Industry Trend Analysis - High Growth Potential Boosted By Rising Chinese Investment - MAR 2018

BMI View: We forecast that Cambodia will continue to be one of the fastest-growing construction markets in Asia over the coming decade. Already expanding from a low base, the market is further boosted by rising investment interest in industrial and commercial facilities as well as support from China for infrastructure development.

Cambodia's construction industry is one of the smallest in Asia but has high growth potential, thanks to its favourable geography and demographics, rising investment interest in industrial and commercial development, and abundant financial support from China for infrastructure projects. As a frontier market in South East Asia, growth rates in Cambodia already benefit from its low base and high developmental needs - existing transport and utility networks require extensive expansions to serve less-developed regions of the country, while the country's young and urbanising population will help support industrial investments. Additionally, Cambodia's strategic location and strengthening ties with Beijing will boost state-led and private investments from China, providing a further boost to construction and investment activity. We have earlier highlighted how Cambodia, along with fellow frontier markets in Asia, will be the biggest beneficiaries from inbound infrastructure investments that form part of China's Belt and Road initiative ( see 'Small Frontier Markets to See Biggest Boost from Belt And Road', February 13). Our overall forecast for Cambodia's construction industry is positive, with real growth expected to reach 9.2% in 2018 and average 10.6% annually between 2018 and 2027.

Small Market but Fast Growth
Cambodia - Construction Industry Growth Forecasts
e/f=BMI estimate/forecast. Source: ADB, BMI

Strengthening Links with China Positive for Infrastructure

Strengthening ties between Cambodia and China, in terms of politics, trade and investment, will provide strong support for growth in Cambodia's construction and infrastructure sectors. Beijing's ongoing pursuit of the Belt and Road initiative and interest in increasing political and economic ties with the region will unlock significant amounts of financing for construction and infrastructure projects. China has overtaken the United States as Cambodia's largest trading partner and Japan as Cambodia's largest foreign investor over the past decade, coinciding with rising outbound investment flows by Chinese companies and state-owned enterprises. Infrastructure and industrial investment pledges come frequently - in January, the two governments announced USD7bn worth of agreements covering urban development, port projects and a highway linking Phnom Penh and Sihanoukville. Our Key Projects Pipeline highlights that there are 16 major infrastructure projects in Cambodia currently in planning or construction stages that are backed by Chinese financing or involving Chinese companies.

Moving Closer to China
Cambodia - Top 5 Trading Partners by Annual Trade Value, USD Thousands
Total trade value is sum of exports and imports. Source: Trademap, UNCTAD, BMI

Industrial and Urban Development in Focus

At the same time, we note that Cambodia's demographic and geographic conditions are also favourable for growth in industrial, tourism and urban development. Cambodia is playing a growing role as a low-cost manufacturing hub, especially for Chinese companies grappling with rising domestic labour costs; this will facilitate ongoing investments in industrial construction while demanding the expansion of roads, railways, ports and other logistics infrastructure ( see 'Regional Integration Efforts Portend Transport Growth Potential', November 8 2017). Industrial development will also drive urbanisation trends in Cambodia, which in turn will create demand for residential construction. Our Country Risk team forecasts that the urban population in Cambodia will grow by nearly 1 million between 2017 and 2027, accounting for a quarter of the country's total population.

Rapid Urbanisation Ahead
Cambodia - Urban and Rural Population, Thousands
e/f=BMI estimate/forecast. Source: UN, BMI

Key Political, Operational Risks Remain

Despite its high growth potential, Cambodia remains a decidedly high-risk frontier market, with numerous political and operational risks present in the construction industry. Cambodia, scores significantly below average across many of the Industry Risk and Country Risk components in our Infrastructure Risk/Reward Index, and ranks in the bottom quartile compared to other Asia-Pacific markets. Aside from frequent construction delays, limited labour supply and poor legal and contracting environments, we note that volatile politics poses a significant risk to the realisation of major infrastructure projects. Chinese investments in Sub-Saharan Africa, Sri Lanka and Mongolia have previously attracted political or public opposition over the perceptions that the projects would offer limited domestic benefits or that credit and ownerships structures were incursions of sovereignty; China-backed casino and real estate projects in Cambodia have similarly attracted scrutiny from local residents. Indeed, one of our key themes for infrastructure development in Asia in 2018 is for increasing numbers of previously planned Belt and Road projects to run into delays or cancellations ( see 'Key Themes For Asia Infrastructure In 2018', December 12 2017).

High Risk, High Reward
Cambodia - Infrastructure Risk/Reward Index Components
Scores out of 100. Higher score = more attractive market. Source: BMI Infrastructure Risk/Reward Index