Can Cambodia rise on the wings of Asian economic recovery in 2021?

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Garment workers have been largely affected by the slowdown in exports and closure of factories in 2020. Heng Chivoan

After a tough year, the Kingdom might be able to taste growth on the back of Asia’s expected leadership in global economic recovery

At the Sihanoukville port, Cambodia’s major entry point for overseas sea freights, cranes have sprung into action, clocking an average 28 moves per hour from 25 in 2019.

Mostly dormant in 2020, port activities improved just a month before the year closed, nudging gross throughput up a marginal 0.83 per cent from a year ago.

But total revenue for the unaudited financial year ended December 31, 2020 slipped 17.3 per cent to $73.2 million from $88.4 million in 2019.

The top line was also $13 million short of the 2020 revenue target of $86.6 million.

Nevertheless, the overall performance is viewed positively by the public-listed entity going by its French name Port Autonome de Sihanoukville (PAS), which saw a sudden spurt in activity in December after the dismal months.

“This is a good sign. We expect an uplift in 2021 with gross throughput rising four per cent,” its chairman and CEO Lou Chhun Kim told The Post.

To be sure, this feel-good sentiment is not unique to Sihanoukville port alone. It has become apparent in some economic sectors in Cambodia, which echoes a similar upturn in Asia.

Analysts put this down to the effective containment of the virus by the governments compared to the rest of the world.

That said, the path could be bumpy in the first quarter of 2021 for Asia because of developed market “growth wobbles”, and until vaccines are widely distributed, Nomura Group research said in a note last month.

“But these rolling virus waves are unlikely to derail Asia’s growth cycle,” it stated.

Similarly, Moody’s Analytics chief economist for Asia Pacific Steven Cochrane felt that a big portion of the region would have regained all of its lost output by the end of 2021.

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Source: Cambodia Securities Exchange

Although, he noted, India and Philippines would struggle to reach the benchmark by the end of next year.

Travel and tourism would weigh on the region through much of 2021, which Cochrane found is not likely to accelerate to any significant extent until a good proportion of the global population is vaccinated against Covid-19.

But the main message here is that the APAC region would lead recovery from the coronavirus recession.

“The region’s recovery benefits from the turnaround in global trade in goods,” he said in his report titled The APAC economy: Looking forward to 2021 published on December 18, 2020.

Furthermore, Asia’s recovery will be led by China, Cochrane asserted, adding that the world’s second largest economy has been led by exports which have been above pre-Covid 19 levels since middle of 2020.

This detail augurs well for Cambodia which on its own has a stable trade relationship with China.

Inflation largely contained

Back home, gross domestic product (GDP) growth prediction for 2021 buoys between four per cent and six per cent amid an austere negative economic contraction in 2020.

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Both National Bank of Cambodia (NBC) and the World Bank have a conservative forecast at four per cent this year, depending on the efficacy of the vaccine.

Slightly upbeat, securities and investment broker Maybank Kim Eng Holdings Ltd projects a 5.9 per cent growth in Cambodia this year and 6.2 per cent in 2022, as exports and manufacturing gradually recover.

It sees inflation staying largely contained in 2021, although it could rise to 3.2 per cent from 2.8 per cent in 2020, as domestic economy recovers.

However, the NBC might focus on stabilising the currency as its monetary tools continue being constrained by a highly dollarised economy.

For many, the roll on to 2021 from a tragic 2020 has been greeted with relief, particularly after the annihilation of the tourism and hospitality segment, much of garment manufacturing and livelihoods.

In the first 10 months of 2020, the garment sector posted a 10 per cent drop in exports, said Ken Loo, secretary-general of Garment Manufacturers Association of Cambodia, as Western demand flowed to a trickle over closure of retail outlets.

This outcome seemingly caused the closure of 43 factories, leaving 14,578 workers jobless. To date, some $20 million has been doled out by the government to around 330,000 factory employees.

While the number of coronavirus cases is among the lowest in the region with no fatalities thus far, Cambodia’s fiscal support, an allocation of $800 million to $2 billion, is admittedly the largest among Laos and Myanmar at 4.3 per cent of GDP.

The government’s fiscal stimulus includes $1.16 billion for small and medium enterprise (SME) credit line, credit guarantee scheme, poor and vulnerable families, cash for work, garment workers, tax incentives and vaccine purchase.

This fiscal support was deployed starting April, alongside NBC’s monetary measures to stimulate the economy.

‘Buy stocks at low price’

No industries were spared by the pandemic in most parts of the year.

Even at Cambodia Securities Exchange (CSX), a majority of the Main Board counters took a beating, dragging the index down by 16 per cent in 2020 to close at 647.98 points. It largely mimicked the battered closing by most regional indices.

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Source: Cambodia Securities Exchange data

Interestingly, this happened despite the largest initial public offering (IPO) listing by Acleda Bank Plc last May, which drove up market capitalisation by 250 per cent to a whopping $2.5 billion.

One of the reasons for the lower index closing might also be because of a long correction period in 2020, CSX chief operations officer Ha Jong Weon mused.

“[One must understand that] the index rose 41 per cent in 2018 and 55 per cent in 2019. This makes 2021 a good investment year,” he said.

In doing so, Yuanta Securities (Cambodia) Plc managing director Han Kyung Tae suggested that it was time that investors and listed companies adopt a longer-term approach to the local capital markets based on qualitative aspects, rather than be caught up by quantitative viewpoints.

“Because in the long run, it will be a costly mistake if one continues to shun investment opportunities in good companies at such low prices.

“We have learned the lesson more than enough from the past,” said Han, whose firm acted as the lead manager for the Acleda IPO.

Over 2020, developer Phnom Penh SEZ Plc saw share price plunge by more than half to close at 1,180 riel on December 31 compared to the start of the year.

This was followed by garment manufacturer Grand Twin International (Cambodia) Plc and state-owned PAS, both having shed 27 per cent of their share price, while Pestech (Cambodia) Plc lost 22 per cent and Phnom Penh Autonomous Port dipped six per cent.

Acleda, on the other hand, gained 3.6 per cent from its IPO price to close at 17,100 riel on the last trading day in 2020.

Overall, Ha said the current situation presents itself for smart investors to buy stocks at a low price and wait to sell at a higher price in the near future.

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Lower index closing probably due to a long correction period in 2020, said CSX chief operations officer Ha Jong Weon. Heng Chivoan

Like the expected growth in the region, equity markets in Asian emerging economies are forecast to benefit from the positive development.

Seeing that these markets provide higher rate of return on investment compared to the developed markets, equity markets this side could still attract more investors.

Although, Ha said, some investors might change their investment targets to only invest in more secure products or valued stocks with growth expectation.

“A lot of businesses in Asian countries have upgraded themselves to be stronger with advanced technology that will help boost growth in 2021,” Ha added.

Diversified Chinese investments

This loosely ties in with Cambodia’s plan to raise the technical skills of workers as stipulated in its five-year Industrial Development Policy and provide incentives to encourage SMEs to improve to join the global value chain.

In their research note Rough landing, divergent recovery on Cambodia, Laos and Myanmar, Maybank Kim Eng analysts Linda Liu and Chua Hak Bin talked about how the pandemic reinforces the need for a more diversified manufacturing supply chain.

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Source: CEIC data, NBC (Maybank Kim Eng research report)

They noted that these three countries stand to benefit from manufacturing foreign direct investments (FDIs) due to manufacturing relocation, especially in labour intensive industries.

Although they acknowledge that FDI inflows have slowed to below 5.8 per cent in the first half of 2020 from 14.2 per cent in 2019 based on NBC’s balance of payments, recovery signs are there with investment approvals posting “robust gains”.

For example, Cambodia’s approved investments for the industry sector expanded by a strong 56.4 per cent in the first half of 2020 compared to 23.2 per cent a year ago.

While investments slowed in 2019 following the online gambling ban, FDIs in 2020 had shifted to non-garment manufacturing sector from tourism projects, the World Bank mentioned last December.

This is so as in the case of $1.4 billion approved investments in real estate from January to July last year, representing a 25.8 per cent year-on-year increase from 2019.

But with strong indication that China is set to grow further, Cambodia is definitely poised to gain. As it is, Chinese FDIs continue to make the largest investment portion. Last year, it stood at 56.3 per cent in the first seven months of 2020, up from 43.7 per cent in the corresponding period in 2019.

The World Bank showed that Chinese FDI in non-garment manufacturing rose 60.4 per cent to $878 million between January and July 2020, from $95 million a year ago.

In that period, agriculture investments by Chinese investors grew to $100 million year-on-year from $34 million while tourism investments dropped to $26 million from $500 million vis-à-vis 2019.

“[This] likely indicated more realistic investment sentiment,” it said.

Moving forward, both countries’ trade relationship is likely to become stronger. For now, bilateral trade has grown 27.3 per cent to $9.4 billion in 2019 versus $7.4 billion in 2018.

Experts are already forecasting positive outcomes from the China-Cambodia Free Trade Agreement, which is expected to take effect early this year, and the Regional Comprehensive Economic Partnership. With the FTA, the World Bank said exports to China could grow by 23 per cent.

Hope is key word

In the meantime, Maybank Kim Eng’s Liu and Chua expect textile and garment exporters to remain under “immense pressure” due to EU’s partial withdrawal of its trade preferences last August.

However, bright spots in bicycles and electrical parts exports will help provide some interim support.

“Growth for the first half of 2021 will likely be weighed down by the lack of a meaningful tourism recovery, but may strengthen in the second half as vaccines become more widely available,” Liu and Chua said.

Still, limited financial resources, vaccine distribution and implementation might not reach Cambodia, Myanmar and Laos till late this year or early 2022.

“This could dampen recovery pace but seeing that these nations are among low-and middle-income countries, they are eligible to tap into the Covid-19 vaccine global access facility, which aims to cover up to 20 per cent of participating country’s population by end of 2021,” they said.

And through all of that, downside risks including a second wave of the outbreak, and a deeper and prolonged decline in tourist arrivals, are likely to persist, the World Bank said.

But hope is the key word here. While reflationary measures such as continued debt restructuring and tax relief till June this year are likely to prompt growth and keep businesses afloat, one can only hope that as Asia rises, so too will Cambodia.