VZCZCXRO9898
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #0097/01 0430533
ZNR UUUUU ZZH
P 120533Z FEB 09
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 0381
INFO RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 PHNOM PENH 000097 
 
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: CAMBODIA'S ECONOMIC SLOWDOWN:  AN OPPORTUNITY FOR 
 
REFORM 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) Summary:  Prime Minister Hun Sen announced to an 
assembled audience of the country's top economists and 
development partners at the Third Cambodia Economic Forum 
February 5 that projections for Cambodia's economic have been 
revised downward to 6 percent for 2009, indicating the more 
sober attitude the government has toward the increasing 
threats to Cambodia's economic growth.  The PM described 
policy measures and reforms to mitigate the negative impacts 
of the economic slowdown.  However, economists predict a 
sharper decline in growth for 2009, and structural and 
regulatory reforms are essential in promoting growth and 
improving Cambodia's competitiveness in the short and long 
term.  The government's political will and commitment to 
reform will be sorely tested in the trying times to come. 
End Summary. 
 
Remarkable Growth Comes to an End 
--------------------------------- 
 
¶2. (U) Over the past decade, Cambodia has enjoyed an average 
9.8 percent annual economic growth, ranking it the seventh 
fastest growing economy in the world.  However, according to 
a recent World Bank study, the special factors that gave rise 
to this decade of rapid economic growth, are no longer 
present.  Economists at the forum agreed that the especially 
rapid growth Cambodia enjoyed early in the decade was 
unsustainable in the medium term, and in fact growth began to 
slow in 2006.  Discounting the fact that Cambodia was 
starting from a very low base, high gowth was primarily due 
to preferential market access and expanding trade due to 
regional integration. 
 
¶3. (U) The current external environment adds additional 
challenges to sustaining economic growth.  In the first half 
of 2008, Cambodia was hit with high inflation, and in the 
second, the global economic crisis hit key sectors of 
Cambodia's economy.  The garment industry, which makes up 
roughly 31 percent of Cambodia's GDP and is one of the 
pillars of the Cambodian economy, is estimated to have 
declined by 2 percent in 2008.  Experts predict a much 
sharper decline in 2009 as orders from the U.S. dry up.  The 
tourism sector, which grew by nearly 20 percent in 2007, is 
also showing signs of decline.  Its growth slowed to an 
estimated 8 percent in 2008; tourist arrivals fell by 3.3 
percent.  Tour operators report hotel occupancy declined by 
up to 30 percent during the December 08-February 09 "high 
season."  Construction has also slowed due to the real estate 
slowdown and over-supply, and experts predict it will take 
five years to recover.  A significant deceleration in growth 
is expected in all three of these key sectors in 2009. 
 
¶4. (SBU) With these bleak figures in mind, the PM conceded 
that the RGC has revised its forecast for economic growth 
from 7 percent down to 6 percent for 2009.  (Note:  As 
recently as the previous week, the PM was publicly 
maintaining that growth would reach 7 percent.  The World 
Bank and IMF have predicted growth rates to fall below 5 
percent.  End Note.)  The PM then outlined proposed measures 
to mitigate the effects of the decline in Cambodia's economy, 
including structural and regulatory reform to improve the 
business environment, investment in infrastructure, and 
provision of social safety nets. 
 
Agriculture to the Rescue 
------------------------- 
 
¶5. (SBU) In particular, the PM highlighted the important role 
that the agriculture sector could play in diversifying 
Cambodia's economic base and offsetting the slowing growth in 
other key sectors.  He emphasized the need to increase 
agriculture production, value-added processing, and exports, 
and called for greater investment in infrastructure, such as 
irrigation.  The RGC plans to make credit available to rice 
farmers, millers, and exporters though loans from Cambodia's 
Rural Development Bank.  The PM expressed his hope that 
investment in the agriculture sector, which currently 
accounts for 30 percent of GDP, could help to boost output 
and sustain economic growth.  (Comment:  Additionally, growth 
and diversification of the agriculture sector could also help 
to mitigate the adverse social consequences of slowing 
economic growth by increasing rural incomes, enhancing food 
security, and absorbing laid-off workers.  However, falling 
commodity prices may discourage some farmers from expanding 
production. End Comment.) 
 
 
PHNOM PENH 00000097  002 OF 002 
 
 
¶6. (U) In the garment sector, the PM acknowledged the need 
for regulatory reforms to reduce the cost of doing business, 
including removing barriers to commerce (such as 
non-transparent fees, customs procedures, and licensing 
requirements).  He also stated that human resource 
development is key to increasing Cambodia's competitiveness 
in the long term.  The PM proposed the creation of training 
scholarships to improve skills as well as providing a social 
safety net for laid-off workers.  He also appealed for 
improved industrial relations to reduce the number of labor 
disputes plaguing the garment industry.  The PM also 
discussed the tourism sector, pledging to continue to provide 
a favorable political/security environment to attract 
tourists.  He also stressed the need for greater 
public-private partnerships to strengthen the sector, and 
encouraged the private sector to reduce costs and improve the 
quality of services provided. 
 
Structural Reforms Needed 
------------------------- 
 
¶7. (SBU) Panelists encouraged the RGC to ease fiscal policy 
and urged the government to redouble its revenue collection 
efforts, including non-tax revenue from various line 
ministries.  On the monetary side, while the banking sector 
remains liquid, experts warned that the sector is vulnerable 
to significant risks:  an over concentration of the sector in 
a few banks, overly strong links to the volatile real estate 
sector, and poor classification of credit.  Experts urged the 
RGC to maintain a flexible exchange rate and to increase 
supervision of the growing banking sector. 
 
¶8. (SBU) At several times during the conference, the RGC 
appealed to development partners for additional assistance to 
support its policy measures and proposed reforms.  Panelists 
repeatedly stressed the need to accelerate disbursement of 
funding and timely implementation of assistance programs to 
promote growth and mitigate the negative impacts of 
Cambodia's economic slowdown.  However, some participants 
stressed that structural reforms are essential to making 
Cambodia a more attractive destination for additional foreign 
assistance and foreign direct investment. 
 
Comment 
------- 
¶9. (SBU) The RGC is taking the challenges to its 
competitiveness and continued growth seriously.  Its revised 
growth forecast from 7 percent to 6 percent, however, is 
still overly optimistic.  The IMF's prediction of growth 
below 4.8 percent is more realistic (and is tolerably good, 
compared to many economies in the region.)  However, the 
challenges of the global economic crisis present Cambodia 
with an opportunity to make important structural and 
regulatory reforms needed to create a more favorable business 
environment and facilitate trade, enhancing Cambodia's 
competitiveness in the short and long term.  The past decade 
of economic growth is not sustainable without potentially 
painful and politically difficult reforms.  The reforms and 
policy measures proposed by Hun Sen and elaborated by the RGC 
officials at the economic forum could help Cambodia to 
weather the current economic storm and realign the economy 
from its overly narrow base, wean it of its dependence on 
garment exports, and position Cambodia well for another 
period of sustained growth when the global economy rebounds. 
 
¶10. (SBU) Opposition politician Sam Rainsy criticized the 
RGC's proposed measures as paying lip service to the donors 
and for failing to address the real challenge to greater 
economic growth in Cambodia:  corruption.  The lack of 
transparency within the government and also in its dealings 
with the private sector is often cited as a significant 
constraint to further growth.  While Hun Sen may have 
sincerely pledged his government to reform, the exclusion of 
opposition members of parliament from the invitation-only 
economic forum sent a somewhat contradictory message about 
the government's commitment to a path of open, transparent 
governance. 
RODLEY