Cablegate: Cambodian Economy Shaken by the Global Economic Slowdown

VZCZCXYZ1316
RR RUEHWEB

DE RUEHPF #0741/01 2791209
ZNR UUUUU ZZH
R 061209Z OCT 09
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC 1241
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS PHNOM PENH 000741

SENSITIVE
SIPDIS

STATE FOR EAP/MLS

E.O. 12958: N/A
TAGS: ECON PGOV EAID ETRD CB
SUBJECT: CAMBODIAN ECONOMY SHAKEN BY THE GLOBAL ECONOMIC SLOWDOWN

REFS: A) PHNOM PENH 277
B) PHNOM PENH 276

SENSITIVE BUT UNCLASSIFIED

1. (SBU) Summary: The global economic crisis continues to take a
heavy toll on Cambodia's once vibrant economy. Cambodia's
narrowly-based economic growth, reliant almost exclusively upon
garment exports, tourism, and construction, has been brought to a
standstill by the sharp fall off in external demand and foreign
investment flows. Economic growth is predicted to contract by as
much as negative 2.75% this year and a growing budget deficit could
threaten macroeconomic stability. End Summary.

Growth Forecasts Even Gloomier
------------------------------

2. (U) The global economic crisis has had a more profound effect on
Cambodia's economy than previously anticipated. Both the
International Monetary Fund (IMF) and Asia Development Bank (ADB)
recently revised growth forecasts downwards. The ADB, which
previously predicted a positive growth rate of 2.5%, now predicts a
negative 1.5% contraction. The IMF is predicting growth to slow to
negative 2.75%, from the negative 0.5% contraction predicted earlier
this year.

3. (U) Foreign direct investment (FDI) flows have slowed as a result
of the global downturn as well. The IMF predicts FDI to decline
nearly 50% in 2009. The drop in FDI has had a significant impact on
Cambodia's construction sector, given the sector's heavy dependence
on foreign, primarily South Korean, investors. Several large-scale
construction projects have stalled or been scaled down, and fewer
new projects have been approved.

4. (U) During a meeting with the Ambassador September 21, David
Cowen, the IMF's Deputy Division Chief for the Asia and Pacific
Department, expressed concerns about the stability of the banking
sector due to the potential for an increase in non-performing loans,
given the extent of lending which is linked to the now stagnant real
estate sector. Cowen also expressed concern about Cambodia's
macroeconomic stability, citing in particular a growing budget
deficit which is projected to rise to 6.75% of GDP in 2009 (up from
2.75% a year earlier). The expanding deficit is due in part to
large salary increases for civil servants and the military, an
increase from 1% of GDP to 5% of GDP in 2009. Domestic financing of
the growing deficit could erode domestic deposits and foreign
reserves, threatening macroeconomic stability. The RGC has defended
these wage increases and Cheam Yeap, Chairman of the National
Assembly's Finance Committee, was recently quoted in local press
affirming the government's commitment to the wage increases, arguing
that they are necessary to raise living standards.

Garment Exports Plummet
-----------------------

5. (U) Garment exports, a key sector in Cambodia's economy, have
fallen precipitously. According to figures from the Ministry of
Commerce, in the first six months of the year, total garment exports
declined by 24.2% year-on-year with garment exports to the U.S.
falling 31.5%. A total of 49 factories have closed their doors in
the first half of the year, while 20 new factories opened during
this same time, according to the Ministry of Commerce.

6. (SBU) While U.S. demand for garments has fallen, the decline in
imports from Cambodia is disproportionately large compared to the
falloff in total U.S. garment imports, indicating that Cambodia's
garment industry is losing market share to other regional
competitors. The government has responded by extending tax
incentives to manufactures, but has thus far failed to address the
real challenges to the competitiveness of Cambodia's garment
industry (Ref A).

7. (SBU) Buyers are making decisions to source elsewhere due to
problems which plague Cambodia's industry, such as poor
infrastructure, low productivity, strained industrial relations, and
corruption. For example, a deal that reportedly would have been
worth more than USD100 million annually in orders from Japan, went
to Bangladesh last year instead. President of the Garment
Manufacturer's Association in Cambodia Van Sou Ieng told Econoff
that "informal fees" encountered during the customs clearance
process for a sample shipment factored heavily in the Japanese
buyer's decision to source elsewhere.

Tourist Arrivals Down But Not Out
---------------------------------

8. (U) Accounting for 16 percent of Cambodia's GDP in 2008, and
employing roughly 300,000 workers, Cambodia's tourism industry help
fuel the past decade of rapid economic growth. However, the global
economic crisis, coupled with the political turmoil in Thailand, has

taken a toll on the sector's once robust growth. Growth slowed to
5.5 percent in 2008, compared to the nearly 20 percent growth in
2007. According to the Ministry of Tourism's statistics, tourist
arrivals to Cambodia declined by only 1.1 percent in the first half
of the year, compared to the same period in 2008. However, this
figure does not accurately reflect the significant impact that the
change in the types of tourists visiting Cambodia is having on the
sector.

9. (SBU) The IMF estimates that tourists arriving by air have fallen
by double digits so far this year. Ho Vandy, President of the
Cambodia Association for Travel Agents (CATA) and Co-Chairman of
Government-Private Sector Working Group on Tourism, told Econoff
that long-haul tourists have decreased, replaced by visitors who
spend less time and less money during their visit.
According to the Ministry of Tourism, South Korean visitors, who had
been the largest group visiting Cambodia in 2008, fell an estimated
33% in the first six months, while tourist arrivals from Vietnam
have increased by approximately 40% and arrivals from Laos have
risen 141% during this same period. (NOTE: The increase in
Vietnamese visiting Cambodia may in part be attributable to the
December 2008 implementation of visa waivers between the two
countries. END NOTE.)

10. (SBU) The country's foremost tourist destination Siem Reap has
been hardest hit. According to the Minister of Tourism, the
majority of Vietnamese tourists visit Phnom Penh, rather than Siem
Reap. Many of these tourists visit Cambodia on inexpensive package
tours, Ho Vandy explained. Revenues generated from the increase in
Vietnamese visitors fall short of offsetting the loss of South
Korean or other tourists who in general spent more time and money
per visit.

11. (SBU) Hotel occupancy rates in Siem Reap declined 30 to 40
percent in the first six months of this year. Ho Vandy reports that
approximately 7 to 8 percent of Siem Reap's 120 hotels have shut
their doors temporarily during the low season from March to
September, another 30 to 40 percent have suffered from profit
losses, and some have downsized employees by 50%, contributing to
rising unemployment in the area. He said that roughly 2,000 workers
in this sector have already lost their jobs or have been temporarily
suspended until after the low season, waiting for the sector to
recover.

12. (U) In what may prove a positive sign, tourist arrivals
increased in July, rising by an estimated 10 percent to offset
declines earlier in the year, resulting in an increase of 0.63
percent in the number of tourist arrivals to Cambodia in the first 7
months. Ho Vandy also told Econoff that hotel bookings have
recently picked up for later in the year, with reservations from
Japan, Europe, and the U.S. on the rise.

Silver Lining?
--------------

13. (SBU) As other key sectors of the economy are declining, the one
positive note is growth in the agriculture sector, which the IMF
predicts to expand by 5% in 2009. Cambodia's longer-term prospects
are also hopeful. While Cambodia's economy is expected to contract
from 2.75% to 1% in 2009, both the IMF and ADB predict growth to
resume in 2010. Contingent on a global economic recovery, and
assuming that tourism-source and garment-source countries' economies
recover quickly, Cambodia's economy is predicted to expend by 3.5%
(ADB) or as much as 4.25% (IMF) in 2010.

Comment
-------

14. (SBU) The sharp decline in economic activity could have
significant consequences for the sustainably of the government's
budget, as revenues decline while increased spending is needed in
priority sectors such as health, education, and infrastructure.
Sound macroeconomic and financial policies are needed to mitigate
the impact of the slowdown, but the government has thus far failed
to launch a comprehensive response to the crisis.

ALLEGRA

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