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Cablegate: Global Economic Crisis Hitting Home in Cambodia

VZCZCXRO4531
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0934/01 3240938
ZNR UUUUU ZZH
P 190938Z NOV 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 0125
INFO RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 PHNOM PENH 000934

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: GLOBAL ECONOMIC CRISIS HITTING HOME IN CAMBODIA

REF: A. CHIANG MAI 163
B. PHNOM PENH 799

1. (SBU) Summary: While Cambodia's financial sector has
little direct exposure to the turmoil affecting international
financial markets, concerns about the indirect impacts of the
global financial crisis on the health of Cambodia's
macroeconomic development are growing. Weakening global
demand is affecting key sectors of Cambodia's economy and
economic growth is predicted to slow significantly in 2009
from the double digit growth enjoyed in recent years. The
economic downturn threatens to derail plans for greater
progress in poverty reduction, particularly if the government
is not quick to recognize the threats to sustained economic
growth. End Summary.

Slowing Growth
--------------

2. Cambodia's recent high economic growth rates increasingly
appear difficult to sustain due to fallout from the global
economic crisis. The IMF recently downgraded its forecast
for Cambodia's economic growth from 7 percent for 2008 to
6.5, and further revised its growth estimate for 2009 down to
4.7 percent. Given the narrow economic base, declines in key
sectors such as garments and tourism are expected to drag
down growth rates in the coming year.

Declining Demand for Garments
-----------------------------

3. (SBU) A sluggish U.S. economy has slowed demand for
Cambodian garment exports. According to statistics from the
Ministry of Commerce, garment exports to the U.S. have
declined by 2.09 percent in the first nine months of the year
compared to the same period last year. The falloff in U.S.
and global demand for garment exports is widely expected to
increase in 2009, which could threaten the livelihoods of the
350,000 workers employed in a garment industry already facing
fierce competition from regional neighbors such as Vietnam.

Fewer Foreign Visitors
----------------------

4. (SBU) The global economic crisis is also slowing expansion
in the tourism sector. While still increasing, the rate of
growth within the tourism sector has slowed. According to
the Ministry of Tourism's' Chief of Tourism Statistics
Office, Mr. Horth Vanny, tourist arrivals increased by over
10 percent in the first eight months of the year. However,
this still represents a decline from previous years of steady
twenty percent growth. Trouble in the South Korean economy
may further hurt tourist numbers as Koreans comprise the
largest pool of visitors to Cambodia. According to Mr. Horth
Vanny, South Koreans accounted for 14.5 percent of total
visitors in the first seven months of the year, followed by
Vietnamese (9.7 percent), Japanese (7.2 percent), and
Americans (7.2 percent.)

5. (SBU) The expected decline in tourism due to the global
economic uncertainty is compounded by the continuing
political instability in neighboring Thailand. According to
media reports, the number of tourist traveling to Thailand
has declined. Ref A reports that the decline in tourists to
Chiang Mai is estimated at just under 20 percent since last
year. Many travelers to Cambodia use Thailand as a gateway.
If fewer tourists are visiting Thailand, there will be fewer
tourists traveling to Cambodia. In response to the predicted
slowdown, tourism industry representatives are urging the
government to take measures to boost the sector, including
reducing the costs of visas and entry tickets to major
tourist sites. So far, the government seems to be primarily
pinning its hopes on attracting tourists through its new
international media campaign promoting Cambodia as "a kingdom
of wonder."

FDI Flows Threatened
--------------------

6. (SBU) Other important areas of the Cambodian economy are
beginning to feel the indirect impacts of the global
slowdown. Foreign Direct Investment (FDI) flows into the
country from affected nations are particularly at risk. FDI
reached USD 876 million in 2007. Investors from South Korea
have led the growth in FDI, with major construction projects
and investments in real estate. According to Cambodian
Investment Board statistics, FDI from South Korea accounted
for nearly fourteen percent of total FDI in the first nine

PHNOM PENH 00000934 002 OF 002


months of the year. There are growing concerns that global
economic uncertainty and a prolonged economic downturn in
South Korea could significantly impact the construction and
real estate sectors. Several major large-scale construction
projects financed by South Korean companies are reported in
the local press to be slowing or suspending new construction
activity and operations.

7. (SBU) While local press quoted the Director of the
Construction Department as stating that construction projects
increased 38 percent in the first eight months of the year,
the real estate market has been stagnant since June and
prices have fallen, according to the Ministry of Economy and
Finance. The President of the Cambodian National Federation
of Building and Wood Workers in Phnom Penh, Sok Sovandeth,
asserts that almost half of the city's construction workers
are out of work due to the slowdown in the construction
sector. (Note: The claimed 50 percent unemployment rate may
be an exaggeration given that national and provincial union
representatives report that the falloff in demand has not had
as dramatic an effect on the rest of the nation's
construction workers. End Note.)

More Falling into Poverty
-------------------------

7. (SBU) The economic downturn also creates a challenging
environment for poverty alleviation. From 1994 to 2004, the
overall incidence of poverty was reduced from 47 percent to
35 percent. However, for Cambodia to further alleviate
poverty to achieve its Millennium Development poverty
reduction goal by 2015, the economy needs to grow at an
annual rate of 7.5 percent for the next eight years. High
inflation, estimated at over 20 percent for 2008, has
contributed to more people slipping below or hovering near
the poverty line this year, according to the Asia Development
Bank and the Minister of Commerce. Inflation coupled with
the gloomier prospects for economic growth jeopardize
Cambodia's ability to sustain its strong economic performance
to achieve its poverty reduction goal.

8. (SBU) Comment: The ripples of the world's economic woes
are beginning to wash up on Cambodian soil, and it is no
longer possible for Cambodians to dismiss the threats poised
by the global downturn or claim isolation from international
financial markets. However, despite warnings from
development partners such as the IMF and ADB, the government
still seems to downplay the potential risks and continues to
insist that 7 percent growth for 2008 will be achieved. The
more seriously the government takes these warnings now, the
better. Mitigating measures are needed now to ensure that
growth does not slow even below the revised figure for 2009.
At the same time, growth at 4.7 percent -- if achieved --
will be viewed as one of the more enviable economic
performances in the region.
RODLEY

© Scoop Media

 
 
 
 
 
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