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