Via Emerging Frontiers, a look at Cambodia:

As the 10-member Association of Southeast Asian Nations (ASEAN) prepares for its single-market Economic Community in 2015, Cambodia is poised to benefit tremendously from this unification. With President Barack Obama in attendance, Cambodia played host to the 2012 ASEAN Summit in Phnom Penh in November. The most salient topic was the upcoming regional economic integration and how it will stimulate new foreign investment by removing tariffs, creating Free Trade Areas (FTAs), and forging pivotal transportation links both within ASEAN and in hegemonic China.

Cambodia, as an emerging low-cost manufacturing hub with tourism appeal, a stable government, and a crescent consumer class, will prosper from this ASEAN unification. The Kingdom’s strategic location and recurrent economic durability – 7% GDP growth is expected for 2013, in line with previous years – has propelled foreign direct investment (FDI), which increased by 44% last year to reach US $1.3 billion. Hun Sen, the country’s Prime Minister, believes that Cambodia will transition from a low-income country to a lower-middle-income country by the end of this year as classified by the World Bank.

The influx of FDI can be attributed to Cambodia courting business and diplomatic delegations from a number of countries, including South Korea, China, Japan, India, Kuwait, and even Belarus, which plans to sell tractors and heavy machinery in the country. In 2012, South Korea became the largest investor in Cambodia, injecting US $287 million into the manufacturing of garments, toys, and electronic parts, as well as tapioca processing and a bio-ethanol plant. China was the Kingdom’s second largest investor, with US $263 million spent on garment and furniture manufacturing and rice mills. Japan invested US $212 million in garment manufacturing, electrical equipment, and a shopping mall.

The anchor of Cambodia’s economy is textile manufacturing. Due to the Kingdom’s low labor costs, tax incentives, and duty-free access to major global markets like the US and the European Union, many well-known clothing brands like Gap, Adidas, and H&M have moved production to Cambodia. Wages in Cambodian factories are about one third of their Chinese counterparts, and productivity levels are high. But recent strikes over wage disagreements garnered media attention and the government had to step in to negotiate a settlement between the unions and the employers. The minimum wage is slated to increase from US $61 to $75 per month, still a fraction of what would be paid in China. However, in a low-margin industry like textiles, manufacturers are prone to relocate to cheaper locations and Cambodia will face increasing competition from Myanmar, which offers a larger labor force (population of over 50 million) and lower costs (a minimum wage of just US $28).

Agriculture plays a prominent role in the Cambodian economy, driven by rice, rubber, and cassava. Rice exports at the end of January were up 165% compared with the same time last year due to growing Asian demand, particularly from China. Hun Sen outlined rubber’s importance to Cambodia in a February speech, and by the end of 2015, Cambodia is projected to produce 100,000 tonnes of rubber annually. Another key crop is cassava, which is cultivated for the refinery of ethanol fuel. Cambodia’s Deputy Prime Minister announced that cassava exports to China will bring in over US $50 million annually as the Chinese are aggressively targeting the use of ethanol biofuel. A recently introduced crop to Cambodia is stevia, a natural low-calorie sweetener and sugar substitute, which has had a successful inaugural growing season.

Cambodia’s tourism industry has continued to experience breakneck growth thanks to Angkor Wat, one of the world’s most captivating tourist attractions. A record 4 million tourists are expected to visit the Kingdom in 2013. 75% of Cambodia’s tourists last year came from the Asia-Pacific region, with the number of Chinese visitors increasing by 35% compared with 2011, placing China in third place behind South Korea and Vietnam for tourist arrivals to the Kingdom. Cambodia is in discussions over a single visa scheme with Laos and Thailand, which would facilitate easier regional travel for tourists.

There has also been an expansion in flights to Phnom Penh. Qatar Airways began flying to the capital via Ho Chi Minh City in February and the airline plans to launch direct flights from Doha next year. Cambodia and India have held talks regarding direct flights between the two countries, and Cambodia Angkor Air, the national carrier, is considering flights to India. The Royal Group, a diversified Cambodian holding company, recently teamed up with a Filipino corporation and is planning to set up Cambodia’s second national airline, which will launch the first direct flights from Phnom Penh to Manila, as well as increasing the number of domestic flights in the Kingdom.

Although Cambodia has a population of fewer than 15 million, the rapidly growing middle-class is spurring growth in a variety of consumer-related sectors. Khmer shopaholics eagerly await the US $205 million, 68,000 m2 Aeon Mall complex, which began construction last year under a Japanese developer and will feature 150 stores and iconic international brands. Food and restaurant chains are also targeting the Kingdom due to the country’s growing appetite for eateries and a diversification of tastes – Cambodia spent US $200 million on food and beverage imports in 2012, a 10% increase from the previous year. 7-Eleven plans to enter the market soon and Burger King has announced that it will open nine branches in Cambodia in the next five years. Talks are also underway to bring the Hard Rock Café brand to both Siem Reap and Phnom Penh.

Another consumer sector that is rapidly going from zero to sixty is automotive retail. One needs only to stroll the increasingly congested streets of the capital to witness a plethora of new cars and SUVs. Auto brands are flooding in to try and capture the booming market. The first ever Phnom Penh International Motor Show was held in March, showcasing new models now available for purchase in Cambodia from Mercedes-Benz, BMW, Land Rover, Ford, and Mitsubishi. Porsche, hot on the heels of its competitors, recently announced plans to unveil a showroom and service center in Phnom Penh. Likewise, Mazda, Volkswagen, and Isuzu have stated plans to open showrooms in Cambodia this year. The country’s Commerce Minister pointed out that the 2015 ASEAN Integration will further benefit the automobile market, as producers and retailers will be able to cheaply import tires from Malaysia and mirrors from Indonesia.

The banking sector has seen recent growth, as lending by commercial banks last year grew by more than a third and total deposits reached US $280 million, an increase of 144%. Regional Asian banks are also entering the market, with Taiwan Cooperative Bank and Malaysia’s Hong Leong Bank both planning to open branches in 2013, and Taiwan’s E Sun Commercial Bank buying a stake in the local Union Commercial Bank.

Once Cambodia’s Achilles heel, the country’s infrastructure is undergoing an overhaul. Huawei, the massive Chinese telecommunications firm, is building a 4G high-speed mobile telephone and internet network that aims to reach 90% of the population. The Royal Group is moving forward with plans for the Lower Se San 2 Dam, a US $781 million hydropower project in Stung Treng Province that aims to transform Cambodia’s energy sector. Electricite du Cambodge (EDC), the state-owned energy company, announced a guarantee to purchase electricity from the dam. The project has been heavily criticized by environmentalists who argue that it will reduce vital silt flows for agriculture and deplete fish stocks. Another infrastructure project being discussed is the restoration of the 6 km railway line linking Cambodia with Thailand at the Poipet border, which would connect Cambodia to the China-ASEAN railroad.

To try and capture some of this economic growth, the Cambodian Securities Exchange (CSX) was inaugurated in 2011 as a joint venture between the Cambodian Ministry of Economy and Finance and the Korea Exchange (KRX). The bourse is one of the world’s smallest and currently lists just one stock, Phnom Penh Water Supply Authority (PPWSA). The state-owned municipal water company listed in April 2012 and its shares went up 48% on the first day of trading.

Attempts for additional IPOs have not been nearly as successful, however. Telecom Cambodia, the state-owned fixed-line company, postponed its listing indefinitely due to poor financial performance. A local real estate developer, VTrust Property Group, and a Taiwanese-owned garment factory, Grand Twins International, have both expressed interest in listing on the exchange but have yet to outline their plans for doing so.

Despite Cambodia’s promise, the country possesses a number of risks for sustained economic growth. Although textile manufacturing, the backbone of the economy, stands to gain from China’s rising wages, it will also face stiff competition from other low-cost manufacturing hubs such as Bangladesh and Myanmar. As Myanmar revises its outdated foreign investment laws and refurbishes its once-tarnished international image, large multi-national corporations will take notice of the country’s sheer size and cheap labor.

Another tough issue Cambodia must tackle is its high-energy costs. Textile manufacturing is an electricity-intensive process, and many investors have held off on building the infrastructure for the production of raw materials like yarn or fabric due to expensive power costs. Neighboring Vietnam, a competitor in textile manufacturing, has electricity prices that are a fraction of Cambodia’s. Overall, Cambodia’s outlook is bright and its steady GDP growth, low-cost labor, and upcoming integration into ASEAN’s single market bode well for sustained economic expansion. The country’s exports will see a boost once tariffs and customs clearance procedures are streamlined within ASEAN’s unified economic zone. Increasing domestic disposable income will buttress strong growth in the consumer sector, from Range Rovers to ramen noodles. As Cambodia continues to develop and diversify its economy, it will increasingly woo attentive investors who see the country’s promising potential.