Cambodia’s days as the region’s economic success story may be over as three of the country’s four growth pillars suffer under the impact of the global economic slowdown

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STEVE FINCH

Cambodia’s traditional economy has sheltered it from some, but not all, of the effects of the global economic crisis, but with three of the country’s four key economic pillars in trouble it is not yet out of the woods.

WHEN investment banking giant Lehman Brothers collapsed last year, it kicked off a financial tsunami that threatened institutions around the world, sinking many and leaving the rest heavily traumatised.

In Cambodia, government officials congratulated the country's financial institutions as if it were foresight rather than backwardness that shielded them from the toxic US sub-prime market largely responsible for the global financial fiasco. Prime Minister Hun Sen even went so far as to applaud the country on its lack of a stock exchange or complex financial products.

There were strong grounds for optimism. With the banks largely untouched, there was no immediate cause for concern about the health of the country's economy. After all, it was one of the world's most robust, leading the Asian region at nearly 10 percent GDP growth per year over the past decade. Foreign investment was driving record property price gains, leading to a generation of nouveau riche Cambodians eager to exchange the security of land for SUVs and new villas in the city.

Annual garment sector growth was in the vicinity of 28 percent per year, while stability and security helped swell annual tourism arrivals from around 200,000 in the 1990s to more than 2 million by 2007.

Douglas Clayton, the head of Cambodia's largest diversified investment fund, Leopard Capital, said Cambodia's lack of integration into the global economy helped it escape the worst effects of the crisis. "I think Cambodia has been hit less than other countries like Singapore and Thailand," he said. "These countries are more a play on the US economy. Cambodia was largely shielded from the financial system, so it was bypassed."

With massive development projects being announced around the country and a new oil discovery off its shores, Cambodia's days as the "sick man" of Asia seemed to be over.

Many foreign companies and investors hit the panic button, and that had a serious impact on emerging markets like Cambodia.

But players like Clayton knew that escaping the financial crisis did not mean Cambodia was out of the danger zone. "The second wave was the economic downturn, and Cambodia was affected by that."

Seven months after Lehman's collapse, the impact of the economic downturn is becoming more evident by the day. Some international institutions say Cambodia will show the sharpest reversal of economic growth of any country in the region.

Analysts say growth could fall to minus 2 percent in 2009. The problem, they say, is that the majority of Cambodia's growth boom hinged on four sectors: garments, tourism, construction and agriculture; and all but the last of those is in free fall.

Even there, plummeting food prices have cut farmers' incomes. Oil and metal prices are also tumbling, hurting Cambodia's prospects of becoming a major resource exporter.

Cambodia's openness, and its lack of diversification, have exposed it to the worst effects of the global slowdown, said the World Bank's chief economist in Cambodia, Stephane Guimbert. "Cambodia is highly dependent on external factors, including its export articles of clothing and apparel, its strong performance on tourism, and the significant volume of foreign direct investment."

The garment sector has been one of the hardest-hit, dependent as it is on the voracious appetite of American consumers, who wear 70 percent of Cambodia's exports. Garments also dominate Cambodia's merchandise exports, accounting for 88 percent of the total, compared with around 26 percent of Vietnam's and only 8.4 percent of China's.

"There has been a serious downturn and loss of jobs in the garment sector - especially for high-end products," said Sorasak Pan, a secretary of state at the Ministry of Commerce.

While falling foreign demand has hit exports, lower foreign investment has led to a seismic shift in the property and construction sector. The country's first major real estate boom has virtually dried up as Korea, China and Hong Kong have been slammed by the global recession.

"Last fall, many foreign companies and investors hit the panic button, and that had a serious impact on emerging markets like Cambodia. There might be a bit of a recovery there, but I don't see a big flush of investment in the short term," said Vanessa Rossi of Chatham House in the UK.

Clayton said a land bubble had formed as a result of people flipping properties to make a profit but that falling land prices had decimated the speculative land market and cut foreign investment. The most visible impact has been on Korean investment, he said. "There seem to be fewer strategic investors from Korea and other places coming here, but there are still a lot of entrepreneurs, so there are some green shoots."

Tourism is also in decline, with arrivals from Korea - the main source of tourists in recent years - falling particularly rapidly. The strong US dollar has also raised the cost of travel to Cambodia, while continuing political turmoil in Thailand has severely affected the sector.

The government has responded by boosting regulations in the sector and spending on international advertising campaigns, but recovery will depend largely on a global recovery.

But even with growth far below its early 2008 levels, many of Cambodia's business leaders say international institutions have been too hard on Cambodia.

They point to agriculture as a bright spot and stress that the crisis has impacted only the narrow slice of the economy that is linked to globalisation. Agriculture, which employs 58 percent of the workforce, has been largely sheltered.

"Cambodia has a nice buffer of agriculture.... Only 500,000 are employed in industries that are exposed to the crisis," Clayton said.

Pundits also point out that some of the country's major property projects seem to be inching ahead, the country's stock exchange is still set for launch at the end of the year, and investment is coming from unexpected places.

John Brinsden, vice chairman at ACLEDA Bank, said Cambodia appeared to be escaping the worst effects of the crisis. "Generally, we are not seeing that much of a slowdown. The general economy seems to be relatively unaffected," he said.

"If the global economy starts to change, Cambodia will escape the worst. [But] if it doesn't turn around globally, it will have a major effect [on Cambodia]."

Clayton agreed that agriculture was helping keep Cambodia afloat. "Agriculture is Cambodia's cushion that insulates it from the worst effects of the crisis," he said. "The strongest economies right now are the ones with a strong domestic economy like India and China, and Cambodia has that domestic component with agriculture.

"The recovery may be two years off, but we may be near the bottom.

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Cambodia’s financial institutions may have escaped the initial impact of the global financial crisis, but with the general economic slowdown now taking hold in the country, it is facing fresh challenges. The second part of this series next Friday will look at the prognosis for Cambodia’s financial sector.

AGRICULTURE

TOURISM

GARMENTS

CONSTRUCTION

BLOOMBERG

Agriculture has been a bright spot in an otherwise gloomy economy and is expected to contribute 2 percentage points to GDP growth. Agricultural prices have fallen since the 2007 commodities boom, but they still remain above historic levels, and investment from nontraditional sources like the Middle East is increasing. The government, in partnership with aid organisations, is also making headway into diversifying beyond regional markets and into Eastern Europe, Africa and the Middle East. Processing and storage capacity is improving, allowing farmers to sell polished rice overseas rather than just raw paddy.

Photo by:

HENG CHIOVAN

The economic downturn, the strong US dollar and political turmoil in Thailand have all hit the tourism sector hard. Ministry figures show arrivals fell 1.2 percent in the second half of 2008 after growing 12.6 percent over the first six months, while Cambodia Association of Travel Agents President An Kim Eang told the Post that arrivals fell 6 percent in the first two months of 2009. Although hotels are not yet reporting mass layoffs, souvenir operators say sales are down and closures likely unless visitor numbers recover. In good news, many Cambodians are taking holidays at home instead of abroad.

Photo by: HENG CHIOVAN

The Cambodia Institute of Development Study put net job losses at 27,000 in 2008 based on an estimated 4 percent contraction in the sector. It expects the sector to contract 3 percent in 2009, costing 19,000 more jobs. Official Commerce Ministry figures show that could be optimistic. While textile, garment and footwear exports actually increased 5.06 percent in 2008, they declined 19.77 percent in the first two months of this year, following an 8.84 percent drop in December. Within those figures was one bright spot: Footwear exports increased 35.17 percent in the first two months of this year.

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TRACEY SHELTON

A construction spending boom over the past decade hit the wall in the second half of 2008 as some developers pulled out and others slowed work. Official figures show the book value of major construction projects approved last year were 1.14 percent down on 2007 at $2.96 billion after approvals grew 313 percent a year earlier. The figures don’t detail actual spending or give a monthly breakdown but, in a good guage for the sector’s health as a whole, South Korean firms invested just $472.89 million in the Cambodian economy last year, down from $629.49 million a year earlier, despite planned investment rising 50 percent.