1: ABOUT CAMBODIA

1.5 GROSS DOMESTIC PRODUCT (GDP) GROWTH

Gross domestic product (GDP) growth remains strong in Cambodia, fercely driven by the growing real estate, construction, garment manufacturing and tourism sectors. The Asian Development Bank has even labelled Cambodia as the new “tiger economy” due to the nation’s consistent economic growth. The Economist Intelligence Unit, a UK-based company renowned for their analyses and economic forecasts of over 200 countries, recognised Cambodia as one of the fastest growing economies and forecasted that the Kingdom’s GDP growth will remain strong over the next fve years and will reach well over the six percent growth per year.

GDP growth in Cambodia

At the end of 2016, GDP growth in Cambodia reached 6.9 percent and that growth is expected to remain consistent. According to a report released by the World Bank in October 2017, GDP growth for last year is projected to ease slightly to 6.8 percent.

Although ofcial statistics for last year have not been released, the Kingdom’s GDP is expected to reach $22 billion, a $2.2 billion increase from the year before. Cambodia’s minister of economy and fnance expects GDP to reach $24.5 billion this year due to favourable predictions surrounding growth. Despite the fact that this year was an election year, there has been virtually no turbulence or impacts on growth.

Although ofcial statistics for last year have not been released, the Kingdom’s GDP is expected to reach $22 billion, a $2.2 billion increase from the year before. Cambodia’s minister of economy and fnance expects GDP to reach $24.5 billion this year due to favourable predictions surrounding growth. Despite the fact that this year was an election year, there has been virtually no turbulence or impacts on growth.

GDP per capita is predicted to be $1,568 this year, a rise of nine percent from last year’s $1,435. According to the World Bank, due to two decades of strong economic growth and a rising per capita GDP, Cambodia has graduated from “low income” status to a “lower-middle income” country, putting the Kingdom in the same category as Vietnam and India. The country received this designation in 2015.

GDP per capita is predicted to be $1,568 this year, a rise of nine percent from last year’s $1,435. According to the World Bank, due to two decades of strong economic growth and a rising per capita GDP, Cambodia has graduated from “low income” status to a “lower-middle income” country, putting the Kingdom in the same category as Vietnam and India. The country received this designation in 2015.

Regardless of this reclassifcation by the World Bank (which relies on a fundamentally diferent ranking system), Cambodia is still considered a “least developed country” by the United Nations. Luckily, this means the Kingdom can continue to receive benefts from this status, such as preferential trade agreements and international aid.

In terms of global GDP ranking, the country is still comparatively low, especially in terms of income per capita. However, the rate of current and prospective GDP growth makes the Kingdom a prime choice for foreign investors seeking to enter into an afordable and fast moving economy with few signs of slowing in the coming decade.

Key reasons for influx of FDI to Cambodia
1.6 FOREIGN DIRECT INVESTMENT (FDI) & INVESTMENT LAW
1.6.1 Global FDI Outlook

Cambodia continues to see an increase in foreign direct investments (FDI) every year, a key driving force of the Kingdom’s economic development. Over the past decade, FDI in Cambodia has increased by over 800 percent, which demonstrates how long the Kingdom’s economic potential was left unnoticed on an international level. China, Japan, Thailand and South Korea are the main sources of FDI infows in recent years, and the property sector is one of the biggest benefactors of this annual growth.

Last year, Cambodia received over $6.3 billion in FDI, which essentially doubled the investment of $3.6 billion the Kingdom received in 2016, according to an annual report from the Council of Development in Cambodia (CDC). The consistency of FDI infows have resulted in the stabilisation of infation, consistent growth of key economic indicators such as GDP, and have aided in the reduction of poverty, economic diversifcation and improvements to the manufacturing sector.

Cambodia’s economic performance and potential has already been recognised to the extent that many existing investments have shifted away from China, Thailand, and Vietnam in favour of Cambodia, to take advantage of the country’s more favourable investment environment.

Despite all of these strengths, there are some remaining challenges for foreign investors. Although labour is extremely afordable, workers are often unskilled due to low education levels. There are talented individuals to be found within the Cambodian labour market, but fnding qualifed candidates for higher management and more technically specifc roles can be challenging.

The present lack of logistics connectivity may pose another challenge for investors. Presently, underdeveloped infrastructure, poor roads, power generation issues and high transportation costs remain a potential issue.

However, due to pledges by the government and foreign investors to upgrade these critical systems, particularly in key economic regions such as Phnom Penh, Sihanoukville and Siem Reap, it is likely that these barriers to investment will be overcome in the coming years.

1.6.2 FDI Trends - China and Cambodia

Chinese foreign investment is of particular importance to Cambodia’s economy. Last year and over the frst half of this year, 19 major MoUs were signed between the two nations relating to a variety of initiatives, with an overriding focus on infrastructure improvements as well as health and agriculture.

According to fndings by the National Bank of Cambodia and National Institute of Statistics, China’s investment has accounted for approximately 44 percent of the total FDI injected into the Kingdom between 1994 and 2017.Last year alone, Cambodia attracted a fxed asset investment of $1.43 billion from China, 27 percent of total investments in the country for that year

Incentives to attract foreign investors 1.6.3 Favourable Investment Laws

Cambodia’s appeal to local and foreign investment is enhanced by a business-friendly environment and a government that ofers investor-friendly laws and regulations:

In summary:

1) The Cambodian government treats all investors equally, regardless of race or nationality (with the exception of land ownership and some specifc investment activities).

2) The government does not impose price or foreign exchange controls.

3) There are no imposed trade restrictions.

4) The Cambodian government allows foreigners to lease land for up to 50 years, and even longer in some situations.

5) No nationalisation policy is undertaken by the government

6) Profts and other earnings can be freely repatriated without restrictions from the government.

Cambodia’s Investment Law also provides that companies granted with the Qualifed Investment Project (QIP) status are entitled to a set of special investment incentives.

To qualify for QIP, an investment project should get a Final Registration Certifcate (FRC) and an investor should register the investment project with the Council for the Development of Cambodia (CDC) or the Provincial Municipal Investment Sub-Committee (PMIS).

There are three kinds of QIPs: Domestic Qualifed Investment Project, Supporting Industry Qualifed Investment Project, and Export Qualifed Investment Project.

QIPs are entitled to the following special incentives:

1) QIPs have the choice to select either a proft tax exemption or a 40 percent special depreciation allowance on the value of tangible properties (anything that can be touched), either new or used, that are utilised for processing or production. An annual Certifcate of Obligation Satisfaction, also known as Certifcate of Compliance, needs to be obtained by QIPs in order to be exempt from paying proft taxes. A proft tax exemption is applicable for a maximum of six years. After that, the QIP is subject to proft taxes.

2) QIPS are exempted from paying duties on imported production equipment, construction materials, etc.

3) Additionally, they receive a full exemption from export taxes, except for activities as stipulated in other legislation.

4) A QIP in an Special Promotion Zone or Export Processing Zone gets the same privileges as other QIPs.

These incentives allow competitiveness within the export market and are benefcial in terms of international trade.

1.6.4 Special Economic Zones (SEZs)

Special economic zones (SEZ) are geographic areas within Cambodian territory, allocated and set up by the government, which ofer businesses and trade regulations that difer than the rest of the country. SEZs also ofer key infrastructure for businesses seeking efciency, such as backup power sources, sewerage and water, roads and onsite customs, tax and other government representatives. Generally, SEZs are best suited to large scale manufacturing operations, for example garment and footwear factories, automotive production facilities and food processing plants.

A large network of SEZs throughout the Kingdom has encouraged and incentivised foreign investment into the industrial sector for many years. Zones provide additional tax breaks, infrastructural backbones and integrated customs support for manufacturing investors.

Map showing special economic zones in Cambodia

The government has recognised the fnancial and time advantages gained by channelling critical infrastructure and labour resources through one specifc location. This is why 33 SEZs have been approved around the country, with a vast network already in operation. The strategic placement of these zones allows for easy access to necessary borders and manufacturing hubs. Phnom Penh’s SEZ is a prime example, with its location on the perimeter of the capital. From a foreign investment perspective, SEZs save funds that would have been spent on land development, infrastructure, security and ongoing maintenance. Tax exemptions on production materials and equipment are possible when an SEZ tenant has a QIP licence and proft tax exemptions are available. SEZs make it possible for foreign investors to acquire renewable leases of up to 50 years, and in many circumstances tenants are able to develop, subdivide or sublease the property.

The Sihanoukville SEZ (SSEZ) remains Cambodia’s largest, with an area of over 1,000 hectares. The $320 million development, once fully completed, will be capable of hosting 300 factories, 80 to 100 thousand workers and will cover 11 square kilometres.

Approximately half of this space is designated for textile, clothing and electronic manufacturing, as well as light industry products. China has pledged to continue to develop the SSEZ and so far it has attracted more than 100 companies from the Kingdom, China and other nations and has resulted in almost 20,000 new employment opportunities.

The success of the SEZs around Cambodia is proven. Over 68,000 jobs have been created thanks to the incentives of SEZs in the country. This success is largely due to the fact that the government has left the management of SEZs in the hands of private sector developers, which has enabled Cambodia’s public sector to avoid bearing the brunt of costs and led to the establishment of a sustainable market.

1.6.5 Ease of Doing Business

One of the primary reasons that so many foreign entities choose to establish their businesses in Cambodia is the lack of legal constraints on foreign-owned entities. Other than outright ownership of land, business activity for foreigners is the same as that of a locally-owned company.

Cambodia placed 20th out of 190 countries in the “Access to Credit” category of the World Bank’s “2018 Ease of Doing Business”. This was mainly due to closer cooperation between fnancial institutions and the Credit Bureau of Cambodia, which facilitated easier access to financing.

Starting a Business in Cambodia:

On average, it takes 113 days and costs $614 for investors to complete the procedures to legally operate a business in Cambodia. Starting a business in the Kingdom involves nine key steps.

The steps, the cost and the number of days it takes to fnish each step, are enumerated below:

1) Finding a suitable name for the company and have it approved by the Ministry of Commerce’s Business Registration Department: seven days/$10

2) Registering the company with the Business Registration Department: 30 days/$420

3) Registering a company seal: one day/$15

4) Opening a bank account in the company’s name, depositing required starting capital and obtaining a bank statement attesting to the deposit: one day/free of charge

5) Stamping and approval of the Memorandum and Articles of Association and other registration documents, and registering for Value-Added Tax (VAT), Patent Tax, and Tax Identifcation Number (TIN): 30 days/$100

6) Informing the Ministry of Labour about the start of operations and hiring of employees: 30 days/$69;

7) Submitting original company statutes and evidence of capital deposit at the Business Registration Department: one day/free of charge

8) Receiving inspection from a Ministry of Labour ofcial: one day/included in fee for step 6

9) Registering at the National Social Security Fund: 14 days (done together with the previous step)/free of charge.

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