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Cablegate: Cambodia's Economy Booms, but Leaves Many Behind

VZCZCXRO8146
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0377/01 0661025
ZNR UUUUU ZZH
R 071025Z MAR 07
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC 8151
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHSG/AMEMBASSY SANTIAGO 0011
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0676
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 PHNOM PENH 000377

SIPDIS

SIPDIS

STATE FOR EAP/MLS, EEB/ESC/IEC, AND EEB/TPP/ABT/ATP--THOMAS
LERSTEN
STATE PLEASE PASS TO USTR--DAVID BISBEE
TREASURY FOR OFFICE OF EAST ASIA
COMMERCE FOR ITA--HONG-PHONG PHO AND ELENA MIKALIS,
ITA/OTEXA
SANTIAGO FOR MICHAEL KELLER

E.O. 12958: N/A
TAGS: ECON KTEX EPET CB
SUBJECT: CAMBODIA'S ECONOMY BOOMS, BUT LEAVES MANY BEHIND


1. Summary. With 13.4% GDP growth in 2005 and 10.4% growth
in 2006, Cambodia has managed to become one of the world's
fastest growing economies while maintaining low levels of
inflation. However, inequality has risen dramatically over
the last decade, and Cambodia's narrow economic base --
focused on garments, tourism, construction, and an
inefficient agricultural sector -- make it vulnerable to
shocks. Oil production expected to begin in 2010 is likely
to generate unprecedented government revenues, offering both
tremendous opportunities and challenges for economic
development and governance. At a recent economic development
conference, the Ambassador called on the Cambodian government
to prepare for the coming oil boom via new legislation on
corruption and information access, revenue management plans
that prioritize development, and strengthened regulatory
institutions. End Summary.

Cambodia Boasts High Growth Rates and Low Inflation . . .
--------------------------------------------- ------------

2. Over the past six years, the Cambodian economy has
enjoyed remarkable and consistently high levels of economic
growth with low inflation. Cambodia's 13.4% GDP growth in
2005 was one of the highest rates in the world, and
participants at the 2007 Cambodia Outlook Conference, held on
February 23 and organized by the Cambodia Development
Research Institute and the ANZ Royal Bank, expect continued
high growth in the future. The International Monetary Fund
(IMF) estimates Cambodia's 2006 GDP growth at 10.4% with 3%
inflation and forecasts 9% growth and 3 1/2% inflation for
2007. Dr. Hang Chuon Naron, head of the Supreme National
Economic Council, predicts 7-10% annual growth from 2007-2010
and 9-10% growth from 2010-2015, noting that Cambodian oil
production is expected to come online in 2010. IMF Resident
Representative John Nelmes praised the RGC for its prudent
macroeconomic monetary and fiscal policies, which provided a
healthy backdrop for economic growth.

. . . But Suffers from Rising Inequality
----------------------------------------

3. Despite the overall sunny statistics, alarm at the
growing gap between Cambodia's rich and poor was a frequent
refrain throughout the conference. Despite overall poverty
rates declining by roughly 1% per year, Cambodia's poorest
have been largely left out of the country's economic growth.
Over the past decade, Cambodia's richest 20% saw their per
capita consumption rise by 45% while the poorest quintile
gained just 8%. The gap between rich and poor narrowed in
Phnom Penh and stayed constant in other urban areas, but
rural areas showed a dramatic increase in inequality. World
Bank Country Manager Nisha Agrawal said that the rising
inequality was unusual and alarming for a country at this
stage of economic development. Today, Cambodia ranks behind
Vietnam, Laos, and Thailand in equality of income
distribution. Agrawal encouraged the government to improve
the poor's access to land and land tenure, diversify existing
sources of economic growth, and target services and
infrastructure to lagging groups.

Garments, Tourism, and Construction Drive Economic Growth
--------------------------------------------- ------------

4. In 2006, total value of garment exports reached USD 2.5
billion, a 20% increase since 2005, with more than 70% of
garments going to the U.S. The garment industry employed
330,000 workers -- a 10% increase over the previous year --
who collectively earned nearly USD 300 million. However,
both the IMF's Nelmes and ANZ Royal executive Gary Runciman
warned that Vietnam's recent entry into the WTO and the 2008
end of safeguards against China are looming threats which
Cambodia's garment industry should meet via improved
infrastructure and increased labor productivity.

5. Tourist arrivals have been growing at 20% per year for
the past two years, with 2 million foreign tourists expected
in 2007, according to Sok Chenda, Chairman of the Cambodian
Development Council. In contrast to their large numbers,
each tourist contributes relatively little to the Cambodian
economy. The prevalence of imported food and wine,
foreign-owned hotels, and foreign-operated tour groups means
that the Cambodian economy receives only 8% of tourist

PHNOM PENH 00000377 002 OF 003


expenditures in Cambodia. Chenda noted that the government
hopes to create more backwards linkages to increase the
economic benefit to the country. Agrawal criticized the
Ministry of Tourism's focus on increasing tourist arrivals
rather than capturing tourist dollars. She warned, "Now
tourism to Siem Reap (the home of the famous Angkor Wat
temples) is as much a curse as a blessing," and cited rapidly
falling groundwater levels, which could cause the temples to
sink, as an example.

6. Construction is closely related to the growth in tourism,
with new hotels in Siem Reap driving much of the sector's
growth. However, there is a growing sense that the
construction boom is not sustainable; occupancy rates at Siem
Reap's hotels are falling as new hotels become operational.
In addition to hotel construction, there are 8,000 to 10,000
new apartments being built in Cambodia's urban centers each
year.

Diversification, Land Insecurity, Oil Revenues
--------------------------------------------- -

7. Nearly every speaker warned that the country's narrow
economic base jeopardized its continued economic growth.
Several described the agricultural and agro-industrial
sectors as underinvested and decried land insecurity and
vast, unused land concessions as hurting the rural economy.
While 70% of Cambodians depend on agriculture for their
livelihood, the sector accounts for only 30% of GDP and a
paltry 3% of exports. Cambodia's per hectare yields are
significantly lower than its neighbors, in large part because
only 20% of agricultural land is partially or fully
irrigated. The World Bank's Agrawal noted that Cambodia's 57
economic land concessions (ELCs) total 1 million hectares,
but more than 80% of the ELCs are idle, tying up valuable
land that could be used for agricultural production. She
encouraged the government to implement a 2003 decree on
social land concessions by canceling non-operational ELCs and
reallocating the land to the 20% of rural households who are
landless.

8. Sectors of the Cambodian economy outside of agriculture
offer growth potential as well. Nelmes cited retail,
banking, and telecommunications as emerging sectors, while
Dr. Naron highlighted electronics, information technology,
and food processing as potential areas for growth. Several
speakers noted that Cambodia's Special Economic Zones offer
an important investment opportunity that should be more
heavily promoted. The government should work to reduce major
costs like infrastructure, electricity, and port fees in
order to promote more investment, Dr. Naron said.

9. United Nations Resident Coordinator Douglas Gardner
claimed that oil revenue is expected to top USD 1 billion per
year within two to three years of the first commercial
production of oil expected in 2010. However, Te Duong Tara,
Director General of the Cambodian Natioal Petroleum
Authority, cautioned that it was very difficult to predict
the size or accessibility of Cambodia's oil reserves. This
apparent blessing could easily turn in to a curse due to
corruption, wastage, and the "Dutch disease" -- uncontrolled
inflation that reduces the competitiveness of other
industries. The Ambassador and Gardner offered similar
prescriptions for avoiding the oil curse: strengthening laws
related to revenue management and oversight, promoting
transparency and accountability via stronger regulatory
institutions and passage of anti-corruption and freedom of
information legislation, and prioritizing spending on
development priorities and savings for future generations.
The Ambassador also encouraged Cambodia to become an
Extractive Industries Transparency Initiative (EITI)
Implementing Country.

Comment
-------

10. Like so much in Cambodia, the Cambodian economy offers
both tremendous opportunities and challenges. While sound
macroeconomic monetary and fiscal policies have helped to
provide a good foundation for growth, economic growth so far
has owed much to the rapidly growing interest in Cambodia's
Angkor Wat temples, the quota system that governed garment

PHNOM PENH 00000377 003 OF 003


exports, and good agricultural yields over the past few
years. Going forward, Cambodia will need to improve
governance and prioritize economic diversification and
services for the most marginalized elements of society if its
spectacular economic growth is to be sustained and equitably
shared. End Comment.
CAMPBELL

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