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.
In the research, political, social, investment and macro-economic risks in Cambodia were assessed and reviewed, particularly as they relate to NagaCorp's casino, hotel and entertainment business operations. In arriving at its findings below, PERC took into account, among 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 2022 and the end of December 2022, a summary of PERC's findings is portrayed below for your reference:
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:
Each of these variables is made up of several sub-variables relating to specific aspects of the category being assessed. 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
Last year was better politically and economically than 2021, and 2023 should be better than 2022. Real GDP growth has been accelerating, supported by an upturn in export demand and a recovery in domestic consumption. Tourism is also growing again, improving conditions for services like restaurants, hotels, and many retail businesses.
Still, overall growth will remain below prepandemic levels for another one or two years. In addition, construction and several categories of real estate, such as luxury condominiums and office premises, are undergoing corrections. As a result, instead of leading the economy's expansion as they did in the years immediately preceding COVID, these industries were a drag on the economy in the second half of 2022 and are likely to remain so in 2023.
Deposit growth has slowed faster than credit growth. This has raised banks' loan-todeposit ratios to levels where a correction is now due. Consequently, the rate of credit expansion is likely to slow considerably in 2023 as banks become more cautious, especially in lending for construction and specific categories of real estate. In addition, the growth of household consumer and mortgage loans could slow, while the high levels of household debt could limit the increase of private household consumption.
The good news regarding tourism is that the total number of foreign visitor arrivals increased sharply in 2022 and is likely to keep growing in 2023, with visitor arrivals from Mainland China finally picking up. The improvement in tourism that has taken place to date reflects a diversification in the sources of foreign visitors to Cambodia, with the increase in visitors from other ASEAN countries growing especially rapidly.
The one significant exception to this is Mainland China, Cambodia's largest single source of foreign tourists before the pandemic but now down to the third position. However, conditions should improve in 2023 since Beijing has recently announced its intention to resume travel into and out of the country. Still, this liberalization will be gradual. Moreover, a shortage of flights and other capacity constraints will have to be overcome before the total number of Cambodia's inbound visitors from China recovers to pre-pandemic levels.
Politically, Cambodia has moved in the direction of improved stability. Although general elections will be held in the middle of 2023, there is little doubt about the outcome. The ruling party will win a large majority. Hun Sen will be reappointed prime minister, but he will take more steps to prepare the country for his retirement in a few years.
Three reasons political risks have decreased over the past year: First, support for the government headed by Prime Minister Hun Sen has increased due to the widespread perception held by the general population that it managed the COVID crisis well. Second, legal challenges and internal divisions have weakened the political opposition. As a result, it is in a very poor position to win many seats in the next elections. Third, Hun Sen has laid the ground for his eventual succession by his son, Hun Manet. This has reduced succession uncertainties and raised confidence in the business community and among foreign investors that there will be policy continuity.
Cambodia's diplomatic relations have improved. The country's most substantial bilateral relationship is with Mainland China, while its most critical multilateral relationship is with ASEAN. Cambodia has also signed a free-trade agreement with South Korea and plans to increase bilateral engagement with Japan. In addition, US President Biden's November 2022 trip to Phnom Penh helped stabilize Cambodian relations with the US. It reduced the risks that Cambodia might be caught in the middle of increased geopolitical tensions between China and the US.
Positive Developments
The Challenges