De-dollarisation Impacts FDI Inflows in Cambodia

Foreign direct investment (FDI) has been important to the economic growth of Cambodia, with the country attracting significant investments in recent years. However, the global trend towards de-dollarisation poses both challenges and opportunities for Cambodia’s FDI landscape.

In 2023, Cambodia witnessed a substantial increase in fixed-asset investment, totaling $4.92 billion, marking a 22% surge from the previous year, according to data from the Council for the Development of Cambodia (CDC). Traditionally, investing in US dollars has been advantageous for foreign investors, given the currency’s global acceptance and stability. However, the diminishing share of the US dollar in world currency reserves, coupled with geopolitical developments such as the Russia-Ukraine war, is reshaping the global currency landscape.

The decline in the US dollar’s dominance has prompted some countries to explore alternative currencies for trade and investment. China’s increasing utilisation of the yuan in bilateral trade and its ascent as the fourth-most used currency in global markets highlight this shift. Moreover, countries disapproving of US policies have begun moving away from the dollar, signaling a broader trend towards de-dollarisation.

For Cambodia, the implications of de-dollarisation are two-fold. Firstly, there are concerns about the erosion of the US dollar’s value over time as more countries transition to alternative currencies. Secondly, the Cambodian government’s intention to accept non-dollar currencies could diversify the economy and shield it from global events.

However, transitioning away from the dollar presents both challenges and opportunities for FDI in Cambodia. While it may attract investors from countries using alternative currencies, such as China, Singapore, and Malaysia, there is uncertainty about whether other investors will follow suit. Moreover, the gradual nature of de-dollarisation ensures a cautious approach by the government to avoid disrupting existing investment flows.

Cambodia’s move towards de-dollarisation is informed by lessons learned from the 2008 global financial crisis, which severely impacted the country’s economy. In recent years, the government has pursued policies to attract FDI, including infrastructure development and participation in initiatives like the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP) agreement.

Furthermore, Cambodia’s favorable investment environment, highlighted by its new investment and taxation laws, positions it as an attractive destination for FDI. The consolidation of existing taxes and the provision of tax incentives aim to incentivize investment and promote economic growth.

As Chinese companies reconfigure their supply chains and seek alternative investment destinations, Cambodia stands to benefit from the “China Plus 1” effect. The country’s strategic location, coupled with an improving investment climate, makes it an appealing choice for multinational corporations looking to diversify their operations.