Logo of Phnom Penh Post newspaper Phnom Penh Post - Weighing up the cost of conflict

Weighing up the cost of conflict

Weighing up the cost of conflict

T HE July 5-7 armed confrontation and subsequent orgy of looting has already cost

investors at least $10 million, while loss of confidence in the country could at

the very least delay hundreds of millions earmarked for investment.

Even advisors who have painted a rosy picture of Cambodia in the past offer bleak

assessments. "A stake has been driven through the heart of industrial development,"

said a foreign economist who asked to remain anonymous. "Even in the best scenario,

three garment factories have been looted and six thousand people have left. That

is a strong adverse reaction. For the rest of this year the economy looks grim."

Both government and independent observers agree that the eruption of urban warfare

shook the underpinnings of the Cambodian economy. They also agree that the full extent

of the damage over the medium to long term, depends on what measures the government

takes to promote macroeconomic stability and restore investor confidence.

Analysts concur that Cambodia's nascent industrial sector will bear the brunt of

the harm.

"The damage is far greater than what was directly caused by fighting and looting.

For three to six months, nobody will touch Cambodia," said Antony Ainsworth,

managing director of International Marketing and Investment Consultants Ltd (IMIC).

"Cambodia attracted $360 million in the first quarter of this year. The country

lost all projects due to be implemented in six months, so the damage will be between

$700-750 million plus the lack of aid the country was gearing up for."

The loudest condemnation from the international community so far has come from the

Americans. The biggest lever the US has on Cambodia is the tacit threat of withdrawing

Most Favored Nation (MFN) status.

The industrial sector, particularly garment manufacturing, depends heavily on unrestricted

access to the US market. "We are worried about MFN, not aid cuts so much. The

stand of the US is of great concern not only for political reasons," said a

Finance Ministry official.

Surprisingly, he claimed not to be concerned about the International Monetary Fund

(IMF) letting disbursements lapse. The Fund allocates money to shore up balance of

payments shortfalls. "The second tranche lapsed in November and we had enough

aid and investment to still have a $28 million surplus in 1996," he said.

The official predicted that the economy will improve after the initial shock - given

aid resumes, MFN agreements remain intact and the government maintains its investment

policies. "If Ung Hout is elected, he will make an announcement saying that

there will be no strategy changes and that the only changes will be in politics."

Outside analysts appear less up-beat. "If the IMF pulls out, others will follow.

At best there is a bubble in the investment pipeline. The government could get the

donors back on-side and hope for a quick disbursement, but there has to be a dramatic

change in the government line which is highly unlikely," said a Western economist.

"The worst case will be a long-term reduction in aid and investment. No matter

what happens it will be worse than before."

As part of continued attempts to chart a deft course in damage control on the international

front, Hun Sen met with about 250 company representatives July 22 at the Council

of Ministers to assuage their fears.

"I know the feeling of investors," he said. "They don't care which

party is in power. The question is of assurances and safety. They must be convinced

that there will be no war in Cambodia. From now on there will be no talk of quotas

in the army or the government."

He harkened to the days when his party ruled by fiat before the UN-sponsored elections

in 1993. "During the State of Cambodia [investors] didn't spend so much,"

he said. "When there were two parties they had to bribe here and there. Ask

Teng Boon Ma how much he bribed to build the Intercontinental Hotel." Sitting

front row center, the tycoon laughed loudly and clapped his hands.

In an effort to soothe investor confidence, the Hun Sen government has formed a subcommittee

to assess the amount of damage to foreign investors caused by the fighting and subsequent

looting.

At Post press time, officials could not give an estimate of the claims forwarded

to them.

One subcommittee member, who declined to be named, said the government does not have

the money to pay compensation and spoke of extending incentives like tax holidays

to soak up the damage. "Investors should not expect money from the government,"

he says. "The committee is intended to express goodwill and show investors that

[Hun Sen] is a fair player."

One undisputed fact is the need for capital inflows, whether private or public, to

keep the economy afloat.

"When looking at the extent of damage, one must first look at the budget and

the balance of payments situation," said a foreign economist.

"Cambodia has a high current-account deficit. The two ways to pay for that are

private investment and donor funds. There is downward pressure on both, so there

will have to be a contraction of trade. The falling incomes of Cambodians will make

up the contraction."

He argued that even if aid and investment resume quickly, the economy will still

be reeling. "The best-case scenario is a short-term shock on capital inflows,"

he said. "The rest of the year will see low or flat growth. There may be a good

harvest, but the rest of the economy will perform poorly."

While there have been no reports of established companies pulling up stakes, new

investors are waiting to judge security and international reaction before taking

risks.

"We haven't seen any cancellations of investment applications, but there are

some suspensions," said Chea Vuthy, information officer at the Cambodia Investment

Board. "Since the fighting, we have received two applications."

Foreign investment in Cambodia during the first three months of the year was double

that of the same period last year, $360.3 million, according to a Cambodia Investment

Board (CIB) report. Half of the approved projects were garment manufacturers.

South Korea was the leading investor. "We are not afraid," says Kwangduk

Yoon commercial attaché of the Korean External Trade Organization. "At

present, projects underway will not be changed, but new projects may delay consideration."

The one argument that economists agree on is that some form of unitary government

would be more attractive to foreign companies.

"It would be easier, I suppose, to make deals with one set of people in the

ministries," said a garment company consultant. "If Hun Sen can guarantee

the security of investments, that's what counts."

"Six months ago, investors saw instability... Now there is only one government,"

said a Finance Ministry official. "Before there were two bosses - an investor

headache. It will be better in terms of stability in the long run."

He ponders, however, whether the new regime has the ability and finesse to convince

international businesses to locate in Cambodia. "Hun Sen has the authority,

but he needs advice - technocrats," he said. "He has the hands, but not

the heads. Most of the people around him are not thinkers."

MOST VIEWED

  • Prince Norodom Ranariddh passes away at 77

    Prince Norodom Ranariddh, the second son of the late King Father Norodom Sihanouk and former First Prime Minister of Cambodia, has passed away in France at the age of 77. “Samdech Krom Preah Norodom Ranariddh has passed away this morning in France just after 9am Paris-time,”

  • General’s gun smuggling ring busted

    The Military Police sent six military officers to court on November 22 to face prosecution for possession of 105 illegal rifles and arms smuggling, while investigators say they are still hunting down additional accomplices. Sao Sokha, deputy commander of the Royal Cambodian Armed Forces and commander of

  • Cambodia, Thailand to discuss border reopening

    Cambodian authorities from provinces along the Cambodia-Thailand border will meet with Thai counterparts to discuss reopening border checkpoints to facilitate travel, transfer of products and cross-border trade between the two countries. Banteay Meanchey provincial deputy governor Ly Sary said on November 22 that the provincial administration

  • More Cambodians studying in US

    The number of Cambodian students studying at US colleges and universities in 2020-21 increased by 14.3 per cent over the previous year despite the Covid-19 pandemic, according to a recent US government report. The 2021 Open Doors report on International Educational Exchange showed that 848 Cambodian students studied

  • Banteay Meanchey gunfight sees 15 Thais arrested, three officers injured

    The Banteay Meanchey Military Police have arrested 15 Thai suspects and their accomplices after a gun battle between two Thai groups caused injuries to three police officers in the early hours of November 21, local authorities said. National Military Police spokesman Eng Hy said that according to

  • PM: Do not defile Tonle Sap swamp forest or else

    Prime Minister Hun Sen ordered police to arrest anyone – including government officials – involved with the deforestation of the flooded forests surrounding the Tonle Sap Lake because it is an area important to the spawning of many species of fish, among other reasons. Speaking in a