Seeking Cambodia’s emerging middle class

Sar Botra’s family owns a nursery business Hong Menea

Seeking Cambodia’s emerging middle class

Phnom Penh Post | 6 September 2014

In a country with a notoriously huge divide between its richest and poorest, what makes a family middle class is up for debate

Three years ago, Sar Botra took out a loan from his relatives, pawned his motorbike and sold the necklace his parents gave him on his wedding day to scrape together a bit of cash to start his own business in Phnom Penh’s Chamkarmon district.

Today, with a successful business, a Toyota Camry, a motorbike, savings and high hopes for his son’s education, Botra views himself as middle class.

“My wife and I were spending $2 per day when we started. We didn’t have a car; we only had a motorbike. We didn’t have money to send to our parents; we didn’t have money to travel or enough to save away,” Botra said.

“Now we can save, travel to different provinces, and we spend about $20 per day on the necessities like feeding ourselves – the rent for our shop alone is $850 a month. I would consider myself part of Cambodia’s middle class.”

There is not yet a definitive measure of just what it means to be middle class in Cambodia, despite new businesses such as Toyota, KIA, Aeon and Hush Puppies all citing the emerging bracket as a as a key reason for their expansion into the Kingdom within the past year.

“Our products are priced at premium, but not so high. It is quite suitable for Cambodia, a country with a growing middle class and high growth,” Philip Kor, executive director of Singapore-based Redina Group, who owns the new Hush Puppies store in Aeon Mall, told the Post last month. 

But Botra, who still prefers to get his dinner from the local market or food vendor, said that none of his friends – though they all see themselves as middle class – fits this demographic. 

“I don’t buy lots of decorations for my home. I don’t do my shopping at Aeon Mall, and I rarely eat out at fast food restaurants,” he said, laughing.

Products on offer at Aeon Mall Hong Menea

The World Bank in Cambodia has defined middle class as those with daily consumption expenditure of between $2.60 and $5.10, in line with the country’s current gross national income (GNI) per capita of $950. 

Additional characteristics that define a middle-class person are the ownership of a television and motorbike, according to the bank.

By World Bank reckoning, about 21 per cent of the population live at or below the poverty line of $1.25 per day; 56 per cent live within the “vulnerable poor” bracket, with an expenditure of $1.25 to $2.60 per day; and about 20 per cent account for the middle class. Three per cent are considered prosperous, able to spend more than $5.4 per day on consumer goods.

In July last year, the International Labour Organization published a working paper on economic class and labour market inclusion in Asia Pacific. The ILO estimated that “in absolute terms”, the middle class – people who earned more that $4 per day – accounted for just 10 per cent, or 635,000 people, of Cambodia’s 6.6-million strong labour force.

The World Bank’s measures place Botra and his family above “middle-class status”, with his plant nursery business making him and his family on average $2,000 per month after rent, bills and purchasing new stock. But the 28-year-old says he is far from wealthy. 

“Even spending $4 a day cannot qualify as someone who lives in the middle class. My breakfast and lunch alone cost more than $5, so it would be more realistic to say today that the minimum is $8 expenditure per day per person,” he said, scoffing at the development agencies’ estimates.

At the other end of the middle-class scale, bordering on “vulnerable poor” but still falling within the World Bank’s criteria, is Chhorn Kimsrors, a 35-year-old garment factory worker who lives in Phnom Penh with her husband and daughter. 

Kimsrors earns $200 per month, spends about $5 per day on her daily consumption, and has a TV, a mobile phone and a late model Honda Dream motorbike. With her husband’s income, the family can save up to $50 every month.

“I was poor in the past, but I am now on an average income, and we are an average-income status family that can afford good food, new clothes and other daily expenses while also saving,” Kimsrors said.

Cambodians who spend more than $2.60 a day are considered middle class by the World Bank Hong Menea

Closing the gap on income inequality between the highest and lowest money earners in Cambodia is helping to increase the Kingdom’s middle class, said Enrique Aldaz-Carroll, senior country economist at the World Bank’s Cambodia office.

The bank’s figures show Cambodia’s Gini coefficient – a measure of income inequality with 0 indicating perfect equality and 100 indicating perfect inequality – declined from a rating of 37 in 2007 to 28 in 2011, with consumption in the poorer half of the population increasing by 21 per cent. 

“If the distribution of economic growth is unequal and favours more prosperous citizens, the size of the middle class will be smaller. Under such a scenario, the size of the middle class would not increase significantly,” Aldaz-Carroll said.

“The middle class saves a larger share of its income than citizens from lower-income groups, so we would see an increase in the volume of savings. 

“This increase in savings would more likely be held in bank accounts, which would help the financial sector expand and provide greater access to finance, which would promote greater domestic investment, which in turn would lead to growth.”

With 35 commercial banks and 39 microfinance institutions (MFI) in Cambodia’s financial market, it’s clear that the Kingdom’s appetite for financial products is increasing. Cambodia’s seven MFIs licensed to take deposits collected $209 million in savings from January to June this year, a 35 per cent increase from $154 million in same period last year.

Meanwhile, in the banking sector, total deposits are also growing rapidly, according to Acleda Bank chief exec In Channy. Banking sector deposits reached $7.8 billion at the end of June, up from $7.56 billion for the full year of 2013.

Cambodia’s demand for credit is also on the rise, according to the Credit Bureau of Cambodia’s outlook published earlier this week. 

The development of Aeon Mall is often cited as a Hong Menea

The study found that outstanding loan balances increased from about $2.5 billion in 2012 to $5.7 billion as of June 30. Driven by a young population migrating to urbanised areas with a hunger for economic opportunity, credit and loan balances will increase almost threefold to $14 billion by 2020, the report predicts.

One of the firms standing to benefit the most from Cambodia’s credit-hungry consumers is Aeon Microfinance, the lending arm of the Japanese mall-developing conglomerate Aeon, which specialises in financing consumer products such as motorbikes, mobile phones and home appliances.

Since the beginning of the year, Aeon Microfinance has increased its outstanding loan size by $5 million to $16 million, according to Daisuke Maeda, managing director of AEON Microfinance Cambodia.

Botra and his family consider themselves middle class Hong Menea

Maeda said about 3,500 new customers with an average monthly salary of $500 sign up every month, and that since Aeon Mall opened in June, loan applications for TVs and appliances like refrigerators have increased fivefold. 

“Two reasons for the increase are our service area is expanding and our target customers, whose monthly income must be $100 or more, are increasing,” Maeda said.

Hiroshi Suzuki, chief economist at the Business Research Institute of Cambodia, said that in order to support the power of consumption within the middle class, the consumer finance sector usually becomes popular.

“Increasing salaries will invite the increased use of this type of finance . . . Usually, the middle class grows as a result of more salaried workers,” he said. 

Suzuki was tentative about defining the market, but estimated that the middle class wage in the Kingdom ranges from $5,000 to $35,000.

The interest in microfinance, credit and loans indicates the emergence of Cambodia’s “aspirational” middle class, according to ANZ Royal chief executive officer Grant Knuckey, who added that class status is also dependent on perception.

“The definition of ‘middle class’ is fluid dependent on the country, in particular based on purchasing power, but also based on perceptions,” Knuckey said, citing an ANZ study into middle-class perceptions in 10 Asian countries published in February.

In Indonesia, more than 80 per cent of people consider themselves to be middle class, while in Vietnam 15 per cent do, according to the ANZ survey, which excluded Cambodia.

“As a general principle, someone would start to move into the middle class when truly discretionary spending becomes possible – that means they can cover all living necessities and can become a discretionary spender or saver,” Knuckey said. 

“The level at which that kicks in can have wide variance between countries, though in Cambodia it would be expected to be relatively low due to the general level of purchasing power here.”

But when Cambodia will truly become a middle income-earning country is still up for debate. 

BRIC’s Hiroshi Suzuki doesn’t expect the country to graduate from low income country status for another 10 years, despite Cambodia’s GNI of $950 per capita edging closer to the World Bank’s definition of a middle-income economy: $1,045. 

But while Cambodia waits to be labelled “middle income”, individuals’ perceptions and aspirations will much sooner achieve this class status whether through continued economic growth and income equality or by access to finance and credit. 

“Someday soon, when my salary will be higher, parallel to my better skills, we can decorate our house better, buy a new sofa or a new electricity cooker, and many other things,” Chhorn Kimsrors said, moments before she hurried back to the factory to finish her shift.