In 2023, NagaCorp appointed Political & Economic Risk Consultancy, Ltd. (PERC), an independent third party from the Company, to conduct a research and review on investment risks in Cambodia. Established in 1976, PERC is headquartered in Hong Kong and engaged principally in the monitoring and auditing of country risks in Asia. From this base, PERC manages a team of researchers and analysts in the ASEAN countries, the Greater China region and South Korea. Corporations and financial institutions worldwide use PERC's services to assess key trends and critical issues shaping the region, to identify growth opportunities, and to develop effective strategies for capitalizing on these opportunities.

PERC has assessed and reviewed Cambodia’s political, social, investment, and macroeconomic risks related to NagaCorp’s casino, hotel, and entertainment business operations. In arriving at our findings below, PERC has taken into account, amongst others, domestic political risks, social instability risks, institutional weaknesses, human resource risks, infrastructure risks, and external political risks. Based on the assessments and reviews carried out between mid-November 2023 and the end of December 2023, PERC summarised our findings below:

Grades range from zero to 10, with zero being the best grade possible and 10 the worst.

PERC quantifies investment risks in Cambodia through the measure of the following variables:

• Domestic political risks
• Social instability risks
• Institutional weaknesses
• Human resource risks
• Infrastructure risks
• External political risks

Each variable comprises several sub-variables relating to specific aspects of the assessed category. The weighted sum of the grades for sub-variables equals the score of a broader variable, while the weighted sum of the grades of the broad variables defines overall investment risks in Cambodia. PERC has treated each variable as having equal importance or weight.

Summary

Cambodia’s biggest concerns going into 2024 are economic rather than political. Events of the past year have answered previous outstanding political questions in reassuring ways. The country has been able to orchestrate a smooth leadership transition. The new government’s policies continue those practiced by the previous government. The general population is supportive of the new leadership, which is centered on Prime Minister Hun Manet, the son of the former prime minister, Mr. Hun Sen. The position of the ruling Cambodian People’s Party has never been stronger.

Although long-standing factions within the CPP remain a feature of the political scene, all factions have supported the new government. In part, that is because Hun Sen is still present to support his son’s transition and to ensure that other factions do not challenge him. It is also partly due to an expansion in the number of special advisors to the prime minister, so key factions have been able to orchestrate generational leadership changes of their own in ways that have protected their influence.

The downside of this transition is that the number of special advisors has grown so large that it is unwieldy and forces the new prime minister to play a more direct role in a wide range of matters. Although the total number of people in advisory positions is large, the prime minister is taking guidance from a much smaller number of experienced advisors who also had the trust of and worked closely with his father. The prime minister is also listening closely to private sector business leaders, including foreign investors, to ensure their biggest concerns are being addressed in ways that protect and enhance the business environment at a time when economic conditions remain challenging.

Cambodia’s economy has moved beyond the COVID-19 pandemic but has not returned to its pre-pandemic levels. Most of the reasons for this delayed economic recovery are external. Unfortunately, that means they are largely beyond the ability of the government to control and are likely to disappoint those hoping for a speedy rebound.

Overall growth will remain below pre-pandemic levels for another few years. Construction and several categories of real estate, such as the luxury condominium and office markets, are undergoing corrections. As a result, instead of leading the economy’s expansion as they did in the years immediately preceding COVID-19, these industries were a drag on the economy in the second half of 2023 and are likely to remain so in 2024. The most significant adverse influences include a downturn in demand in the US and Europe for some of Cambodia’s biggest exports like garments, the continuing reluctance of Mainland Chinese to travel outside their country, and the inflationary impact and other economic disruption caused by the Ukraine and Gaza wars.

All of these negative external factors are likely to continue to impede growth in 2024, just as they did in 2023. Cambodia will also have to contend with the slowness with which the US Federal Reserve lowers interest rates, possible fallout from further strains in US-China relations, and continuing economic weakness in China, the US, and Europe. The new Cambodian government has a more nuanced foreign policy that has positioned the country well to maintain stable relations with all key players, including China, the US, and other ASEAN member countries.

There will be a few positive external developments. For example, more direct investment will likely flow into Cambodia as multinationals adjust their supply lines and try to reduce their reliance on China for sourcing. Still, Cambodia’s domestic economy will have to contend with a continuing correction in the local residential real estate market in 2024, with limited growth in consumer spending due to low wage increases and slow job growth, and with a rise in non-performing loans, which will put pressure on the financial sector.

Positive Developments

• The government has gone through its first leadership transition in modern history. It was orchestrated peacefully and has fortified confidence in Cambodia’s social and political stability.
• The new government’s policies will be consistent with those of the previous government. One change likely to be made is greater attention to the environment, such as by reducing reliance on coal, which should be welcomed by those involved in the green tourism industry.
• The new prime minister is changing how he filters the information he gets. First, he relies more on a small number of people with considerable experience. Second, he is listening more to committees of different private sector leaders to discuss specific issues of importance and is acting on this advice.
• The government has further strengthened its special relationship with Mainland China over the past year, even as it has also improved its relations with other countries, including Vietnam, the US, Thailand, and the EU. Moreover, there has been less negative fallout for Cambodia from Russia’s war in Ukraine and Israel’s war against Hamas in Gaza than there has been for many other countries. This is likely to continue to be the case in 2024.
• Cambodia is succeeding in growing the number of tourists from sources other than the Mainland. The sharpest increases in percentage terms have been from Russia and other Eastern European countries, while the most significant gains in numerical terms have been from countries like Thailand, Vietnam, Laos, Japan, and South Korea.

The Challenges

• Official growth figures exaggerate how fast the GDP and some of its components are expanding. The traditional engines of growth – tourism, manufacturing, and construction – are still experiencing problems. Most causes are external, but the coming year will still be difficult for the private sector. The real estate and financial sectors are experiencing the most significant challenges, but the overall level of consumer spending is weak and likely to remain so in 2024.
• The political transition has involved a bloating of the government, with the appointment of 1,422 secretaries and undersecretaries of state. A team as top-heavy as this will be challenging to coordinate and will make it difficult for Hun Manet to delegate authority easily during his first year in office.
• Perceptions of some risks are worse than the actual situation. This relates to the stability of the political system and personal security threats. The challenge Cambodia faces is to align perceptions better with reality. These risks are lower than they are often portrayed in the media and lower than the same variables in other countries in the region. Cambodia is more stable than is often appreciated. The challenge is how best to improve perceptions.
• The high costs of using some kinds of infrastructure (mainly power), inadequate development of specific services like waste management, and poor maintenance make physical infrastructure issues some of the most substantial considerations for many foreign investors and a factor that will limit the future economic growth rate.
• Perhaps the most significant human resources shortcoming is the shortage of well-educated labor with strong specialist skills. Labor productivity has declined since the COVID-19 pandemic. That is mainly because there has been a shift in labor from higher-productivity manufacturing to lower-productivity agriculture. The government is trying to transition the economy from a low-skilled, labor-intensive growth model to a skills-driven one. However, progress toward that goal will only be achieved slowly and depends on further improvements in the education system.