Experts perspectives: Global inflation on Cambodia’s economy and investment

PHNOM PENH: As global crises cast a shadow on the energy sector, rising inflation has become a pressing concern for economies worldwide. 2023's record high of 6.9% inflation significantly impacts every corner of the world.

While Cambodia maintains a relatively healthy inflation rate, it's not entirely immune to the wider trend. Cambodia's inflation rate is expected to return to normal for 2024, about 2.5 percent, the same as last year, according to a report recently published.

National and international experts offer their perspectives on the extent of inflation's impact on Cambodia's economic and landscape.

To combat rising inflation in the United States the Federal Reserve (FED) has raised interest rates 11 times since March 2022, the benchmark rate is now 5.25% to 5.50%, Mr. Anthony Galliano, Group CEO of Cambodian Investment Management shared with Estatedia.

He said the central banks around the world followed the FED in boosting rates, and the dollar hovers at two-decade highs against a basket of major currencies. Cambodia is a substantially dollarized economy and is aligned with higher U.S. rates, increasing the cost of funds for banks and consequentially higher borrowing costs for consumers and corporations. Higher interest rates suppress borrowing demand and have particularly impacted real estate and construction in the Kingdom.

He continues that it costs more to borrow a mortgage for buying a property and for developers to borrow money for projects, Thus construction is impacted by less property development. As Cambodia is still a bank-dominated economy in terms of capital, businesses are more reluctant to borrow for expansion. Inflation also reduces consumer demand as higher prices discourage spending. Many Khmers are watching their wallets as the cost of goods increases globally.

He also explained, as it said that inflation can be a good thing. That would apply to the U.S., the culprit for rising rates given the strong performance of its economy, however being dollarized, Cambodia's economy may not be performing as well and therefore inflation can only be a bad thing. The bright spot is that being substantially dollarized, Cambodia benefits from the strong dollar, which has higher purchasing power against depreciating currencies. Commodities are priced in U.S. dollars.

Therefore the cost of oil, for example, a major import, is the dollar based is not more expensive as compared to other countries whose currencies have depreciated. On the other hand, Cambodia is still heavily reliant on exports with 60% of the exports going to countries other than the U.S., whose currencies have depreciated, and therefore Cambodian goods are more expensive. This was evident in the decrease in exports in 2023, except in the U.S.

While Asia grapples with high inflation, Cambodia's relatively stable economic situation positions it to attract increased foreign direct investment (FDI) from China, believes Mr. Lor Vichet, Vice-President of Cambodia Chinese Commerce Association (CCCA). He predicts China will remain the leading source of FDI in Cambodia throughout 2024.

Mr. Vichet attributes Cambodia's resilience to its unique dollarization policy. As the only dollarized economy in the region, including both and RCEP nations, Cambodia experiences milder inflation compared to its neighbors. This stability, coupled with a moderate inflationary response to the US Federal Reserve's interest rate hikes, makes Cambodia an attractive investment destination, particularly for Chinese investors.

He said that Cambodia's priority exportation is garment, footwear, and travel goods (GFT), however, recent data have shown a decrease of about 15 percent, therefore, the CDC is seeking to strengthen other export avenues, especially agricultural products such as rubber. The total investments from the Chinese businessmen into the Kingdom's tire production reached over $1 billion and these projects have added value to the nation's industry as well as created thousands of jobs for the Cambodians.

In an interview with Estatedia, His Excellency Penn Sovicheat, Secretary of State and Spokesperson for the Cambodian Ministry of Commerce acknowledged the impact of global inflation on the Cambodian economy but emphasized that its effect is moderate due to shifting consumer trends.

“While global inflation is undeniable, its impact on Cambodia is mitigated by changing consumption patterns,” explained His Excellency. “Across many countries, individuals are prioritizing essentials like food or winter coats over non-essential items.” He sees this trend as a potential buffer against economic turbulence.

His Excellency expressed optimism and confidence in Cambodia's economic resilience, citing that Cambodia has built strong trust with its customers and the country's established position in global production chains. “We expect the global situation to eventually return to normal, much like it did during the COVID-19 pandemic,” he added, expressing faith in the world's ability to overcome economic challenges.

“The Ministry of Commerce is actively striving to maintain stability in existing markets, ensuring fair prices and preventing unnecessary product shortages,” he assured. “Cambodia is strategically expanding its reach to new markets, particularly in Africa, the Middle East, and within RCEP countries, which boasts a 60% global market share,” he elaborated, stressing the potential of these untapped markets.

His Excellency also underscored the importance of promoting Cambodia's agricultural exports, a key sector for the nation's economy. Additionally, he highlighted the development of robust online sales channels, further diversifying economic opportunities.

Cambodia's international trade stood at $46.82 billion in 2023, recording a decline of 1.9 percent compared to 2022. While exports were marginally up by 1.8 percent, the imports showed a decline of five percent, according to the trade data released by the General Department of Customs and Excise (GDCE) yesterday.

The Kingdom's total exports in 2023 stood at $22.64 billion while the imports were estimated at $24.18 billion. The country recorded a trade deficit of $1.53 billion last year.

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