LIMITED IMPACT OF U.S. FINANCIAL CRISIS IN

UNCLAS PHNOM PENH 000799 SENSITIVE SIPDIS DEPT FOR EAP/MLS, EEB, EAP FOR DAS MARCIEL DEPT PASS USAID FOR ASIA BUREAU DEPT PASS USTR FOR DAVID BISBEE E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD CB SUBJECT: LIMITED IMPACT OF U.S. FINANCIAL CRISIS IN CAMBODIA, BUT GDP GROWTH THREATENED ¶1. (SBU) Summary: The U.S. financial crisis has had little impact on Cambodia's emerging financial sector. However, the U.S. and global financial woes will likely slow growth in Cambodia's major garment and tourism sectors, with potentially severe consequences for Cambodia's recent robust economic growth rates. End Summary. Financial Sector Unshaken, But Possibly Stirred -------------- -- ¶2. (SBU) Cambodia's emerging banking sector is relatively insulated from the turmoil in the U.S. financial system. While still relatively unexposed, Cambodia's banking sector could share in the global hangover from the troubles in the U.S. financial sector. An influx of foreign capital has helped to spur rapid growth within the banking sector over the past few years. Economic experts warn that if investors' overseas assets are affected by the financial crisis, foreign direct investment and other capital flows into the economy could dry up. Much of the growth in credit lending is linked to the booming real estate market. Should FDI slow, experts are concerned that construction projects may falter, which could in turn have negative impact on banks' loan portfolios. U.S. Slowdown Hurts Key Sectors -------------- ¶3. (SBU) Most significantly, the downturn in the U.S. economy is likely to result in reduced demand for garment exports and slow growth in the tourism sector. Cambodia's double digit economic growth is heavily dependent on expansion in the garment and tourism industries. The U.S. is Cambodia's single largest trading partner, accounting for 60 percent of total exports in 2007. The slowdown in the U.S. economy has contributed to projections that GDP growth will slow to 7 percent in 2008, down from 10.2 percent in 2007. U.S. demand for garment exports, accounting for 70 percent of exports in this key sector last year, fell slightly in the first six months of the year. The reduction in demand for exports comes at a time of increased worry over Cambodia's ability to compete with China and Vietnam's garment industries. A continued downturn in the U.S. would have significant consequences for U.S. orders of Cambodian garments. ¶4. (SBU) Concerns over the U.S. financial crisis are likely to stem the tide of tourists visiting Cambodia. The tourism sector grew 10.2 percent in 2007, with foreign tourist topping two million, generating revenues of $1.4 billion. Among Cambodia's two million tourists in 2007, 15.5 percent came from the U.S., the U.K., and France. As households in the U.S. and Europe worry about financial uncertainties, the tourism industry fears that many will opt to forego long-distance travel. Although visitor numbers had grown 10 percent, year-on-year through August, 2008, the rate of increase was weak, with package tours coming via Thailand falling dramatically. A continued downturn would hamstring the expansion of this vital sector. ¶5. (SBU) Comment: While secondary effects of the turmoil in U.S. financial markets may not be felt for some time, any prolonged recession in the U.S. economy would have severe consequences for Cambodia's economic development. As such, Cambodian officials are keenly attentive to USG measures to strengthen the U.S. economy. CAMPBELL