FDI-Driven Real Estate Boom-Bust Cycle of Cambodia: Lessons for Macroeconomic Development Strategy

There was a substantial real estate boom-bust cycle in Cambodia during the 2016-2021 period. We find that this boom-bust cycle was driven by the sudden rise of the foreign direct investment in Cambodian real estate sector in 2016, particularly from China. During the FDI-driven boom-bust cycle period, the contents of FDI inflows to Cambodia were changed such that the real-estate FDI replaced the conventional FDI to textile and energy sectors, which used to be a major source of Cambodian growth. This paper illustrates that there were critical macroeconomic consequences from such FDI-driven boom-bust cycle in Cambodian real estate markets: (i) extremely fast increase of mortgage loans (increasing by 30 times during the 2008-2021 period) contributed to abnormally rapid expansion of domestic credit relative to GDP, (ii) sudden rise of external debts relying on short-term debts. Trades and FDI were two main engines of Cambodia’s economic growth, achieving the 7.1% rate of real GDP per capita growth during the 1994-2008 period, before the Global Financial Crisis. Global trades faltered due to this global shock and the Cambodian exports significantly slowed down. Cambodia sought more aggressive FDI inflows, the second engine of growth. This was possible during the because of increased liquidity and capital in global capital caused by the QE. However, the Taper Tantrum in 2013 hit Cambodia. Thus, Cambodia’s two engines of growth suffered slowdown. In response to these series of global shocks, Cambodia attracted the FDI to real estate sector around 2016, which disturbed the macroeconomic stability conditions without solving the growth slowdown problems. This episode of Cambodian development experience delivers important lessons for the development strategies of the developing economies relying on external engines of growth such as trades and FDI.