OCTOBER 2008 ECONOMIC INSTITUTE

Transcription

1 CAMBODIA ECONOMIC WATCH OCTOBER 2008 ECONOMIC INSTITUTE of CAMBODIA

2 Research Director : Sok Hach Project Team Leaders : Neou Seiha English Editor : Alanna Jorde Authors : Neou Seiha Chhun Dalin

3 TABLE OF CONTENTS List of Abbreviations and Acronyms List of Tables and Figures Foreword Executive Summary iii v vi vii Part I: Recent Economic Developments and Outlook 1 1. Cambodian Economic Growth Agriculture Industry Service 8 2. Trade, Investment and Productivity External Trade and Capital Movements Private Investment and Stocks of Capital Productivity Price and Monetary Development Inflation Exchange rate Money supply Interest rate Fiscal Development and External Debt Budget Revenue Budget Expenditure Budget Financing and External Debt Labor Force, Incomes, and Poverty Employment Incomes Poverty 30 EIC - Cambodia Economic Watch - October 2008 i

4 Part II: Structural Reforms: Current Implementation and Prospects Banking and Financial Sector Reform Banking and Non Bank Finance Microfinance Public Financial Management Reform Reform Outcomes: Revenue Collection and Budget Disbursement Overall PFMRP Revisited and Process for Platform Trade Reform Economic Integration Trade Facilitation Public Administrative Reform Central Administration Reform Sub-National Administrative Reform Legal and Judicial Reform Achievements and Progress of Legal Reform Judicial and Alternative Dispute Resolution (ADR) Land and Natural Resource Reform Land Reform Forestry Reform Fisheries Reform 59 Bibliographic References Appendix 1: Key Economic Indicators 63 Appendix 2: Key Structure Reforms 77 ii EIC - Cambodia Economic Watch - October 2008

5 LIST OF ABBREVIATIONS AND ACRONYMS ADR Alternative Dispute Resolution AEC ASEAN Economic Community ASEAN Association of South East Asian Nation BSP Budget Strategic Plan CAMEX Cambodia Stock Exchange Market CAR Council for Administrative Reform CDC Council for the Development of Cambodia CDRI Cambodia Development Resource Institute CED Custom Excise Department CIS Credit Information Sharing CLJR Council for Legal and Judicial Reform CMA Cambodia Microfinance Association CMDG Cambodia Millennium Development Goals COBRA Cambodian Offsite Bank Reporting for prompt corrective Action CoM Council of Minister CR Cambodian Riel CSES Cambodia Socio Economic Survey D&D Decentralization and Deconcentration EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FA Fishery Administration FMIS Establishment of Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government-Donor Coordination Committee GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System ILO International Labour Organization IMF International Monetary Fund JMI Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative MDTF Multi-Donor Trust Fund MEF Ministry of Economy and Finance MFI Microfinance Institutions MIS Management Information System MLMUPC Ministry of Land Management, Urban Planning, EIC - Cambodia Economic Watch - October 2008 iii

6 and Construction MoC Ministry of Commerce MoH Ministry of Health MoJ Ministry of Justice NA National Assembly NBC National Bank of Cambodia NCDD National Committee for D&D NIS National Institute of Statistics NLDA National Authority for Land Dispute Resolution NSDP National Strategic Development Plan OWOs One-Window Offices PFMRP Public Financial Management Reform Program PMG Priority Mission Group PPD Public Procurement Department RGC Royal Government of Cambodia RSM Royal School of Magistracy SAD Single Administrative Document SCM Supreme Council of Magistracy SSC-TD&TR Sub-Steering Committee on Trade Development and Trade-Related Investment TFCP Trade Facilitation and Competitiveness Project TWGFE Technical Group on Forestry and Environment VND Vietnam Dong WB World Bank WEF World Economic Forum WTO World Trade Organization iv EIC - Cambodia Economic Watch - October 2008

7 LIST OF TABLES Table 1.1: Cambodia's Real GDP Growth by Sector (%, 2000 prices) Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) Table 1.4: Trends of Service Sectors (% increase, 2000 prices) Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) Table 2.2: Approved Private Investment Projects* Table 2.3: Productivity of Workers (% Increase, US$2000 price) Table 3.1: Cambodia s Monetary Survey (Billions of Riel) Table 3.2: Cambodia s Interest Rate (% per annum, end of period) Table 4.1: Cambodia s Central Government Revenue (Billion of riel) Table 4.2: Cambodia s Central Government Expenditure (Billions of Riel) Table 4.3: Cambodia s Financing Budget (Billion of Riel) Table 5.1: Cambodia's Population and Labor Force (000's) Table 6.1: Interest Rates as of June 2008 Table 6.2: Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of August 2008) Table 7.1: Indicators Tracking PFMRP Progress Table 7.2: PFM Objectives and Key Indicators Table 8.1: Status of Remaining WTO-related Laws Table 8.2: Trading Across Borders Table 10.1: Adopted Legal Texts in Third Legislature by the NA Table 10.2: Progress on the Remaining Fundamental Draft Laws LIST OF FIGURES Figure 3.1: Cambodia s Consumer Price Index (December 2002=100) Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) EIC - Cambodia Economic Watch - October 2008 v

8 FOREWORD With the aim of providing a broad-based economic analysis to policy makers and stakeholders, the Economic Institute of Cambodia (EIC) has great pleasure in presenting the latest issue of Cambodia Economic Watch. This EIC series of publications not only serves as a policy-oriented research paper, but also as a reference for all readers who wish to gain a snapshot of the Cambodian economy or monitor its development. As in previous issues, this edition presents the latest economic performance and prospects based on the analysis of current data from many reliable sources. It takes an in-depth look at the trends of the main economic indicators and the progress of reform policies. It also highlights the urgent measures that need to be taken to address any of the problems encountered. In brief, two main phenomena have been noted in Firstly, the double digit economic growth rate could not be maintained due to slower growth expected for garment industry and negative growth rate anticipated for construction sector; despite tourism sector and financial sector remain relatively strong. These trends are likely to carry over 2009, and thus a lower economic growth rate is also expected accordantly. Secondly, inflation rate is doubled to that of 2007 because of soar in food prices and impressive increase in transportation, household good and medical care. Increase of prices of crude oil and food price in the international market and depreciation of the US dollar, as well as dependency on imported consumer goods, are main reasons for this huge inflation. We would like to thank the World Bank for its generous support. Special thanks to Chea Huot and his team for their invaluable comments, to Dane Hor, Chhim Rothsothea, and EIC research assistants for their excellent assistance, to all EIC staff for their enthusiasm, and to other institutions and individuals too numerous to list. Sok Hach, Director Economic Institute of Cambodia vi EIC - Cambodia Economic Watch - October 2008

9 EXECUTIVE SUMMARY Economic Growth Besides the fourth consecutive year of double digit economic growth realized in 2007, data from 2005 to 2007 also showed a successive decline in the rate of economic growth in Cambodia from 13.3 percent in 2005 to 10.2 percent in Available data for the first nine months of 2008 and current local and global economic trends suggest that Cambodia s economic growth is likely to continue to slow significantly in Cambodia s two main economic growth-supporting industries, garments and construction, are continuing their downward trend in External factors, such as fears of a recession in the US and the anticipated end of safeguarding measures, which were imposed by the US and EU against Chinese exports, are adversely affecting the growth of Cambodia s garment industry. Residential construction growth is expected to slow to a negative rate in 2008 and spark bubble risks, given drops in prices expected for residential construction and land, and housing loan credit restrictions. In the meantime, the number of foreign tourist arrivals in Cambodia is continuing to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as current dispute along Thai and Cambodian border. The financial sector is still booming. And, the agricultural sector remains strong thanks to optimal weather conditions and expanding markets for agro-products. Still, investment in agro-industry has remained slim in In combination with soaring prices for imported raw materials and consumer goods during the year, Cambodia is expected to enjoy only moderate economic growth of 7 percent in 2008, 3.2 percent-point lower than that of The downward trend is likely to carry over to 2009, when the economic growth rate is expected to slow to about 6 percent. The anticipated launch of a Cambodia Stock Exchange Market and exploitation of the extractive industries such as oil and gas continue to attract attention and draw big investors to Cambodia. Cambodia s economic growth could be speeded up if significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, would improve the economic and investment environment and potentially spur even higher economic growth. Trade and Investment During the first half of 2008, total exports increased by only 6.7 percent, while total imports increased by 36.3 percent. The total trade deficit is expected to EIC - Cambodia Economic Watch - October 2008 vii

10 widen by 37.6 percent in 2008, reaching about 16.7 percent of GDP. The widening of the trade deficit coupled with an expected income balance deficit will create a deficit of current accounts (including capital transfer) totaling about 3.9 percent of the GDP, despite a significant increase in balance of services and a surplus in transfer accounts. The deficit is expected to be financed by foreign grants, loans and direct investment. The overall balance of payments for 2008 is likely to be a surplus of about 2.1 percent of GDP. Growth in external trade is expected to slow in 2009 because of a slowdown in both in Cambodia garment exports and imports of raw materials used in the garment and construction industries. Following the same phenomenon, the balance of payments for 2009 is expected to reach a surplus of about 2.9 percent of GDP. During the first half of 2008, the Council for the Development of Cambodia approved 50 investment projects (most of which were mega projects) worth about US$4.4 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in value of fixed assets compared to the same period in Most of the investment projects involved the garment and tourism sectors. Only two investments in agro-industry were approved, despite increases in agricultural prices and the high rater of agricultural production so far this year. Prospects are slim that the number of projects approved in 2009 will increase significantly given the current global financial crisis and limited local skills and resources. However, the launch of the Cambodian Stock Market and oil and gas industry opportunities are likely to attract foreign investors and massive injections of foreign investment, which should make for a positive investment outlook for the next few years. Prices and Exchange Rate Data for the first eight months of 2008 revealed that inflation jumped to 22.6 percent in August 2008 compared to only 5.2 percent in August The price of food rose 36.9 percent, household goods 27.4 percent, transportation 25.8 percent and medical expenses 11.2 percent in August 2008, compared to increases of 9.9 percent, 0.5 percent, 2.9 percent, and 5.3 percent, respectively, in August Other consumer prices increased slightly during this period. Despite an active agricultural sector, and near capacity production of crops, livestock and fish, food prices continue to increase significantly. This is because large amounts of local food products (mainly paddy and fish) are informally exported to neighboring countries, where they are subsequently sold for considerably higher prices. That is causing shortages of local food supply; viii EIC - Cambodia Economic Watch - October 2008

11 Cambodians thus import food mainly from Thailand, at higher prices than it was exported. This, in turn, pushes the price of food consumed in Cambodia up considerably. Recent spikes in transportation costs, meanwhile, are mainly due to sustained recent jumps in the price of crude oil on the international market. Oil accounts for a significant share of the production cost of food and other consumer items. Sustained increases for oil also push up prices for other consumer products such as medical care items and household goods because Cambodia does not produce these items nationally and therefore remains highly dependent on imports. Based on trends from previous years, the overall inflation in December 2008 is expected to be about 21 percent, which is much higher than that of December However, given a decrease in price of crude oil on the international market, inflation rate is expected to decrease in In year average, the riel in 2008 was relatively stable against the US dollar and Vietnam dong; but depreciated against the Thai baht by 7.2 percent. Together with prudent monetary policy of the NBC, the relative strength of the riel was mainly a result of the US economic recession. The extent of US economic recession into 2008 would continue weaken the US dollar and the surplus of the balance of payment would enable the government capacity to maintain a stable exchange rate against US dollar. Besides a fixed-rate with the US dollar, fluctuation of the riel against other trade partner currencies, such the Thai baht, should also be taken into consideration. Cambodia s main import partners are Thailand, Vietnam and Singapore. In theory, the depreciation of the riel against the Thai baht should encourage Cambodia to increase trade with Thailand. But instead it results in increases in domestic consumer prices because limited local production capacity force Cambodians to use higher imported products. Fiscal Development During the first half of 2008, the central Government collected CR2,658 billion in revenue, or 66.5 percent of the total it had expected to collect for the entire year. Tax revenue reached 67.5 and other revenues 62.5 percent of the planned budget. A high average inflation rate of 20.9 percent during the period was the main factor in the nominal increase. In real terms, however, central Government revenue is perceived to achieve only what was planned during the first half of Taxes on income, profit, and capital gain have increased significantly in 2008 and about 77.4 percent of all tax revenue under the budget plan has been collected. Meanwhile, about 46.9 percent of projected export taxes and 41.8 percent EIC - Cambodia Economic Watch - October 2008 ix

12 of import taxes on petroleum were collected. A drop in garment exports and a Government subsidy on gasoline import taxes explain why revenue has fallen short of targets in the Government budget. Informal exports and petroleum imports from neighboring countries are also to blame for state revenue leakage. Given the pattern of economic activity so far in 2008 and previous trends, the Government is only expected to meet its budget targets in real term for Domestic revenue is expected to reach CR4,766 billion in nominal terms, which would be a 18.7 percent increase over 2007 and account for 10.8 percent of the GDP for On the expenditure side, the Government spent 44.9 percent of its budget plan total during the first half of About 44.5 percent and 45.6 percent had been used for current expenditure and capital expenditure, respectively. The Government spent 40.4 percent of the total it had budgeted for civil administration and 65.1 percent for defense and security. Late reporting from line ministries may explain why the spending figures were so low halfway through the year. However, it is worth nothing that spending on civil administration wages had reached only 41.5 percent of the plan. In the wake of high inflation, the late disbursement of pay is certain to compromise the ability of civil servants to survive given that their salaries tend to be low. Spending on national defense and security may increase significantly during the year due to the current border dispute between Thailand and Cambodia. Based on previous trends and given higher-than-expected revenue, total expenditures are expected to meet targets for As a share of GDP, total expenditure for 2008 is likely to increase slightly to 14.6 percent, from 14.4 percent in Budget disbursement as a share of GDP for priority sectors may reach 2.4 percent, which would include a slight increase in wages. To maintain living standards and achieve poverty reduction, spending on wages for civil administration and priority sectors should, at the very least, keep pace with the rate of inflation. Overall, the budget deficit is expected to be about CR1,684 billion in 2008, about a 64.1 percent increase over As a percentage of GDP, the deficit in 2008 is expected to be about 3.8 percent. The budget deficit is mainly financed by international borrowing and foreign assistance, of which external loans account for about 60 percent, which allows Cambodia to avoid domestic debt financing. Total public debt stock was about US$2.4 billion by the end of 2006 and was on a sustainable path. But, moderate risks do remain, given the current low level of Government revenues, the continued existence of external arrears and the potential for contingent liabilities. Progress of Structure Reform x EIC - Cambodia Economic Watch - October 2008

13 For banking reform, the National Bank Cambodia granted licenses to a new commercial bank and two specialized banks were transformed to commercial banks. The National Bank also issued new Prakas on the Maintenance of Reserve Requirements against Commercial Banks Deposits and Borrowings which increased the reserve requirement to 16 percent for foreign currencies. This tool is aimed to reduce the amount of currency in circulating, tighten loans offering, and reduce the use of US dollar. There was also progress made in important reforms in non-banking finance, the insurance industry and financial market. The Ministry of Economy and Finance issued a Prakas on Life Insurance Business in August 2008 and sub-decree on Micro-Insurance has been drafting. Capacity building on the future stock exchange continues with the assistant from Korea. In the area of Public Financial Management Reform, platform 1 of budget credibility was completed in December 2007, but some actions do remain. The incomplete actions in platform 1 have been included in the action plan for platform 2 which was initially expected to start in March However, platform 2 has not been implemented as of yet. In the area of trade reform, the general ASEAN charter, which was signed at the 13 th ASEAN summit, was ratified by the king on March 31, 2008 and was forwarded to the ASEAN Secretary-General on April 02, Beside, concerning with the WTO law enactment program, there are two laws were promulgated during the first semester of In total, 29 out of 46 promised regulations for the WTO were promulgated. ASYCUDA was officially launched in May 2008 at Sihanouville port. Average time of inputting a custom declaration had fallen from one hour to around 20 minutes. However, traders need time to familiarize themselves with system. One-stop service office was introduced in the Phnom Penh Special Economic Zone in September 2008 to simplify investor procedures in the zone. In the area of administrative reform, a royal decree on Special Operating Agencies was promulgated in March 2008 to improve the quality and capacity of public service delivery and to strengthen the professional ethics of officials. Beside, the revision of Merit Based Performance Incentives (MBPI) was revised at the meeting of CAR, MEF, ministries, and development partners. Then sub-decree No 29 on MBPI was approved in April 2008, which abrogates the sub-decree No 98 & 38. The law on Administration and Management of Capital, Provinces, Municipalities, Districts and Khans was adopted in April 2008 as part of the ongoing Decentralization and Deconcentration process. The law stipulates that sub-national councils will be established through indirect elections as required by the Law on Election of Councils for Capital, Provinces, Municipalities, Districts and Khans, which was adopted in April EIC - Cambodia Economic Watch - October 2008 xi

14 Due to the relation of sub-national financial management regime and the Decentralization and Deconcentration reform, law on Public Financial System was adopted and promulgated in May A scope of the law is recognized as a fundamental law to manage the national public financial as well as sub-national in Cambodia. In the legal and judicial reform, up to 140 legal texts, including 3 main codes, were adopted as of June The law on Establishing the Commercial Court which sets out the details for the court s structure is being drafted and is expected to be reviewed after the Ministry of Commerce s second roundtable discussion. The draft will be forwarded to the Council of Ministers. Besides judicial solution, Alternative Dispute Resolution is recognized as quickly mechanism in dealing with cases. A continuing process of the Alternative Dispute Resolution tasks have been confirmed by a pilot of Center for Justice Service at District and labor disputes solution via labor arbitration. Though, a national arbitration center has not been established yet since the draft sub-decree on Organizing and Functioning of the National Arbitration Center is not approved. For the land and natural resource reforms, as of December 2007, land systematic registration result in 1,061,414 land parcels and 794,639 land titles have been distributed by Royal Government of Cambodia. In the Social Land Concession area, a total amount of 4,770 hectares has been registered as state private land by the Land Allocation for Social and Economic Development pilot project and the land will be used for distributing land to poor and landless families, a statement by the chairman of TWG for Land in the 12 th meeting of the GDCC. In a statement in phase II of its Rectangular Strategy, the Government encourages the private sector to plant economically-viable private forests, with proper and clear technical guidelines, especially on degraded forest land. According to the Fishery Administration s 2007 annual report, 509 fishing and fish shelter communities, in both marine and fresh water, have been established, of which 447 are fishing communities and 62 are fish shelter communities. In line with its goals under phase II of the Rectangular Strategy to strengthen the fishery sector, the Government has said it will take serious action against illegal encroachment of flooded forests and illegal fishing equipment. xii EIC - Cambodia Economic Watch - October 2008

15 Part I Recent Economic Developments and Outlook EIC - Cambodia Economic Watch October

16 2 EIC - Cambodia Economic Watch October 2008

17 Chapter 1 Cambodian Economic Growth Beside the fourth consecutive year of double digit economic growth rate realized in 2007, the series data between 2005 and 2007 also showed that Cambodia s economic growth rate is slowing down successively, from 13.3 percent in 2005 to 10.2 percent in Available data for the first nine months of 2008 and current local and global economic trends suggest that Cambodia s economic growth is likely to continue its downward trend significantly over to This downward trend is also expected to carry on into Table 1.1: Cambodia's Real GDP Growth by Sector (%, 2000 prices) p 2009p Agriculture -1.0% 15.5% 5.5% 5.1% 5.5% 5.3% Paddy -12.2% 43.7% 4.3% 7.5% 6.2% 5.6% Industry 17.0% 12.9% 18.4% 8.4% 6.4% 4.1% Garments 24.9% 9.2% 20.4% 10.0% 8.8% 6.8% Services 13.2% 13.1% 10.1% 10.2% 8.4% 7.3% Tourism 23.4% 22.3% 13.7% 10.3% 9.3% 8.6% Non-tax GDP 9.4% 13.8% 11.0% 8.1% 7.0% 5.8% Total GDP 10.3% 13.3% 10.8% 10.2% 7.0% 6.0% Non-Agriculture 15.8% 12.3% 13.0% 12.2% 7.6% 6.3% Sources: Compiled from NIS for , EIC projection for The Cambodia s two main economic growth-supporting industries, garments and construction, are continuing their downward trend in External factors, such as fears of a depression in the US and the anticipated end of safeguarding measures, which have been imposed by the US and EU against Chinese exports, are affecting the growth of Cambodia s garment industry. Residential construction growth is expected to slow to a negative rate in 2008, and spark bubble risks, given drops in prices for residential building and land, and housing loan credit restrictions. In the meantime, the number of foreign tourist arrivals in Cambodia is continuing to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as current dispute along Thai and Cambodian border. The financial sector is still successful. And, the agricultural sector remains strong thanks to optimal weather conditions and expanding markets for agro-products. Still, investment in agro-industry has remained slim in EIC - Cambodia Economic Watch October

18 In combination with soaring prices for imported raw materials and consumer goods, Cambodia is continuing its downward trend and enjoy only moderate economic growth of 7.0 percent in 2008, 3.2 percent-point lower than that of The downward trend is likely to carry on to 2009, when the economic growth rate is expected to slow to about 6 percent. The anticipated launch of a Cambodia Stock Exchange Market (CAMEX) and exploitation of the Extractive Industry such as oil and gas continue to attract attention and draw big investors to Cambodia. Cambodia s economic growth could be speeded up if significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, would improve the economic and investment environment and potentially spur even higher economic growth rate Agriculture 2008 has been another rainy year, and has followed equally wet years in 2007, 2006 and in The agricultural sector continues to be natural resource-based and growth is expected to increase slightly to 5.5 percent growth in 2008 from 5.1 percent in Growth has been bolstered by an expansion in cultivated areas, higher exported agricultural product prices, and a continued increase in livestock production. However, agro-investment has remained weak, despite soaring prices and demand on the global market. Effective irrigation and natural resource management systems are urgently required to achieve sustainable agricultural growth and thus reduce poverty, since the agricultural sector is the main source of income for the country s poorest inhabitants. Based on current trends, agricultural sector growth is expected to be about 5.3 percent in 2009 and growth prospects remain slim in the coming years. Crops, especially paddy, continue to be the main source of income for Cambodian farmers. Data available for the first nine months of 2008 suggest weather conditions and the volume of crop production have been as favorable as the previous three years. Cultivated areas continued to increase in 2008, by about 4,800 ha for paddy, even though some places experienced too little or too much rain and a significant amount of cultivated land was sold to speculators. In addition, sale prices increased at relatively the same pace as production costs thanks to impressive gains in export market prices. As a result, paddy value-added should increase at a moderate pace of about 6.2 percent in 2008, down from 7.5 percent in 2007, and growth prospects will remain moderate for the next few years. Other crops, meanwhile, grew at a significant rate of about 10.1 percent, up from 9 percent increase in 2007, and growth rates are expected to remain strong in coming years. 4 EIC - Cambodia Economic Watch October 2008

19 Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) p 2009p Paddy -12.2% 43.7% 4.3% 7.5% 6.2% 5.6% Other Crops 9.5% 12.2% 6.5% 9.0% 10.1% 9.6% Livestock 3.9% 5.6% 8.2% 3.7% 6.6% 6.4% Fishery -1.7% 5.6% 3.8% 0.8% 0.8% 0.8% Rubber & Forestry -0.3% 3.5% 6.6% 1.8% 1.1% 1.2% Total Agriculture -1.0% 15.5% 5.5% 5.1% 5.5% 5.3% Sources: NIS for , EIC projection for 2008 and 2009 Besides revenue they earn from crop cultivation, livestock is another potential source of income for many Cambodian farmers. Data available for the first nine months of 2008 suggest value-added for livestock will increase moderately by 6.6 percent in 2008, a 2.9 percent-point increase over 2007, due to rising food prices, slightly improving accessibility to credit in rural areas and the imposition of Government restrictions suspending some livestock product imports. However, limited initial capital, together with high interest rates or current difficulty and complexity of accessibility of credit (even some improvement has been made), are likely to continue to constrain growth in the livestock sector. Investment in this sector remains slim despite significant increases in local consumption and prices. Cambodia continues to import large quantities of livestock products from neighboring countries. Based on the current situation, the growth rate for livestock is expected to increase in next coming years, but only moderately to about 6.6 percent in Investment for Small and Medium Enterprises could help to speed up growth in this sector. Based on available data for the first nine months of 2008, fishery production is expected to be relatively the same as in The fisheries value-added is expected to grow slightly, by about 0.8 percent in 2008, the same growth rate posted in Small fish, used for the production of a popular salt fish pâté, remain abundant, while normal fish production continues to lag behind. However, the number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish rearing habitats remain important concerns for the sustainable growth of the sector. These practices have led to declining fish stocks and a reduction in the number of places available for fish to breed. Thus, the prospects that fish stocks will expand in coming years is slim. Growth in the forestry sector is expected to be about 1.6 percent in 2008, up slightly from 1.1 percent in But the sector s growth potential will remain weak for the next few years. The rubber sector is expected to post a negative 2.6 EIC - Cambodia Economic Watch October

20 percent growth rate in 2008 because old growth rubber trees have been replaced either by new trees that are still too young to produce raw rubber or other crops. Rubber growth is thus expected to remain flat in coming years Industry Industry sector growth is continuing on a downward trend in 2008 due to slower expected growth in garment exports and negative growth in the construction sector. Other industrial sectors are growing at a moderate pace. The total industrial growth rate has grown by only 6.4 percent in 2008, down from 8.4 percent in 2007 and 18.4 percent in Based on the current trend, the industrial growth rate is likely to continue its downward trend in 2009, due to expected continued downward trend of construction and garment sector, before get back to moderate growth in the next coming years. Progress in Government reforms in line with effective anti-corruption policies could accelerate industrial growth. Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) p 2009p Garments 24.9% 9.2% 20.4% 10.0% 8.8% 6.8% Food, Beverages & Tobacco -5.3% 9.0% 3.3% 3.1% 5.5% 5.5% Electricity, Gas and Water 11.3% 12.7% 31.5% 11.7% 12.2% 11.2% Construction 13.2% 22.1% 20.0% 6.7% -0.3% -5.7% Other industries 9.3% 17.4% 14.1% 6.4% 8.3% 7.2% Total Industry 17.0% 12.9% 18.4% 8.4% 6.4% 4.1% Sources: Compiled from NIS for , EIC projection for The garment industry, the industrial sector s main contributor, has remained strong in 2008, but growth continues to slow. According to the Customs Department of the Ministry of Economy and Finance (MEF), the number of garment exports rose by 15.4 percent in the first half of 2008, roughly the same as the increase posted during the same period in Exports to the US grew by 13.4 percent and those to other markets, mainly the EU, jumped more than 20 percent. This growth is mainly due to safeguarding measures imposed by the US and EU to restrain Chinese exports, low labor costs and depreciation of the riel or dollar against other currencies, especially the Chinese yuan. A labor compliance project monitored by the International Labor Organization (ILO) that has created a niche market for Cambodian apparel, Cambodia s WTO membership and a reduction in export transaction bureaucracy also is helping to maintain the sector s growth. 6 EIC - Cambodia Economic Watch October 2008

21 However, the price of Cambodian apparel continues to decline as competition for the US garment market intensifies, especially from Vietnam and China, and US economic depression. Cambodian clothing exports to the US are in direct competition with Vietnam (88 percent) and China (70 percent). The sluggish US economy has also been a factor in declining prices for Cambodian apparel. Cambodia s garment export prices declined by 7.4 percent in the first half of Prices for garments exported to the US market declined by 10.2 percent while those to other markets remained roughly the same. The value of garment exports during the first half of 2008 increased by only 7.8 percent. The value of exports to the US rose by only 2.2 percent while the value of exports to other markets such as the EU remained strong. The Cambodian garment industry is expected to grow by about 7.7 percent in But growth is likely to shrink in future years, especially as safeguarding measures, which have figured prominently in the sustained growth of the Cambodian garment industry, are set to expire at the end of Cambodia is seen as weak in terms of international competitiveness compared to China and Vietnam and most of Cambodia s garment factories are owned by foreigners, many of whom are Chinese. The end of safeguards need not necessarily prove devastating, however. Cambodian garment producers have managed to create a niche market thanks to an ILO-monitored labor compliance project and relatively low labor costs. Together with Government efforts to reduce transaction export bureaucracy through such measures as one Window Service and its membership in the WTO, Cambodia seems poised to retain its major clients/buyers in the EU and US. Cambodian garment industrial growth will fluctuate along with global demand in the coming years. In addition, a recent increase in the minimum wage of garment workers in Vietnam and China is likely to prompt hundreds of garment factories to relocate elsewhere and industry analysts expect some will move to Cambodia. Nevertheless, it s unlikely the industry will be able to post significant gains unless Cambodia can convince the US to grant it duty-free status under the US New Partnership for Development Act. Growth in the construction sector, meanwhile, is on a downward trend even though steel imports increased by 33.6 percent during the first half of The number of construction projects recorded by Phnom Penh Municipality during the first quarter of 2008 was roughly the same as But prices for imported materials used in the construction sector during the first half of 2008 increased significantly compared to the same period in The price of imported steel, for instance, increased by 18.2 percent. Sale prices for newly-constructed residences were perceived as stagnant during the first half of 2008 and are expected to decrease in the second half of The value-added for the construction sector is thus expected to decrease by EIC - Cambodia Economic Watch October

22 0.3 percent in 2008, compared to an increase of 6.7 percent, 20 percent, and 22.1 percent in 2007, 2006, and 2005, respectively. While such negative growth affects a few of the services sectors, and most notably real estate, it will not undermine the economy like it has in the US. This is because construction sector and real estate sales transactions are mostly done in cash in Cambodia. Timely actions from the banks to restrict credit for housing loans also help to reduce potentially negative impacts of downturns in the construction sector. Most of mega construction projects are owned to Korean. As current global economic crisis is affecting the Korean economy, the Cambodia construction sector s growth is expected to carry on its negative growth rate before recovery. This negative growth is likely to widen to 5.7 percent into 2009, given that sale prices continued their stagnant or decline. The food, beverage and tobacco sector is growing at a faster rate in 2008 given higher food prices, according to available data for The depreciation of the riel against the Thai baht, ongoing Thai political instability and border disputes between Thailand and Cambodia should boost the competitiveness of local products against those imported from Thailand. However, because investment in agro-sectors remained weak during the first half of 2008, consumers in Cambodia simply swapped Thai products for Vietnamese and Chinese products. The food, beverage and tobacco sector is expected to grow at a slightly higher pace, reaching 5.5 percent in 2008, compared to 3.3 percent in This trend is expected to carry on in next few years. Other industrial sub-sectors such as electricity, gas, water and other manufacturing sectors are likely to grow at about the same pace they did in Moderate growth is projected for these sectors as Cambodia starts to import more and more electricity from neighboring countries as part of long-term investment programs Service Last but not least, the service sector may grow significantly in 2008, but it s unlikely to post double-digit growth as growth is expected to slow somewhat in the tourism, trade and transport sectors. The overall service sector, excluding public administration, is expected to expand by only 8.7 percent in 2008, which is a drop from a growth rate of 10.5 percent in 2007 and 10.6 percent in Service sector growth has been bolstered by annual increases in the number of foreign tourist arrivals in Cambodia and a significant expansion in economic activity, especially the trade, transportation, communication, and financial service sectors. Based on current economic trends, service sector growth likely will remain strong but will slow slightly over the next few years. 8 EIC - Cambodia Economic Watch October 2008

23 Table 1.4: Trends of Service Sectors (% increase, 2000 prices) p 2009p Transport & Communication 9.5% 14.5% 2.1% 7.2% 6.1% 6.2% Trade 5.9% 8.5% 7.1% 9.5% 7.1% 6.5% Hotels & Restaurants 23.4% 22.3% 13.7% 10.3% 9.3% 8.6% Finance 20.6% 19.6% 23.9% 22.2% 32.0% 18.9% Other Private Services 19.2% 13.1% 14.2% 11.5% 8.2% 7.0% Total Private Services 14.3% 13.4% 10.6% 10.5% 8.7% 7.5% Public Administration -6.7% 5.9% -1.3% 0.1% 0.2% 0.8% Total Services 13.2% 13.1% 10.1% 10.2% 8.4% 7.3% Sources: NIS for , EIC projection for Trade accounts for the biggest portion of Cambodia s service sector, followed by transport and communication. The sectors continue to grow at a significant pace as a result of the current country s economic performance. However, soaring prices for imported oil products and high inflation are expected slow growth of most services. Trade is expected to grow by 6.1 percent and transport and communication by 7.1 percent in 2008, compared to 7.2 percent and 9.5 percent, respectively, in Meanwhile, physical infrastructure remain poor, especially and roads and railways. Further rehabilitation and reconstruction of roads is essential to enhance trading opportunities in remote areas of the country. Increased mobility of people, goods and services will, in turn, create a positive circle of market dynamics. That said growth in trade and transportation activities will remain strong in the next few years. The hotel and restaurant sector contributed significantly to overall service sector growth. The number of foreign tourist arrivals in Cambodia during the first seven months of 2008 increased by only 11.9 percent compared to 22.5 percent during the same period in The number of tourists who arrived in Cambodia via Siem Reap airport declined by 7 percent, while those who came through Phnom Penh airport and by land/boat increased by 11.9 percent and 30.4 percent, respectively. The global economic slowdown likely explains these figures and Thai political instability could also be a factor. In combination with higher inflation during the year, the tourism sector is expected to expand by about 9.3 percent in 2008, a drop in growth of about 1 percent-point compared to However, the number of foreign tourist arrivals is expected to grow significantly, but with a slower pace, based on expected slower growth rate of global economy. This means that the hotel and restaurant sector will EIC - Cambodia Economic Watch October

24 remain strong, but its growth rate will continue its downward trend to about 8.6 percent in 2009, from 23.4 percent in 2004, before recovery. The financial and real estate sectors performed well during the first half of 2008 and the financial sector is expected to continue to grow in the second of 2008 due to the expansion of economic activities and bank trust. But the real estate sector will slow significantly as a result of declining prices expected for land and residential construction, and credit restrictions imposed by banks. In 2008, the growth rate is projected about 32 percent for financial sector and only 5.8 percent for the real estate sector, compared to 22.2 percent and 10.8 percent, respectively, in Even though most real estate transactions were completed in cash rather than bank credit, a slowdown in growth in this sector may adversely affect growth in other service sectors such as entertainment activities. Other service sectors are expected to grow only about 8.2 percent in 2008, on average, down from 11.5 percent in These downward trends are expected to continue for the next few years. 10 EIC - Cambodia Economic Watch October 2008

25 Chapter 2 Trade, Investment and Productivity In 2008, Cambodia s garment external trade is slowing down, but the value of imported cars, motorcycles, buses, trucks, tractors, and alcohol increased significantly. That leads to widen the Cambodia s trade deficit. However, trade deficit, as well as income account deficit, is totally financed by revenues from foreign tourists, private and government transfers, and impressive foreign investment External Trade and Capital Movements Total exports in the first half of 2008 increased by 6.7 percent, compared to 12.6 percent during the same period in 2007, according to available data from the MEF. The drop reflects a slow down in the volume of garment exports. While exports of agricultural products rose sharply, their overall volume remained low and were made through informal channels, causing serious leakages in tax revenue. In contrast, imports accelerated 36.3 percent during the first half of 2008 and imports of petroleum and raw materials, especially those used in the garment sector, made up the lion s share. While growth in the value of imported fabric slowed, the value of imported cars, motorcycles, buses, trucks, tractors, beer and other alcohol increased significantly. Growth in imports is a sign of an emerging middle class whose disposal income has grown as a result of land and housing speculation. The total trade deficit is expected to widen in 2008, reaching about US$1.8 billion in nominal terms or about 16.7 percent of GDP, up about 37.6 percent from Due to a significant increase in the number of foreign tourist arrivals in Cambodia, the income generated from tourist spending (travel) is expected to reach about US$1.5 billion in 2008, representing a 32.3 percent increase from Unfortunately, revenue from tourist transportation remains low and is likely to reach only about US$255 million in 2008, a 21.7 percent jump from 2007, since Cambodia does not have a stake in any of the airlines or other transportation industries serving international markets that are funneling tourists into the country. The service sector surplus continues to improve significantly in 2008 in nominal terms, up by 42 percent from 2007 and climbing to 8.3 percent of GDP. Outflows of income continue to figure prominently in 2008 and largely take the form of dividends and profits from foreign investments in the country, particularly in the garment industry, and payments for foreign technical assistance by donors. The 2008 income account is expected to reach a deficit of about US$430 million or about 3.9 percent of GDP, which is an increase of about 19.3 percent from EIC - Cambodia Economic Watch October

26 Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) p 2009p Exports of Goods 2,589 2,910 3,694 4,089 4,823 5,358 Imports of Goods 3,269 3,928 4,749 5,424 6,660 7,230 Trade Balance ,018-1,056-1,335-1,837-1,872 Agriculture Textiles & Garments 1,082 1,173 1,409 1,534 1,767 1,860 Oil & Gas ,123-1,306-2,119-2,106 Other Goods -1,332-1,698-1,742-2,094-2,284-2,609 Balance of Services ,085 Transportation Travel ,012 1,342 1,578 Others Balance of Incomes Balance of Transfers Private Transfers Government Transfers Current Accounts Financial Accounts Official Loans Net Foreign Direct Investment Others Change in Foreign Reserves At the National Bank (NBC) Outside NBC Sources: Compiled from NBC for , EIC projection for Net private transfers are expected to reach US$383 million in 2008, relatively the same as Combined with a large inflow of foreign aid, Cambodia is likely to have a surplus of about US$809 million in its transfers account in 2008, which represents about 7.3 percent of GDP. In total, its current account deficit, including official transfers, has increased to US$543 million or about 3.9 percent of GDP. Nevertheless, the financial account is expected to be in surplus by about US$774 million, reaching 7.3 percent of GDP in 2008, which is about a 15.7 percent increase from 2007 because of an impressive foreign investment expected during the year. To sum up, the overall balance of payments is expected to reach a surplus of 12 EIC - Cambodia Economic Watch October 2008

27 about US$231 million in 2008, which represents a 44.4 percent decrease from 2007 and about 2.1 percent of the GDP. It is worth noting that since Cambodia is a dollarized economy, with individuals and institutions able to hold foreign currencies, the overall change in the balance of payments reflects not only foreign reserves held by the National Bank of Cambodia (NBC), but also economic agencies and households. Growth in external trade (both exports and imports) is expected to slow due to anticipated drops in the growth of Cambodian garment exports and of imports of raw material used in the garment industry and the construction industry. The trade deficit is expected to be relatively the same in 2008 because of an expected drop or stabilization in the prices of oil and other construction materials on international markets. Therefore, Cambodia s trade deficit may reach only 15 percent of GDP in 2009, about 1.7 percent point lower than in Despite continuous improvement in balance of services, thanks to expansion in the tourism sector, the deficit in current accounts is expected to reach 3.6 percent of GDP in 2009, down from 4.9 percent in The deficit was partly financed by foreign aid in the form of grants and loans and foreign private investment in Cambodia, which represented about 6.5 percent of GDP. Overall, Cambodia s balance of payments for 2009 is expected to reach a surplus of about US$ Private Investment and Stocks of Capital During the first half of 2008, the Council for the Development of Cambodia (CDC) approved 50 investment projects worth about US$4.4 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in value of the fixed assets compared to the same period in 2007 because most of the projects approved in 2008 were mega projects. Most of the investment projects involved the garment and tourism sectors, which accounted for 24 and 6, respectively, of the approved investment projects and US$25 million and US$4.1 billion of fixed assets. The investment activity was bolstered by healthy garment exports and tourism activities during It is worthy noting that only two investments in agro-industry have been approved, despite increases in agricultural prices and high agricultural production this year. EIC - Cambodia Economic Watch October