PHNOM PENH - After months of official denials and upbeat forecasts, Cambodian
Prime Minister Hun Sen said for the first time last week that the country's
economy is not immune to the rising global financial and economic crisis. As
key business sectors, including garments, tourism and construction, all show
signs of weakness, the premier finally said the government must do more to
stave off a crisis.
"It is clear that if the [government fails] to take timely and appropriate
measures to manage the crisis, the effects of the global financial crisis and
economic downturn will become a real cause for Cambodia's financial system and
economy to fall into a dangerous crisis," Hun Sen said during an address to the
Cambodian Economic Forum. He also took the occasion to lower
the government's 2009 gross domestic product (GDP) growth forecast to 6% from
Although still higher than most outside projections - including the
International Monetary Fund's 4.75% growth forecast - economists say the
premier's disclosure represents a significant policy shift. The day before the
February 5 forum, Cheam Yeap, a lawmaker from Hun Sen's ruling Cambodian
People's Party and the chairman of the National Assembly's Finance Commission,
said the global financial crisis would have "no impact" on Cambodia.
Those denials, however, had become statistically difficult to defend. The
Economic Institute of Cambodia, an independent think tank, showed that exports
in the first half of 2008 grew by only 6.7%, or about half the 12.6% rate
recorded over the same period the previous year. That included a severe
downturn in the crucial garment export sector: at least 22 garment factories
were closed by the end of last year, shedding over 20,000 jobs in the process.
Tourism also saw declining growth in the second half of 2008, with arrivals
dampened by an armed border dispute with neighboring Thailand and the closure
of Bangkok's Suvarnabhumi Airport, through which many tourists transit to
Cambodia. Tourism arrivals were up a mere 5.5% year on year, the first time
annual growth was below 18% since the 2003 severe acute respiratory syndrome
(SARS) scare of that year. It was also the first year since then that visits to
Angkor Wat dropped, with visitor numbers down about 50,000 visitors to 1.05
The booming construction sector, which had been driven largely by South Korea
investors, has also been hit by the global turmoil. Douglas Clayton, chief
executive of Cambodia's first investment fund, Leopard Cambodia, warned last
September that local land values would fall as Korean investors pulled out of
ventures because of sub-prime loan related problems back home.
By November, South Korean developer GS Engineering & Construction announced
it was halting for at least one year construction on its US$1 billion,
seven-skyscraper complex, and that it would scale back its original plan to
only three buildings. With the economy slowing and South Korean investors
heading for the exits, it's increasingly unclear from where the high-spending
expatriates will arise to fill the high-end, high-rent complex.
Some analysts and commentators had earlier suggested that small, financially
undeveloped Asian economies like Cambodia, which lacked exposure to toxic
subprime products and had diversified their past reliance on exports to US and
European markets, might "decouple" from deteriorating financial conditions in
the West and maintain strong growth momentum.
But recent statistics show that "we can't say anymore that Cambodia is
decoupled" from the wider global turbulence, said Stephane Guimbert, country
economist for the World Bank. "Since we prepared [our 4.9%] projection [for
Cambodian 2009 growth] in November 2008, most of the developments in the global
economy have pointed to a deeper crisis than expected at that time," he said.
In part that's because Chinese demand for the region's products, many of them
intermediate goods destined finally for Western markets, is not holding up as
strongly as some had hoped. The IMF recently halved its 2009 growth forecast
for Asia to 2.7%. During a February 2 teleconference announcing the Asia
revision, IMF managing director Dominique Strauss-Kahn referred to the previous
decoupling theory as "a funny story". "We have always been arguing here that
there was not such a thing [as decoupling]," Strauss-Kahn said.
John Nelmes, the IMF's local resident representative, predicts Cambodian GDP
growth will likely fall below 4.8% in 2009 and only recover to 5% to 6% next
year if larger global economies implement well coordinated fiscal and monetary
policies. If accurate, Cambodia's growth is expected to fall by half of recent
trends; between 2004 and 2007, GDP growth averaged 11.1% annually.
"Looking forward to the near term, the global crisis is likely to take a heavy
toll on Cambodia," Nelmes told Asia Times Online.
Until now, integration with global markets had buoyed the Cambodian economy.
With the implementation of more market-oriented reforms, including measures to
lure foreign investment, average per capita annual income more than doubled to
$593 in 2007 from $285 in 1997. Now many fear a reversal of fortunes that could
drive more Cambodians, already estimated at 35% of the population, back under
the poverty line. Cambodia's poor were already hard hit by last year's spike in
inflation, which soared to 25% last May before moderating to an overall annual
rate of 13.5%.
Guimbert and others say Hun Sen's government should move to stimulate the
economy through fiscal outlays towards agriculture, infrastructure and social
safety nets. The World Bank also recommends more structural reforms so that
Cambodia will be better-positioned to benefit when the global economy rebounds.
Those suggestions include streamlining export processes and the establishment
of a national arbitration center to allow foreign investors to bypass the
country's notoriously corrupt courts for business disputes.
The World Bank ranked Cambodia 135 out of 185 countries surveyed for their
overall business climate and in mid-2008 ranked it below every other
Association of Southeast Asian (ASEAN) nation except Myanmar in three main
categories: control of corruption, government effectiveness and rule of law.
That assessment was echoed last week by the United Kingdom-based environmental
watchdog Global Witness in a new investigative report that accused Hun Sen's
government of cornering and "pillaging" the country's growing mineral and
petroleum industries. [See accompanying story]
Hun Sen says such assessments represent a double standard in light of the
recent incompetence and corruption witnessed in the Western financial industry.
"Rich countries are only blaming poor countries for corruption - they never
blame one another," Hun Sen was quoted saying in the local media. "Powerful
nations no longer have the right to advise small countries."