As some Southeast Asian nations face internal issues, the Kingdom’s stability could be an attractive destination to investors, but institutional setbacks might turn them away

Days after the shock military takeover of Myanmar’s government and the imposition of a one-year state of emergency, some investors pulled the brakes on foreign direct investments (FDI) as sanctions by the US and India loomed.

One of them was Thai-owned industrial estate developer Amata Corp Public Co Ltd, which suspended its $1 billion project in Myanmar, fearing that the turn of events would put off investors, Nikkei Asia wrote on Monday.

Reports also stated that investors are taking it slow, preferring to “wait and see”, just like Amata.

As for China – which allegedly viewed the coup as a “cabinet reshuffle”, Fitch Solutions Inc opined it might stay neutral. China owns a sizeable interest in construction projects, about 29 per cent, in the country.

“China may prove to be the exception, given its higher risk appetite and history of backing the previous military regime,” it mentioned in a note early this week.

In fact, the outcome could deepen bilateral ties between the two countries, allowing Chinese firms and funds to further entrench themselves in the growing domestic infrastructure and energy space, it said.

Coming off the pandemic a tad stronger than the rest of the world with a year-on-year gross domestic product (GDP) growth of 2.3 per cent in 2020, a possible increase in funds in Myanmar is not going to dent its voracious investment appetite in the rest of the region.

As Stephen Higgins, co-founder and managing partner of Mekong Strategic Partners Co Ltd, succinctly said: “In the context of China’s total outbound non-financial investment, the amount required to replace Western investment into Myanmar is chicken-feed.”

And so, he does not expect the Myanmar investments to have any material impact on China’s ability to invest further in Cambodia.

Though this would not be the case in Cambodia only. The economic powerhouse is projected to pour in more investment into Southeast Asia in the coming years as trade tensions with the US linger.

“From China’s point of view, it is only realistic to manage the risks of potential disruption and ‘decoupling’ of the country’s largest exports destination,” said UOB Group head of research Suan Teck Kin.

He offered that one way is to leverage on the strengths of the domestic economy and to further expand and intensify cooperation with other large markets and regions.

“The ASEAN [member states] and the Belt & Road Initiative countries will fit in this narrative given their geographic proximity and significant growth potential,” Suan said in a macro note late January.

Here is where its dual circulation strategy will come into play. It is a key principle that will guide China’s next-stage development prescribed in its 14th five-year plan (2021-2025).

One part of the strategy involves internal circulation, which refers to domestic economic activities, a main anchor for its economy. The other is external circulation, consisting of economic interaction with the outside world.

The latter stipulates deeper connectivity between domestic components, such as consumption, production and distribution, outside of China via channels such as trade, services, capital, investment, finance, culture, and people flow or exchanges, Suan explained.

For ASEAN, China’s economic policies are definitely welcomed by member states, including those embattled with political uncertainties, like Malaysia and Thailand.

ASEAN FDI to stay weak

While Cambodia enjoys a stable political environment, it has managed to control the spread of Covid-19 with no deaths so far.

Additionally, economic growth is forecast to be around four per cent this year after contracting a record 3.1 per cent in 2020.

Taken together, is Cambodia in a preferred position to receive higher investment from China and other investors?

“That remains to be seen,” said David Van, public-private partnership senior associate of Platform Impact Co Ltd.

He pointed out that, so far, Singapore had managed to attract the most FDI in 2020, constituting a 12-year high of S$17.2 billion (US$12.9 billion).

“No country [is able] to record good economic growth without a strong manufacturing base as the services and real estate sector [alone] cannot contribute substantial percentage of GDP as basic manufacturing,” he said.

He cited the example of the US sacrificing its industrial policy since the days of former President Ronald Reagan, which resulted in the impoverishment of US households.

“[Instead] the policy enriched Chinese [households]only because US corporations were chasing after better margins,” he said.

However, he lauded Cambodia for identifying and prioritising certain key sectors that will help it leapfrog into the 21st century digital era.

“We have been stuck with low-based garment and footwear manufacturing for decades. The government is gearing up education and skills enhancement for Industry 4.0.

“[It is also attracting] investments in research and development including in-country value-added processing of agricultural products,” Van said.

Looking at Cambodia’s FDI, the Council for the Development of Cambodia approved 121 fixed asset projects valued at $5.9 billion as at end-September, 2020.

Of that, China bankrolled $848 million projects, up 30 per cent year-on-year from $654.6 million in the corresponding period.

In relation to that, Greater China states, Hong Kong and Taiwan, invested a total of $164 million, down by half from $360.9 million in the same period in 2019.

Coming in second after China was South Korea with $262.8 million, whose investment grew more than 10 times from a year ago, followed by Malaysia ($51.7 million).

A big portion of these investments went to industries, comprising 103 projects that were valued at $809.3 million while six tourism projects chalked up $3.9 billion.

Regionally, UN Conference on Trade and Development (UNCTAD) data showed that investments into ASEAN from around the world fell 31 per cent to $107 billion in 2020.

But China instead gained 15 per cent more FDI totalling $163 billion, along with an increase of inflows to Hong Kong.

“China became the top destination of FDI inflows in 2020, with the US trailing in second position after a 46 per cent drop in inflows,” UOB’s Suan noted. “The EU came in third with a 71 per cent decline in FDI inflows.”

While FDI into ASEAN is expected to stay weak this year, as warned by UNCTAD, Suan said historically, the region has in general, outperformed the competition for foreign investment.

This represents a 14 per cent compound annual growth rate (CAGR) from 2009 to 2019, ahead of China (4.1 per cent) and the US (5.5 per cent), which is largely attributed to the stability of the region and its openness to foreign investments.

With the onslaught of one of the world’s largest multilateral pacts, the Regional Comprehensive Economic Partnership (RCEP), ASEAN has yet another catalyst, Suan said.

According to him, FDI inflows into RCEP accounted for 37 per cent of the global share last year, which was an increase of nearly 14 percentage points from 2019.

Further investments driven by the RCEP, its integration into the global value chain (GVC), China’s dual circulation strategy and the region’s rising population and income, are waiting to happen.

The question is, where does Cambodia stand in all this?

Anthony Galliano, CEO of Cambodian Investment Management Co Ltd, said although the Kingdom’s FDI has grown exponentially in recent years, it remained overly concentrated with China, having surpassed other FDI sources combined.

Cambodia also ranks in the lower tier for inward foreign investment in ASEAN, topping only Myanmar, Laos, and Brunei, and only garnering half of what Thailand does as its closest competitor up the ranks.

“Undoubtedly, Myanmar’s FDI will dry up and quickly,” he said, however adding that that investment pool is “miniscule”, just $2.5 billion in 2019 compared with Singapore’s $92 billion.

To be sure, Singapore, Indonesia, and Vietnam are historically the largest FDI recipients in South East Asia, which cumulatively made up more than 80 per cent of FDI inflows for the region in 2019.

“I don’t expect Cambodia to benefit from the turbulence in Myanmar, Thailand and Malaysia. In fact, in such instances there can be contagion risk, with investors unfortunately avoiding countries they classify similarly.

“However, Cambodia has embraced foreign investment from China and that is expected to remain stable and consistent, whereas China is not a major investor in Thailand and Malaysia. Although, Malaysia is not encouraging increased Chinese investment,” he said.

‘. . . well aware of hiccups’

That said, economist Dr Chheng Kimlong deemed that a lot more needs to be done in order to lure more FDI, given that Cambodia does not have a good investment rating. This is a result of its high corruption ranking and lack of transparency.

He suggested that regulatory governance, public administration and policy coordination among government ministries have to be polished up.

In addition, smart economic diplomacy, effective economic policy and policy implementation should be further enhanced at a much faster pace, Kimlong said.

Galliano too felt that even though Cambodia has an open and liberal foreign investment regime and has made great strides in the ease of doing business, it needs to counter international investor perceived concerns in order to diversify and increase FDI.

He counted lack of transparency in the legal system, robustness of energy supply and its high cost, especially for heavy industry, scarcity of skilled labour and an underdeveloped infrastructure, as setbacks.

“Even though I believe it is greatly flawed and inaccurate, it also doesn’t help that the World Bank’s 2020 Doing Business report, ranks Cambodia 144th out of 190 countries, down by six spots compared to the previous year,” he told The Post.

Nevertheless, things are looking up for Cambodia, as the government would have everyone believe.

Ministry of Economy and Finance spokesman Meas Soksensan said Cambodia is set to reign in benefits on anticipated investments and reshoring of GVC activities in ASEAN and the China-Cambodia Free Trade Agreement.

He said a number of activities were implemented to update production capacities and bases. As such, Cambodia is looking to raise investments in non-garment industries such as agro-industry, rice milling, food processing, and solar energy and panels.

Electronics and electrical manufacturing is another potential sector for investment, though it is relatively small now.

Soksensan also made note of domestic investments which currently constitute 40 per cent of total investments.

The uptrend is reflective of the improving business environment and confidence among local investors in the country.

“It also shows enhanced entrepreneurship which is a critical outcome from the government’s long-term actions,” he added.

However, looking forward, Platform Impact’s Van believed that only a comprehensive integrated approach and better inter-ministerial coordination can result in improved growth among regional peers, and lead Cambodia to higher middle income status.

“The government is well aware of such hiccups and is making every effort to address them and only time will tell how effective these efforts are,” Van opined.