CAMBODIA ECONOMIC WATCH APRIL ECONOMIC INSTITUTE of CAMBODIA. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CAMBODIA ECONOMIC WATCH APRIL 2009 ECONOMIC INSTITUTE of CAMBODIA

2 This report is made possible by generous support from the World Bank. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank. President : Sok Hach Team Leader : Neou Seiha English Editors : Sam Campbell & Tyler Marcus Authors : Neou Seiha Chhun Dalin

3 TABLE OF CONTENTS 1. List of Abbreviations and Acronyms iii 2. List of Tables and Figures v 3. Foreword vi 4. Executive Summary vii 5. Part I: Recent Economic Developments and Outlook 1 1. Cambodian Economic Growth Agriculture Industry Service 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 35 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 Key Outputs of the Preparation PFMRP Platform Consolidated Action Plan for Platform Trade Reform Economic Integration Trade Facilitation Public Administration Reform Central Administration Reform Sub-National Administration Reform Legal and Judicial Reform Progress of Legal Reform Judicial and Alternative Dispute Resolution (ADR) Land and Natural Resource Reform Land Reform Forestry Reform Fisheries Reform 63 Bibliographic References 65 Appendix 1: Key Economic Indicators 67 Appendix 2: Key Structure Reforms 79 ii

5 LIST OF ABBREVIATIONS AND ACRONYMS ADR Alternative Dispute Resolution AEC ASEAN Economic Community ASEAN Association of South East Asian Nation CAMINCO Cambodian National Insurance Company CAMEX Cambodia Stock Exchange Market CAP Consolidated Action Plan CAR Council for Administrative Reform CDC Council for the Development of Cambodia CDCF Cambodia Development Cooperation Forum CDRI Cambodia Development Resource Institute CFs Community Fisheries CIS Credit Information Sharing CLJR Council for Legal and Judicial Reform CMA Cambodia Microfinance Association COBRA Cambodian Offsite Bank Reporting for prompt corrective CoJ Council of Jurist CoM Council of Minister CR Cambodian Riel CSES Cambodia Socio Economic Survey D&D Decentralization and Deconcentration DANIDA Danish International Aid Agency EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FiA Fishery Administration FMIS Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government-Donor Coordination Committee GDCE General Department of Custom and Excise GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System ILO International Labour Organization JMIs Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative iii

6 MDTF MEF MFI MIS MLMUPC MoC MoH MoJ MPWT MRD NA NBC NCDD NCSNDD NFP NIS NLDA NSDP OWOs PFMRP PFMRSC PMG PPD RGC RSM SCM TDSP TFCP TWG F&E TWG-LJR TWG-PAR UNIDO VND WB WTO Multi-Donor Trust Fund Ministry of Economy and Finance Microfinance Institutions Management Information System Ministry of Land Management, Urban Planning, Ministry of Commerce Ministry of Health Ministry of Justice Ministry of Public Works and Transport Ministry of Rural Development National Assembly National Bank of Cambodia National Committee for D&D National Committee for Sub-National Democratic Development National Forest Program National Institute of Statistics National Authority for Land Dispute Resolution National Strategic Development Plan One-Window Offices Public Financial Management Reform Program Public Financial Management Reform Steering Committee Priority Mission Group Public Procurement Department Royal Government of Cambodia Royal School of Magistracy Supreme Council of Magistracy Trade Development Support Program Trade Facilitation and Competitiveness Project Technical Group on Forestry and Environment Technical Group on Legal and Judicial Reform Technical Group on Public Administration Reform United Nations Industrial Development Organization Vietnam Dong World Bank World Trade Organization iv

7 LIST OF TABLES Table 1.1: Cambodia's Real Economic 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$2000 price) Table 3.3: Cambodia s Monetary Survey (Billions of Riel) Table 3.4: Cambodia s Interest Rate (% per annum, end of period) Table 4.1: Cambodia s Central Government Revenue (Billion of riel) Table 4.2: Cambodia s Central Government Expenditure (Billions of Riel) Table 4.3: Cambodia s Financing Budget (Billion of Riel) Table 5.1: Cambodia's Population and Labor Force (000's) Table 5.2: Daily Average Earnings of Vulnerable Workers (riel) Table 6.1: Loan for Property as of December 31, 2008, in CR millions Table 6.2: Interest Rates as of December 2008 Table 6.3: Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of March 2009) Table 7.2: PFM Objectives and Key Indicators Table 8.1: Status of Remaining WTO-related Laws Table 10.1: Progress on the Remaining Fundamental Draft Laws Table 10.2: JMI for 2nd CDCF Meeting, TWG-LJR Table 11. 1, 2&3: JMIs to be Implemented and Monitored between the 2nd and 3rd meeting of the CDCF LIST OF FIGURES Figure 1.1: 2008 Economic Growth by Quarter (%, 2000 prices) Figure 1.2: US garment import for the first two months of 2009 (Percent change) Figure 3.1: Cambodia s Consumer Price Index (December 2002=100) Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) 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, the global crisis seems to show its severe impact on Cambodia since the last quarter of Thus, Cambodia s economic growth rate slowed significantly in 2008 due to slower growth of garment industry, construction sector and tourism. These trends are likely to carry over 2009, and thus a lower economic growth rate is also expected accordantly. 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 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

9 EXECUTIVE SUMMARY Economic Growth The global crisis started its severe impact on Cambodia during the last quarter of 2008, especially on the garment industry, tourism and construction. Cambodia economic growth was only about 5.2 percent in 2008, which was down from a growth rate of 10.2 percent in The 2008 growth gained support from the moderate increase in foreign tourists, garment and banking business during the first half of The growth rate of the construction and real estate significantly slowed down in Other sectors kept their moderate growth with a slightly lower pace. Cambodia s economy still largely depends on foreign trade, tourists and investments. In the US, EU, and Korea the global economic crisis seems to continue its effect in 2009, thus Cambodia s economic growth rate is also expected to slow down to about 2 percent in The garment industry would decline because the global demand, especially the US and EU, is declining and the safeguarding measures imposed by the US and EU against Chinese export have expired. The construction and real estate activities would also decline significantly and have a negative growth rate as many residential and mega construction activities are being frozen and the bubble of residential prices is popping. The decline of these activities is likely to affect some commercial banks that invested and provided loans or credit in these sectors. The number of foreign tourist arrivals in Cambodia is also slim for 2009 as global revenue is declining. The agricultural sector appears to be the main source of growth for 2009, but unpredictable and slim as it is still dependent on weather conditions and agroinvestment remains moderate. Other sectors growth will reach only moderate rates. The growth projected for the next few years would be also modest and also depend on global welfare. Nonetheless, it seems that the upcoming Cambodia Stock Exchange Market and the exploitation of Extractive Industries such as oil and gas are attracting the attention of many big investors to Cambodia. vii

10 Thus, Cambodia s economic growth could be sped up in short run if some critical reforms are seen in significant progress. These reforms, together with effective anti-corruption policies, could provide a preferred environment and opportunity for higher economic growth. Trade and Investment During 2008, total exports increased by only 15.2 percent, while total imports increased by 19.6 percent. The total trade deficit is expected to widen by 31.3 percent in 2008, reaching about 16.9 percent of GDP. The widening of the trade deficit coupled with an income balance deficit created a deficit of current accounts (including capital transfer) totaling about 7.3 percent of the GDP, despite a significant increase in balance of services and a surplus in transfer accounts. The deficit could not be totally financed by foreign grants, loans and direct investment. Thus, the overall balance of payments for 2008 was first time for a deficit of about 0.7 percent of GDP. Growth in external trade and foreign tourists and investment in Cambodia are expected to slow significantly in Following the same phenomenon, the balance of payments for 2009 is expected to widen its deficit to about 2.9 percent of GDP. During 2008, the Council for the Development of Cambodia approved 101 investment projects worth about US$ 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 Most of the investment projects involved the garment and tourism sectors, and 7 investments in agro-industry were approved due to increases in agricultural prices and the high rater of agricultural production so far. 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 Yearly average inflation was about 19.7 percent during It jumped to the peak of 25.7 percent in May 2008 and slowed down to 13.5 percent in viii

11 December Price of food rose to the peak of 45.8 percent, household goods 29.6 percent, transportation 29.4 percent, and medical expenses 17.5 percent in May-June 2008, before slowing down to 23.2 percent, 26.1 percent, 1.1 percent, and 10.6 percent, respectively, in December Other consumer prices were relatively stable. Farmers, the main producers of food, benefited from 2008 inflation because soaring prices of agro-products allowed producers to generate income higher than that of that of their expense. The origin of this inflation was mainly caused by external factorssoaring crude oil and food prices in the international market while Cambodia remained largely dependent on imports of food and raw materials. Based on the current decline in global demand, the overall inflation for 2009 is expected to slow down significantly to about 1or 2 percent. In a year average, the riel in 2008 was relatively stable against the US dollar and Vietnam dong; but depreciated against the Thai baht by 3.5 percent. Together with prudent monetary policy of the NBC, the relative strength of the riel was mainly a result of the US economic recession. Despite the US economic recession s continued weakening of the US dollar, the expected 2009 deficit in balance of payments will pressure the government to maintain a stable exchange rate against US dollar. Fiscal Development The central Government collected CR5,290 billion in revenue in 2008, or 32.4 percent higher than the total it had expected to collect earlier in the year. Compared to what was implemented in 2007, revenue collected from international trade taxes increased only 15.7 percent, while other tax revenues increased steadily more than 33 percent. Beside a slower growth of garment exports and a Government subsidy on gasoline import taxes, informal exports and imports from neighboring countries are also to blame for state revenue leakage. The central Government spent US$6,337 in 2008, or about 14.0 percent over the total amount it had budgeted for expenditures earlier in the year. Compared to what was implemented in 2007, total expenditure increased by 14.4 percent and spending for civil administration and for defense and security increased by 21.1 percent and 17.8 percent. Spending on priority sectors ix

12 increased by 24.3 percent. Spending on wages increased by 12.3 percent in 2008, about 38.9 percent-point lower than that in In total, the 2008 deficit reached CR1,047 billion or only 67.1 percent of what was planned in the budget law. It was only about a 2.1 percent increase from 2007, or about 2.5 percent of GDP. The budget deficit was mainly financed by international borrowing and foreign assistance. External loans accounted for about 60 percent, allowing Cambodia to avoid domestic debt financing. Assuming Cambodia s economy grows around 6 percent in 2009, the central Government expects to raise CR5,135 billion in revenue, a 28.8 percent increase over its planned revenue for 2008,. At the same time, the Government planned budget expenditures of about CR 7,259 billion in The deficit is still expected to be financed by foreign financing, of which 65.3 percent are loans. It is worthy noting that for 2009 civil administration disbursements were planned to increase by 25.3 percent in the 2008 budget plan, while spending on defense and security is expected to increase by 64.2 percent. In the 2008 budget plan spending for health, education, agriculture, and rural development was stated to increase by 24.5 percent, 19.4 percent, 16.2 percent, and 32.9 percent, respectively, Updated data on the public debt by the IMF revealed that the public debt stock would increase to about US$2.8 billion at the end of 2008, an 8.8 percent increase from As a percentage of GDP, the public debt accounted for about 26.8 percent in 2008, a slightly decrease from 29.7 percent in The ratio of debt to GDP was expected to slightly decline in Debt is on a sustainable path. However, moderate risks remain, particularly given the slower economic growth rate, low levels of current government revenues, the continued existence of external arrears and the potential for contingent liabilities. If Cambodia reaches debt-rescheduling agreements with the two creditors and begins servicing debts in 2009, the risk of debt distress will decline further, though low revenue collection will continue to pose risks to debt sustainability. Progress of Structure Reform For banking reform, after a meeting between the Board of Directors of the Association of Banks on January 23, 2009, the National Bank Cambodia (NBC) x

13 announced the reduction of reserve requirements from 16 percent to 12 percent and cancelled the 15 percent cap on loans to the real estate sector. The NBC decided to mitigate the requirement in order to ease funds for business as the real estate sector stagnated because of global problems. There was also progress made in important reforms in non-banking finance, the insurance industry and the financial market. The Cambodian National Insurance Company (CAMINCO) has been privatized, with the government share reduced to only 25 percent. Recently, the MEF signed a joint-venture agreement with a South Korean firm on March 23, 2009 that will give the government a 55 percent share in the exchange and the Korean Stock Exchange a 45 percent share. In the area of Public Financial Management Reform (PFMR), Platform 2, implementing effective financial accountability, was launched on December 03, Building on improved budget credibility toward achieving better financial accountability is a method of continuing stage 1 and starting stage 2 of the PFMR program. With this launching, there are 14 PFM objectives and 57 activities laid out with each objective. In the area of trade reform, The ASEAN Charter was ushered into force on December 15, The charter provides the legal and institutional framework for ASEAN to be a more rule-based, effective and people-centered organization, paving the way for realizing an ASEAN Community by Concerning the WTO law enactment program, the number of laws passed has remained the same as of the second semester of The Trade Development Support Program (TDSP) officially launched on March 23, 2009 with a budget of US$ 12.6 million. This program is financed by the European Commission, the Danish International Aid Agency (DANIDA), and the United Nations Industrial Development Organization (UNIDO). It will be administered by the World Bank (WB). The program is designed to facilitate trade by improving regulations and internal processes with a focus on legal reforms, trade facilitation and product standards. In the area of administrative reform, the Council of Administrative Reform (CAR) has prioritized facilitating the three mechanisms Priority Mission Groups (PMGs), Merit-Based Performance Incentives (MBPI), and Special Operating Agencies (SOAs) in On March 25, 2009, a Memorandum of Understanding between the MoH, MoI, MLMUPC, and CAR was signed with the development partners to implement the MBPI and PMGs. xi

14 Under the Law on Administrative Management of Capital, Provinces, Municipalities, Districts and Khans, the National Committee for Sub-National Democratic Development (NCSNDD) process has been enacted since January The NCSNDD has a general responsibility to ensure the implementation of the organic law. In legal and judicial reform, preparations for a specialized commercial court are underway with the Draft Law on Establishing the Commercial Court after comments from the roundtables at the MoC. The draft has to be rearranged in accordance with the new format required by the Council of Minister (CoM) but the contents have been kept without alteration. Since an adoption of the Law on Commercial Arbitration, an establishment of a national arbitration center is pending according to an unapproved draft of the Subdecree on Organizing and Functioning of the National Arbitration Center. The draft was submitted to the CoM in May Presently, the draft is subject to ongoing discussions and the approval is expected in April For the land and natural resource reforms, the MAFF formed five working groups to review and evaluate 35 existing ELC companies in 13 provinces. This resulted in three companies asking to cancel contracts, two companies being warned and 30 companies pushed to implement the ELCs according to the third quarter 2008 progress report. A revision of the right to give Economic Land Concession (ELC) has been issued through sub-decree No 131 dated September 15, 2008 on Adjustment of ELC. The sub-decree states that all rights of decision making on ELCs at the provincial and municipal levels have been taken away. A National Forest Program will be finalized and approved in September and start implementation by the end of this year. It is set as a Joint Monitoring Indicator for the Technical Working Group Environment and Fishery. In the same line, more tasks have been put into consideration as related to forest boundaries, demarcation of protected areas, and community forest sites and protected areas. According to the Fishery Administration s (FiA) second quarter report of 2008, CF legal documents, CF boundary demarcations, and fish sanctuaries have been created for 14 CFs in Sihanoukville and 14 CFs in Kampong Cham. xii

15 Part I Recent Economic Developments and Outlook 1

16 2

17 Chapter 1 Cambodian Economic Growth The 2008 updated data suggested that Cambodia achieved only a modest economic growth rate of about 5.2 percent in 2008, which was down from a growth rate of 10.2 percent in This was because of the global crisis and its severe impact on Cambodia during the last quarter of 2008; especially on garment industry, tourism and construction, which were the three main sectors that pushed the country s economic growth rate up to double-digits during 2004 and Table 1.1: Cambodia's Real Economic Growth by Sector (%, 2000 prices) p 2009p Agriculture -1.0% 15.5% 5.5% 5.1% 4.8% 4.3% Paddy -12.2% 43.7% 4.3% 7.5% 3.6% 4.2% Industry 17.0% 12.9% 18.4% 8.4% 3.1% -3.3% Garments 24.9% 9.2% 20.4% 10.0% 2.0% -2.1% Services 13.2% 13.1% 10.1% 10.2% 6.7% 3.9% Tourism 23.4% 22.3% 13.7% 10.3% 5.7% 3.9% Total GDP 10.3% 13.3% 10.8% 10.2% 5.2% 2.0% Non-Agricultural GDP 15.8% 12.3% 13.0% 12.2% 5.4% 1.1% Sources: Compiled from NIS for , EIC projection for 2009 Sectors that are the most vulnerable to the global crisis are those with a high concentration of foreign direct investment (FDI) and those that export their products. The garment sector is the most vulnerable sector, followed by the tourism, construction, and real estate sector. Cambodia s agri-business does not show up as a vulnerable sector in terms of capital source and output. As evident, garment, construction and real estate growth slowed significantly during 2008; they declined sharply in the last quarter of The tourism sector grew only at a very moderate pace. The banking business was relatively healthy and other non-agricultural sectors kept, in average, their moderate growth with a lower pace. Thanks to the higher prices of agro-products in the world market and the favorable weather for crop production during 2008, the growth of the agricultural sector also kept its moderate pace. Non-agricultural sectors slowed 3

18 down to about 5.4 percent in 2008, about 6.8 percent-points lower than that of The global economic crisis seems to continue its effect into 2009, especially in the US, EU, Japan and Korea. The garment, tourism and construction sectors will be flat and decline as they still depend largely on foreign trade, tourists and investments. Thus, Cambodia s economic growth will shrink in Figure 1.1: 2008 Economic Growth by Quarter (%, 2000 prices) Sources: Data compiled from NIS The garment industry is expected to decline in 2009 and have a negative growth rate because the global demand, especially from the US and EU, is declining and the safeguarding measures imposed by the US and EU against Chinese export have expired. The number of foreign tourist arrivals in Cambodia is also slim for 2009 as global revenue is declining. The construction industry, especially residential construction, and the real estate industry will also decline significantly and have a negative growth rate as many residential and mega construction activities are being frozen and the bubble of residential prices is popping. The decline of these activities is likely to affect commercial banks that invested and provided loans or credit in these sectors. As the growth of current economic activities is expected to slow down and people prefer to keep cash in hand rather putting it in the bank, the banking sector growth is expected to slow-down significantly. 4

19 The agricultural sector appears to be the main source of growth for However, it remains unpredictable since it is still dependent on weather conditions. Investment in agro-industry is still moderate in 2009 and agro-product prices are also being down. If, and only if, the agricultural sector were not to meet any serious problems as a result of severe drought or floods, Cambodia s economic growth rate will slow-down to about 2 percent in The growth prospected for the next few years will be also modest and depend on global welfare. Yet in the short term it seems that the upcoming Cambodia Stock Exchange Market and the exploitation of Extractive Industries such as oil and gas are attracting the attention of many big investors to Cambodia. Thus, Cambodia s economic growth could be sped up in the coming years if some significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, could provide a preferred environment and opportunity for higher economic growth 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 resourcebased and growth increased only about 4.8 percent growth in 2008, down from a 5.1 percent increase in Growth was bolstered by an expansion in cultivated areas and higher agricultural product prices. The agro-investment has remained weak, despite soaring prices and demand on the local and global market. Despite the global crisis remaining in 2009 and prices of agro-products are going down, the agricultural sector growth is expected to keep the moderate growth pace of about 4.3 percent in 2009 as prospects remain moderate in the coming years. Promoting the agricultural sector is an urgent need to diversify the sources of growth. The garment and construction industries appear to be insufficient for the country s economic growth in the coming years. Repeatedly, more effective irrigation, infrastructure, and natural resource management systems are required to speed up and achieve sustainable agricultural growth and thus reduce poverty, as the agricultural sector is the main source of income for the country s poorest inhabitants. 5

20 Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) p 2009p Paddy -12.2% 43.7% 4.3% 7.5% 3.6% 4.2% Other Crops 9.5% 12.2% 6.5% 9.0% 8.5% 8.6% Livestock 3.9% 5.6% 8.2% 3.7% 2.5% 4.4% Fishery -1.7% 5.6% 3.8% 0.8% 5.1% 0.8% Rubber & Forestry -0.3% 3.5% 6.6% 1.8% 1.2% 1.8% Total Agriculture -1.0% 15.5% 5.5% 5.1% 4.8% 4.3% Sources: NIS for , EIC projection for Crops, especially paddy, are the main source of income for Cambodian farmers data suggested weather conditions and the volume of crop production were as favorable as the previous three years. Cultivated areas continued to increase in 2008, but only 6,000 ha for paddy and some places, however, experienced too little or too much rain. Thanks to impressive gains in export market prices during the first half of 2008, paddy increased at a moderate pace of about 3.6 percent in 2008, down from 7.5 percent in The paddy growth prospects will remain moderate for the next few years, expected at about 4.2 percent in 2009, as opportunities for further cultivated land are decreasing. Other crops meanwhile grew at a significant rate of about 8.5 percent, slightly down from 9.0 percent increase in Growth rates are expected to remain strong in coming years, expected to remain at about 8.6 percent for Besides revenue they earn from crop cultivation, livestock is another potential source of income for many Cambodian farmers data also suggested that livestock increased moderately by 2.5 percent in 2008, a 1.2 percent-point lower than 2007, due to limited initial capital, high interest rates and difficult access to credit (even though some improvement has been made). These constraints are likely to continue to restrain growth in the livestock sector in Cambodia is still expected to continue to import large quantities of livestock products from neighboring countries, as local investment in this sector remains slim. Based on the current situation, the growth rate for livestock is expected to increase at only a moderate pace in next coming years, of which about 4.4 percent is expected for in

21 2008 data also revealed that fishery production was relatively the same as in As price of fish increased significantly in 2008, the fishery sector grew by about 2.0 percent in 2008, the 1.2 percent-point increases higher than the growth rate posted in Small fish, used for the production of a popular salt fish pâté, remained abundant while normal fish production was still limited. However, the number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish 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 prospect that fish stocks will expand in the coming years is slim, with an expected growth about 0.8 percent in Growth in the forestry sector grew about 0.6 percent in 2008, down slightly from 1.1 percent in The sector s growth potential will remain weak for the next few years due to weak natural resource management. The rubber sector posted a 6.6 percent growth rate in 2008, 2.4 percent-point lower than that of 2007 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 expected to remain flat in coming years Industry The Industry sector s growth is continuing on a downward trend in 2008 due to the current global crisis and its effect on garment exports and the construction sector. Other industrial sectors are growing at a moderate pace. The total industrial growth rate grew only by only 3.1 percent in 2008, down from 8.4 percent in 2007 and 18.4 percent in Based on the current trend, the industrial sector is likely to continue its downward trend in 2009 and have negative a growth rate of 3.3 percent due to mainly the expected decline of the construction and garment sectors. Progress in Government reforms in line with effective anti-corruption policies could accelerate industrial growth. The garment industry is no longer the main contributor to the industrial sector growth. The garment industry s growth slowed down significantly in 2009 due to the significant decline in prices and lower demand from the US and EU market. 7

22 Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) p 2009p Garments 24.9% 9.2% 20.4% 10.0% 2.0% -2.1% Food, Beverages & Tobacco -5.3% 9.0% 3.3% 3.1% 6.0% 5.5% Electricity, Gas and Water 11.3% 12.7% 31.5% 11.7% 10.5% 8.7% Construction 13.2% 22.1% 20.0% 6.7% 3.0% -13.0% Other industries 9.3% 17.4% 14.1% 6.4% 6.2% 3.8% Total Industry 17.0% 12.9% 18.4% 8.4% 3.1% -3.3% Sources: Compiled from NIS for , EIC projection for 2009 According to the Customs Department of the Ministry of Economy and Finance (MEF), the quantity of garment exports rose by 9.5 percent in 2008, roughly one percent-point lower than the increase posted during Exports to the US grew by 9.4 percent, the EU only 6.5 percent and those to other markets jumped more than 16.0 percent. The US and EU took about 68.4 percent and 21.2 percent, respectively, of total Cambodia s garment export. This growth was mainly due to safeguarding measures imposed by the US and EU to restrain Chinese exports and low labor costs and depreciation of the riel or dollar against other currencies, especially the Chinese yuan. Additionally, a labor compliance project monitored by the International Labor Organization (ILO) has created a niche market for Cambodian apparel, Cambodia s new WTO membership and a reduction in export transaction bureaucracy have all helped to maintain the sector s growth. However, the price of Cambodian apparel continued to decline steadily as competition for the US garment market intensifies, especially from Vietnam and China. 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. At the same time, Cambodia s average garment export prices declined by 6.7 percent in Prices for garments exported to the US market declined by 10.0 percent while those to other markets remained roughly the same. Thus, the value of garment exports increased by only 2.2 percent. The value of exports to the US decreased by 1.5 percent while the value of exports to the EU and other market increased by 6.0 percent and 20.8 percent, respectively. 8

23 In sum, the Cambodian garment industry grew by only about 2.0 percent in The 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, expired at the end of 2008 and US demand is decreasing. Data of the first two months of 2009 has been revealed that US garment imports from Cambodia were off from about US$199 million a month during the first two months of 2008 to US$161 million during the same period of This represented a 19.1 percent drop of US import from Cambodia compared to a 10.9 percent drop for the total US garment imports. That reflected Cambodia garment industry is more vulnerable to the decline than other countries. Figure 1.2: US garment import for the first two months of 2009 (Percent change) Sources: Compiled from US department data This data also revealed that Thailand and China was also off by only 12.9 percent and 3.1 percent, respectively; while Vietnam and Bangladesh have surprisingly kept increasing during the same period. Cambodia is thus seen as weak in terms of international competitiveness compared to Thailand, China and Vietnam. 9

24 Overall, since the US and EU are still in a crisis in 2009, Cambodian garment product export growth will continue its downward trend into Thus, overall Cambodia s garment industry growth will also continue its downward trend in 2009, with an expected negative growth rate of about 2.1 percent. It s unlikely the industry will be able to post significant gains in next coming years 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, was on a downward trend even though steel imports increased by 36.8 percent during Sale prices for newly constructed residences were perceived as stagnant during the first half of 2008 and are declining in the second half of The growth of the construction sector slowed to 3.0 percent in 2008, down from an increase of 6.7 percent, 20 percent, and 22.1 percent in 2007, 2006, and 2005, respectively. Slower growth in this sector reflected a slower growth of a few others of the services sectors, most notably real estate. The slower growth of real estate will not undermine the economy like it has in the US and Vietnam. 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 helps to reduce potentially negative impacts of downturns in the construction sector. Most of the mega-construction projects are owned by foreigners. As the current global economic crisis is still lingering, many construction projects are on hold. The construction sector s growth is expected to post a negative growth rate in This negative growth is likely to be to 13.0 percent into 2009, given that sale prices will continue to decline. The food, beverage and tobacco sector grew at a faster rate in 2008 given higher food prices, according to available data for The depreciation of the riel against other currencies, especially the Thai baht, boosted the competitiveness of local products against the imported products. However, because investment in agro-sectors remained weak during 2008, Cambodian consumers thus continued to use imported products, even with higher prices. In total, the food, beverage and tobacco sector continued to grow at a moderate pace of about 6.0 percent in 2008, up from 3.3 percent increase in This trend is expected to carry on in the next few years and achieve a 5.5 percent growth rate in More investment incentives along with credit 10

25 and initial capital and entrepreneur skills are needed to speed up the sector growth. Other industrial sub-sectors such as electricity, gas, water and other manufacturing sectors grew 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 growth also slowed down significantly because of the slower tourism, trade and transport sectors. The overall service sector, excluding public administration, is expected to expand by only 6.8 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 dependent on 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. As these economic activities are expected to slow down in coming years, service sector growth will also slow in coming years and is expected to be about only 3.9 percent in Table 1.4: Trends of Service Sectors (% increase, 2000 prices) p 2009p Transport 9.5% 14.5% 2.1% 7.2% 6.5% 4.9% Trade 5.9% 8.5% 7.1% 9.5% 6.5% 4.6% Hotels & Restaurants 23.4% 22.3% 13.7% 10.3% 5.7% 3.9% Finance 20.6% 19.6% 23.9% 22.2% 16.0% 4.9% Other Private Services 19.2% 13.1% 14.2% 11.5% 6.6% 3.2% Total Private Services 14.3% 13.4% 10.6% 10.5% 6.8% 3.9% Public Administration -6.7% 5.9% -1.3% 0.1% 4.5% 2.9% Total Services 13.2% 13.1% 10.1% 10.2% 6.7% 3.9% Sources: NIS for , EIC projection for 2009 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 country s solid economic performance during the last few years. However, soaring prices for imported oil products and high 11

26 inflation has slowed growth of most services. Trade grew by 6.5 percent, while transport and communication grew by 7.5 percent in 2008, compared to 7.2 percent and 9.5 percent, respectively, in Meanwhile, physical infrastructure remains poor, especially the roads and railways. Further rehabilitation and reconstruction of roads is essential to enhance trading opportunities in remote areas of the country. As economic activities are slowing down in 2009, the growth in trade and transportation activities would also slow and are expected to be about 6.5 percent for both sectors in The hotel and restaurant sector contributed significantly to overall service sector growth. The number of foreign tourist arrivals in Cambodia during 2008 increased by only 6.4 percent compared to 18.2 percent during The number of tourists who arrived in Cambodia via Siemreap airport declined by 12.1 percent, while those who came through Phnom Penh airport and by land increased by 6.5 percent and 30.5 percent, respectively. Both the global economic slowdown and Thai political instability likely explain these figures. In combination with higher inflation during the year, the tourism sector is expected to expand by about 5.7 percent in 2008, a drop in growth of about 4.5 percent-point compared to The downward trend is also expected to continue in 2009 with the expected slower growth rate of the global economy. The tourism sector growth is expected reach about 4.6 percent in The financial sector performed well during the first half of 2008 due to the increase in credit demand and bank trust; but it was also significantly slowed-down the second half of 2008 because of the decline in construction, real estate, and other economic activities. Many commercial banks were also invested in construction and real estate sector. In total, the financial sector grew by 16.0 percent in 2008, down from 22.2 percent in The growth prospected for this sector is also slims as economic activities for 2009 are slowed-down or declining. The real estate sector growth slowed significantly to 5.0 percent in 2008 as a result of declining prices of land and residential construction and credit restrictions imposed by banks. Even though most real estate transactions were completed in cash rather than bank credit, a slowdown in growth in this sector adversely affected growth in other service sectors such as entertainment activities. Other service sectors grew only about 8.2 percent in 2008, on average, down from 12.1 percent in These downward trends are expected to continue for 2009 and the next few years. 12

27 Chapter 2 Trade, Investment and Productivity In 2008, Cambodia s garment external trade slowed down, but the value of imported cars, motorcycles, buses, trucks, tractors, and alcohol increased significantly. That led to a widening of Cambodia s trade deficit. Trade deficits, as well as income account deficits, could not be totally financed by foreign grants, loans and direct investment. Thus, the overall balance of payments for 2008 was first time for a deficit of about 0.7 percent of GDP External Trade and Capital Movements According to data compiled from the National Bank of Cambodia (NBC), total 2008exports increased by 15.2 percent, compared to a 10.7 percent increase in The value of garment exports grew slightly in 2008 but it declined sharply as a share of total export value, to about only 67 percent in 2008 from about 80 percent in Agricultural product export values rose sharply, but their overall volumes remained low as transactions made through informal channels were causing serious leakages in tax revenue. In contrast, imports accelerated 19.6 percent during 2008 and imports of petroleum made up the lion s share of the increase. The value of imported fabric declined, but 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 disposable income has grown as a result of land and housing speculation. The total trade deficit widened in 2008, reaching about US$1.7 billion in nominal terms or about 16.9 percent of GDP, up about 31.3 percent from Due to a continued increase in the number of foreign tourist arrivals in Cambodia, the income generated from tourist spending (travel) reached about US$1.2 billion in 2008, representing only a 7.6 percent increase from the previous year. Reflecting a slower increase of foreign tourist arrival in Cambodia, this pace was significantly slower than the 17.8 increase from Additionally, Cambodian travel to abroad decreased by 11.9 percent. 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, revenue from tourist transportation remains low and reached only about US$229 million in 2008, a 9.4 percent jump from 13

28 Nonetheless, the transportation payments of Cambodians visiting abroad kept increasing steadily, about 18.2 percent increase from In combination with other service receipts and payments, total service receipt increased by only 5.9 percent in 2008, compared to a 19.4 percent increase in 2007, while total service payment increased by 13 percent in In sum, total service sector surplus decreased slightly by 4.1 percent in 2008 in nominal terms and reached only 6.0 percent of GDP. Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) p 2009p Exports of Goods 2,589 2,910 3,693 4,088 4,708 4,737 Imports of Goods 3,269 3,903 4,727 5,419 6,456 5,969 Trade Balance ,034-1,331-1,748-1,232 Agriculture Textiles & Garments 1,068 1,158 1,430 1,566 1,602 1,446 Oil & Gas ,123-1,306-1, Other Goods -1,318-1,660-1,741-2,122-2,646-2,862 Balance of Services Transportation Travel ,012 1,113 1,167 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: NBC for , EIC projection for 2009 Outflows of income continue to figure prominently in 2008 and largely take the form of dividends and profits from foreign investments in the country, 14

29 particularly in the garment industry, and payments for foreign technical assistance by donors. The 2008 income account reached a deficit of about US$468 million or about 4.5 percent of GDP, which is an increase of about 21.2 percent from Net private transfers were expected to reach US$365 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$851 million in its transfers account in 2008, which represents about 8.2 percent of GDP. In total, its current account deficit, including official transfers, increased sharply to US$748 million or about 7.3 percent of GDP. Nevertheless, the financial account was in surplus by only about US$673 million or 6.5 percent of GDP in 2008, which was about a 1.8 percent increase from There is a slight increase in finance from official loans, but finance through foreign direct investment decreased by 7.0 percent from To sum up, the overall balance of payments was for the first time in a deficit of about US$75 million in 2008 or about 0.7 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 NBC, but also economic agencies and households. For 2009, growth in external trade (both exports and imports) is expected to slow significantly due to anticipated drops in Cambodian garment exports and decreases in imports of raw material used in the garment and construction industry. The trade deficit is likely to decrease slightly in 2008 because of an expected stabilization in the prices of oil and other construction materials on international markets. Therefore, Cambodia s trade deficit may reach 12.0 percent of GDP in 2009, a 5.6 percent-point decrease from that of Despite expected improvement in balance of services due to a recovery of expansion in the tourism sector, the deficit in current accounts is expected to reach 2.4 percent of GDP in 2009, about 4.9 percent-point lower than that in However, the current crisis may flatten the flow of foreign direct investment into Cambodia for Thus, the financial account surplus is not likely to be able to finance the current deficit. Overall, the balance of payments for 2009 is expected to be in a deficit of 1.1 percent of GDP. 15

30 2.2. Private Investment and Stocks of Capital During 2008, the Council for the Development of Cambodia (CDC) approved 101 investment projects worth about US$10.9 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in the fixed assets compared to 2007 because most of the projects approved in service sectors in 2008 were mega projects, especially those in tourism. Most of the investment projects involved the garment and tourism sectors, which accounted for 38 and 20, respectively, of the approved investment projects and US$149 million and US$8.8 billion of fixed assets. It is worthy noting that only six investments in agro-industry have been approved for US$108 million, despite increases in agricultural prices and high agricultural production during the year. Table 2.2: Approved Private Investment Projects Feb 2009 Number of Approved Investment Projects Total Garments Hotels Others Fixed Assets Approved (Millions of US Dollars) Total ,451 2,667 10, Garments Hotels ,101 8, Others ,217 1,395 1, Source: Compiled from CDC, Cambodian Investment Board During the first two months of 2009, the CDC approved 14 investment projects and US$242 of fixed assets. Most approved projects were in energy, garment, and tourism. No investment project has been seen in agricultural the sector so far. In total, for 2009, together with the global crisis and limited local skills and resources, the expected number of approval projects is slim. Decline in private consumption in the US and EU markets and the expiration of US and 16