VZCZCXRO2295
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0802/01 2701019
ZNR UUUUU ZZH
P 261019Z SEP 08
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 9943
INFO RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 PHNOM PENH 000802 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MLS, EEB 
DEPT PASS USAID FOR ASIA BUREAU 
DEPT PASS USTR FOR BISBEE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD KTIA PGOV PREL CB
SUBJECT: CAMBODIA'S BOOMING ECONOMY FUELS DEVELOPMENT, BUT 
CAN THE MOMENTUM BE SUSTAINED? 
 
¶1.  (SBU) Summary:  During meetings with the Deputy Secretary 
of State September 14 and 16, a group of economic experts and 
development partners highlighted the dynamic economic growth 
taking place in Cambodia.  Political stability has made 
possible double digit economic growth.  However, Cambodia 
faces increasing challenges to maintaining this strong 
momentum in the future.  Corruption, inflation, and high 
energy costs threaten Cambodia's ability to sustain the 
breakneck speed of development.  Government efforts to 
address these concerns and increased diversification into the 
agricultural sector could have significant consequences for 
sustained economic growth and poverty alleviation.  End 
Summary. 
 
A Booming Economy 
----------------- 
 
¶2. (U) A decade of relative political stability in Cambodia 
has helped to fuel an average of 11 percent economic growth 
for the past five years, which is among the highest growth 
rates in the world, and remarkable achievement for a small 
country recovering from decades of turmoil and devastation. 
Cambodia's strong economic performance has largely been 
driven by expansion in the garment and tourism sectors.  H.E. 
Hang Choun Naron, Secretary General of the Supreme Economic 
Council, Ministry of Economic and Finance, briefed the Deputy 
Secretary on improvements to the legal and regulatory 
framework and the robust growth in the financial sector.  The 
government's liberal investment regime, among one of the most 
investor-friendly in the world, attracted USD 876 million in 
foreign direct investment in 2007.  U.S. investors are 
increasingly taking note of the emerging opportunities, with 
Dupont, GE, and Microsoft recently establishing a presence in 
Cambodia.   While this rapid rate of growth has contributed 
to a reduction in poverty levels, from 35 percent to 31 
percent over the past three years, the dynamic growth brings 
with it new challenges and several factors threaten to impede 
further economic expansion. 
 
Costs of Corruption 
------------------- 
 
¶3. (SBU) Despite the emerging opportunities attendant with 
the dynamic growth, weak rule of law continues to deter some 
would-be investors from entering the Cambodian market.  U.S. 
and domestic businesses alike expressed their concerns about 
the lack of a fair and impartial judicial system to guarantee 
a fair dispute resolution process.  Additionally, the lack of 
transparency and predictability in administrative procedures, 
such as registration, licensing, and permits, can increase 
the cost of doing business.  (Note: Some recent investment 
agreements, such as one with Japan, provide for third party, 
international investment dispute resolution, although these 
mechanisms have yet to be tested in domestic courts. End 
Note.) 
 
¶4. (SBU) However, Brett Sciaroni, President of the 
American-Cambodian Business Council, told the Deputy 
Secretary that the Cambodian government is the most open and 
accessible government in the region.  He explained that the 
government's willingness to promote trade and investment 
allows most issues to be favorably resolved within the 
government before ever needing to seek judicial redress. 
U.S. businesses present in Cambodia are encouraging about 
their positive experiences and the government's strong 
support for foreign investment and trade facilitation, 
despite the weak rule of law. 
 
High Costs of Energy 
-------------------- 
 
¶5. (SBU) In addition to concerns about the lack of adequate 
legal protections for investments, the high cost of energy in 
Cambodia inhibits greater economic expansion.  The group of 
economic experts explained to the Deputy Secretary that 
underinvestment in energy infrastructure coupled with 
skyrocketing demand to fuel the economic boom has resulted in 
a 100 kilowatt per hour shortfall in supply, pushing up the 
costs of energy in Cambodia to among the highest in the 
world, and up to three times the cost in neighboring Vietnam. 
 Eighty percent of Cambodia's energy supply is powered by 
diesel generators.  The economic experts agreed that 
Cambodia's economic growth has been hampered by the high 
price of energy, with some estimating that the growth rate 
would double if energy costs are reduced.  Sciaroni described 
Cambodia's efforts thus far to build its energy sector as 
insufficient to the task of meeting the ever-growing demand 
 
PHNOM PENH 00000802  002 OF 003 
 
 
for power.  However, Naron explained that Cambodia plans to 
import power from neighboring Thailand, Vietnam, and Laos, 
develop a transmission grid for distribution, and invest in a 
new coal-powered plant, and several hydropower projects.  As 
a result, he expects Cambodia to be able to reduce the price 
per kilowatt hour down to 11 cents in 2011 from the current 
17 to 20 cents. 
 
Rising Prices Taking a Toll 
--------------------------- 
 
¶6. (SBU) Cambodia's high inflation rate, estimated at over 
twenty percent for 2008, poses additional challenges to the 
sustainability of the recent economic growth.  High global 
fuel and food pieces are driving up costs in Cambodia. 
According to ADB Country Director Arjun Goswami, the price of 
rice has doubled since last year and meat prices are up 
thirty to sixty percent.  Van Sou Ieng, Executive Director of 
the Garment Manufacturers Association of Cambodia, explained 
that the rising cost of inputs, the vast majority of which 
are imported, coupled with a shortage of skilled labor which 
is driving up wage prices, are cutting into already thin 
profit margins in the garment sector.  Vong predicted that 
without duty free access to the U.S. market, garment exports 
from Cambodia will fall thirty-five percent in 2009.  IMF's 
Resident Representative John Nelmes warned that rising input 
and labor costs, combined with accelerated FDI unchecked by 
fiscal restraint, risk entrenched inflation.  The gathered 
experts told the Deputy Secretary that Cambodia needs to 
further tighten its monetary and fiscal policy to check 
inflation, a goal many thought was achievable. 
 
¶7. (SBU) The Cambodian government recently took strong 
measures to curb inflation which are applauded by the 
experts.  These measures include a doubling of reserve 
requirements in July and the June limitation on the amount of 
loans to the real estate sector.  Despite these efforts, 
excessive liquidity in the market is compounding the 
inflationary pressures, according to Nelmes.  Cambodia's 
banking sector is growing rapidly, with credit lending up one 
hundred percent year on year.  Nelmes emphasized that the 
National Bank of Cambodia lacks the capacity to adequately 
monitor and regulate this booming sector.  (Note: In other 
meetings, Nelmes has noted a strong suit of the government to 
effectively tamp down inflation has been its ability to 
exercise fiscal restraint. End Note.)  Cambodia needs a sound 
and well-regulated banking system for sustained growth. 
(Note: A representative from the U.S. Department of 
Treasury's Office of Technical Assistance is currently 
conducting an assessment of Cambodia's banking and financial 
sectors to identify potential areas for technical assistance. 
End Note.) 
 
Expansion in Agriculture Key for Sustained Growth 
--------------------------------------------- ---- 
 
¶8. (SBU) The economy is expected to grow by seven percent in 
2008, down from 10.2 percent in 2007.  Inflation and the 
slowing of the U.S. economy, with reduced demand for garment 
exports, are tempering the dynamic economic performance from 
previous years.  While seven percent is still an impressive 
rate, Nelmes stressed that a difference of a mere three 
percent in GDP growth over the long term is the difference in 
graduating to middle income status in ten versus twenty 
years.  The high inflation also threatens to undermine some 
poverty alleviation gains. 
 
¶9. (SBU) To date, Cambodia's economic growth has been overly 
dependent on expansion in the garment and tourism sectors. 
ADB's Goswami stressed that the agriculture sector has huge 
and as-of-yet untapped potential for economic growth.  With 
eighty to eighty-five percent of the working population 
engaged in agriculture, Goswami argued that rural economic 
development is key not only to continued robust economic 
growth but also to poverty alleviation. 
 
¶10. (SBU) During a September 14 meeting with the Deputy 
Secretary, representatives from several foreign aid-funded 
projects working in Siem Reap province to promote private 
sector-led development acknowledged that the last decade has 
seen considerable progress, but noted an array of continued 
challenges to rural economic growth for the 8 to 9 million 
people who earn their livelihood from farming.  Creating 
opportunities for both formal and informal dialogue has 
resulted in marked progress in communication and cooperation 
between public and private sectors.  In contrast to 
neighboring Vietnam, however, growth proceeds at a slower 
 
PHNOM PENH 00000802  003 OF 003 
 
 
pace and continues to be impeded by official corruption, lack 
of credit, and poor infrastructure. 
 
¶11. (SBU) The representatives noted that the government and 
private sector have each undergone significant improvement in 
the past decade, but there is still much yet to be 
accomplished.  Cambodia is poised on the brink of significant 
changes in agricultural production.  Still largely driven by 
human-and animal-power, the shift to mechanization -- if 
properly managed -- could revolutionize agricultural 
production capacity, thereby serving as a true engine of 
economic growth and development for the country. 
 
Comment 
------- 
 
¶12. (SBU) Cambodia's strong economic performance is currently 
facing some challenging head winds.  Inflation in particular 
threatens to impede further growth and undermine recent 
poverty alleviation gains.  However, the Cambodian 
government's acknowledgment of these challenges and its 
efforts to address these concerns are encouraging for the 
economy's ability to maintain the high levels of growth 
achieved over the past decade. 
 
CAMPBELL