According to the “ASEAN Investment Report 2019,” Cambodia’s FDI inflows reached an all-time high last year, with growth concentrated in manufacturing and services, particularly finance and insurance. Foreign direct investment increased by 15% to US$3.1 billion, the highest level ever recorded.

Cambodia’s record FDI number is easily dwarfed by what other member states of the Association of Southeast Asian Nations are receiving, considering that the region’s FDI inflows reached a record high of $155 billion last year, of which Singapore received $77 billion, Indonesia $22 billion, and Vietnam $16 billion.

China is no doubt the current largest investor in Cambodia. In 2017 and 2018, China accounted for 23% and 26% of the total $2.7 billion and $3.1 billion respectively. It was followed by a combined FDI from ASEAN member states, at 22% and 25% in 2017 and 2018 respectively.

The unfortunate thing is that when there is talk about China, negative views always come up. It is strange that people are complaining about China while everyone is trying so hard to gain more trade, more investment, and larger tourist inflows from China. Simple examples abound. Bilateral trade between China and Vietnam hit $106.71 billion in 2018. More than 10 million Chinese visited Thailand last year, contributing more than $100 billion in revenue to the country. Every country in the region envies that number.

China contributes a lot to Cambodia’s economy, building infrastructure such as hydropower plants and road connectivities, contributing capital through the real-estate and construction sectors, creating jobs though increasing manufacturing investment and sending in more than 2 million tourists last year.

To improve connectivity between Sihanoukville and Phnom Penh, an expressway costing $1.87 billion under a build-operate-transfer arrangement is being constructed, the first expressway in Cambodia. The most rapid increase in high-rise building numbers in the provincial capital of Sihanoukville hit a record last year when 238 buildings were approved, up from 188 buildings in 2017.

Over-reliance on China does involve macro-economic risks that can be heightened further by superpowers’ geopolitical rivalry and constant internationalization of Cambodia’s domestic politics.

Chinese FDI mainly focuses on the real-estate and financial sectors, which typically are prone to boom-and-bust cycles and external factors. Rising domestic credit in the construction sector also increases the financial sector’s vulnerability.

Geopolitically, Cambodia is often labeled as “being bought” or as a “vassal state of China” whenever the dynamism of superpowers’ geopolitical rivalry is put into focus.

The internationalization of Cambodia’s domestic politics has caused much harm to its economy and investment confidence at a level not seen in any other country in the region. Anti-China rhetoric provoked by opposition groups, threats of a coup or toppling of the government through people power, threats of the possible withdrawal of trade preferences provided by the European Union through the Everything But Arms (EBA) scheme, all of these have caused investors and tourists to drag their feet.

Even though it has yet to materialize, the threat of the EBA withdrawal has already caused investors to think twice about buying or sourcing products from Cambodia. According to a study by the World Bank, the estimated decline in Cambodia’s garment and footwear exports if the EBA is suspended is $510 million, or 5.4% of Cambodia’s total garment and footwear exports. This does not take into account of the social impact caused by disruption of economic sustainability and efforts on poverty alleviation. It is hard to imagine the possible impact on the livelihoods of 800,000 garment workers, 80% of whom are women, should many of them be forced out of their jobs, leaving them to resort to migration or other forms of vulnerable jobs.

Cambodia understands that “internationalization” of its domestic politics will not go away any time soon, especially when its evolving young democracy is becoming “electoral currency” for some foreign politicians who often have oversimplified views over Cambodia’s historical and political complexities, and are not fully aware of the values of the “longest peace in Cambodia’s modern history.”

In addressing macroeconomic challenges apart from the above-mentioned political aspects, it is observed that the government is pursuing three major venues, namely structural and industrial diversification, drastic reforms to cut business costs and the strengthening of the logistics sector, and development of a digital economy.

Structural and industrial diversification has been pursued through various supports and incentives that the government is providing toward non-garment manufacturing companies, especially those that can create many jobs and provide technical training for higher-skilled labor. The main strategies and action lines are elaborated in the Industrial Development Policy (IDP).

Structural adjustment has been put into place starting from late March this year through drastic reforms that outlined a 17-point strategy to reduce the cost of doing business. With these new reforms, the government expects to save the private sector up to $400 million a year. Development of Cambodia’s logistics masterplan and strengthening of a more competitive logistics sector also added up momentum to efforts in cutting business costs.

On cultivating new industries, Cambodia’s strong orientation toward building a digital economy presents opportunities not just for the country but also for potential investors. Cambodia’s digital economy has been gradually taking shape and creating new business activities in digital payment, online entertainment and e-commerce, while a tech-savvy new generation can become both market users or even a workforce to create such platforms.