CAMBODIA'S economy, already shaken by last July's fighting, is now being buffeted

by the effects of a region-wide financial meltdown.

The government is trying to attract new foreign investment - but the odds are stacked

against it.

Experts have warned that Cambodia - as did Thailand and other Asian nations before

it - may be freefalling to economic crisis.

"We are heading into trouble," said an economist who asked not to be identified.

He said that both the currency crises in the region and Cambodia's own sloppy economic

management spell danger for the future.

While consumer spending appears to be gradually recovering since July's fighting,

the economy has been hard hit by the dramatic decline in tourism, according to a

new economic report from the Cambodia Development Resource Institute (CDRI).

Based on last year's tourist arrivals, CDRI says that Cambodia may have lost at much

as $20 million between July and October in tourist dollars.

CDRI found that inflation and prices have been fluctuating wildly since July, as

the riel has steadily depreciated - falling 29% against the dollar.

Inflation was at 9.1% in December, overshooting its goal of 5% for the year.

New investment is suffering as a result of Asia's current financial climate, according

to Sok Chenda, Secretary-General of the Council for the Development of Cambodia (CDC).

Since most investors come from Asia, he said, "we are now hit indirectly by

the regional crisis".

According to Cambodian Investment Board (CIB) figures, about 60% of total capital

investment has come from Asian nations since 1994.

In the last year, total approved investment has slipped from $800 Million to $759

million - though experts say that the money actually being spent here is considerably

less than that.

Chenda is concerned that new austerity measures in former investment powerhouses,

such as Malaysia and South Korea, will reduce the investor pool. Some Asian firms

already committed to projects have asked for delays because of the crisis, he added.

However, South Korean commercial attaché Yoon Kwang Duk maintained that Korean

investment here - which the CIB pegged at $189 million in 1997, making the country

the largest investor - has not been adversely affected by financial problems in Korea.

"The level of investment is mostly the same as last year," he said, adding

that investments were relatively small-scale such as garment factories and that no

projects had been delayed or cancelled.

But prospective investors may have been scared off by the fighting and may now be

awaiting the outcome of 1998's elections before committing, said Yoon.

Many investors say they are concerned about the rising relative labor costs in US

dollar-dominated Cambodia compared to Southeast Asian countries with currencies that

have devalued more than 50% against the dollar.

"Relatively speaking, labor is not as cheap here as it used to be," said

one investor. "Indonesia is five times cheaper than before."

The garment sector has been particularly hard hit by the region's economic turmoil,

industry officials said.

"Before the crisis, we had roughly seven to ten factories being established

every month. Now we have one or two," said Van Sou Ieng, president of the Cambodian

Garment Manufacturers Association. He added that two Asian-owned factories have closed

for financial reasons, but did not name them.

Alex Traun, general manager of Naga Cement Ltd, has been predicting such problems

since last November. Naga Cement, Cam-bodia's sole cement producer, is facing stiff

competition from Thailand as the baht continues its record slide.

"Other investors have the same problem - the imports of Thai products are hurting

local manufacturers," Traun said, noting that imported Thai cement has fallen

from $100-105 per ton to $65. He has dropped his price from $83 to $63 to compete,

but said: "No one can afford to keep losing."

In 1996 Thai exports to Cambodia were worth 9.1 billion baht while Thailand bought

1.2 billion baht from Cambodia.

Figures from 1997's last quarter, when the baht plunged, were not yet available but

an official at Cambodia's main port said about 30% of all imports were from Thailand

compared with around 20% before the baht was floated in July.

Traun and other manufacturers have asked the government to curb the imports that

are undercutting local products. "They have to do it until the baht has stabilized.

"We don't want it forever, we need to see how we can cut our costs."

And the government has apparently taken investors' requests seriously. Sok Chenda

said a subdecree is already in the works to raise taxes on certain imports, including

cement. Council of Ministers spokesman Khieu Thavika confirmed that the Cabinet decided

on Jan 22 to take measures to protect local producers.

Thavika said taxes on local products would be pegged and other imports temporarily

protected. The details have yet to be worked out.

Protections, however, do not extend to imports smuggled across the Thai border.

Cheap black-market goods have cut sales of some products by about 90%, according

to an executive from a local soft-drink company. "The more I sell, the more

I lose," he lamented.

Hul Lim, an Industry Ministry undersecretary, told investors at a recent CDC conference

that Cambodia is trying to attract investment that will decrease Cambodia's reliance

on imports.

"We don't produce enough products for local consumption... Our industrial sector

cannot supply local product needs - only maybe 20%. The other 80% must be imported."

One economist cautioned that the riel's relative rise to neighboring currencies is

only temporary and will eventually fall in line with the region.

"Before the riel and the baht were pegged at a steady 100 riel to one baht.

It is an unnatural situation for those trading on the border," he said. "I

think we will see an exchange rate of 5,000 riel to the dollar very soon."

Yet Asia's currency crisis is good news for importers able to take advantage of weak

currencies. The Thakral Group, a worldwide conglomerate about to open Cambodia's

first electronics factory, is benefiting by buying raw materials where they are cheap,

according to project manager Roy Mathew.

"We get the benefit at the raw material level, and the consumer will get the

benefit at the finish."

The Council of Ministers is set to clamp down on speculative investors and penalize

those who do not begin their projects.

"Until now we couldn't cancel projects that weren't operational. But now we

can," said Suon Sitthy, Secretary-General of the Cambodian Investment Board.

The new empowering subdecree also encourages potential investors with liberal "tax

holidays" of up to eight years and assurances the intellectual property rights

will be respected.

Second Prime Minister Hun Sen has also vowed to speed up the investment process.

"We're forcing the procedures to be done in the shortest possible time,"

he said after a Jan 16 meeting at the CDC.

The CDC is meant to process applications in 45 days but many investors say they have

met with delays and excessive red tape - mostly caused by partisan bickering over

who will receive the substantial payoffs that come with most big-time investments.

But the CDRI is skeptical of the government's ability to attract investment while

its internal financial management, and others in the region, remain in disarray.

"The financial crisis in the region has highlighted the inadequate supervision

and regulation of the financial systems in the regional economies," it said,

adding that Cambodia lacks a banking law to regulate private commercial banks.

One local economist agreed, saying that the same nepotism and corruption that caused

an economic collapse in Indonesia and South Korea also permeates Cambodia.

The lack of sound regulations and management framework may spell disaster in the

future, experts warned. "We are not really putting our house in order,"

said an economist. "We have to be prepared for bad times."