Leopard Cambodia Fund - Monthly
Newsletter Issue 10 - February 2009
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Welcome to the 10th Issue of the Leopard Cambodia
Fund (LCF) Monthly Newsletter. May we begin by offering our thanks
to all those who have taken the Cambodia plunge with us during this
last month. Our final close is at midnight New York time on the 2nd
April so if you are still of a mind to invest in Cambodia via LCF,
please remember there are only 6 weeks to go. Monthly closures
continue with the next close taking place on the 27th February
2009. Please contact our Chief Operating Officer Thomas Hugger for
offering documents, subscription forms and general enquiries at: [email protected].
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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.
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...is the name of an occasional report on Asian markets written by LCF investor and Feeder Fund non exec Director
Markus Winkler of VGZ Zurich. Markus's reports
are read by several thousand Swiss and German investors-he is one
of Switzerland's leading, if not the leading, investor in Vietnam. Copied here are his comments on Cambodia written
after a recent visit:
'Cambodia: 30 years after the invasion of the Vietnamese army to
end the reign of terror of the Pol Pot regime, Cambodia has found
its way to normality and increasing prosperity. In 2008, record
prices for agricultural products led to considerably higher export
revenues. In the 4th quarter of 2008 the other important export
sector, the textile industry, experienced a lack of orders and had
to lay-off workers. The boom in the construction and real estate
sector that started in 2007 (cf. report visiting tour 2007-08) is
over as well. The Chinese and Korean construction companies that
conjured up whole settlements out of nothing in the Phnom Penh
region and pushed up land prices have reduced their projects or put
them on ice after the speculation with condominiums slowed down and
buyers for apartments suddenly stayed away. In 2008 the approved
foreign direct investments (FDI) increased from USD 2.67 bn to
almost USD 6 bn, however, the realised FDI actually decreased from
USD 0.87 to 0.8 bn. Yet another decline to USD 0.6 bn is feared for
2009. From an economic point of view, the coming year will not be
easy for Cambodia. The positive side of the coin is that
agricultural land is again available for very cheap prices (under
USD 1 per m2). Its fertile soil and the abundance of water make
Cambodia a very interesting venue for investments in the
agricultural area.
Due to its very youthful population (a total of 14.7 m) and the
need to "catch up" (GDP per capita is approx. USD 580),
the economy will also grow between 5% to 6 % even in this difficult
year. By the way, the USD is the omnipresent currency, the local
currency Riel (KHR; 4'000 KHR approx. 1 USD) is hardly used, not
even in daily business. Politically, the constitutional monarchy is
quite stable. Prime Minister Hun Sen has been in the office since
1985 and in the parliamentary elections that took place last year
he was able to even strengthen his position. I'm a member of the
supervisory board of the Leopard Cambodia Fund that was launched
last year. Until the present this Fund is virtually the only
reasonable method of investing in Cambodia. With the support of the
Seoul stock exchange, preparations are being made for the opening
of a stock exchange.' To see Markus's full report on pan Asian
markets please go to: www.vgz.ch/bk/QuoVadisAsia2008-09.pdf
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Catharsis at
last: the Khmer Rouge Trials begin
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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Leopard in the News: Articles
containing information and comments on both Cambodia and on the
Leopard Cambodia Fund appear regularly in various publications and
news outlets. To view the page in our website
displaying links to these, click
here.
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The
NAV
of Leopard Cambodia Investments (BVI) Ltd as of 31 Jan 2009 is
USD1007-38 (31 Dec 2008
USD1006-56).
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Investing
in LCF via a Self Invested Personal Pension Plan (SIPP): We
would like to remind UK taxpayers that they can invest in LCF via a
SIPP and enjoy all the tremendous tax advantages associated with
SIPPs. Hornbuckle Mitchell is our SIPP provider and more information
on the company can be found here:
www.hornbucklemitchell.co.uk
Initial
contact should be made with Hornbuckle Mitchell through their Asia
SIPP expert Stephen Davis at:
[email protected]
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ISIN No KYG5458L1023
CUSIP
No G5458L102
Valoren
No 003811078
Bloomberg
LEOPARD KY
Lipper
ID 65096323
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Leopard Cambodia Investments
(BVI) Ltd.
ISIN
No VGG5458M1005
CUSIP
No G5458M100
Valoren
No 003884357
Bloomberg
LEOBVIL VI
Lipper
ID 65096324
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The IMF medium term view of the economy is
cautiously optimistic:
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'Medium-term prospects depend on
maintaining macroeconomic and financial stability, improving
governance and infrastructure, and taking other actions to strengthen
competitiveness.
Under the current baseline, growth is projected to rise gradually to
7-7� percent a year, driven by FDI-promoted export opportunities,
broader tourism development, and higher agricultural yields-each
critical to sustained growth and poverty reduction, including meeting
the Millennium Development Goals. The current account deficit would
narrow to 5-6 percent of GDP with further export diversification,
even accounting for large investment-related imports. Under this
scenario, the reserve cover would settle around 2�-3 months of
imports. Underpinning stabilization efforts would be modest fiscal
consolidation over the medium term, with the overall budget deficit
narrowing to less than 2 percent of GDP by 2012.'
Moreover, the authorities, with IMF help, are beginning to get to
grips with the banks:
'Excessive credit
growth, regulatory forbearance, and now tighter funding conditions
have heightened risks to the banking sector.Staff urged much closer
monitoring by the NBC of banks' compliance with prudential
regulations to prevent systemic problems. The NBC continues to
improve supervisory capacity, with plans in 2009 for more intensive
on- and off-site monitoring. However, enforcement remains weak, in
particular dealing effectively with capital adequacy and loan
provisioning. Staff also noted that bank licensing procedures need to
be strengthened, with new entry reserved to those entities with a
significant banking background. To this end, the NBC was urged to
ensure close coordination between its recently established Financial
Intelligence Unit and Banking Supervision Department to ensure new
and existing banks complied fully with anti-money laundering
guidelines. Finally, staff welcomed the updating of fit-and-proper
rules.'
And the IMF's final appraisal? It reads quite well we think: in
essence it says 'you are doing OK Cambodia and you'll be fine,
provided you continue to take our advice':
- 'Cambodia is facing its most
challenging macroeconomic and financial conditions this decade.
External shocks have been magnified by the concentration of economic
activity, dependence on external inflows, and weaknesses in the
banking system. The Cambodian authorities have swiftly recognized the
serious challenges that lie ahead and agree on the necessity of a
clear and timely policy response to manage the risks and avoid an
even deeper downturn.'
- 'Fiscal policy is expected to
continue to underpin stabilization efforts, with a more expansionary
stance in 2009 appropriate. The
government is to be commended for strong budget performance so far in
2008, especially given potential pressures arising from national
elections, border security issues, and a weakening economy. Moderate
fiscal easing in 2009 could help mitigate the impact of an expected
growth slowdown. Concerted efforts are also needed to strengthen PFM,
in particular on improving Treasury management and budget
coordination and integration, including the recording of donor
inflows. Finally, to maximize public gain, future oil and mineral
production should be guided by a transparent fiscal regime.'
- 'The current monetary stance is
broadly appropriate, but conditions require close watch to avoid
excessive tightening and aggravating risks to banking system.
As credit growth drops and inflation pressures subside, moderate
easing could be justified. However, further steps are needed to
improve policy effectiveness along the lines of longstanding IMF TA
recommendations. A clear strategy must be put in place to manage
liquidity risk.Upfront action should be taken to strengthen the
liquidity management framework to deal with potential pressures. The
NBC's recent moves toward putting in place an overdraft facility is a
critical step in this direction, but caution will need to be
exercised in assessing eligible collateral and distinguishing
liquidity from solvency pressures facing banks.'
- 'Beyond immediate actions to
contain liquidity risk, swift and comprehensive measures are needed
to improve banking soundness, including on solvency issues. The
NBC continues to strengthen the prudential framework, but more
systematic efforts are needed in supervising banks and enforcing
regulations, given the likelihood nonperforming loans will rise as
the economy further slows.'
- 'Risk of external debt distress
is moderate, but could become more pronounced with a prolonged
downturn. In light of this possibility and
given a large external borrowing requirement, prudent debt management
remains essential, with Cambodia expected continue to borrow on
largely concessional terms in the foreseeable future.'
- 'If the need were to arise and
understandings could be reached on outstanding debt arrears, staff
would support a request for a new PRGF arrangement.'
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