic Climate 

•       Cambodia marked a turning of a central planning economy to a market economy in April 1989 (Diep, 2005).

•       On 30 April 1999, Cambodia successfully became a member of ASEAN and a member of WTO in September 2004.  In June 2009, Cambodia was lifted from the blacklist by the US government (Sok, 2009).

•       Since 31 December 2015, the ten ASEAN member countries have officially launched the ASEAN Economic Community (http://aseanup.com/).

Foreign Development Assistance

•       Cambodia is characterised as a heavily aid-dependent country.

•       Approximately Cambodia’s budget is constituted by 40% of foreign development assistance, of which close to 14% is spent by NGOs (CDC 2014; RGC 2013).

SME Report

•       From the base of zero in 1989, the number of private enterprises had quickly risen to a total of 505,134 enterprises in which the number of SME establishment counted for 99.8% of the entire establishment, consuming 73% of national employment, and 58% of national production (EC, 2011).

Rapid Growth of the Banking Sector

•       As of March 2015 there are 36 commercial banks, 11 specialized banks, 21 licensed microfinance institutions, 28 registered microfinance institutions and around 60 unregistered NGOs.

•       Bank deposits (BD): $53 million in 1993 to $347 mil. in 2000; $914 mil. in 2005, $4 bil. in 2010, 12 bil. in 2014, but reduced to $10 billion in 2015.

•       Credit to the private sector: increased from US$92 million in 1993 to $233 million in 2000, to $3.2 billion in 2010, then to $11 billion in 2015 (Cambodian Economy, 2015).

Interest Rate

•       The domestic US dollar interest rate—the US dollar lending rate 12-month weighted average—increased to 11.51% per annum at the end of 2014.

•       The domestic US dollar fixed deposit interest rate (12-month weighted average), however, remains at 4.2% per annum (World Bank, 2015).

•       A joint World Bank/IMF debt sustainability analysis (DSA) conducted in 2013 showed that Cambodia’s debt distress rating remained low, with all debt burden indicators projected to remain below their respective thresholds.

•       The size of Cambodia’s external debt (including arrears) is projected to have reached US$ 5.6 billion or 33.9% of GDP in 2014 (World Bank, 2015).

Cambodia’s Debt

•       A joint World Bank/IMF debt sustainability analysis (DSA) conducted in 2013 showed that Cambodia’s debt distress rating remained low, with all debt burden indicators projected to remain below their respective thresholds.

•       The size of Cambodia’s external debt (including arrears) is projected to have reached US$ 5.6 billion or 33.9% of GDP in 2014 (World Bank, 2015).

Currency

•       Cambodian currency is Riel (KHR). Cambodia has been one of the highly dollarized economies since 1992. Since 2007, the share of foreign currencies in broad money has reached around 80% and the economy has become dollarized.

•       The share of US dollar deposits in total deposits has fluctuated between 92% and 98% during the past two decades. By December 2014, US dollar deposits reached almost US$8.6 billion more than half the size of the economy (World Bank, 2015).

Advantages of Dollarization

The economy has achieved an impressive performance during the past two decades (World Bank, 2015).

1. Dollarization is known to constrain cash-strapped governments from resorting to domestic financing, a major cause of spiral inflation in the late 1980s and early 1990s in Cambodia.
2. During times of external shocks when there is a US dollar shortage, the total value of US dollars in circulation can help finance current account deficits, a role often played by foreign reserves.
3. Other proponents of dollarization believe it is most beneficial to a small open economy, like Cambodia, heavily trading with other dollarized partners, with a business cycle highly correlated with that of the US.
4. By eliminating exchange rate risk, dollarization attracts capital inflows and facilitates high level of openness, fostering Cambodia’s liberal trade and investment regimes.

Disadvantages of Dollarization

The Cambodian authorities acknowledged in its Rectangular Strategy (RS) Phase 3 that the economy remains highly dollarized which imposes limitations on monetary policy (World Bank, 2015).

1. Dollarization at least partly renders Cambodia’s exports and the production of tradable goods less competitive compared with its low-income peers due to nominal exchange rate appreciation vis-à-vis other currencies.
2. Some rough estimates put the loss of seigniorage at between US$1 and US$2 billion. Seigniorage is the gain (or loss) resulting from circulating the face value of a currency minus the cost of producing it.
3. Dollarization and exchange targeting may not anchor price levels as well as one might expect.
4. The key feature of dollarization is a fixed exchange rate (riel versus US dollar exchange rate peg) which constrains trade policy.

Ways Forward

            In the early stages of development of the banking sector, with its newly established monetary authorities, human resources capacity and a regulatory framework to manage monetary policy in Cambodia were weak.

            Therefore, at that time, the benefits of dollarization outweighed the costs (World Bank, 2015).

Trade Liberalization

•       The main markets of Cambodia’s exports are North America and EU (ITC by Country Report, 2014).

•       Cambodia gains benefits from the EU’s Generalized Scheme of Preferences (GSP) as a Least Developed Country (LDC), which enables the duty-free exports of all products except arms and ammunition. (Countries and Regions – Cambodia, 2014).

•       Cambodia is in the top list of liberal investment markets in developing Asia with the permission of 100% foreign ownership and only marginal number of industries closed to foreign investments (UNCTAD, 2013).

•       Another research from NagaCorp (2013) also indicates that Cambodia offers one of the most liberal investment environments in Southeast Asia.

Labor Costs

•       From 2010, garment workers earned the minimum wage of $61 per month while there is no minimum wage for other industries.

•       In 2014, the tripartite Labor Advisory Committee approved to raise the minimum wage to $100 (Investment Climate Statement – Cambodia, 2014).

•       In 2015: the minimum wage to $128

•       January 2016: the minimum wage to $140

III. Social Climate 

Age Structure

0–14 years                               31.9%

15–64 years                              64.3%

65 and over                              3.8%

More info: https://en.wikipedia.org/wiki/Demographics_of_Cambodia