VZCZCXRO1841
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0353/01 1211054
ZNR UUUUU ZZH
P 301054Z APR 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHINGTON DC PRIORITY
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY 0762
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 PHNOM PENH 000353 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR F, EAP/MLS, EAP/RSP, EEB/TPP/ABT/ATP--SPECK, 
EEB/IFD/OMA, DRL/ILCSR-MITTELHAUSER 
STATE PLEASE PASS TO USTR FOR DAVID BISBEE 
STATE PLEASE PASS TO USAID FOR ASIA, DCHA, GH, EGAT 
BANGKOK FOR FAS--MEYER AND PICKELSIMER 
HANOI FOR FAS--WADE AND RALPH 
AGRICULTURE FOR FAS/OCRA--RIKER 
TREASURY FOR CHUN 
LABOR FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON SOCI PGOV EAGR ELAB CB
SUBJECT: PRIME MINISTER OUTLINES BULWARKS AGAINST 
"INFLATION TYPHOON" 
 
¶1.  SUMMARY.  Prime Minister Hun Sen took his economic battle 
plan to the airwaves April 23, outlining the causes of 
Cambodia's increasing inflation, enumerating policies the 
government has enacted in recent years to create a robust 
economy, and listing possible future steps to further combat 
inflation and potential food shortages.  Seizing the 
opportunity of a nationally televised semi-annual meeting 
between government officials and the private sector, the PM 
abbreviated the government-private sector dialogue in favor 
of a four hour speech about Cambodia's economic situation. 
With an eye towards voters, he emphasized that Cambodia did 
not have a rice shortage and detailed a number of past 
actions and possible next steps to combat rising food prices 
and other inflation.  Most significant among these plans were 
eliminating customs duties and VAT on food and agricultural 
imports, providing additional credit to rice millers and the 
state-owned rice company, ending a ban on Vietnamese pork 
imports, and increased wages for garment workers and civil 
servants.  The PM also said that he would end a ban on rice 
exports, but might impose export taxes on rice if Cambodia's 
food security situation worsened dramatically.  End Summary. 
 
¶2.  The Government-Private Sector Forum is a meeting of the 
Prime Minister and his full cabinet with the representatives 
of eight joint government and private sector working groups 
tackling issues from agriculture to industrial relations. 
The semi-annual event is nationally televised and attended by 
hundreds of diplomats, officials, and business people.  This 
meeting, the 13th forum, was held on April 23.  In the past, 
each working group gave an overview of concerns in their area 
and asked for specific government interventions, which the PM 
usually approved or declined on the spot.  This meeting was 
notable in that the government-private sector dialogue was 
dramatically shortened to allow for lengthy remarks about 
inflation from the Prime Minister. 
 
Finance Minister Predicts 7.2% Growth in 2008 
--------------------------------------------- 
 
¶3.  The opening speech of Keat Chhon, Minister of Economics 
and Finance, was heavy in its praise for the Prime Minister, 
noting that the economy has grown at an average of 11.1% per 
year since the last national elections in 2004.  However, 
global financial events have hurt Cambodia's economic 
performance and near term economic outlook, with 18.7% 
inflation in January 2008 and GDP growth expected to slow to 
7.2% in 2008.  The Minister mentioned briefly that the Prime 
Minister was keeping the "inflation typhoon" under control 
through a combination of monetary and fiscal measures. 
(Note:  A sidebar, printed in the Minister's remarks but not 
read, acknowledged the possibility that increased government 
spending designed to alleviate the impact of inflation on the 
poor could in fact end up spurring further inflation. 
However, the note concluded, the current inflation is 
"imported" rather than having primarily Cambodian causes, and 
is unlikely to be worsened by Cambodian government efforts. 
The document quotes Deutsche Bank executive Josef Ackerman as 
denying the market's self-healing power and cites the USG's 
bail out of Bear Stearns as further rationale for government 
intervention.  End Note.) 
 
PM Weighs in on Private Sector Requests 
--------------------------------------- 
 
¶4.  On the substance of the Government-Private Sector Forum, 
Prime Minister Hun Sen announced decisions about requests 
made from the eight working groups that constitute the Forum. 
 He agreed to eliminate customs duties and suspend VAT on 
food, agricultural inputs such as machinery and animal feed, 
and several metals.  He pledged to reduce customs tariffs on 
organic chemicals.  He declined to establish a convention 
center in Phnom Penh, saying that private sector developers 
already had plans to build several exhibition halls in the 
capital.  Plans to increase the reserve requirements at banks 
will go forward despite objections from the banking industry. 
 Hun Sen said that he agreed in principle with proposals to 
draft new laws on trade unions and the creation of a labor 
court.  (Comment:  International Labor Organization 
 
PHNOM PENH 00000353  002 OF 004 
 
 
representative John Ritchotte told us neither of these 
proposed laws were discussed in the Industrial Relations 
Working Group.  It is not clear what the proposed law on 
trade unions would say.  The existing Labor Law refers to a 
not-yet-established labor court, and the embassy and the ILO 
have previously been concerned about whether the creation a 
labor court, in a country with a famously corrupt judiciary, 
would undercut the innovative and transparent Arbitration 
Council, which was created with U.S. Department of Labor and 
USAID funds.  End Comment.) 
 
Global and Domestic Factors Fuel Inflation 
------------------------------------------ 
 
¶5.  Turning his attention to Cambodia's increased inflation, 
the PM said that global factors and Cambodia's own economic 
success lie behind the recent increases in Cambodian 
inflation.  Global causes include the five-fold increase in 
global oil prices since 2003, increased consumer demand for 
food and other goods, lower agricultural production due to 
shifts from food to bio-fuel production and poor weather, 
increased population, and the depreciation of the dollar. 
Cambodia is particularly sensitive to the dollar's 
depreciation, the PM noted, because Cambodia's economy is 
dollarized and the vast majority of its exports go to the 
U.S., while it imports most of its goods from other Asian 
countries whose currencies are appreciating against the 
dollar.  Domestically, high economic growth rates, 
skyrocketing real estate values, increasing numbers of 
tourists, and the surge of broad money (cash plus funds in 
checking and savings accounts and non-institutional money 
market funds) have fueled the demand for consumer goods, Hun 
Sen stated. 
 
¶6.  Throughout his speech, the PM was quick to assuage 
potential fears of food shortages by emphasizing that 
Cambodia has enough food to feed its people and is, in fact, 
a net rice exporter.  He noted that Cambodia had recently 
shipped 6,000 tons of rice to Senegal.  He also asserted that 
while urban populations may feel the pinch of higher food 
prices, these same dynamics lead to higher incomes for 
farmers.  With so many urban workers having family back in 
the provinces, the economic effects of the increased rice 
price may be evened out within families, he said. 
 
Prudent Government Policies Have Kept Economy Growing 
--------------------------------------------- -------- 
 
¶7.  Highlighting Cambodia's prudent fiscal and monetary 
policies, the Prime Minister enumerated actions that the 
government has taken in the past--both specifically in 
response to the recent increase in inflation and more 
generally over the past several years--to keep the Cambodian 
economy growing without overheating.  In April 2008, the 
government gave garment and shoe factories a three year 
exemption from the 1% pre-paid tax on profits.  This was part 
of a deal that gave these factories the financial flexibility 
to agree to give workers a USD 6 per month cost of living 
adjustment to last through 2010. 
 
¶8.  The Prime Minister has taken several steps intended to 
secure the country's food supply.  He banned rice exports on 
March 26, 2008, later announcing that he would lift the ban 
effective May 26, 2008.  (Note:  After appeals from the 
Commerce Minister, Hun Sen later agreed that three eastern 
provinces with high rice production could export rice, mostly 
to Vietnam.  Consumer goods have long been smuggled into and 
out of the country to avoid paying customs duties, and we 
have heard reports that rice is now being smuggled out in 
defiance of the ban, but we do not know on what scale this is 
occurring.  End Note.)  Hun Sen said that he had also ordered 
the state-owned rice company Green Trade to sell rice from 
their stock; provided additional financing to be used as 
working capital by Green Trade and the Cambodian Rice Millers 
Association; and rescinded an August 2007 ban on the import 
of Vietnamese pork products.  (Note:  While the PM claimed 
credit for lifting the ban as an anti-inflationary measure, 
the ban was initially imposed in response to an outbreak of 
 
PHNOM PENH 00000353  003 OF 004 
 
 
porcine respiratory and reproductive syndrome, also know as 
blue ear disease.  Hun Sen noted that the disease was now 
present only in isolated pockets in Vietnam.  End Note.) 
 
¶9.  Over the past several years, the Cambodian government has 
increased the base salaries of government officials, military 
personnel, and retirees by 10-20% per year, Hun Sen said, a 
rate significantly exceeding inflation.  The government 
doubled the allowances given to the spouses and children of 
working, retired, and disabled officials and soldiers. 
(Comment:  This move is largely rhetorical and symbolic as 
these allowances are quite small even in a Cambodian context. 
 The spouse allowance increased from 63 cents per month to 
USD 1.25, and the child allowance rose from 75 cents per 
child per month to USD 1.50 per child per month.  End 
Comment.)  By using lower, out-of-date prices for calculating 
the taxes on gasoline for consumer use and diesel fuel for 
electricity generation, the government has cut the effective 
tax rate on these products.  As a result, the price of gas 
has risen more slowly in Cambodia than in neighboring 
Thailand or Vietnam.  Similarly, electricity prices are lower 
than they would be otherwise, the PM stated. 
 
Battling Inflation and Food Insecurity:  The Road Ahead 
--------------------------------------------- ---------- 
 
¶10.  Cambodia's economy will face an unfavorable environment 
in the medium term, the Prime Minister asserted, explaining 
that many of the factors fueling inflation now would likely 
continue.  He noted that there were some silver linings to 
this situation.  For example, Cambodia will be a cheaper and 
more attractive tourist destination thanks to the dollar's 
decline. 
 
¶11.  The National Bank will adopt a cautious monetary policy, 
Hun Sen said, by increasing the reserve requirement at banks 
from 8% to 16%; encouraging banks with strong balance sheets 
to invest some of their assets abroad; establishing 
guidelines aimed at reducing lending in some high-risk 
sectors, especially real estate; and slowly de-dollarizing 
the economy. 
 
¶12.  Fiscal policies will also be carefully developed in 
order to keep inflation in check and promote continued 
economic growth.  Hun Sen called for government spending to 
remain within the parameters of the balanced 2008 budget. 
The government will aim to increase revenue by reducing 
smuggling, tax evasion, and tax fraud.  The government will 
reduce or eliminate customs tax and VAT on food and 
agriculture imports, offsetting this loss of revenue with 
higher taxes on luxury goods such as cars, alcohol, and 
cosmetics.  The Prime Minister called for better enforcement 
of property and unused land taxes, and the implementation of 
a capital gains tax.  Finally, the government may consider 
introducing export taxes on rice if a severe shortage of rice 
develops within the country. 
 
¶13.  The Prime Minister also enumerated other government 
policies which could boost agricultural production if needed. 
 Licensing rice storage, processing, and export firms would 
help collect data about rice production and rice levels and 
would impose some degree of control on the process.  Finally, 
the government and private sector could provide low interest 
loans to the Rice Millers Association to increase its ability 
to store rice for later sale for domestic consumption.  The 
government could encourage the creation of community-based 
farmers associations and then direct financing, seeds, and 
technical assistance to these organizations. 
 
Comments 
-------- 
 
¶14.  Hun Sen clearly saw the nationally televised 
Government-Private Sector Forum as a campaigning opportunity 
and did his best to appeal to voters.  His speech sought to 
reassure voters with repeated assertions that Cambodia 
produces enough rice to feed its people and has even exported 
6,000 tons of rice to Senegal in recent weeks.  His rants 
 
PHNOM PENH 00000353  004 OF 004 
 
 
were this time focused on populist themes, including 
defending people in Kandal province from a land grab, and, 
unusually, did not criticize the international community at 
all.  The PM also targeted the opposition, warning that this 
could be the last Government-Private Sector forum if the CPP 
does not win the election. 
 
¶15.  But for all his politicking, the PM's speech was most 
notable for the overall soundness of his economic analysis, 
actions, and plan.  International observers consistently give 
Cambodia high marks for its fiscal responsibility, trade and 
investment openness, and overall economic mindset.  Hun Sen 
has been consistent in his economic goals, repeating in both 
good times (considering how oil revenue might be spent) and 
bad (the current inflation situation) that the government's 
rectangular development strategy will guide its decisions. 
The PM has now backed away from earlier reactionary moves, 
announcing the immediate end to the ban on Vietnamese pork 
imports and the May 26, 2008 expiration of the rice export 
ban.  With an eye toward the international community, he was 
careful to note that his new proposed emergency measures to 
limit rice exports--potentially imposing export taxes--fall 
within WTO rules.  The most dubious parts of his plan are his 
monetary efforts.  In Cambodia's highly dollarized and open 
economy, the government has little control over money supply. 
MUSSOMELI