CAMBODIA'S BOOMING ECONOMY FUELS DEVELOPMENT, BUT

UNCLAS SECTION 01 OF 03 PHNOM PENH 000802

SENSITIVE
SIPDIS

DEPT FOR EAP/MLS, EEB
DEPT PASS USAID FOR ASIA BUREAU
DEPT PASS USTR FOR BISBEE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD KTIA PGOV PREL CB
SUBJECT: CAMBODIA'S BOOMING ECONOMY FUELS DEVELOPMENT, BUT
CAN THE MOMENTUM BE SUSTAINED?


1. (SBU) Summary: During meetings with the Deputy Secretary
of State September 14 and 16, a group of economic experts and
development partners highlighted the dynamic economic growth
taking place in Cambodia. Political stability has made
possible double digit economic growth. However, Cambodia
faces increasing challenges to maintaining this strong
momentum in the future. Corruption, inflation, and high
energy costs threaten Cambodia's ability to sustain the
breakneck speed of development. Government efforts to
address these concerns and increased diversification into the
agricultural sector could have significant consequences for
sustained economic growth and poverty alleviation. End
Summary.

A Booming Economy
--------------


2. (U) A decade of relative political stability in Cambodia
has helped to fuel an average of 11 percent economic growth
for the past five years, which is among the highest growth
rates in the world, and remarkable achievement for a small
country recovering from decades of turmoil and devastation.
Cambodia's strong economic performance has largely been
driven by expansion in the garment and tourism sectors. H.E.
Hang Choun Naron, Secretary General of the Supreme Economic
Council, Ministry of Economic and Finance, briefed the Deputy
Secretary on improvements to the legal and regulatory
framework and the robust growth in the financial sector. The
government's liberal investment regime, among one of the most
investor-friendly in the world, attracted USD 876 million in
foreign direct investment in 2007. U.S. investors are
increasingly taking note of the emerging opportunities, with
Dupont, GE, and Microsoft recently establishing a presence in
Cambodia. While this rapid rate of growth has contributed
to a reduction in poverty levels, from 35 percent to 31
percent over the past three years, the dynamic growth brings
with it new challenges and several factors threaten to impede
further economic expansion.

Costs of Corruption
--------------


3. (SBU) Despite the emerging opportunities attendant with
the dynamic growth, weak rule of law continues to deter some
would-be investors from entering the Cambodian market. U.S.
and domestic businesses alike expressed their concerns about
the lack of a fair and impartial judicial system to guarantee
a fair dispute resolution process. Additionally, the lack of
transparency and predictability in administrative procedures,
such as registration, licensing, and permits, can increase
the cost of doing business. (Note: Some recent investment
agreements, such as one with Japan, provide for third party,
international investment dispute resolution, although these
mechanisms have yet to be tested in domestic courts. End
Note.)


4. (SBU) However, Brett Sciaroni, President of the
American-Cambodian Business Council, told the Deputy
Secretary that the Cambodian government is the most open and
accessible government in the region. He explained that the
government's willingness to promote trade and investment
allows most issues to be favorably resolved within the
government before ever needing to seek judicial redress.
U.S. businesses present in Cambodia are encouraging about
their positive experiences and the government's strong
support for foreign investment and trade facilitation,
despite the weak rule of law.

High Costs of Energy
--------------


5. (SBU) In addition to concerns about the lack of adequate
legal protections for investments, the high cost of energy in
Cambodia inhibits greater economic expansion. The group of
economic experts explained to the Deputy Secretary that
underinvestment in energy infrastructure coupled with
skyrocketing demand to fuel the economic boom has resulted in
a 100 kilowatt per hour shortfall in supply, pushing up the
costs of energy in Cambodia to among the highest in the
world, and up to three times the cost in neighboring Vietnam.
Eighty percent of Cambodia's energy supply is powered by
diesel generators. The economic experts agreed that
Cambodia's economic growth has been hampered by the high
price of energy, with some estimating that the growth rate
would double if energy costs are reduced. Sciaroni described
Cambodia's efforts thus far to build its energy sector as
insufficient to the task of meeting the ever-growing demand

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for power. However, Naron explained that Cambodia plans to
import power from neighboring Thailand, Vietnam, and Laos,
develop a transmission grid for distribution, and invest in a
new coal-powered plant, and several hydropower projects. As
a result, he expects Cambodia to be able to reduce the price
per kilowatt hour down to 11 cents in 2011 from the current
17 to 20 cents.

Rising Prices Taking a Toll
--------------


6. (SBU) Cambodia's high inflation rate, estimated at over
twenty percent for 2008, poses additional challenges to the
sustainability of the recent economic growth. High global
fuel and food pieces are driving up costs in Cambodia.
According to ADB Country Director Arjun Goswami, the price of
rice has doubled since last year and meat prices are up
thirty to sixty percent. Van Sou Ieng, Executive Director of
the Garment Manufacturers Association of Cambodia, explained
that the rising cost of inputs, the vast majority of which
are imported, coupled with a shortage of skilled labor which
is driving up wage prices, are cutting into already thin
profit margins in the garment sector. Vong predicted that
without duty free access to the U.S. market, garment exports
from Cambodia will fall thirty-five percent in 2009. IMF's
Resident Representative John Nelmes warned that rising input
and labor costs, combined with accelerated FDI unchecked by
fiscal restraint, risk entrenched inflation. The gathered
experts told the Deputy Secretary that Cambodia needs to
further tighten its monetary and fiscal policy to check
inflation, a goal many thought was achievable.


7. (SBU) The Cambodian government recently took strong
measures to curb inflation which are applauded by the
experts. These measures include a doubling of reserve
requirements in July and the June limitation on the amount of
loans to the real estate sector. Despite these efforts,
excessive liquidity in the market is compounding the
inflationary pressures, according to Nelmes. Cambodia's
banking sector is growing rapidly, with credit lending up one
hundred percent year on year. Nelmes emphasized that the
National Bank of Cambodia lacks the capacity to adequately
monitor and regulate this booming sector. (Note: In other
meetings, Nelmes has noted a strong suit of the government to
effectively tamp down inflation has been its ability to
exercise fiscal restraint. End Note.) Cambodia needs a sound
and well-regulated banking system for sustained growth.
(Note: A representative from the U.S. Department of
Treasury's Office of Technical Assistance is currently
conducting an assessment of Cambodia's banking and financial
sectors to identify potential areas for technical assistance.
End Note.)

Expansion in Agriculture Key for Sustained Growth
-------------- --------------


8. (SBU) The economy is expected to grow by seven percent in
2008, down from 10.2 percent in 2007. Inflation and the
slowing of the U.S. economy, with reduced demand for garment
exports, are tempering the dynamic economic performance from
previous years. While seven percent is still an impressive
rate, Nelmes stressed that a difference of a mere three
percent in GDP growth over the long term is the difference in
graduating to middle income status in ten versus twenty
years. The high inflation also threatens to undermine some
poverty alleviation gains.


9. (SBU) To date, Cambodia's economic growth has been overly
dependent on expansion in the garment and tourism sectors.
ADB's Goswami stressed that the agriculture sector has huge
and as-of-yet untapped potential for economic growth. With
eighty to eighty-five percent of the working population
engaged in agriculture, Goswami argued that rural economic
development is key not only to continued robust economic
growth but also to poverty alleviation.


10. (SBU) During a September 14 meeting with the Deputy
Secretary, representatives from several foreign aid-funded
projects working in Siem Reap province to promote private
sector-led development acknowledged that the last decade has
seen considerable progress, but noted an array of continued
challenges to rural economic growth for the 8 to 9 million
people who earn their livelihood from farming. Creating
opportunities for both formal and informal dialogue has
resulted in marked progress in communication and cooperation
between public and private sectors. In contrast to
neighboring Vietnam, however, growth proceeds at a slower

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pace and continues to be impeded by official corruption, lack
of credit, and poor infrastructure.


11. (SBU) The representatives noted that the government and
private sector have each undergone significant improvement in
the past decade, but there is still much yet to be
accomplished. Cambodia is poised on the brink of significant
changes in agricultural production. Still largely driven by
human-and animal-power, the shift to mechanization -- if
properly managed -- could revolutionize agricultural
production capacity, thereby serving as a true engine of
economic growth and development for the country.

Comment
--------------


12. (SBU) Cambodia's strong economic performance is currently
facing some challenging head winds. Inflation in particular
threatens to impede further growth and undermine recent
poverty alleviation gains. However, the Cambodian
government's acknowledgment of these challenges and its
efforts to address these concerns are encouraging for the
economy's ability to maintain the high levels of growth
achieved over the past decade.

CAMPBELL