W(h)ither Cambodia?

As we go to press, financial and other markets globally continue to struggle as the world tries to find a solution to the banks' near death experience and the consequent drying up of credit. Cambodia, though insulated to a degree, is not immune. We at LCF are very much heartened however by the IMF's recently published country report on Cambodia which makes for very interesting reading: considerably more positive than negative it nevertheless pulls no punches:
 
'Growth is slowing, liquidity is tightening, and, as a result, banks' balance sheets are coming under strain. Competitiveness has eroded given the recent sharp real appreciation of the Cambodian riel and U.S. dollar'.
 
And few readers will be surprised to learn that the twin 'villains of the piece' are excessive property development and the financiers of that development:
 
'The immediate risks to Cambodia arise from liquidity shortages among banks owing to a sharp slowing in external inflows and deposit growth. Over the past few years, these inflows have fuelled rapid credit expansion, which has bolstered economic activity and contributed to a boom in the property sector (LCF note: almost entirely condominium development in Phnom Penh.) As conditions tighten, bank lending has moderated, construction activity has slowed, and property prices-after reaching historic peaks-appear to be declining. Some banks, including several large ones, could face a large deterioration in credit quality and a need for recapitalization, depending on the magnitude of the current slowdown and effectiveness of the policy response. Others have entered Cambodia recently with limited banking experience or large exposure to the property sector, making them especially vulnerable to external conditions and an economic slowdown'.
 
And the global slowdown, particularly the slowdown in the US (40% of garments exports), has hit export dependent Cambodia hard:
 
'The economy has been particularly vulnerable to recent shocks given its narrow production base, concentration of exports by product and destination, and dependence on external inflows. As a result, economic activity is slowing in most sectors and liquidity conditions are tightening as funding sources dry up'.
 
All of which means a slowdown:
 
'Growth is projected at 4.8 percent in 2009.While agricultural output is expected to pick up, garments and tourism would act as a significant drag given weak external conditions. Real estate and construction activity is expected to decelerate further, as investment becomes more constrained by inflows and credit'.
 
Or, to put it simply, the Americans cannot afford to buy so many new clothes, the Europeans cannot afford to put occupancy rates back up to the recently seen highs of 95% in Phnom Penh, the Koreans have learnt the hard way that there is no point in building condominiums unless there is sound fundamental demand for them and the (mainly foreign owned) banks in Cambodia are wishing that they had not lent quite so much money to developers, particular to those with such excessively prosaically named projects such as CamKo City (CAMbodiaKOrea-geddit?). With a name like that you just know that the development is another Muang Thon Thani, the Kanjanapas brothers' similarly out of town piece of pointless hubris which eventually became Bangkok Land's nemesis.
 
So is it all gloom and doom? Far from it:
 
'the overall budget deficit has remained low, with revenue rising rapidly and expenditure appropriately restrained. To the government's credit, national elections in mid-2008, which were largely peaceful, and ongoing border tensions with Thailand have not exerted extraordinary pressures on the budget so far'.
 
and:
 
'The fiscal stance continued to underpin the government's stabilization efforts in 2008.The overall deficit is expected at around 1� percent of GDP, against an official target of 4� percent and an outturn of around 3 percent in 2007. Revenue continues to rise (including as a share of GDP), owing to a buoyant domestic economy and improved tax and customs administration, with a pilot of the ASYCUDA system launched and ad hoc tariff exemptions reduced. Current expenditure has been in line with planned allocations, including a mid-year fiscal package'.
 
Or, in other words, the Government are not being profligate with peoples' taxes and with donors money and they are also becoming administratively more efficient.
 
And the IMF clearly takes the view that the Central Bank is doing a fair job:
 
'In response to excessively loose conditions in the first half of 2008, the National Bank of Cambodia (NBC) doubled the reserve requirement on foreign currency deposits (FCDs) to 16 percent in June. It also placed caps on banks' lending to the real estate sector.
 
Credit growth, which exceeded 100 percent (y/y) in mid-2008, is expected to fall to around 60 percent by year-end. Despite recent global developments, the riel has remained generally stable against the U.S. dollar since mid-year'.
 
Inflation is easing too (albeit with a caveat):
 
'Inflation should continue to fall, based on the IMF's latest commodity price outlook and moderating demand pressures.Headline inflation is projected to decline to around 7� percent (y/y) by end-2009. However, the lagged effects of high inflation in 2008 could still yield upward wage pressures.'
 
So the economic picture, though less rosy than one year ago and perhaps a bit more 'frontier' in its risk profile, is, as the IMF makes clear, reasonably sound and manageable. The ever pragmatic Hun Sen Government listens-always a good sign. And with both external and internal demand tailing off as credit dries up, asset prices ease, highly geared speculators get burned, and Cambodia becomes, at least for now, a buyers market. The investment fundamentals of the country remain sound of course: minerals onshore and gas offshore, cheap and highly fertile agricultural land, tremendous tourism potential with Angkor Wat, Angkor Thom, 'hip' (as the 'Financial Times' described it)  Phnom Penh and beaches as empty as pre cheap flight days. These natural resources, combined with a young, growing and increasingly English speaking population and with a highly pragmatic Government make for what we see as one of the few great untapped Asian investment stories remaining. For the moment, it's a buyers market. Fortunately we are buyers and equally fortunately we have a little cash.
 
For those addicts of the 'dismal science', we have summarised the IMFs' medium term view of the economy and it can be found on the right hand side column of this newsletter.
    

 

 
The trial has begun in Phnom Penh of  Kaing Guek Eav, otherwise known as 'Duch', the erstwhile head of S21 or Toul Sleng, the former Lycee in Phnom Penh turned into a prisoner holding and torture centre by the Khmer Rouge. Duch, a former teacher, oversaw the torture and subsequent execution of up to 18,000 people from 1975 to 1979. Following the usual and predictable way in which such regimes turn in upon themselves, many prisoners were loyal party members or 'cadres' who had been denounced by other Khmer Rouge. Others to be tried include former President Khieu Samphan and former Foreign Minister Ieng Sary. Pol Pot of course escaped justice dying in 1998. For those with an interest in the extraordinary recent history of the country, John Tully's 'Cambodia: From Empire to Survival' is one of the best general reads around. Even more powerful perhaps is Bangkok based journalist Nic Dunlop's 'The Lost Executioner': haunted by the pictures of S21 taken by Vietnamese photographer Van Tay when Phnom Penh fell to the Vietnamese in 1979,  Dunlop searched for and eventually found Duch 20 years later on the Cambodian/Thai border working for, of all things, an American aid organisation. The trials will not be quick but the important process of catharsis has begun: another good turning point for Cambodia.

 

 

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