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