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Cambodia: ASEAN Economic Community Provides Opportunities

Key Information
CapitalPhnom Penh
Population15.7 million
CurrencyCambodian Riel (1 KHR = 0.0002 USD as of 11 April 2016)
Official languageKhmer
Form of state
Constitutional monarchy

 

Major Merchandise Export (% of total, 2014)Major Merchandise Import (% of total, 2014)
Manufactured goods (92.8%)Manufactured goods (57.6%)
Agricultural products (7.0%)Fuels and mining products (8.7%)
Fuels and mining products (0.2%)Agricultural products (5.0%)
Top three export markets (% of total, 2014)Top three import markets (% of total, 2014)
European Union (27.2%)China (32.6%)
US (23.5%)US (12.2%)
Hong Kong (7.9%)Thailand (11.9%)

Sources: Economist Intelligence Unit, the World Trade Organization

 

Political Highlights

Cambodia is officially a multiparty democracy. Prime Minister Hun Sen has been ruling Cambodia since 1985. His Cambodian People’s Party (CPP) remains the largest party after the 2013 general election, winning 68 seats in the 123-seat National Assembly. The CPP and the main opposition party, the Cambodia National Rescue Party (CNRP) reached a power-sharing arrangement but it broke down in 2015. Tensions between both parties and a risk of political instability will likely continue to rise in the run-up to the 2018 election.

Cambodia is classified by the World Bank as a low-income country. Agriculture still employs roughly two-thirds of the labor force and contributes to one-third of economic output, while garment-making is the dominant industry, accounting for about 80% of exports. The government will continue to focus on improving basic living conditions and diversifying the economy. This involves measures to enhance agricultural productivity. Approximately 75% of farmers are still engaged in subsistence agriculture, suggesting that there is scope for large productivity gains. Disputes over land ownership and use are common due to unclear property rights. A land titling campaign was started in 2012, but, progress on land reform has been limited so far.


Economic Trend

Economic Indicators20132014*2015*2016*2017*
Nominal GDP
(USD bn)
15.416.6*17.719.220.9
Real GDP growth
(%)
7.47.16.97.07.0
GDP per capita
(USD)
1,010.4*1,095.6*1,168.01,234.51,312.4
Inflation
(%)
3.03.91.22.12.8
Budget balance
(% of GDP)
-2.1-1.30.1-2.7-1.9
Current account balance
(% of GDP)
-12.3-12.1*-11.2-8.3-8.0
Public debt
(% of GDP)
33.333.433.633.433.0

* Estimates
Source: The International Monetary Fund (IMF)

 

Cambodia’s economic growth has been one of the fastest among Asia’s developing economies in recent years. It averaged over 7% in the last five years, driven by robust growth in garment exports, real estate and construction. Real GDP growth is forecast to be 7.0% in 2016, and will remain strong in the coming years, under the assumption that the heightened political tensions will not impact the economy significantly. The Cambodian Riel is broadly stable, supported by the country’s positive short-term prospects. Cambodia has a high degree of dollarization with the ratio of foreign currency deposits to broad money standing at 83% in 2015.

The issue of low pay has sparked protests in recent years. The government increased the minimum wage of 2016 in the garment sector by 9% to US$ 140 per month, roughly matching Vietnam’s and significantly higher than Bangladesh’s US$ 68. The growing competition from other low-cost garment producers and potential labor unrest represent challenges to Cambodia.

While Cambodia’s growth story is not going to end anytime soon, long-term economic prospects hinge on whether the country can promote its competitiveness. Bottlenecks in infrastructure and education could divert foreign investment to other emerging markets in the region. Rapid wage growth is reducing its comparative advantage in cheap labor. The ASEAN Economic Community provides opportunities, but it will leave Cambodia more exposed to competition from its neighbors.

 

Chart: Hong Kong total exports to Cambodia
Chart: Hong Kong total exports to Cambodia

Hong Kong-Cambodia Trade

Total exports from Hong Kong to Cambodia increased by 13.9% from HK$7,015 million in 2014 to HK$7,989 million in 2015. The top three export categories to Cambodia were: (1) textiles, (2) hides, skins and furskins, raw, and (3) clothing & clothing accessories, which represented 70.7% of total exports to Cambodia.

Cambodia is a member of the ASEAN. Following the signing of the ASEAN-China Free Trade Agreement which came into effect in 2010, Hong Kong and the ASEAN also agreed to pursue a bilateral Free Trade Agreement (FTA) in April 2014. The Government of Hong Kong Special Administrative Region is now discussing with ASEAN the preparatory work for formal negotiations. The FTA is expected to cover the following major areas: (a) elimination and/or reduction of tariffs and non-tariff barriers; (b) preferential rules of origin; (c) liberalization of trade in services; (d) liberalization, promotion and protection of investment; and (e) dispute settlement mechanism. Cambodia is also a founding member of the Asian Infrastructure Investment Bank (AIIB).

ECIC Underwriting Experience

The ECIC offers coverage on Cambodian buyers with payment terms in Irrevocable Letter of Credit (ILC). from April 2015 to March 2016, there was no insured business on Cambodia.

 

Content provided by Picture: Hong Kong Export Credit Insurance Corporation
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