CAMBODIAN ECONOMIC CRISIS DEEPENS

UNCLAS SECTION 01 OF 02 PHNOM PENH 000276

SENSITIVE
SIPDIS

STATE FOR EAP/MLS

E.O. 12958: N/A
TAGS: ECON PGOV EAID ETRD CB
SUBJECT: CAMBODIAN ECONOMIC CRISIS DEEPENS

REFS: A) PHNOM PENH 205
B) PHNOM PENH 97
C) 08 PHNOM PENH 1032

SENSITIVE BUT UNCLASSIFIED


1. (SBU) Summary. Cambodia's heady days of double digit economic
growth are over. The adverse impacts of the global economic crisis
have brought Cambodia's growth to a screeching halt, from 10.2
percent in 2007 to low single digits, if not the World Bank's
estimated negative 1 percent in 2009. Nearly all of the pillars of
Cambodia's economy - garments, tourism, and construction - have been
adversely affected; only the agriculture sector has thus far been
unaffected. The economic crisis poses significant challenges to
sustaining the country's progress toward its development goals and
meeting the needs of the country's most vulnerable affected by the
crisis. To date the government's efforts to mitigate the adverse
impacts have failed to address the fundamental challenges of
sustaining economic growth and a more comprehensive, coordinated
response is urgently needed to prevent greater numbers of the
population from falling into poverty. End Summary.

Growth Prospects Growing Grimmer
--------------


2. (SBU) Cambodia's past decade of economic growth was remarkable by
any standard. However, it was overly dependent on the garment,
tourism, and construction sectors, and now the global economic
crisis is exposing the vulnerabilities of this narrowly-based
economy. In late 2008, international financial institutions were
predicting the economy to grow at between 4.7 and 4.9 percent, which
represented a significant slowdown from the average ten percent
growth of previous years. However, as the adverse impacts of the
global economic crisis hit home, growth forecasts were successively
revised downwards. The Asia Development Bank (ADB) currently
predicts a growth rate of 2.5% (predicated primarily on an expansion
in the agriculture sector); the International Monetary Fund (IMF)
predicts growth to slow to -0.5 percent, and the World Bank (WB)
forecasts -1 percent.

Deep Impact in the Pillars of the Economy
--------------


3. (SBU) A significant deceleration in growth is expected in all
three of the key sectors of the economy in 2009: garments, tourism,
and construction. The garment industry has been the hardest hit of
all of the sectors of Cambodia's heavily export-dependent economy
(see septel). The sector accounted for an estimated 30 percent of
GDP in 2008. In the first two months of the year, however, the
volume of garment orders decreased by an estimated average of 30
percent. Compared to the same two months last year, garment exports
are down by 40 percent and the value of garment exports declined by
26 percent in January. The Garment Manufacturers Association
estimates that 50,000 - 70,000 workers have lost their jobs since
Fall 2008, 33,995 in the first three months of the year alone.
(Septel reports on the Garment Sector in more detail).


4. (SBU) The tourism sector, which grew by nearly 20 percent in
2007, is also showing signs of decline, with growth slowing to 5.5
percent in 2008. During the first quarter of this year, the number
of foreign visitors declined by 3.4 percent. While there have been
fewer job losses in the tourism sector to date, hotels and
restaurants report instituting hiring freezes and job losses are
expected to follow.


5. (SBU) Stagnation in the real estate sector has weakened the
construction industry. Real estate prices have declined by 30-40
percent in some areas, according to the Bonna Realty Group,
Cambodia's prominent real estate company. Large foreign-invested
construction projects have stalled or slowed. For example, plans
for a seven skyscraper project have been scaled down to three and
the project has been delayed until 2010. Construction-related
imports declined by 7 percent in the last quarter of 2008. While
precise figures are not available, firms report that unemployment
among construction workers is on the rise.


6. (SBU) Among the four key pillars of the economy, only agriculture
has emerged from the crisis relatively unscathed. The ADB predicts
growth in the agriculture sector to exceed the 4.5 percent level
achieved in 2008. The sector's growth potential (which accounted
for 34.4 percent of GDP in 2008) could help to mitigate some of the
adverse impacts of the economic slowdown, such as providing social
safety nets for affected workers. However, an expansion in the
agriculture sector will not be sufficient to offset the declines in
the other key sectors, nor boost Cambodia's sagging GDP.
Additionally, the sector remains vulnerable to changing and
unpredictable weather conditions and the volatile commodities
market.


7. (SBU) While the banking sector was largely sheltered from the

PHNOM PENH 00000276 002 OF 002


global financial crisis, the slowing economy is expected to have a
secondary impact on the banking industry. The WB and IMF have
warned of increased risks of non-performing loans, which are
believed to be underreported. The economic slowdown and resulting
stagnation in the real estate market will increase the sector's
exposure (Ref A). Microfinance institutions report rising
delinquency rates, as farmers who borrowed based on the high food
prices of early 2008 now find themselves unable to repay their loans
due to the steep fall in commodity prices.

Significant Social Consequences
--------------


8. (SBU) Slowing growth presents significant social challenges for
Cambodia. With unemployment on the rise, it will be increasingly
difficult to absorb the estimated 270,000 new job seekers entering
the workforce each year. The economic crisis is eroding Cambodia's
laudable poverty reduction gains and threatens to put at risk
Cambodia's achievement of the Millennium Development Goal 1 percent
reduction in the poverty rate in 2009. The country's most
vulnerable are still reeling from the high inflation of the first
half of 2008. According to a recent WB report, an additional
200,000 people are expected to fall below the poverty line this
year, the highest number of "new poor" in the region.


9. (SBU) Rising unemployment and pessimism about future prospects
could give rise to a number of social ills, such as drug use,
criminal activity, child labor and exploitive labor conditions, and
human trafficking. A recent Interagency Conflict Assessment,
utilizing the new Interagency Conflict Assessment Framework
developed by State and USAID, identified rising unemployment
affecting at-risk youth, resulting in illicit behavior, such as drug
abuse and gang activity, as a significant threat to Cambodia's
political and social stability.

Government's Response
--------------


10. (SBU) Despite downplaying the bleak growth forecasts and
continuing to officially maintain that economic growth is targeted
at 4-6 percent this year, the government appears to be taking the
threats to the economy seriously. As recently as April 28, Dr. Hang
Chuon Naron, Secretary General, Supreme National Economic Council,
Ministry of Economy and Finance, told a gathering of development
partners that 6 percent growth was still within the range of growth
forecasts. However, it is not readily apparent that the government
has developed a comprehensive strategy for meeting the diverse and
deep challenges of the economic crisis head on.


11. (SBU) While the government has already taken a number of
measures in response to the crisis, these do not appear to have been
as part of a coordinated response. In consultation with the private
sector, the government adopted specific measures, such as tax relief
for the garment industry, expanding foreign vehicle access to
promote tourism, and support for agro-business. The government also
created a USD7 million dollar fund to provide training and
microcredit to laid-off workers and announced the prioritization of
pro-poor spending to protect the most vulnerable and provide
additional social safety nets. While mitigating measures such as
these are badly needed, they do not address the underlying
fundamental structural problems which constrain economic growth and
threaten to undermine progress towards meeting the country's
development goals (Ref C).

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


12. (SBU) The unique factors that gave rise to Cambodia's decade of
rapid economic growth are unsustainable (Ref B). What is really
needed are important structural and regulatory reforms to create a
more favorable business environment, facilitate trade, and diversify
the economic base, enhancing Cambodia's competitiveness in the short
and long term. A comprehensive response to the crisis requires
close coordination among numerous government ministries and
departments, which has proven difficult even in the best of times,
and may be particularly more difficult in the face of a declining
economy as competition among government entities increases for
scarce government resources. It will likely be up to development
partners to support the government's efforts by accelerating and
coordinating their assistance programs, particularly those in the
short term which support vital social safety nets.

RODLEY